issuing bonds for a currency issuing government is a policy choice not an economic imperative it's a policy Choice here's Randy and Yea issuing bonds is voluntary operation that gives the public the opportunity to substitute non-interest earning government liabilities thank cash for interest bearing government liabilities T bills notes bonds which are credit balances in Securities Accounts at the same Central Bank if people believe the government needs to borrow to spend then you get into all of these debates who's going to buy them is the bid to cover ratio going to be adequate and all the rest of the kind of stuff but if you understand that bonds are voluntary operations then it becomes irrelevant these sort of debates whether there are takers for government bonds and whether they're owned by domestic or foreign citizens so we show most of the debates that take place are just rooted in fundamental myths and misunderstandings about what's really happening basically the operational side now there may be reasons to be concerned Warren touched on this the other day might it become an issue when you have a large enough stock of public debt and you have a central bank that is following a tailor rule or something like a tailor rule raising interest rates to try to fight inflation and you could potentially get into a sort of toxic situation where the rate hikes themselves begin to feed inflationary pressures 20 years ago I published a paper it was it appeared as a chapter in this book where I sort of uh Randy mentioned the other day something about laugher and the napkin I didn't put mine on a napkin either but I drew in it kind of looks like laugh laer curve right where the point is that if you're in a low Dead uh environment and a lot of the well there are certain conditions I'm not going to go into all of them let me just leave it at if you don't have a large stock of public debt and a few other things hold uh raising interest rates may have the usual conventional effect that is they would be contractionary but if the public debt gets large enough raising interest rates from say i1 to I2 could actually the stimulative at the macro level so we got to recognize that and if that's the case and it could create a sort of unsustainable situation in terms of the inflation impacts is there an answer to that the answer is sure you just keep the interest rate down because the interest rate has become the problem at that point so Scott fulweiler wrote about this and I should say Scott would have been here today but he couldn't make it and so this presentation we did together okay so it's it's the both of us we both work on it uh this paper was published by Scott in 2005 long before the FED started paying interest on reserve balances but Scott asked the question what would happen if the FED did what other central banks already do which is to pay interest on reserve balances so he wrote this paper and it's very good and it's short especially for Scott uh Fuller so Scott goes through this and he says you know we could issue bonds keep issuing bonds and have a zero interest rate policy or just manage the interest rate so it stays below the growth rate what would happen if we did that well we wouldn't have the problem with the intertemporal government budget constraint that all the mainstream economists use to tell us that fiscal policy is on an unsustainable trajectory so they use this macro model and they plug in uh the variables and they say based on the current outlook for interest rates and growth rates in the debt and so forth we're on an unsustainable trajectory we need to make changes and Scott said well if you think it's unsustainable just lower the interest rate below the growth rate and the debt will converge and the problem goes away that's basically this problem so Scott's saying the in the interest rate is a policy variable okay the mainstream treats the interest rate as what Market phenomenal right the market is doing it which is why the bond vigilante is matter but Scott's saying no set the interest rate so if it's a policy variable there's a very easy solution to this problem all right option three so the first two options were issue bonds issue bonds and let the Central Bank fiddle with the interest rate issue bonds and anchor the interest rate at zero now we're moving into don't issue bonds don't issue bonds and let the Central Bank play with the interest rate that's another option okay we could do that and once again Scott has that base covered he's very good at this so in this p in this piece paying interest on reserve balances more significant than you think Scott says uh with with interest on reserve balances eventually the entire national debt could be held exclusively as Reserve balances just leave it there simplifies monetary policy operations and the more significant point is that it makes it clear to everyone that interest on reserve balances demonstrates that the fed's operations are offsetting in nature not financing so that's the purpose of that paper all right option four no bonds and Zer zero interest rate or nearly zero kind of uh overnight interest rate Bill Mitchell says uh this is the preferred option from an mmt perspective no bonds and permanent zero interest rate policy now like I said that's a policy P it's a prescriptive policy right that's his position he would like to see no bonds issued to the non-government sector and interest rates permanently anchored at zero he calls it uh um omf overt monetary financing okay that's his preferred thing but he says it's you know the preferred option from an mmt perspect perspective government should not issue any public debt to the non-government sector as the benefits of doing so are small relative to the large opportunity costs all right so those are four options he goes on talk about helicopter money mm always understood QE as an asset swap with little or no transmission apart of apart from a placebo effect okay doesn't really do anything overt monetary financing he says Central Bank provides the monetary capacity to support larger fiscal deficits with no further debt being issued to the non-government sector so what bill has in mind is the central bank just buys the bonds directly from treasury credits A treasury's account treasury spends and you're of and running okay the original mmt proponents he says would characterize overt monetary financing as a highly desirable policy development because it makes a whole bunch of this stuff cleaner and clearer right next part what should we do to bond or not to bond that is the question right so what changes if we consider options three and four both of which involve not issuing treasuries at least to the non-government sector all right what changes well the big thing is public perception right if you're only issuing bonds to that are purchased by the central bank then the public understands that they're not being burdened by this debt stock that you don't have to worry about who's going to buy them and foreigners and all the rest of the stuff we often hear about no increase in public debt for he says this is Bill the Rabid Financial commentators to beat into a frenzy and push out predictions of insolvency it would get us all focused on inflation risk instead of solvency and the morality play borrowing driving us all into debt is immoral and all the rest of it who will buy them paying it back neuter the IMF the rating agencies they have nothing to complain about and all of that of