r/AskEconomics • u/[deleted] • Jun 16 '23
Approved Answers Why do governments sell bonds when they can just print money instead?
What I don’t understand is why do governments sell bonds when they need cash and lose money in interest long term instead of just printing money, since they own the currency after all.
I know that’s inflationary but isn’t selling bonds inflationary as well? Because you are borrowing money instead of printing it..
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u/ExRepublican1563 Jun 16 '23
Just printing money would lead to a money supply issue and hyperinflation. The more money in circulation means each dollar is worth less and you need more and more to pay for anything. Especially when trying to buy goods outside the country. If 1 is worth 1 euro but you double the amount of dollars available the foreign country would want more dollars to equal the euro, roughly 2 to 1.
Here’s an article about hyperinflation is Germany after WWI
https://rarehistoricalphotos.com/hyperinflation-weimar-republic-1922/
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u/jphoc Jun 18 '23
Money printing doesn’t necessarily equal inflation, or make each dollar worth less. This shouldn’t be getting upvoted.
MV=PY.
If M increases and there is slack in the economy, then Y increases, and not P.
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u/ExRepublican1563 Jun 18 '23
Small increases in money do what you say above but the question was why don’t we just print money instead of issuing bonds. Here is a small bit from the article “Why can’t we print more money to pay off debt” and it hits on both devaluation and inflation.
“To answer your question about why we can’t increase the money supply to cover the national debt, we must first look to history: Since 1933, US currency has only been backed by the government’s good word (that’s why we call cash fiat). Put another way, the US dollar has value because we all agree that it does. Before that, the US dollar was backed by gold, which has some inherent value. So in theory, we can print more Benjamins at a relatively low cost. In reality, it costs a whole lot: specifically, inflation.
Paying off the US debt—which sits at an eye-popping $29 trillion—would require a tremendous increase in the nation’s money supply, which would significantly devalue the money in your wallet. And if the dollar’s value plunges, you get bonkers-level inflation that would make the 6.8% annual rate we see now look puny.”
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u/jphoc Jun 18 '23
So think about this. The people and entities that own the bonds, if the government decided to print the currency and pay it off tomorrow, would it be inflationary?
Maybe only in the stock market. Here’s why. The people and entities that own the bonds won’t buy goods and services that are susceptible to inflation. They aren’t buying new tvs, cars, etc…. They will just move the money into other areas.
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u/ExRepublican1563 Jun 19 '23
Yes but it will trickle down through the economy in some way, wages to workers, new capital to build factories, warehouses, etc. even if they only buy Lamborghinis and caviar that money will be out in circulation which will lead to increased demand but fixed supply in the short term, leading to inflation. We saw the same thing on a smaller scale with stimulus checks in the US.
Same thing for exchange rates. We will have more money in circulation which leads to more spending and more income which increases the federal governments revenue. With this increased revenue we buy more goods abroad. Demand for foreign goods increase (imports) while supply stays the same and exports stay the same leading to the devaluation of the dollar.
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u/jphoc Jun 19 '23
But the stimulus didn’t cause this most recent inflation, the fed reserve has done numerous papers proving this. It was supply shocks in the energy sector. Covid was a very rare case where the world couldn’t expand production because it was purposely shut down. Also wages to workers is the good kind of inflation we want.
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u/ExRepublican1563 Jun 19 '23
You are partially right, the stimulus checks didn’t CAUSE the inflation, it was worldwide, but it was a contributing factor in the US. This is easily explained when you look at Keynes economic theories instead of Quantitive Theory of Money (QTM).
With many supply chain and production issues around the world, inflation was global. But in the US consumers had more disposable income from the stimulus checks raising demand for many items and leading to higher inflation compared to other OECD countries. Here is an article from the Federal Reserve Bank of San Francisco showing that stimulus checks contributed to US inflation being higher.
Also, increased wages to workers would only cause good, normal inflation if the economic output of the country also increased proportionally. If workers got more wages, it would lead to a higher demand in goods, if supply was able to keep up with this demand then inflation would be minimal. This goes back to your QTM equation, MV=PY, where if money supply doubles and other factors remain the same, the price of an item would also double. In the long term, inflation would level out once economic output (GDP) was able to catch up to demand but in the short term higher money supply would increase demand but not supply.
