The Weekend Quiz – October 15-16, 2016

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1. A high give for me. I got all answers correct three weeks in a row!

2. I understand why i got #3 wrong (nuance), but what am i missing on #2? The non-government sector DOES enjoy an increase in its financial asset holdings as a result of its sovereign government’s net spending, regardless of whether debt was issued to match… yes? Is it just that it happens, but the public may or may not “enjoy” it? 😛

3. David Swan, in regards to question #2 I believe that MMT considers the sovereign government spending to occur first and the issuance of any debt that might be associated with it in some way to occur after the fact. And that debt issuance is therefore better understood as a separate asset swap that neither increases or decreases the assets of the private sector, it just changes the composition of those assets. But, even if I am correct on that part, what I don’t understand is how the interest component of any debt issuance is addressed. Interest payments by the government are related to the issuance of debt and it seems to me that such payments should increase net financial assets in the private sector whenever interest rates are positive. Since MMT holds that the government can pay zero interest on its sovereign debt if it chooses to, it seems to me that paying any positive interest is going to increase private sector assets. Perhaps that will be addressed in the answers for the quiz.

   I also found question #3 to be difficult and await the answers to see if I got it right for the right reasons. In the meantime I will hang my Friend of the People Award over the fireplace and celebrate.

4. David

   You are entirely correct, except the question is specifically about the debt issuance, not the net spending. As you say, the debt issuance makes no difference; the non gov enjoys the increase, but not as a result of the debt.

5. Jerry

   If I’m not mistaken, interest payment (both positive or negative) on government bonds does indeed alter the amount of net financial assets held by the non-government sector. But at the moment of issuance of the new bonds, it is the same amount of reserves (equivalent to the price of the bonds purchased) that moves from the checking account at the CB to the savings account at the CB. The only relevant thing happening in the process is that funds change form, they switch from a very liquid form to a less liquid form.

   If the yield of these bonds is not zero, the amount of those funds in the less liquid form will be increased or decreased at some point in the future, which means that the amount of financial assets of those who hold the bonds will change. But at inception, bond buyers are handing over currency for something that is worth the same amount of currency at that specific moment. If they resold those bonds right away, they would not be making any financial gains, in theory, and the value of their financial assets would remain unchanged. Only if holders decide to keep the bonds in their portfolio would they be making financial gains (or losses).

   I think this is the logic behind Warren Mosler’s claims that the US non-government sector has been giving up a huge amount of interest income from the government sector when bond holders decided to sell their bonds to the FED in exchange for liquidity during the QE period. The sooner you get rid of the bond (fixed income), the lower the total interest revenue you get from your investment. And if the liquidity you get when selling the bond to the government sector before maturity is invested in non-government sector financial assets, there are no net gains for the non-government sector but a redistribution of the inside money.

6. Xanti, thank you for the reply. I think I understand that in theory with a perfect auctioneer (and perfectly complete market) that the exchange of the more liquid asset (cash or its equivalence) for the little bit less liquid asset of a U.S. Treasury Bond (for example) implies that the exchange is equal in terms of assets at the time of the exchange. Except that in a typical exchange both sides will still think they are getting something or they wouldn’t go through the trouble of the process. But in this case the government is not getting anything, since in MMT theory, which I believe is correct, the government doesn’t even need to issue debt. Only the bond purchaser is benefiting from this exchange. The bond purchaser arguably is receiving an increase in something that induces the purchase of the bond. It could be personal satisfaction, but I would think that a net gain in financial assets is more likely.

7. 0 from 3 grrr

8. Jerry:
   “It could be personal satisfaction, but I would think that a net gain in financial assets (IN THE FUTURE) is more likely.”

9. Hi totaram, thank you for quoting me but I don’t see the distinction that (IN THE FUTURE) is supposed to make. In my admittedly incomplete understanding of MMT, governments that issue their own currency do not need to borrow it back by selling bonds. If such government does in fact sell bonds, then that is an act of welfare of sorts for the purchasers, whether at the time of the sale or sometime in the future. Now if the bond was structured so that it was non-transferable (couldn’t be sold) and also unable to be used as collateral for any type of loan, then perhaps there would be a reason to issue them, because they might actually constrain aggregate demand in that case. But that is just my thinking at the moment, and I am trying to clarify that thinking, and hoping to learn. So please do comment further if you can help me with that process of understanding.