stuff so he says there are major political advantages to moving to overt monetary financing all right I think we're damned if we do and damned if we don't there's no clear winner here there's no way to entirely avoid criticism weaponization no matter what you do all right so I'm going to show you some of this if we continue to issue government bonds to the non-government sector the way we do today then we hear the usual stuff economists the Press policy makers they weaponize the dead they talk about burdening future Generations who's going to buy it they weaponize the sustainability models they talk about exploding Debt Service it doesn't converge you got people like Olivia Blanchard Larry Summers Jason Ferman all using this framework to make the argument that the US needs to reduce the deficit because it's on an unsustainable trajectory based on these models weaponized Bond vigil anes you'll lose control of rates and and all that sort of stuff but if we propose Zer which eliminates a lot of those problems then they weaponize something different they say well if you if you keep the interest rate at zero then you're depriving the Central Bank of its ability to find our star and so you'll hear stuff about fiscal dominance or one uh argument or another it's going to be inflationary and all that if we say don't issue bonds to the non-government sector then they'll just say your printing money is going to be inflationary so what's an mmti to do the hell are you supposed to do they're going to pick on you no matter which one you choose so we created this little table and we just sort of imagine you know under which of the four options do you avoid the most criticism okay where where is it the cleanest and as you can see there's not really a clear winner here okay if we do what we do today which is column one they weaponize at that they weaponize the uh intertemporal government budget constraint you hear about Vigilantes but you know at least you'd leave them with the interest rates so they wouldn't complain about interfering with the central bank and because you leave them with the bonds and the interest rate they're not going to complain about printing money you move to the next option and you got a different set of things I don't have time to go through each one of them okay but make the slides available but the point of this is to say there's not a clear winner in terms of the options okay so so I'm going to put my cards on the table because as I said when I first got involved in this project it was the descriptive stuff that interested me I liked it I liked learning about and digging into and arriving at a place where I thought I had pretty good Mastery of the monetary operations it felt good to understand so I like the descriptive stuff and that first paper I referred to earlier was descrip and then I went to work on the hill and I realized what a mess we're in because I was surrounded by people working as the chief Economist for the Democrats on the Senate budget committee that no one in the Senate and their staffers had the obvious idea how to understand the role of deficits or debt in the economy that they were all falling prey to these myths and misunderstandings so I would go around playing this game and I would ask them hey if you had a magic w wand and I told you you could wave the magic wand and it would eliminate the national debt would you wave the magic wand everybody said yes not even hesitation of course I would wave the wand I want the debt gone said okay well what if I give you a different wand and I say if you wave the wand you will eradicate the world of treasuries no bills notes bonds they're just all gone would you wave the wand and they would look at me like I had three horns you know coming out of my head say why would I do that why would I want to do that so they didn't even understand that the thing we call the national debt is nothing more than the stockpile right the stock of us Treasures held in portfol excuse me portfolios and all the rest of it right they didn't understand they want one to go away but they want to keep the other well I'm sorry you can't have it both ways so that started to shake my confidence in things and then I wrote the deficit myth and I talked about some of this I told these kind of stories was in the book and I said look I'm sort of agnostic on whether we issue bonds or don't issue bonds the problem seems to be the way we refer to them it's the word debt that has everybody hung up right and so maybe we just need to give it a different name Warren used to recommend calling it instead of the national debt having a giant Debt Clock Loom over people in New York City ticking away Warren would say you know just call it the interest rate maintenance account maybe everybody would just just calmed down a little bit we've said call it the dollar savings clock we've tried right marketing rebranding it's just that it didn't catch on and everyone is still very clearly worried about and weaponizing the national debt and then you see what happened in the UK with Liz trust and everybody believes that the bond market smacked her down and said you will not get the fiscal package that you are proposing we aren't willing to finance it and now labor is terrified and everybody looks at what happened to Liz truss and they view that as a lesson for future governments and so at some point you go you know maybe we're not going to win this fight maybe we're not going to get the policy response we need to deal with climate and housing and all the rest of it uh because we can't get Beyond where we are in our understanding of deficits and especially the debt so I did an interview with the ft and they asked me if you had five wishes or a magic wand and you could do five things what would you do Warren and I talked a little bit about it uh before I committed to all five of those and I made one of them I said no more bonds just don't do it they're more trouble than they're worth we're not going to educate people fast enough to get Beyond this to get the right policy so let's just stop right so that's kind of where I have arrived and I like my little play on words here which is if we were to do that if the UK were to do that it could enjoy guilt-free spending isn't that nice you know the German word for Deb is guilt right and we do feel guilty about increase in the deficit because it adds to the debt and we have this idea that this is a burden somebody's ultimately going to have to pay it back so let's just get let's just get over it let's stop issuing it the labor party's fiscal rules are clearly I think intention Within missions you want to build a lot of housing but you want to rely on the private sector to do it just spend and build the public housing leave the resulting pounds in the system let the bank of England decide what to pay on those Reserve balances and tell the market to pound sand that is my position uh as I stand here today so what can we do to De weaponize right uh to avoid this is Scott's line mass destruction de weaponized to avoid we got to have policy responses some of the very critical challenges that we are facing and we're having trouble getting there I think largely because we're still too hung up on what the national debt so-called means and the dangers the dangers that it poses so we have written a lot over the years trying to educate people trying to help people understand that there are options and that the way we understand things today has