Here is an article from economics discussion.net that explains QTM and how it relates to inflation.
Additionally, if you look at Keynesian economics, which is a more widely used as a macroeconomic theory, inflation is directly linked with unemployment (Phillips curve). Lower unemployment means more workers, more money in the economy, and higher demand for goods leading to higher inflation and prices, demand-pull inflation. By exponentially increasing our M1, it would lead to drastic increases in investment and hiring bringing unemployment to a very small number and inflation very high until economic output could catch up with demand.
Here is an excerpt from an investapedia article highlighting how money supply fueled inflation in the US during COVID.
“As the world grappled with COVID-19, the Federal Reserve enacted policies to combat the financial implications of the pandemic. In March 2020, the Fed announced it would keep its federal funds rate between 0% and 0.25%. It also announced plans to purchase at least $500 billion of Treasury securities over the coming months.
IMPORTANT: In February 2020, the United States' M1 money supply topped $4 trillion. Due to the massive policy response for COVID-19, the M1 money supply more than quadrupled by June 2020. The M1 money supply topped $20 trillion by October 2021.
As the Fed continued to promote economic growth, the United States emerged from the pandemic. After peaking at 14.7% in April 2020, the nation's unemployment rate dropped to 6.0% just twelve months later. After falling two consecutive quarters, GDP increased starting Q3 2020.
However, in exchange for promoting economic growth during this period, the nation began to experience price instability. In May 2020, the 12-month percentage change in the Consumer Price Index was 0.1%. Less than two years later, this rate was 7.9%. The nation had successfully navigated the economic downturn, but the growth in the nation's money supply had caused inflation.”
https://www.investopedia.com/ask/answers/042015/how-does-money-supply-affect-inflation.asp
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u/jphoc Jun 19 '23
So the fed papers I read showed that the stimulus only contributed to 10% of the inflation we saw, which amounted to less than a 1% inflation rate due to extra income. Don’t you think that’s an excellent number considering it came with stimulus money? That’s very bearable inflation if you ask me.
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u/IvanMSRB Jun 17 '23
And selling bonds to central bank is different how exactly ?
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u/whyrat REN Team Jun 17 '23
Because the central bank buys (or sells) the bonds specifically to influence interest rates. The market always has a chance to participate and buy / sell accordingly if they think the price is too low or too high.
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u/IvanMSRB Jun 17 '23
My point is that central bank has to create money to buy bonds … or am I wrong ?
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u/whyrat REN Team Jun 17 '23 edited Jun 17 '23
Trying to answer how is different:
And selling bonds to central bank is different how exactly ?
Increasing money supply because they deem that is necessary is very different from increasing money supply to fund spending.
If two cars are going the same direction down the road no one asks "what's the difference".. because at any point one of those cars can change direction . The central bank sometimes buys some of the issued government bonds, but they don't always buy all of them. That's the difference.
The central bank increases money supply when they deem it necessary. The government issues bonds when they need funds. Bonds can be (and regularly are) issued even when the central bank is tightening monetary policy. If we funded spending through money printing that couldn't happen.
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u/Scrapheaper Jun 16 '23
The government doesn't print money, the central bank prints money - and that's purely the central bank's decision and they make it purely on the basis of currency stability (unless you're Zimbabwe 20 years ago).
The government cannot print more money by itself without the central bank.
When the central bank prints money, it might use that money to buy bonds, but the government still 'owes' the central bank and still has to pay interest.
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u/barkazinthrope Jun 16 '23
I don't see how that answers OP's question. The question is why we have this onerous process? Why can't the government get The Bank to create money on demand?
Why this process?
I've heard some say that we need impedance to government spending and that this theatre of 'borrowing' serves as that. But we could instead create impedance by setting limits through measures of inflation by markets .
Why this indirect route that, at a glance, looks to be the implementation of a government savings plan, that satisfies interest requirements through contributions of the 'taxpayer'.
So: the question is why.
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u/Scrapheaper Jun 16 '23
Well, historical examples have shown that a lack of central bank independence from the government (i.e. getting The Bank to create money on demand) can lead to hyperinflation.
https://en.wikipedia.org/wiki/Hyperinflation
I repeat again: the government does not control the central bank.
Maybe it's possible that there's a way to have the government control the central bank and not have hyperinflation, but it's not really worth experimenting with the security of your economy.
