RE: unlimited bond issuance and the interest rate

[Simon Camroux <simon.camroux@xxxxxxxxxxxxx>]

Dear Hyman

May I have all your money.

Simon

-----Original Message-----
Sent:	Tuesday, 2 June 1998 13:57
To:	POST-KEYNESIAN THOUGHT
Subject:	Re: unlimited bond issuance and the interest rate

This discussion is a sterling example of how far out in left field this
lunatic philosophy of Economics has strayed.  Throughout most of man's
existence upon earth, the extent of the Agrarian era, his one over
riding obsession has been enough Food with which to survive -- the
"living" we all seek. Food is Real.  Money is Not.  Money in all its
forms, bonds etc. is pure fantasy.  Food grows on trees, Money does not.

Food has a point of satiation for all people, no matter their status in
society.  Any other item of GDP is Food derived and subordinate to Food,
in that nothing can be produced except by a well enough Fed producer.
That means that measuring the urge to acquire Food with the fantasy
concept of Money, (invented for the sole purpose of acting as a
Surrogate for Food in a scarce Food marketplace in order to deny access
to those for whom there was not enough to supply) that when Food
availability reaches that satiation point, enough to supply everyone,
that there will be then no demand for Food.  Food will then become
priced at Zero, complete deflation, an ideal price.  That has always
been the classic definition of Inflation, (Excess Money Seeking Scarce
Food) as exampled in Germany and other places, not the contrived
Inflation imposed today by Dr. Alan Greenspan, in the Food abundant
Post-Agrarian era, by deliberately putting the cart before the horse,
just to make a big deal out of the lunatic concept that is Doctrinaire
Economics.

For the fantasy that Money and bonds represent, there is no point of
satiation. For Food, even the mundane example of salt, there is a point
of supply wherein there will be no demand, and it will go begging at
zero price, what was supposed to be the inevitable restoration at long
last of the ancient Garden of Eden, a century ago.

For all those who take this god forsaken philosophy seriously, I'm sure
there are enough erudite scholars to point out any errors in my analysis
-- if there were any errors.  Either speak up and point them out, be a
man and admit these errors and let the world become restored to sanity.
Point out my error and I will shut up.  Or, as I expect, you will shut
up, even resort to filter me out, because none of you can refute this
simple analysis.