flaws and and there misunderstandings and so so forth again this is Bill Mitchell what would happen if a sovereign currency issuing government ran a fiscal deficit and didn't issue debt at all or sold bonds only to the central bank instead of the non-government sector what would happen if we did over monetary financing and he says uh with a fiscal deficit and no bond sales you get excess reserves in the cash system and the overnight interest rate Falls to zero or to the support rate we've explained this a million times I have Warren has Scot has ad nauseum the only difference between this and issuing bonds to drain the reserves is that the central bank has to use a different technique to hit its interest rate target that's all that changes and Larry got it Larry recognized it there's no difference between issuing the bonds or not issuing the bonds the difference is on Whose Ledger are you going to write down the liability on the central bank's Ledger or the treasuries and who's going to get I was going to say credit for but I don't want to say that who is going to pay the interest the central bank or the treasury that's what the difference comes down to all right so here's Scott fulweiler again from his 2005 paper deficits that are unaccompanied by Bond sales are viewed disapprovingly as monetization even though there's no meaningful difference between doing it the way we do it today issuing the bonds deficits always create net Financial Assets in direct proportion no matter which way you do it what matters isn't whether you sell bonds but whether the deficit is too large given the non-government desire to net save once you have interest bearing reserves it becomes obvious that Bond sales are offsetting interest rate maintenance not financing operations with interest on reserve balances eventually Scott says the entire national debt could be held exclusively as Reserve balances or as learner said issue bonds only in keeping with the principles of functional Finance so paying interest on reserves simplifies monetary policy frees the treasury and the fed from selling bonds to support the interest rate target it just makes it cleaner and more transparent otherwise it changes very little fundamentally again no difference between issuing government debt to the non-government sector and the Central Bank paying interest on Reserves at the Target rate they're identical but the politics can be different all right it doesn't make it less inflation AR if you issue bonds it doesn't alter the quantity of net Financial Assets in the non-government sector and it doesn't add jet fuel to the spending it doesn't make the deficit more stimulative because there's no difference between so-called Bond financed and money financed deficits there's no reason for the government to sell bonds at all that's from Full Wilder's pwor no further increase in the debt means no unnecessary and counterproductive debt sealing drama no fights about burning grandchildren all that sort of stuff all right this is just a image that Scott uses a lot because people don't understand they see the way the government arranges treasury auctions coupled with deficits I say oh well this is how we pay for things and I call this one on the left covert monetary financing and the one on the right overt monetary financing it's the same thing the Central Bank back stops the dealers and it all works the same way you end up in the same place whether you do it overtly or covertly that's the point here so would stopping Bond issuance undermine Central Bank Independence no if you've got interest bearing Reserve balances the central bank still has control of the overnight interest rates that's the policy rate if you moved away from that uh and oh you're not issuing bonds then government agency Securities or swaps could emerge as benchmarks you could still have something the private sector could use to price risk even without treasuries because you often hear well if you get rid of bonds that's the risk-free rate that's used to price risk for other Securities and lending and so forth you you'd have a huge problem if you got rid of bonds and Scott is saying no you wouldn't there are other ways uh to do that the transmission of monetary policy with interest bearing Reserve balances is identical to that uh with non-interest bearing Reserve balances and bonds to drain the excess balances treasury Securities could eventually be replaced the interest rate on the national debt would then be whatever interest rate the central bank is paying on reserve balances there's no inherent reason for treasury liabilities to exist across the entire term structure except to support operations for long-term interest rates if you want do it that way all right now how would you manage credit conditions without the tailor rule if you said to the central bank keep the interest rate at zero uh oh how do you conduct monetary policy how do you manage credit conditions oh Warren has a paper where he put forward I don't know 20 30 different proposals for how to change uh what the treasury the fed and the banking system everything from regulatory change changes to operational changes and so forth there a whole list of things that we've proposed over time about how to go about managing influencing credit conditions lending and all the rest of it but that's there Eric T Mo and Randy did an edited volume Randy's book on Minsky Eric's uh book on Central Bank and asset pric and all the rest of it it's all there uh bill has dealt with the question of well if you're not able to ra interest rates and you have a permanent zero interest rate policy won't you just get asset bubbles people say that all the time bills written about that uh and address those concerns everyone from the Federal Reserve to some mm legal Scholars Nathan tankus and others have written to answer this question how can you manage credit conditions if you're not relying on changes in the short-term interest rate the answer is there are 101 things that you can do all right if you look at uh what other countries have done this is a from a paper where they looked at um how many times countries have tightened or loosened policy using tools other than the overnight interest rate okay so loan to value debt to income other sorts of criteria being used to either loosen credit conditions or tighten credit conditions how many times have countries done that this looks at that this one tells you how effective it's been and the paper just makes the arrives at the conclusion that it's quite effective you can use other tools that daren't the overnight interest rate to manage credit conditions other countries do it and they do it very effectively mmt has an answer for every one of these weaponization we show that printing money as Scott says isn't a thing if they really understood the operations they wouldn't say it if you're not issuing debt it means you don't have to deal with the fiscal sustainability that comes out of the um intertemporal government budget constraint if you're at Zer or managing interest rates it means you don't have to worry about Bond vigilantes Mosler Minsky Mitchell Ray T Mo Etc have done research on as I just said macr credential other ways to influence credit Beyond using short-term interest rates functional Finance means fiscal policy has a strong counter cyclical role to play and yet we still have to recognize and be prepared for the fact that no matter which option we choose people are going to complain about