So where does that leave the question of “sovereign obligation”? Of course, when the government issues bonds to private savers (and I stress, that is what they are: they are not investors because the government is not dependent on the funds received to undertake its activities, since they have already been paid for by the Bank of England), it undertakes to repay them at maturity, with interest. But that is the product of a set of rules which the government itself has chosen to create. But, as I note, the government could fund itself without issuing bonds. It could fund itself without paying interest. It could, if it wished, change the terms on which bonds operate. In other words, this totally artificial human construct called the bond market can have the rules under which it operates, and even the understanding of why it operates, altered if the political will to do so existed. As a consequence, there need be no hard, external “brake” imposed by markets on the government’s fiscal capacity. That there is a pretence that such a brake exists is the consequence of neoliberal political policy choices, and nothing more.
Ho Hum.
Sorry, too many subordinate and subsubordinate clauses. Got lost after the first opening bracket.
It seems to me that with MMT (or Spud’s understanding of it) government has, in effect, a perpetual motion machine. Output for no input. Given that this, in Spud’s description, offers Rachel from Complaints the answer to all of her prayers, why doesn’t she take it? Why doesn’t anyone? I find it hard to believe that Red Rach has such sympathy for evil capitalist bond holders and that market that she simply pays them interest out of the sheer goodness of her heart.
Remarkable, isn’t it, that the development of bond markets and the trust associated with them, by clever people in sophisticated societies over many centuries, was completely unnecessary?
How lucky we are at last to have Prof Potato to help us to see through these old fashioned conventions, and usher in the unconstrained state spending that will take us to the Promised Land!
“… because the government is not dependent on the funds received to undertake its activities.”
Abolish all taxes then.
…this totally artificial human construct called the bond market can have the rules under which it operates, and even the understanding of why it operates, altered if the political will to do so existed.
Interesting how leftoids imagine that labelling any constraint to their fantasies a “human construct” or a “social convention” somehow removes the constraint. All human institutions are human constructs, but it doesn’t follow that institutions are never anchored in reality. Many are, having been developed by trial and error over hundreds, even thousands, of years. Language is a human construct, so leftoids imagine that words like ‘woman’ can be redefined to fit their ideology: ‘woman’ as ‘adult human female’ is a constraining definition and so a mere convention that can be abolished to allow a woman to have meat and two veg.
I will say this in his Defense (and I don’t often say that as regular contributors here will know). I think he is saying that they could issue Gilts with zero coupon and there’d still be a demand for them – partly because Brown’s destruction of pension funds requires them to hold them as ‘safe assets’. I don’t think he’s advocating not paying a coupon on bonds which have already been issued. I will agree obviously that it’s an insane idea and also that the post as a whole is so convoluted that it’s largely of academic interest. His explanation of the UK sovereign bond market would fail an economics ‘A’ level certainly.
VP: Candidly, that just proves the A level economics sillybus is completely wrong.
“… because the government is not dependent on the funds received to undertake its activities.”
I suppose the Government can “buy” anything in this country it wants, using printed monopoly money, at gun-point, but how exactly does the esteemed professor expect to buy oil and gas from the USA, or food imports, or anyone else supplying this country, who won’t take our photocopier output “money”, and cannot be robbed?
Has he not understood the concept of foreign currencies and international trade?
He belongs in a closed economy like North Korea.
Not to mention that if you run the presses without bonds to back them, very quickly no one who has any option will take the resulting bills.
This likely includes the police and the army. You definitely want to pay those if you’re in government.
The Soviets got by with special stores for the people they really wanted to keep onside. I wonder how soon those will be showing up in Britain.
As Bill Clinton said “You mean to tell me that the success of the program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?”
And the answer was silence.
Gamecock looked up Perfidious Albion. Murphy’s picture was there.
Ok. So bonds are “artificial,” markets are “pretence,” and the government can just rewrite the rules whenever it feels like it. Seems legit.
Bonds aren’t legal obligations then I presume? Cool. And obviously it wouldn’t destroy credibility or scare off capital and hike future borrowing costs.
Yet again the UK can revert to Spud’s magic printing press and it won’t recklessly spark inflation, currency chaos and higher rates. And I presume that as the bonds are imaginary, so is the money Spud just printed and the ensuing gazillions in tax he’ll again want to steal from anyone with two brass farthings. We can just ignore it all.
When he attempts to smile I just want to punch some sense into him.
I wouldn’t be so sure…
Nothing there to restrict the change to the terms on future bonds: any bonds are in the crosshairs, I think. And Spud, despite being a supreme moron, has some infantile cunning – he knows the market value of bonds currently outstanding dwarfs the value of bonds that will be issued once he ‘changes the terms on which bonds operate.’ Since that’s where the money is, that’s where he will attempt to appropriate wealth.
@Van_Patten – “they could issue Gilts with zero coupon and there’d still be a demand for them”
Certainly. They’re auctioned, so zero-coupon gilts would fetch a price which is equivalent to the value of a zero risk promise of their face value at maturity. Such an instrument could be useful to many people as gilts are exempt from Capital Gains Tax, so they’re equivalent to index linking the value of cash.
Which is why – at least as far as I’m aware – there are in fact zero coupon gilts.
In fact, I wrote to the Debt Management Office about this recently. I know that gilts are CGT free, that gilts interest is not (so, the opposite of US munis, where the interest is income tax free and capital gains are not. US munis trade at lower coupons/yields than Treasuries, one of the grand examples of how taxes alter investment decisions. Also, the usual finding is that “how much” lower the coupons are is a function of the tax rates of the buyers). So, knowing something about who buys zero coupon gilts, why – and whether there’s enough buying for the tax break to change the yield – would be, you know, interesting.
The response I got back was, well, mumble mumble, no work been done on this, mumble. Now, me, I call bullshit on that. No public work perhaps.
But it would be interesting, no? Does tax free lending to govt lead to govt paying a lower coupon than taxable lending to govt? My immediate answer would be “Yes, how stupid are you?” But would be nice to know, from horse’s mouth, no?
A bloody good question. Actually if we include the ‘how stupid are you’ it’s 1.5 good questions.