Limits to government spending are not determined by private bond markets

Wednesday and a relatively short blog post after two rather long posts in the preceding two days. The first topic concerns the limits to government spending. The second brief topic reports on research where it was found that the music of AC-DC confounds Lady Beetles and soybean aphids. Who would have thought! Which was by far the most interesting research paper I have read this week after dealing with the likes of Stuart Holland on Monday and Tuesday. And then some music from around the world to smooth out the day.

Limits to government spending

There was a tweet being retweeted like there was no tomorrow last week which linked to an article in the Financial Times (July 14, 2018) – Fiscal hawks’ tales of doom do not fly with the young.

The article had a picture of the latest progressive political star – Alexandria Ocasio-Cortez with the caption that she:

… backs the view that restraints on a government’s spending are primarily set by the amount it can borrow without fuelling inflation.

Progressive types then thought it was useful to retweet this incessantly for a few days.

My response – I certainly hope that Alexandria Ocasio-Cortez does not back that construction of the limits on spending for a currency-issuing government.

And I certainly hope that progressives do not embrace it either.


It is fundamentally incorrect and just reframes the way neoliberals think and uses their sort of language.

The article was questioning the:

… warnings from some fiscal hawks about how financial markets would be overwhelmed by the wave of government bonds needed to fund the stimulus.

It noted that the evidence has not supported the fiscal hawk scaremongering.

It asks: “Where are the storied bond vigilantes?”

It also correctly notes that:

Because the US borrows in its own currency, warnings about too much Treasury issuance are in reality about two spectres: harmful increases in inflation, or a dose of political mismanagement so severe it would lead to a technical default by the US.

The “technical default” refers to the ridiculous process where the US Congress approves increases in the ‘debt ceiling’. The theatre around that process might one day see the US government ‘run out of money’ because the politicians have legally forced it to.

Of course, that process doesn’t negate the fact that the US government can never run out of US dollars if it doesn’t want to. We cannot say the same thing about, say, a Eurozone Member State government.

And it says that the deficit hawks:

… have now educated a generation in the risks of dogmatic opposition to government debt, and made austerity a more tangible threat to young Americans than harmful inflation. Small wonder then that Alexandria Ocasio-Cortez, the self-described democratic socialist, was recently nominated to represent New York in Congress.

I would not have used the word “education” to describe the propaganda pumped out by the hawks. Explicit lies are not education. Education is about enlightenment not deception.

Which is why the vast majority of students who undertake macroeconomics in universities around the world are not receiving an education. They are being indoctrinated with a particular ideological frame.

The FT article then goes off the rails when it says that:

She has backed the increasingly popular view that restraints on a government’s spending are primarily set by the amount it can borrow in its own currency without fuelling inflation – not its annual tax revenues.

Some economists may find this perspective uncomfortably liberal, but it is not necessarily inaccurate. It acknowledges global demand for US Treasuries, which is a more honest depiction of the government’s finances than a Treasury that is only capable of spending the amount it raises through tax revenues in any particular year.

She being Ocasio-Cortez.

The view might be popular and a challenge to the mindless mainstream economists (the hawks) but it is also incorrect.

It is also not a view that progressives should be propagating as it operates within a neoliberal frame.


Lying behind the view, implicit yet fundamental, is the myth that the US government (or any currency-issuing government) has to issue debt in order to spend.

The corollary, which is the proposition that progressives are meant to “back”, is that as long as the private bond markets are receptive to that debt issuance, the government can spend.

The related (and final) proposition in this flawed logic stream is that under those circumstances, the problem government spending has to address is its inflationary consequences, which become the limits on the deficits.

It sounds – sort of intuitively reasonable – to a lay person.

But intuition and common sense is a dangerous guide to follow in these matters.

I discussed the perils in this blog post – When common sense fails

The reality is as follows:

1. A currency-issuing government is only limited in its nominal spending capacity by the real resources (goods and services) that are available for sale in that currency.

2. Such a government can always purchase anything that is for sale in that currency, including all idle labour, irrespective of whether the inflation rate is 1 per cent or 10 per cent and independent of its past fiscal balance outcomes.

3. The requirement that deficit spending be matched by debt-issuance to the private sector is purely voluntary.

4. The government spending, in fact, provides the net financial assets, which allows the non-government sector to purchase the debt.

5. It is true that accelerating inflation might emerge before all available resources are fully utilised as a result of sectoral bottlenecks.

6. That is why, the government should introduce a Job Guarantee, which allows the government to guarantee ‘loose’ full employment using automatic stabilisers by purchasing at fixed rather than market prices. In other words, it can bring all labour into productive use without accelerating inflation.

7. Hitting an inflationary wall does not mean the government is unable to spend further in nominal terms. Financially, the government could just keep putting out orders for goods and services and chase the market price upwards, with hyperinflation the ultimate result if this behaviour persisted.