one thing or another all right coming close to the end adding some additional concerns so we open a conversation and as I said you know the descriptive stuff we're aligned around but on a prescriptive side and on this question about whether we should continue to issue bonds whether we should only issue them directly to the central bank whether we should not issue them at all or whether we should carry on with current practice issuing bonds to match the deficit to the non-government sector we've been having these discuss it's important that we talk about this and that we understand one another's concerns so ry's raised uh some concerns around Financial fragility oh I'm sorry I'm not there yet this is a different one I'm about to get there uh all right mm have had their own additional reasons for favoring no bonds and or sir all right this is a different slide if you are doing things the way we do them today which is column one and you have a central bank following a tailor rule or otherwise using rate hikes to fight inflation the rate hikes might become inflationary so that's an issue if you do things the way we're doing it today Financial fragility Alam Minsky right the rate hikes leading uh highly lever um borrowers into potentially unsustainable speculative reponds and positions it's corporate welfare is what bill and Warren call it like Ubi for the rich or whatever so you have those issues if you stopped issuing bonds and or did serve then those problems disappear you're not going to cause Financial fragility if you're anchoring the interest rate at zero you're not going to have uh rate hikes becoming inflationary because you don't have uh the bond market any longer and so forth right so those problems go away why ISS you de at all if there's no compelling case to do so as Bill Mitchell says why do we keep doing it so I'm going to jump here to some of Randy's concerns that have been raised just in internal conversations and I think he's had a a paper just uh recently on some of this at believe Le right so he's asking look if we got rid of bonds completely would it really not matter matter would it create some problems maybe in terms of the Public's portfolio preferences would it compromise the business model of banking where could there potentially be problems there does a modern financial sector need risk-free collateral for liquidity it's important to deal with these questions right shouldn't be proposing something without thinking about all of the potential risks and things that you know you got to uh anticipate problems that you could create so we've dealt with these I think uh to some extent Scot and I were thinking them through on the saving vehicle issue if you just keep with current practice then there's no problem everybody has their risk-free asset and you've got your treasuries uh Bank costs and profits not a problem because banks have access to uh treasuries a risk-free return uh doesn't compromise the business model of banking you have no liquidity approaching but if you move to options three and four or and this is ry's question and maybe concern then do you start to get into uh a new set of problems right do you open yourself up to a new set problem and we're open to that possibility we're saying yeah it's worth thinking about right all right so what about two additional options ask yourself this question what if the Central Bank issued the Securities instead of the treasury there's an idea Central Bank can do that so central banks have a lot of options if the government stops issuing bonds you can have Central Bank Securities you could rely more on reverse repost time deposit accounts uh you could have fed accounts or central bank accounts and you could even make them available to the business Community or to individuals it's obvious if we do that that central banks can never run out of money Central Bank could issue its own liabilities at any maturity it desires if it did that it could announce the rates at each maturity there's a twoyear 5 year 10 year 20 whatever if you weren't doing zero interest rate then you could set rates across the entire term structure you have risk-free uh interest rates across the term structure for private lenders to price from if you're doing Z then you could set rates slightly higher or not Scott says that's his uh line you could have on tap Securities which would mean risk-free collateral is plal you just announce the price and let the quantity flow you'd avoid the stupid approach currently employed which assumes that the desired increase in collateral is whatever number happens to pop out of the budget box at the end of every year you get the number of treasuries that match the deficit the mainstream would say this infringes on Central Bank Independence but the reality is it gives them more tools if you were to do something like this so in conclusion some of you have seen the film finding the money and those of you who've seen it probably will never forget a particular scene in the film where a White House Economist is asked you know why is the government issue treasuries if you have if you have the ability to issue currency why do you borrow and he flubs the question okay and I think the question is more interesting in an era in which the central bank is paying interest on reserve balances it's like if bonds are about interest rate maintenance and that's why we were issuing bonds to drain off reserves to allow the central bank to achieve its interest rate target assuming the target is above zero now that we're paying interest on reserves now the Central Bank what's the further purpose of issuing treasuries it's it becomes almost duplicative at that point right so I added another column which is options five and six we could let the central bank issue Securities and then leave the central bank to set the interest rates at different maturities uh including the overnight interest rate or we could anchor the overnight interest rate at zero now does a more clear winner begin to emerge doesn't it maybe Warren says no so this is why we're doing this right because it opens up a conversation but when we think through the different issues and we just answered yes or no on each of these this is how the chart filled itself out okay so so uh I'm sure Warren will tell us why um this last option is no good but the point is that no matter what we propose it's going to be criticized okay and our view Scott's View and my view is that MNT is about making choices within the right framework and not avoiding choosing something because we're afraid of what the other side will say accusing us of printing money or compromising fed Independence or whatever that's not the right way for us to make a decision on this we ought to do so um in an mmt consistent



0:07issuing bonds for a currency issuing government is a policy choice not an economic imperative it's a policy Choice
0:14here's Randy and Yea issuing bonds is voluntary operation that gives the public the opportunity to substitute
0:22non-interest earning government liabilities thank cash for interest
0:28bearing government liabilities T bills notes bonds which are credit balances in
0:33Securities Accounts at the same Central Bank if people believe the government needs to borrow to spend then you get
0:40into all of these debates who's going to buy them is the bid to cover ratio going
0:45to be adequate and all the rest of the kind of stuff but if you understand that bonds are voluntary operations then it
