Bond Myths

This is a new chapter as at 2024, inserted in a rough pedagogical order. This chapter is no myth of course, we are myth-busting.

The myth is that: the government debt is a burden on our grandchildren. Complete nonsense. It is the exact opposite. It is ostensibly the net wealth of our grandkids in the form of NZD.

The Mosler Frame

The original MMT contribution to The Bond Story concerned pure monetary operations between central bank and Treasury.

When the government spends it adds to reserves. Banks can statutorily lend reserves, and may seek to do so to gain interest, but if the government spending results in overall excess reserves for the whole system, then the interbank lending rate drops rapidly to zero. A good thing, you might think. You’d be right.

However, some central bankers dislike zero interest rates (for false reasons, but that is another story) and so in order to “offset operating factors” the central bank will either sell bonds to drain the reserves or pay interest on the reserves so the banks do not mind holding excess reserves.

Total smoke & mirrors. But that’s what they do in central banking for the bullsh1t jobs maintenance of employment of professional accounts clerks.

No Fixed Exchange Rate

We no longer have a fixed exchange rate nor a commodity peg in New Zealand, we operate a floating exchange rate. This means government bond operations and the Debt Management Office are anachronisms.

All NZ government spending can be directly “monetized” by simply instructing the RBNZ to credit accounts when the government makes payments.

In the old days government bonds may have been useful for purposes of pass-through inflation control, which is a political realpolitik. People do not like to see inflation even though there are no bad economic consequences, and inflation can even be beneficial for the poorest (if the inflation comes from rising lowest real wages).

You might ask when did the lowest real wage ever rise first? “Not often,” is the answer. But governments have full power to make that happen if they choose. And it has happened. It is just a policy choice, but not the norm.

OK, but given we do not want to get voted out of office, even if the political psychology is false, the government may desire to keep inflation stable, and in the low digits. This is a problem to manage if there is a fixed exchange rate or anything else the government promises to convert that it cannot create.

In the fixed exchange rate case the government effectively promises to swap NZD for other currencies, for if they do not, and exports are weak, then the exchange rate may deteriorate, and the government then faces unsavoury policy options for targeting the exchange rate, such as using unemployment to “discipline” labour. Including cutting back on government services. Both terrible socially destructive policies.

An alternative is to offer bonds, so that some consumption is forestalled, as well as demand for NZD rises, relative to other currencies and other assets. It also may make NZD cash harder to obtain and exports might become more favourably priced in relative terms, increasing the negative terms of trade (we’d send out more stuff, but the NZD might appreciate). But this is also a terrible policy, since it amounts to a highly regressive basic income scheme. Basic income but only for people who already have money, and in proportion to how much money they already have.

On a floating exchange rate there is no such constraint. If exports go down, the government can make domestic policy adjustments to redistribute share of output, if they want to. The pass-through inflation is not something anyone would need to worry about. Econ nerds do worry about it because they do not typically understand the policy space made free with a floating exchange rate. They still tend to think in fixed exchange rate paradigms, so they make the wrong policy advice. It is comical, but tragi-comedy. People suffer due to such idiocy. And the politicians are clueless, so cannot lift a finger to help the working class.

To lift a finger one tends to need to know why one wants to lift the bone.

So this is all a realpolitik problem too, but this chapter is about a different aspect of realpolitik, one that is probably worse.

The Mitchell Frame

Bill Mitchell alerted me (I was just reading his work, catching up) to the fact that he agrees with Warren, but has another way of explaining why government bond instruments exist.

It was already bad enough on a fixed exchange rate regime, where the only semi-reasonable policy options in the face of weakening exports was to offer rich folks free money, in the form of Treasury bonds. If exports have been somehow deeply undermined structurally then there can be no end of this until some Prime Minister decides “enough is enough!” and ‘does a social welfare’ reform.

Mitchell explains it is even worse than this!