8. Such a strategy would be futile though.

You can see in those eight points, I have broken the nexus between spending, debt-issuance and inflation.

It should be further recognised that all spending (government and non-government) carries an inflation risk.

The following blog post considers some of these issues (among many others) – Real resource constraints and fiscal policy design (June 21, 2018).

AC-DC and the Lady Beetles

Some biologists from the US Mississippi State University published an article last week (July 10, 2018) – Testing the AC/DC hypothesis: Rock and roll is noise pollution and weakens a trophic cascade – which sought to study the impact of “Anthropogenic sound” on the environments using “lady beetles, soybean aphids, and soybean plants” as the “model for studying the direct and indirect effects of global change on food webs”.


Here is a press report on the study – Rock and roll IS noise pollution, Mississippi State study shows – if you don’t feel like reading the scientific paper linked to above.

The scientists found that AC-DC’s null hypothesis that “Rock and Roll Ain’t Noise Pollution” could not be sustained.

Instead, the alternative was found to be statistically significant.

The researchers subjected an ecosystem of lady beetles, aphids and soybean plants to around the clock (“Shook all night long”) “rock music, country music and more conventional urban sounds to test the effects of noise on an environment.”

The ladybirds became “less effective predators, which resulted in higher aphid populations and lower biomass for soybean plants” when AC-DC was blasting out.

But just before you start calling for bans, the researchers also found that tractor noise had the same effect.

And here it is. From the 1981 album – Back in BlackRock And Roll Ain’t Noise Pollution.

AC/DC alas, sadly, without Bon Scott and, more recently, Malcom Young, not to mention the retirement of bass player Cliff Williams and the criminal complexities surrounding drummer Phil Rudd.

Music from around the world …

I love Playing for Change organisation which cruises the world recording musicians and puts them together playing great songs.

This version of the Bob Dylan composition – All Along the Watchtower

In this version you get Lakota singers and dancers, sitar player in India, various hand drummers, guitar players from here and there, violin player from the US and Lebanon, and more.

And the Doors drummer John Densmore pops up playing his drums at Venice Beach.

One of the better covers of this song.

And here is the best version from one of the best albums ever – Electric Ladyland – recorded by Jimi Hendrix in 1967 and released in 1968 on Reprise.

I bought this album as an import (there was one shop in Melbourne that sold imports at the time) while still a teenager. I still play it.

The 15 minute version of Voodoo Chile with Stevie Winwood on organ (recorded live in New York) is without equal.

The pop music reviewers of the day didn’t like the album – but I considered they just weren’t ready for its genius.

I have been listening to this album today while typing.

I would also add that the reference being “all along” a “Watchtower” confounded people as to what Dylan meant, but that is another story.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

This Post Has 13 Comments

  1. AOC has done interviews with Real Progressives:
    She gets to econ and MMT at around the 38 min mark.

    and a Justice Democrats interview with Stephanie Kelton:

    She has a degree in Econ too.

    She probably misspoke or was misquoted. It seems that she just had MMT explained to her earlier this year and was very receptive, but you don’t become an expert overnight and she has been very busy since then.

  2. My wife reminds me, (perhaps too often), that AC/DC used to play their school dances. (Kuring-gai High).

    It seems to me that MMT is really getting quite an airing; perhaps a small germinating mass of people on socmed. Its relevance as an explainer of what’s required is also coming to the fore, so I guess they’re conjunctural, and not unrelated.
    Myself, and a few others are starting to be like Euro-wasps on twitter, for instance, when the well-meaning types like Koukoulas tout watered-down versions of ‘household debt’. One finds oneself getting quite innovative in re-phrasing for effect, each time, but also to try and not sound like cracked records.
    I scored a letter in The Saturday Paper the week before as a follow-on from Seccombe’s piece on RW think tanks. They edited one sentence out, which kind of detracted from the ‘squeezed for space’ narrative, but then they do that.
    The sentence was something like “The FedGov literally ‘spends the Dollar into existence’ ”
    I guess they just couldn’t cope with that one…

  3. So accurate: [It sounds – sort of intuitively reasonable – to a lay person.

    But intuition and common sense is a dangerous guide to follow in these matters.]

    And by the way…

    Imagine Portugal which is in “constant” violation of article 123 of Lisbon Treaty would not have the bless (I wonder why?) of Timothy Franz Geithner, The Man, at Warburg Pincus which owns DBRS (Dominion Bond Rate Service)… possibly would had imploded already…

    It seems that we just stop to be able to communicate effectively…

  4. ‘I certainly hope that Alexandria Ocasio-Cortez does not back that construction’

    well, if she’s been hanging around Steph Kelton she certainly won’t believe it but is probably using aspects of the mainstream language for political reasons. I assume that is what Stephanie advised Bernie to do.

    Bill has made it clear that he doesn’t support this (presumed) approach and that telling it like it really is is the best way.