0:52becomes irrelevant these sort of debates whether there are takers for government bonds and whether they're owned by
0:58domestic or foreign citizens so we show most of the debates that take place are
1:05just rooted in fundamental myths and misunderstandings about what's really
1:11happening basically the operational side now there may be reasons to be
1:17concerned Warren touched on this the other day might it become an issue when
1:23you have a large enough stock of public debt and you have a central bank that is
1:29following a tailor rule or something like a tailor rule raising interest rates to try to fight inflation and you
1:36could potentially get into a sort of toxic situation where the rate hikes themselves begin to feed inflationary
1:44pressures 20 years ago I published a paper it was it appeared as a chapter in
1:50this book where I sort of uh Randy mentioned the other day something about laugher and the napkin I didn't put mine
1:56on a napkin either but I drew in it kind of looks like laugh laer curve right where the point is that
2:03if you're in a low Dead uh environment and a lot of the well there are certain
2:09conditions I'm not going to go into all of them let me just leave it at if you don't have a large stock of public debt
2:15and a few other things hold uh raising interest rates may have the usual
2:21conventional effect that is they would be contractionary but if the public debt gets large enough raising interest rates
2:27from say i1 to I2 could actually the stimulative at the macro level so we
2:33got to recognize that and if that's the case and it could create a sort of
2:39unsustainable situation in terms of the inflation impacts is there an answer to
2:44that the answer is sure you just keep the interest rate down because the interest rate has become the problem at
2:51that point so Scott fulweiler wrote about this and I should say Scott would have been here today but he couldn't
2:57make it and so this presentation we did together okay so it's it's the both of us we both work on it uh this paper was
3:04published by Scott in 2005 long before the FED started paying interest on
3:10reserve balances but Scott asked the question what would happen if the FED
3:15did what other central banks already do which is to pay interest on reserve
3:21balances so he wrote this paper and it's very good and it's short especially for Scott uh
3:27Fuller so Scott goes through this and he says you know we could issue bonds keep
3:33issuing bonds and have a zero interest rate policy or just manage the interest rate so it stays below the growth rate
3:41what would happen if we did that well we wouldn't have the problem with the
3:46intertemporal government budget constraint that all the mainstream economists use to tell us that fiscal
3:53policy is on an unsustainable trajectory so they use this macro model and they
3:59plug in uh the variables and they say based on the current outlook for
4:05interest rates and growth rates in the debt and so forth we're on an unsustainable trajectory we need to make
4:11changes and Scott said well if you think it's unsustainable just lower the interest rate below the growth rate and the debt will converge and the problem
4:18goes away that's basically this problem so Scott's saying the in the interest
4:23rate is a policy variable okay the mainstream treats the interest rate as what
4:29Market phenomenal right the market is doing it which is why the bond vigilante is matter but Scott's saying no set the
4:36interest rate so if it's a policy variable there's a very easy solution to this problem all right option three so
4:43the first two options were issue bonds issue bonds and let the Central Bank fiddle with the interest rate issue
4:49bonds and anchor the interest rate at zero now we're moving into don't issue
4:55bonds don't issue bonds and let the Central Bank play with the interest rate
5:00that's another option okay we could do that and once again Scott has that base covered he's very good at this so in
5:07this p in this piece paying interest on reserve balances more significant than you think Scott says uh with with
5:16interest on reserve balances eventually the entire national debt could be held
5:22exclusively as Reserve balances just leave it there simplifies monetary policy
5:28operations and the more significant point is that it makes it clear to everyone that interest
5:35on reserve balances demonstrates that the fed's operations are offsetting in nature not financing so that's the
5:42purpose of that paper all right option four no bonds and Zer zero interest rate
5:50or nearly zero kind of uh overnight interest rate Bill Mitchell says uh this
5:56is the preferred option from an mmt perspective no bonds and permanent zero
6:01interest rate policy now like I said that's a
6:07policy P it's a prescriptive policy right that's his position he would like
6:12to see no bonds issued to the non-government sector and interest rates permanently anchored at zero he calls it
6:20uh um omf overt monetary financing okay that's his preferred thing but he says
6:26it's you know the preferred option from an mmt perspect perspective government should not issue any public debt to the
6:32non-government sector as the benefits of doing so are small relative to the large opportunity costs all right so those are
6:40four options he goes on talk about helicopter money mm always understood QE
6:46as an asset swap with little or no transmission apart of apart from a placebo effect okay doesn't really do
6:53anything overt monetary financing he says Central Bank provides the monetary
6:59capacity to support larger fiscal deficits with no further debt being issued to the non-government sector so
7:06what bill has in mind is the central bank just buys the bonds directly from treasury credits A treasury's account
7:12treasury spends and you're of and running okay the original mmt proponents
7:19he says would characterize overt monetary financing as a highly desirable policy development because it makes a
7:25whole bunch of this stuff cleaner and clearer right next
7:30part what should we do to bond or not to bond that is the question right so what
7:36changes if we consider options three and four both of which involve not issuing
7:41treasuries at least to the non-government sector all right what changes well the big thing is public
7:47perception right if you're only issuing bonds to that are purchased by the central bank then the public understands
7:55that they're not being burdened by this debt stock that you don't have to worry about who's going to buy them and
8:01foreigners and all the rest of the stuff we often hear about no increase in public debt for he says this is Bill the
8:07Rabid Financial commentators to beat into a frenzy and push out predictions of insolvency it would get us all
8:14focused on inflation risk instead of solvency and the morality play borrowing
8:19driving us all into debt is immoral and all the rest of it who will buy them paying it back neuter the IMF the rating
8:26agencies they have nothing to complain about and all of that of stuff so he says there are major political
8:33advantages to moving to overt monetary financing all right I think we're damned
8:40if we do and damned if we don't there's no clear winner here there's no way to
8:46entirely avoid criticism weaponization no matter what you do all right so I'm going to show you some of this if we
8:53continue to issue government bonds to the non-government sector the way we do today then we hear the usual stuff