To see why, we have to go beyond Warren Mosler’s frame, and consider neoliberal Realpolitik, not just econhead nerd realpolitik. For a start, recall we have a floating exchange rate, so the pure monetary purpose for government bonds has completely disappeared. They are an anachronistic instrument that only fraudulent or ignorant central bankers and Treasury officials insist still be in place. The central bank can instead avoid disruptive overnight cash rate fluctuations${}^\dagger$ by simply permitting all banks clearing payments each day to have an interest free overdraft.

${}^\dagger$I always regard these “disruptions” as elitist concerns. But on occasion they could bleed over into the real economy and lead to banks wantonly charging their customers excessive fees, so generally we do not want unavoidable interbank payments clearing disruptions. It’s like the playground bully. If a bigger bully hits them up, the little kids cop the punishment. Yeah, that’s right, most people in “finance”, banking, trading and economics are frickin’ children. They’d’ rather lose $\$$1,000 than gain $\$$2,000 if that meant their neighbour went up by $\$$5,000.

Mitchell explains that even if the central bankers and Treasury officials know the previous details — that government bond operations are an anachronism, a pointless waste of time — there is still a further Neoliberal minded impulse for why they are happy to persist in perpetuating the myth of the need for the government to issue bonds to offset spending.

It is pretty simple, and yet shocking:

The neoliberals want to control government and the politicians, they want politicians to believe more government spending, such as to run full employment, will cause market havoc, meltdowns, and “destroy the currency”.

The fake bond story is a perfect rhetorical vehicle for this, which the “financial” press eats up like hungry zombies feeding on the brains of the working class. Brain drain of Kiwis to Australia perhaps comprehensible — but will not help those workers, the Aussie neoliberal elite zombie hoards are probably worse.

It is about power and control.

First of all though, you are entitled to a rotfl at: “It’ll destroy the currency!” 🤣

… since you by now know exactly where the price level comes from, and where (insatiable) demand for the currency originates.

The only meltdowns would be bond traders crying home to Daddy Greenspan (as they did in Australia when the Aussie bond market dried up, although who the Crocodile Dun Greenspan was for the RBA I cannot recall).

For the serious suff: The power elites appear to (whether ignorantly or knowingly out of malice) want to “reign in the government” to avoid any hope of prosperity for the poorest among the working class. We can call this class warfare, since that is what it is. Who of any compassion and loving kindness would not want to see the poorest workers lifted up in prosperity? The answer is plenty of people, the neoliberal elites in particular. The oligarchs for another class. And a whole lot of upper-middle class ℭ𝔘𝔑𝔗𝔰.

If not, if these groups really want to see the poorest people lifted up out of poverty, then where is their charity? It cannot be found. So either they are incredibly dumb and ignorant, or they are engaging in class warfare, or they just could not give a stuff.

There really is no other explanation for this mindset. Since as we noted the operational purpose for government bonds has disappeared.

The neoliberals and their oligarchs need the general public to have a fear of the government debt and need to make sure citizens and the mass media know the government debt is a terrible thing. It is of course ostensibly the opposite of a terrible thing.

The government debt is nothing but all the dollars spent by the government that have not yet been used to pay taxes. It is the net private wealth held in the form of NZD balances of the non-government sector.

Non-ostensibly, the only major problem with a large and growing government debt is the make-up of the owners of the deposit and bond accounts who have most of the net government spending. Particularly the bond holders. Most bond holders (other than the government itself, the RBNZ) are either institutional money manager funds, or wealthy people. They are getting the free basic income. The poorest workers are not.

The problem with government debt is not how large a sum it is, but how it is distributed. The Top Ten Percent have it all.

Left Pocket

Note that if the RBNZ held 100% of the Treasury debt, that’d be perfect. The neoliberal zombies and former bond traders could cry all they like. It is the left pocket of government owing the right pocket. Yippee! Whoop-de-do.

Revealing the farce that continued government bond operations are: a complete pro-inflationary — in the most regressive way — useless waste of human time.