Re: fiscal deficit

["Kazuhiro Kurose" <kurose@xxxxxxxxxxxxxxxxxxxxxx>]

Hi William

> The government does not have to issue bonds to operate it
> fiscal policy correctly.
> Bond issues are about monetary policy.

I can understnad that the government does not necessarily need to issue bonds to conduct fiscal policy. It is possible
that the government can conduct fiscal policy within its budget. In this case, government bonds aren't issued. But why
are bonds issues about monetary policy? I think that the decision whether to issue bonds or not is made by the
government, not the central bank. And I think that what you said destroys the traditional understanding that the agent
to conduct fiscal policy is the goverment and the agent to conduct monetary policy is the central bank. Perphaps, is it
your aim??

> the outstanding stock
> of paper may reflect accumulated budget deficits but it need not. This
> depends on
> how the central bank deals with the consequences for the cash position of
> the system that
> arise from the deficits and what cash rate target they are pursuing.

I can't understand this point. What does "cash position" mean? I guess that it is the ratio of cash in total wealth. If
my guess is correct, what the central bank can change is the RATIO of cash to the outstanding stock of goverment bonds,
not the outstanding stock of government bonds itselves. So I think that the outstanding stock of government bonds always
reflects the accumulated deficits.

> (a) increased money holdings - why is that bad? people may choose to hold
> the surplus cash
> in the commercial banks - their preference. It is of-course unlikely that
> all the reserve excesses
> will be taken up in this way.
> (b) increased holdings of wealth - why is that bad? especially when the
> paper you are holding
> is issued by the issuer of the currency.
>
> You make the point that this would induce a lack of effective demand. Why?
> these portfolio changes
> have followed the net goverment spending which is required to fill the
> spending gap left by the non
> government sector. The stock changes are driven by the flow.

I can perfectly understand. I have misunderstood.

 **************************************
  Kazuhiro Kurose
  Graduate School of Economics and Business
  Administration, Hokkaido University
  Kita 9 Nishi 7, Kita-Ku, Sapporo, Japan
  060-0809
    TEL: +81-11-716-2111 ex:2786
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