9:00economists the Press policy makers they weaponize the dead they talk about burdening future Generations who's going
9:06to buy it they weaponize the sustainability models they talk about exploding Debt Service it doesn't
9:13converge you got people like Olivia Blanchard Larry Summers Jason Ferman all using this framework to make the
9:19argument that the US needs to reduce the deficit because it's on an unsustainable
9:24trajectory based on these models weaponized Bond vigil anes you'll lose control of rates and and all that sort
9:31of stuff but if we propose Zer which eliminates a lot of those problems then
9:37they weaponize something different they say well if you if you keep the interest rate at zero then you're depriving the
9:42Central Bank of its ability to find our star and so you'll hear stuff about fiscal dominance or one uh argument or
9:49another it's going to be inflationary and all that if we say don't issue bonds
9:54to the non-government sector then they'll just say your printing money is going to be inflationary
10:00so what's an mmti to do the hell are you supposed to do they're going to pick on you no matter which one you choose so we
10:08created this little table and we just sort of imagine you know under which of
10:13the four options do you avoid the most
10:18criticism okay where where is it the cleanest and as you can see there's not really a clear winner here okay if we do
10:26what we do today which is column one they weaponize at that they weaponize the uh intertemporal government budget
10:32constraint you hear about Vigilantes but you know at least you'd leave them with
10:38the interest rates so they wouldn't complain about interfering with the central bank and because you leave them
10:44with the bonds and the interest rate they're not going to complain about printing money you move to the next option and you got a different set of
10:50things I don't have time to go through each one of them okay but make the slides available but the point of this
10:56is to say there's not a clear winner in terms of the options okay
11:03so so I'm going to put my cards on the table because as I said when I first got
11:09involved in this project it was the descriptive stuff that interested me I liked it I liked learning about and
11:15digging into and arriving at a place where I thought I had pretty good Mastery of the monetary operations it
11:22felt good to understand so I like the descriptive stuff and that first paper I referred to earlier was descrip
11:29and then I went to work on the hill and I realized what a mess we're in because I was surrounded by people working as
11:36the chief Economist for the Democrats on the Senate budget committee that no one
11:41in the Senate and their staffers had the obvious idea how to understand the role
11:48of deficits or debt in the economy that they were all falling prey to these myths and misunderstandings so I would
11:55go around playing this game and I would ask them hey if you had a magic w wand and I told you you could wave the magic
12:01wand and it would eliminate the national debt would you wave the magic wand
12:06everybody said yes not even hesitation of course I would wave the wand I want the debt gone said okay well what if I
12:13give you a different wand and I say if you wave the wand you will eradicate the world of treasuries no bills notes bonds
12:21they're just all gone would you wave the wand and they would look at me like I had three horns you know coming out of
12:27my head say why would I do that why would I want to do that so they didn't even understand that the thing we call
12:34the national debt is nothing more than the stockpile right the stock of us
12:40Treasures held in portfol excuse me portfolios and all the rest of it right they didn't understand they want one to
12:46go away but they want to keep the other well I'm sorry you can't have it both ways so that started to shake my
12:53confidence in things and then I wrote the deficit myth and I talked about some of this I told these kind of stories was
12:59in the book and I said look I'm sort of agnostic on whether we issue bonds or
13:05don't issue bonds the problem seems to be the way we refer to them it's the word debt that has everybody hung up
13:12right and so maybe we just need to give it a different name Warren used to recommend calling it instead of the
13:18national debt having a giant Debt Clock Loom over people in New York City
13:23ticking away Warren would say you know just call it the interest rate maintenance account maybe everybody
13:28would just just calmed down a little bit we've said call it the dollar savings clock we've tried right marketing
13:35rebranding it's just that it didn't catch on and everyone is still very clearly worried about and weaponizing
13:43the national debt and then you see what happened in the UK with Liz trust and everybody believes that the bond market
13:50smacked her down and said you will not get the fiscal package that you are
13:56proposing we aren't willing to finance it and now labor is terrified and everybody looks at what happened to Liz
14:02truss and they view that as a lesson for future governments and so at some point
14:07you go you know maybe we're not going to win this fight maybe we're not going to get the policy response we need to deal
14:14with climate and housing and all the rest of it uh because we can't get
14:19Beyond where we are in our understanding of deficits and especially the debt so I
14:25did an interview with the ft and they asked me if you had five wishes or a magic wand and you could do five things
14:31what would you do Warren and I talked a little bit about it uh before I committed to all five of those and I
14:38made one of them I said no more bonds just don't do it they're more trouble than they're worth we're not going to
14:43educate people fast enough to get Beyond this to get the right policy so let's just stop right so that's kind of where
14:51I have arrived and I like my little play on words here which is if we were to do
14:57that if the UK were to do that it could enjoy guilt-free spending isn't that
15:06nice you know the German word for Deb is guilt right and we do feel guilty about
15:14increase in the deficit because it adds to the debt and we have this idea that this is a burden somebody's ultimately going to have to pay it back so let's
15:20just get let's just get over it let's stop issuing it the labor party's fiscal rules are clearly I think intention
15:28Within missions you want to build a lot of housing but you want to rely on the private sector to do it just spend and
15:34build the public housing leave the resulting pounds in the system let the bank of England decide what to pay on
15:40those Reserve balances and tell the market to pound sand that is my position
15:46uh as I stand here today so what can we do to De weaponize right uh to avoid
15:53this is Scott's line mass destruction de weaponized to avoid we got to have policy responses some of the very
16:00critical challenges that we are facing and we're having trouble getting there I think largely because we're still too
16:07hung up on what the national debt so-called means and the dangers the
16:12dangers that it poses so we have written a lot over the years trying to educate
16:18people trying to help people understand that there are options and that the way
16:23we understand things today has flaws and and there misunderstandings and so so