  5. Like Simon Cohen says- politicians have to use the mainstream language if they want to get elected. It is probably very unfortunate. Anyways, considering the current laws in place in the US, it is not an incorrect statement, even by MMT standards. Or at least it can be twisted around so that it is not really very incorrect.

    The amount the US Government can borrow in US Dollars is only limited by the law, and, for all practical economic purposes, by the inflationary aspect of spending. Many times Bill has said that the government spends first and that spending by itself allows the private sector to buy the bonds the government issues. Also that the borrowing does not reduce the inflationary potential of the spending. If the law requires the government to link the deficit spending to the borrowing, then under the law at least, it follows that both the borrowing and the deficit spending are practically the same thing and have the same effect- assuming the government only ‘borrows’ when it deficit spends. And if they are limited by anything other than law, it is by inflation.

    It would be nice to not have to twist things around though.

  6. Bill has made it clear that he doesn’t support this (presumed) approach and that telling it like it really is is the best way. Simon Cohen

    I certainly agree since it is the truth that sets one free.

    In that spirit, we should note that fiat itself (i.e. physical fiat, aka “cash” and account balances at the central bank) is the debt of the monetary sovereign (and a liability of the Central Bank). And since, as Bill has noted, positive yields on the inherently risk-free debt of a monetary sovereign constitute “corporate welfare” then positive interest on reserves (IOR) is also corporate welfare. Not only that but even 0% interest on reserves is corporate welfare since demand account balances at the Central Bank, having 0 maturity wait, should have the lowest interest rate of any debt of a monetary sovereign, i.e. have a NEGATIVE interest rate.

    That said, individual citizens, as opposed to banks and other fiat users, have an inherent right to use their Nation’s fiat and should be exempt from negative interest up to say, $250,000, the current US deposit limit, on individual citizen debit/checking accounts at the Central Bank itself.

  7. What Alexandria Ocasio-Cortez said:

    “The idea that we’re going to austerity ourselves into prosperity is so mistaken, and honestly I feel like one of the big problems we have is that, because Democrats don’t have a deep understanding of or degrees in economics, they allow Wall Street folks to roll in the door and think that they’re giving them an education,” Ocasio-Cortez told In These Times last month.

    “They’re not. It’s a con, and they’re getting conned because they don’t understand the transformative power of the purse that Congress has. It’s not just Democrats. I don’t think most of Congress understands how economics works.”

    Hard to reconcile that with the ft stuff.

    She supports a job guarantee.

    She has a degree in economics, not that that counts for much in MMT circles, but I haven’t heard anything from her in opposition to MMT.

    “Still Raining, Still Dreaming” has always been my favorite ELL cut.

  8. Well apparently AOC has just said “Unemployment is low because everyone has two jobs” and that one I just can’t twist enough to be accurate. She should stop doing so many interviews and just get elected at this point. Spend the time reading billyblog instead.

  9. Jerry,
    Your report of the comment made by Alexandra Ocasio Cortez made me actually look the numbers for the number of people in the USA with more than one job. According to Business Insider, German Edition, which was the fastest source that I couid find. The number of people in the USA with more than one job is close to 8 million. The number of officially unemployed is 6.6 million. These numbers make me wonder if holding a second job should be outlawed, as a short term policy.
    Of course it would be hard to enforce such a law. Since, when a persons wages do not match their economic desires the default position in the USA is that you have to do what ever it takes to aquire the money to be able to fullfill the desires. Is it possible to indoctrinate people to lower their level of desires? My guess is that such indoctrination is very difficult because the line between needs and wants is a very wide gray? grey? OK, grau line.

  10. Bill, being an AC/DC fan I could have told you my production often drops dramatically when one of their songs comes on the radio. The ladybugs are probably fans also. It ain’t noise pollution if you like it.

  11. Curt, personally, I would never make it illegal for someone to do more. It is a shame that some people have to work two jobs to make a living though. In a wealthy country like the US. Lots of people are motivated by a desire to provide for their children and family. I doubt that goes away with legislation or indoctrination.

  12. “4. The government spending, in fact, provides the net financial assets, which allows the non-government sector to purchase the debt.”

    If the government spending (deficit) is matched by bond purchases, has it really increased total net financial assets into the economy, or is it only the case if that spending is not matched by bond purchases that net financial assets have increased?

    If the government was to do the latter (deficit spend without borrowing), who is holding the corresponding liability according to GAAP principles, and what exactly is this liability?


  13. Dear Dean (at 2018/07/25 at 9:27 am)

    All spending by government adds to the net financial assets of the non-government sector just as taxation drains the net financial assets.

    Whether the spending (above taxation) is accompanied by bond-issuance is irrelevant in the first instance because it just involves a change in the portfolio mix of those assets held by the non-government sector (some asset for bonds). After time elapses, the bonds attract income flows from the government (interest payments) which then, further add to the net financial assets of the non-government sector.

    best wishes

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