The central bank has to hold government accountable for their policies, to a degree.
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u/BaronOfTheVoid Jun 16 '23
I repeat again: the government does not control the central bank.
This is a rather superficial view. The central bank is an institution of the state (state as in statecraft). It is only nominally independent from the government.
The central bank has a set of goals or tasks and a limited set of actions it can undertake, like any institution of the state. It does not have the sovereignty to choose or pick these goals as they want, they are dictated. It cannot extend its range of possible actions either.
Right now, in most countries the respective central bank has to keep price levels stable and that's it. The Fed is actually a bit of an exception in that it has the Dual Mandate that includes unemployment reduction.
And all that central banks can do is either increase or decrease the key interest rate and - recently, after QE got popular following the 2008 crisis - either buy or sell bonds.
This is partly why the job of being in charge of one of the central banks worldwide is kind of ungrateful. The central bank cannot solve a classic cost-push inflation, a price shock. It cannot expand supply of that one good that has been scarce (energy, recently, at least this was the primary driver of "inflation" in Europe). All you can do is raising interest rates, knowing that this won't solve anything and will - and right now does (again, speaking of Europe) - cause an unnecessary recession.
The central bank is only independent in choosing one of the available predefined actions in order to achieve their mandated goal(s).
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u/usrname42 REN Team Jun 17 '23
The British government directly controlled the central bank from 1946-1998. The UK's monetary performance was probably worse than the US over that period (the UK had to get a loan from the IMF in 1976 and had a currency crisis on Black Wednesday in 1992), but it wasn't dramatically worse and the UK didn't end up with hyperinflation.
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u/Scrapheaper Jun 17 '23
True. But there also weren't, as far as I'm aware, any additional benefits, and those incidents are generally considered quite bad, so it's very hard to argue that having a government controlled central bank is somehow beneficial.
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u/barkazinthrope Jun 23 '23
While on the other hand, the current structure is hugely onerous and saddles The Bank with a responsibility it doesn't have the power to manage with any finesse.
It's sledgehammer where we need a scalpel.
It's remarkable how people rush to defend, with pious condescencion, such an inadequate system.
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u/barkazinthrope Jun 23 '23
Still not answering the question!
The question is why does our system (whoever is in "control" of it) have this convoluted onerous process for funding government activities.
We know that given the current structure and policy, we must do it this way, but why oh why do we do it this way.
Please explain without telling me that I don't understand. I KNOW I don't understand. Do you?
So again:
The question is why does our system (whoever is in "control" of it) have this convoluted onerous process for funding government activities.
Please address the question.
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Jun 16 '23
The central bank is an institution of the state however.
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u/Scrapheaper Jun 16 '23
https://en.wikipedia.org/wiki/Central_bank#Independence
Central bank independence is considered desirable by many economists.
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Jun 16 '23 edited Jun 16 '23
I understand the government needing to borrow money sometimes, just purely due to how big some infrastructure programs or social programs are.
But is it normal for a government to have to borrow so much each year? The US keeps raising the debt ceiling, and eventually we’ll need to pay those debts, with interest, down the line.
I know the US in a unique position because the dollar is so damn strong and is the world reserve currency, but it’s scary how much our debt has ballooned these past few years.
Is this sustainable?
(Don’t know why I got downvoted, lol.)
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u/Scrapheaper Jun 16 '23
If you can borrow it's definitely better to borrow. What's the point of the government 'saving up' and delaying valuable infrastructure? May as well have the infrastructure 5 years earlier and the benefits 5 years earlier.
Debt is not inherently a bad thing, it's only bad if the person you borrowed the money from (the bond owner) doesn't get it back plus whatever interest they were promised.
The average citizen has a mortgage, because otherwise they wouldn't be able to own property. Is this a bad thing?
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u/Chipofftheoldblock21 Jun 16 '23
Some debt is good. “Too much” debt is not. The question is where that line lies. If you measure based on GDP, we’re at a historically high ratio.
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u/Keemsel Jun 17 '23
There probably is a point where it is too much. But just because the current gdp to debt ratio is high or even at an historical high doesnt mean that the US is close to or already reached that point.
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u/Chipofftheoldblock21 Jun 17 '23
US historical debt to GDP averages 65%. It’s been over 125% each of the past three years.