16:29forth again this is Bill Mitchell what would happen if a sovereign currency issuing government ran a fiscal deficit
16:36and didn't issue debt at all or sold bonds only to the central bank instead of the non-government sector what would
16:43happen if we did over monetary financing and he says uh with a fiscal deficit and
16:48no bond sales you get excess reserves in the cash system and the overnight interest rate Falls to zero or to the
16:55support rate we've explained this a million times I have Warren has Scot has ad nauseum the only difference between
17:01this and issuing bonds to drain the reserves is that the central bank has to use a different technique to hit its
17:07interest rate target that's all that changes and Larry got it Larry recognized it there's no difference
17:14between issuing the bonds or not issuing the bonds the difference is on Whose Ledger are you going to write down the
17:20liability on the central bank's Ledger or the treasuries and who's going to
17:26get I was going to say credit for but I don't want to say that who is going to pay the interest the central bank or the
17:31treasury that's what the difference comes down to all right so here's Scott fulweiler again from his 2005 paper
17:39deficits that are unaccompanied by Bond sales are viewed disapprovingly as
17:44monetization even though there's no meaningful difference between doing it the way we do it today issuing the bonds
17:51deficits always create net Financial Assets in direct proportion no matter which way you do it what matters isn't
17:58whether you sell bonds but whether the deficit is too large given the non-government desire to net save once
18:05you have interest bearing reserves it becomes obvious that Bond sales are
18:11offsetting interest rate maintenance not financing operations with interest on reserve balances eventually Scott says
18:18the entire national debt could be held exclusively as Reserve balances or as
18:24learner said issue bonds only in keeping with the principles of functional
18:30Finance so paying interest on reserves simplifies monetary policy frees the treasury and the fed from selling bonds
18:37to support the interest rate target it just makes it cleaner and more transparent otherwise it changes very
18:42little fundamentally again no difference between issuing government debt to the non-government sector and the Central
18:49Bank paying interest on Reserves at the Target rate they're identical but the politics can be different all right it
18:57doesn't make it less inflation AR if you issue bonds it doesn't alter the quantity of net Financial Assets in the
19:03non-government sector and it doesn't add jet fuel to the spending it doesn't make
19:09the deficit more stimulative because there's no difference between so-called
19:14Bond financed and money financed deficits there's no reason for the government to sell bonds at all that's
19:21from Full Wilder's pwor no further increase in the debt means no
19:26unnecessary and counterproductive debt sealing drama no fights about burning
19:32grandchildren all that sort of stuff all right this is just a image that Scott
19:38uses a lot because people don't understand they see the way the
19:43government arranges treasury auctions coupled with deficits I say oh well this is how we
19:50pay for things and I call this one on the left covert monetary financing and
19:56the one on the right overt monetary financing it's the same thing the Central Bank back stops the dealers and
20:02it all works the same way you end up in the same place whether you do it overtly or covertly that's the point here so
20:11would stopping Bond issuance undermine Central Bank Independence no if you've
20:17got interest bearing Reserve balances the central bank still has control of the overnight interest rates that's the
20:23policy rate if you moved away from that uh and oh you're not issuing bonds then
20:30government agency Securities or swaps could emerge as benchmarks you could still have something the private sector
20:37could use to price risk even without treasuries because you often hear well if you get rid of bonds that's the
20:42risk-free rate that's used to price risk for other Securities and lending and so
20:48forth you you'd have a huge problem if you got rid of bonds and Scott is saying no you wouldn't there are other ways uh
20:54to do that the transmission of monetary policy with interest bearing Reserve balances is identical to that uh with
21:02non-interest bearing Reserve balances and bonds to drain the excess balances treasury Securities could eventually be
21:08replaced the interest rate on the national debt would then be whatever interest rate the central bank is paying
21:15on reserve balances there's no inherent reason for treasury liabilities to exist
21:20across the entire term structure except to support operations for long-term
21:27interest rates if you want do it that way all right now how would you manage credit
21:34conditions without the tailor rule if you said to the central bank keep the
21:39interest rate at zero uh oh how do you conduct monetary policy how do you
21:45manage credit conditions oh Warren has a paper where he put forward I don't know
21:5020 30 different proposals for how to change uh what the treasury the fed and
21:57the banking system everything from regulatory change changes to operational changes and so forth there a whole list
22:04of things that we've proposed over time about how to go about managing
22:09influencing credit conditions lending and all the rest of it but that's there Eric T Mo and Randy did an edited volume
22:16Randy's book on Minsky Eric's uh book on Central Bank and asset pric and all the
22:22rest of it it's all there uh bill has dealt with the question of well if you're not able to
22:28ra interest rates and you have a permanent zero interest rate policy won't you just get asset bubbles people
22:34say that all the time bills written about that uh and address those concerns everyone from the Federal Reserve to
22:41some mm legal Scholars Nathan tankus and others have written to answer this
22:47question how can you manage credit conditions if you're not relying on changes in the short-term interest rate
22:53the answer is there are 101 things that you can do all right
22:59if you look at uh what other countries have done this is a from a paper where
23:04they looked at um how many times countries have tightened or loosened
23:11policy using tools other than the overnight interest rate okay so loan to
23:17value debt to income other sorts of criteria being used to either loosen credit conditions or tighten credit
23:23conditions how many times have countries done that this looks at that this one tells you how effective it's been and
23:30the paper just makes the arrives at the conclusion that it's quite effective you
23:35can use other tools that daren't the overnight interest rate to manage credit
23:40conditions other countries do it and they do it very effectively mmt has an answer for every one of these
23:46weaponization we show that printing money as Scott says isn't a thing if they really understood the operations
23:52they wouldn't say it if you're not issuing debt it means you don't have to deal with the fiscal sustainability that
23:58comes out of the um intertemporal government budget constraint if you're at Zer or managing interest rates it
24:06means you don't have to worry about Bond vigilantes Mosler Minsky Mitchell Ray T