Hyman

Richardson, David (DPL) wrote:
>
> Greg Nowell wrote
>
> > There is probably nothing more basic to economics than
> > the law that increasing supply decreases price for a
> > given demand curve.
> >
> > Consequently we would expect that a rapid increase in
> > the production of bonds would decrease their price
> > (raise the interest rate).  This has nothing to do with
> > whether "there is enough money" to "fund" bonds.  It
> > simply has to do with the price people are willing to
> > pay for something which whose supply is increasing.
> >
> Since there has so far been no response I thought I might have a go.
>
> It just sounds like ordinary economics to suggest that the more of
> something there is, the lower will be the price.  Hence it just seems
> crazy to suggest that the government could issue more of something
> without seeing its price fall.  In the case of a government bond, any
> reduction in its price means an increase in its yield.  That will
> necessarily increase the ruling interest rate.  Hence the apparently
> obvious proposition that government deficits/debt increases interest
> rates.
>
> We would all expect that the above would be a fairly close description
> of what might happen in the case of a salt producer, to use Nowell's
> example.  However, government debt, including money as a special case of
> government debt, comes into being under very unusual circumstances that
> also need to be spelt out.  Additions to government debt, or at least
> additions to the nominal value of government debt, come about as a
> result of government deficits, an excess of government spending over
> government revenue.
>
> By failing to spell out the context in which government debt comes into
> existence we can fail to appreciate that the analogy with a salt
> producer breaks down.
>
> A government deficit can only come about in a closed economy (to keep
> the example simple) if the private sector is willing to save sufficient
> of its income to "make room" for the government deficit.  Otherwise
> national income will grow until sufficient savings are generated and/or
> higher taxes on the higher national output eliminate the deficit anyway.
> This is just the ordinary unfolding of the multiplier process.  The main
> point is that if there is still a budget deficit, it means that savers
> are making equivalent savings - plus any needed to cover the difference
> between corporate investments and savings.
>
> It is also worth noting that the spending by government normally means
> the payment by the government in cash (or a claim on the central bank,
> which amounts to the same thing).  Hence the recipients of government
> expenditure find they have additional financial assets.  They may save
> the additional assets, either in the original form they are received, or
> swap them for something else with a financial intermediary of some sort,
> or they may spend them, leaving the next recipient of that money with a
> new choice of how to dispose of the money/financial asset.  Of course,
> revenue raising exercises present the equal and opposite scenario.  If
> we have a government deficit we have an excess of those receiving
> money/financial assets from the government and so we can concentrate on
> them for the purpose of exposition.
>
> Let us abstract from the corporate sector, just like we have with the
> external sector, to keep things uncomplicated.  That would mean savings
> in the private sector are equal to the budget deficit.  Now the budget
> deficit represents the borrowing task, the value of the bonds and other
> financial assets the government must "sell" to finance the deficit.  It
> just so happens that is also exactly equal to the net financial assets
> the private sector needs to find in order to park its savings.  I
> emphasize the word "net" because we could have a level of financial
> intermediation in which case the government issues bonds worth $100,
> banks accept deposits from savers of $100 and put that money to work by
> purchasing $100 in government bonds.  The net position of the banks is
> unchanged, but individuals now hold greater financial assets and the net
> liabilities of the government have increased.  Of course in principle we
> could have many levels of financial intermediation between the
> government's bond issue and the savings vehicle of the ultimate savers.
> The important thing is that at the end of this process the net worth of
> the private sector increases by $100 while the debt of the government
> increases by $100.
>
> The interesting outcome of all this is that the same multiplier effects
> that bring savings into line with the budget deficit also have the
> effect of bringing the demand for financial assets into line with the
> supply of financial assets.  (At this point we could quote Keynes
> extensively to show that he appreciated this point and, indeed, may have
> been rather frustrated that few others seemed to follow the point at the
> time.  That is rather a diversion, however, if anyone wants to follow
> that up, I made reference to Keynes's views on this point in the
> Cambridge Journal of Economics (1986) in a response to an earlier
> article by Asimakopulos.)
>
> So far in the story there is little for interest rates to do.  The
> demand and supply of financial assets are brought into line through the
> Savings = Investment identity.  Quite apparently if the private sector
> accepts an excess of payments over receipts from the government, it will
> thereby also be accepting the additional financial assets that creates.
> At the current interest rate the amount held by (past) savers in
> financial assets must necessarily be the amount issued by government and
> other debtors.  If people hold more than they wish to - a possibility
> that seems to be implied by notions of excess loanable funds, interest
> rates will not necessarily fall to persuade them to hold the financial
> assets.  Instead people will merely spend the excess, generating further
> income for third parties, until eventually the "excess" finance is held
> by people who want to hold the assets.  If in any sense one felt their
> financial holdings are greater than they want, there are many ways of
> dissipating that wealth. It is hard to imagine a disequilibrium that
> might get a change in interest rates going.  Putting that differently,
> whether I chose to spend my receipts rather than save them, there is
> little consequence for interest rates.
>
> Of course none of this is to suggest that interest rates will not
> change.  Clearly transactions motives and other motives to hold money
> are brought into play by the situations we have been discussing.  But
> those changes would come about as a result of changes in income etc that
> unfold over time.
>
> All of the above follows from a government deficit.  This needs to be
> carefully distinguished from a situation in which the composition of the
> outstanding government liabilities is subject to change.  Central banks
> can and do alter interest rates by changing the proportions of different
> financial assets held by the private sector, especially the proportion
> of interest bearing to non-interest bearing assets.  But this is usually
> playing around with the different types of government debt, exchanging
> bonds for cash, rather than being a question of the total debt
> outstanding.  The two should be treated as distinct issues.  It is
> likely that false conclusions are the result of confusing the total
> government debt with the composition of that debt.
>
> You would not want to generalise from any of the above arguments to
> suggest it is always the case that the "government can ... set the level
> of demand via an unconstrained issuance of bonds, with no effect on
> interest rates or the value of money per se."  However, if there are
> substantial interest rate effects and changes in the value of money
> (inflation), it is not the issuance of debt that is likely to be the
> problem.  We should instead round up the usual suspects.
>
> We would want to conclude that debt is a case that violates "the law
> that increasing supply decreases price for a given demand curve" perhaps
> because we cannot insist on a given demand curve in the present context.
>
> Sorry this posting is getting a little long, but Nowell has raised
> important issues.
>
> >