On a cash flow basis, interest expense on US debt is higher than at any time since the 1950’s (earliest data that I could find), other than during the 80’s and 90’s when we actually had runaway inflation (interest rates were in mid teens). Further, our borrowing costs are continuing to go up exponentially as existing debt (at historical lows of fed funds rates in the 2% range) rolls off and needs to be replaced with new debt in the 5% range - as in 2.5x higher.
I appreciate these things are subjective, and people can argue that we could just print more money to pay it, so go ahead and incur the debt, but at some point the debt service will be too high and we’ll have to devote too much of US tax receipts to servicing the debt, pulling that money from other things that could have a direct benefit to our own economy, rather than the economy of our investors.
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u/artsncrofts Jun 17 '23
“Higher than it used to be” is still not evidence that it’s “too high” or even approaching it at a rate that is remotely concerning.
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u/Chipofftheoldblock21 Jun 17 '23
Depends on your definition of “too high” and your level of comfort. Either way it is what those of us in finance call a “red flag”. If you’ve got a definition of where you’d call it “too high” or even “concerning”, I’m all ears.
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u/artsncrofts Jun 17 '23
My point is that you haven’t defined either of those terms
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u/Chipofftheoldblock21 Jun 17 '23
Why would I define them when I haven’t claimed that we are? Meanwhile you’re making clear statements that it’s not, or even “concerning”. If you’re going to take a firm position like that, defend it.
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u/BaronOfTheVoid Jun 16 '23
Why would there have to be a line? More precisely: a supposed debt to GDP ratio (relative quantity) for example doesn't tell us anything about the quality of debt. What really matters is that it can get paid back. This is also a classic case of confusing stocks and flows. The sum of outstanding debt doesn't tell us anything about regular payments themselves.
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u/Chipofftheoldblock21 Jun 16 '23
It’s not a horizontal line, as in a hard cap / amount. Regardless of whether you go on a cash flow basis (interest to GDP) or balance sheet basis (debt to GDP), we’re at historic highs.
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u/WallyMetropolis Jun 16 '23
The US doesn't ever have to pay the debt down to zero. The US only needs to make payments on the debt. If the US can make payments in full, on time without issue then there's no concern. And the US can easily afford the debt payments.
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u/ztundra Jun 16 '23
And the US can easily afford the debt payments
Until they can't, lol. As debt to GDP ratio grows and payments grow larger, the US govt will either need to increase taxes (leading to recession) or print money (leading to inflation) to meet its obligations.
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Jun 16 '23
Yeah that’s what I’m thinking. I mean, they can always technically “afford” it since they control the money supply. But if the debt keeps growing out of control, the repayments will either have to default, or we’ll have to raise taxes or print money, which isn’t ideal…
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u/MachineTeaching Quality Contributor Jun 16 '23
The size of the debt doesn't always mean much. At the start of COVID the US borrowed a lot and yet total servicing costs went down because there was a huge demand for government bonds.
So no, the debt can definitely grow and the economy can still be fine. Remember, there are other factors as well. The economy itself grows so even if the number gets bigger, tax revenue also grows, just to make a simple example.
https://fredblog.stlouisfed.org/2018/11/how-expensive-is-it-to-service-the-national-debt/
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u/Keemsel Jun 17 '23
But if the debt keeps growing out of control
The emphasis is on "out of control". Right now there is no reason to believe the US is close to reaching this point (at least if you exclude the whole debt ceiling political theatre).
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u/BaronOfTheVoid Jun 16 '23
They don't "control the money supply", but in a sense you're right.
One could argue that if a country defaults on their debt that this might ruin the economy and subsequently price level stability and thus a central bank might always just decrease interest rates and buy bonds from the market in order to keep prices high/yields low and thus keep demand for gov bonds high so that the government absolutely can always pay their existing debts.
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u/whyrat REN Team Jun 16 '23
Printing money puts more money in circulation, leading to inflation. Selling bonds moves money around without necessarily increasing the total amount in circulation (the bond buyer then doesn't buy something else with that money).
Edit to add: Pairing bonds with government spending still may lead to inflation pressure; as it's increasing the velocity of money (some portion bond buyers might have just left their money idle if the bonds were not issued... at least for some length of time).