24:11Mo Etc have done research on as I just said macr credential other ways to
24:17influence credit Beyond using short-term interest rates functional Finance means fiscal policy has a strong counter
24:24cyclical role to play and yet we still have to recognize and be prepared for the fact that no matter which option we
24:30choose people are going to complain about one thing or
24:36another all right coming close to the end adding some additional concerns so
24:44we open a conversation and as I said you know the descriptive stuff we're aligned
24:50around but on a prescriptive side and on this question about whether we should continue to issue bonds whether we
24:57should only issue them directly to the central bank whether we should not issue them at all or whether we should carry
25:02on with current practice issuing bonds to match the deficit to the non-government sector we've been having
25:09these discuss it's important that we talk about this and that we understand one another's concerns so ry's raised uh
25:17some concerns around Financial fragility oh I'm sorry I'm not there yet this is a different one I'm about to get there uh
25:25all right mm have had their own additional reasons for favoring no bonds
25:31and or sir all right this is a different slide if you are doing things the way we
25:37do them today which is column one and you have a central bank following a tailor rule or otherwise using rate
25:44hikes to fight inflation the rate hikes might become inflationary so that's an issue if you do things the way we're
25:51doing it today Financial fragility Alam Minsky right the rate hikes leading uh
25:57highly lever um borrowers into potentially unsustainable speculative reponds and
26:03positions it's corporate welfare is what bill and Warren call it like Ubi for the
26:08rich or whatever so you have those issues if you stopped issuing bonds and or did serve then those problems
26:17disappear you're not going to cause Financial fragility if you're anchoring the interest rate at zero you're not
26:22going to have uh rate hikes becoming inflationary because you don't have uh the bond market any longer and so forth
26:29right so those problems go away why ISS you de at all if there's no compelling case to do so as Bill Mitchell says why
26:36do we keep doing it so I'm going to jump here to some of Randy's concerns that have been raised just in internal
26:43conversations and I think he's had a a paper just uh recently on some of this
26:49at believe Le right so he's asking look if we got rid of bonds completely would
26:56it really not matter matter would it create some problems maybe in terms of
27:01the Public's portfolio preferences would it compromise the business model of banking where could there potentially be
27:09problems there does a modern financial sector need risk-free collateral for liquidity it's important to deal with
27:16these questions right shouldn't be proposing something without thinking about all of the potential risks and
27:22things that you know you got to uh anticipate problems that you could create so
27:29we've dealt with these I think uh to some extent Scot and I were thinking them through on the saving vehicle issue
27:36if you just keep with current practice then there's no problem everybody has their risk-free asset and you've got
27:42your treasuries uh Bank costs and profits not a problem because banks have
27:47access to uh treasuries a risk-free return uh doesn't compromise the
27:52business model of banking you have no liquidity approaching but if you move to options three and four or and this is
27:58ry's question and maybe concern then do you start to get into uh a new set of
28:05problems right do you open yourself up to a new set problem and we're open to that possibility we're saying yeah it's
28:12worth thinking about right all right so what about two
28:17additional options ask yourself this question what if the Central Bank issued the Securities instead of the
28:23treasury there's an idea Central Bank can do that so central banks have a lot
28:28of options if the government stops issuing bonds you can have Central Bank Securities you could rely more on
28:34reverse repost time deposit accounts uh you could have fed accounts or central bank accounts and you could even make
28:40them available to the business Community or to individuals it's obvious if we do
28:45that that central banks can never run out of money Central Bank could issue its own liabilities at any maturity it
28:52desires if it did that it could announce the rates at each maturity there's a
28:57twoyear 5 year 10 year 20 whatever if you weren't doing zero interest rate
29:03then you could set rates across the entire term structure you have risk-free
29:09uh interest rates across the term structure for private lenders to price from if you're doing Z then you could
29:14set rates slightly higher or not Scott says that's his uh line you could have
29:20on tap Securities which would mean risk-free collateral is plal you just
29:25announce the price and let the quantity flow you'd avoid the stupid approach
29:31currently employed which assumes that the desired increase in collateral is
29:37whatever number happens to pop out of the budget box at the end of every year you get the number of treasuries that match the deficit the mainstream would
29:44say this infringes on Central Bank Independence but the reality is it gives them more tools if you were to do
29:51something like this so in conclusion some of you have seen the film finding the money and those of you
29:58who've seen it probably will never forget a particular scene in the film where a White House Economist is
30:06asked you know why is the government issue treasuries if you have if you have the ability to issue currency why do you
30:14borrow and he flubs the question okay and I think the question is more
30:19interesting in an era in which the central bank is paying interest on reserve balances it's like if bonds are
30:27about interest rate maintenance and that's why we were issuing bonds to drain off reserves to allow the central
30:33bank to achieve its interest rate target assuming the target is above zero now
30:39that we're paying interest on reserves now the Central Bank what's the further purpose of issuing treasuries it's it
30:46becomes almost duplicative at that point right so I added another column which is
30:52options five and six we could let the central bank issue Securities and then leave the central bank to set the
30:59interest rates at different maturities uh including the overnight interest rate or we could anchor the overnight
31:04interest rate at zero now does a more clear winner begin to
31:10emerge doesn't it maybe Warren says no so this is why
31:15we're doing this right because it opens up a conversation but when we think through the different issues and we just
31:22answered yes or no on each of these this is how the chart filled itself out okay
31:27so so uh I'm sure Warren will tell us why um this last option is no good but
31:32the point is that no matter what we propose it's going to be criticized okay
31:39and our view Scott's View and my view is that MNT is about making choices within the right framework and not avoiding
31:47choosing something because we're afraid of what the other side will say accusing us of printing money or compromising fed
31:54Independence or whatever that's not the right way for us to make a decision on this we ought to do so um in an mmt
32:02consistent way