great stuff, as always ... question: why does the US government have to roll over its debt? Could it not just print money to pay it off? (inflation risk aside)
Good question, and one that requires a surprisingly complex answer. First, it is worth noting that both money and bonds are government debt obligations. The government guarantees that $5 in cash is backed by the full faith and credit of the US government and only accepts cash/bank deposits to clear private debts to the federal government (like taxes). In the same way, the government guarantees that the owner of a $1,000 10 year government bond will be given $1,000 in 10 year's time. The only difference is that the government does not pay interest on cash, but does pay interest on bonds.
In theory any government could simply print and directly issue cash in order to fund itself (think about how Chinese governments deployed the first bank notes) and avoid issuing bonds all together. In practice this turns out to be an extreme headache, especially in modern economies. It requires pinpoint coordination between fiscal and monetary authorities in order to manage growth and inflation while making private debt the only source of interest-bearing financial assets.
Governments therefore issue bonds to mitigate their risk and the risk to the economy as a whole. Instead of just issuing money (a government debt obligation that pays 0 interest) you also issue bonds (a government debt obligation that pays some interest) and create a central bank separate from the fiscal authority in order to manage these debt obligations and their interest rates. Having a separate set of debt obligation with a fluctuating interest rate gives the central bank the ability to better manage the macroeconomy and reduces the risk of large nominal fluctuations that would be caused by funding the government through cash only.
Now, on a technical level the Federal Reserve is prevented from directly printing money in order to pay off the debt. They cannot simply purchase bonds from the Treasury and credit them with cash. However, they can buy bonds from private actors using bank reserves (a different kind of government debt). This functionally guarantees government bonds and allows the Federal Reserve to set interest rates on those bonds. If you imagine the Federal Reserve setting interest rates on 10 year bonds at 0% then these bonds are functionally equivalent to cash and voila, the government has technically printed money to pay off some of its debt. This is currently what is going on with Yield Curve Control in Japan, and the results are not as dramatic as you would expect (inflation remains negative in Japan currently). But this also means that as long as their currency is in use governments will need to issue and roll over some obligations whether that be cash, bank reserves, or government debt.
great stuff, as always ... question: why does the US government have to roll over its debt? Could it not just print money to pay it off? (inflation risk aside)
Good question, and one that requires a surprisingly complex answer. First, it is worth noting that both money and bonds are government debt obligations. The government guarantees that $5 in cash is backed by the full faith and credit of the US government and only accepts cash/bank deposits to clear private debts to the federal government (like taxes). In the same way, the government guarantees that the owner of a $1,000 10 year government bond will be given $1,000 in 10 year's time. The only difference is that the government does not pay interest on cash, but does pay interest on bonds.
In theory any government could simply print and directly issue cash in order to fund itself (think about how Chinese governments deployed the first bank notes) and avoid issuing bonds all together. In practice this turns out to be an extreme headache, especially in modern economies. It requires pinpoint coordination between fiscal and monetary authorities in order to manage growth and inflation while making private debt the only source of interest-bearing financial assets.
Governments therefore issue bonds to mitigate their risk and the risk to the economy as a whole. Instead of just issuing money (a government debt obligation that pays 0 interest) you also issue bonds (a government debt obligation that pays some interest) and create a central bank separate from the fiscal authority in order to manage these debt obligations and their interest rates. Having a separate set of debt obligation with a fluctuating interest rate gives the central bank the ability to better manage the macroeconomy and reduces the risk of large nominal fluctuations that would be caused by funding the government through cash only.
Now, on a technical level the Federal Reserve is prevented from directly printing money in order to pay off the debt. They cannot simply purchase bonds from the Treasury and credit them with cash. However, they can buy bonds from private actors using bank reserves (a different kind of government debt). This functionally guarantees government bonds and allows the Federal Reserve to set interest rates on those bonds. If you imagine the Federal Reserve setting interest rates on 10 year bonds at 0% then these bonds are functionally equivalent to cash and voila, the government has technically printed money to pay off some of its debt. This is currently what is going on with Yield Curve Control in Japan, and the results are not as dramatic as you would expect (inflation remains negative in Japan currently). But this also means that as long as their currency is in use governments will need to issue and roll over some obligations whether that be cash, bank reserves, or government debt.
If you want to read more you should check out this piece (if you haven't already): https://apricitas.substack.com/p/the-yield-curve-is-a-policy-choice
amazing .... thanks!