thegreatdivide
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Prof. Steve Keen explains the idiocy (and failure) of interest on public debt "which must be repaid". https://profstevekeen.substack.com/p/its-not-a-debt-its-a-gift?utm_source=post-e...It’s not a debt, it’s a giftHow interest payments on bonds create money for the banking sector.
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I'm going to show why by starting with an operation which, in most countries in the world, is illegal: the Central Bank buying bonds directly from the Treasury. This operation is illegal for the same reason that smoking marijuana is illegal in most countries in the world, while drinking alcohol is not. It's not because the former is more dangerous than the latter, but because legislators followed conventional wisdom rather than scientific research, and banned the safer drug while making the more dangerous one legal.
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Unfortunately, stupid laws mean that neither Figure 1 nor Figure 2 is legal. Instead, just like a stoner is forced by stupid laws to buy his dope from a dealer, the Central Bank is forced by stupid laws to buy Treasury Bonds from Private Banks. What actually happens in practice is shown in Figure 3: the Treasury sells to Primary Dealers, and the Central Bank buys off the Dealers.
"Primary Dealers" is a very apt label for private banks, given that they function like drug dealers selling to drug consumers today. They only have a market because stupid laws enable their trade.
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The end result of this process is, potentially, equivalent to the direct sale of Bonds by the Treasury to the Central Bank—if the Central Bank bought all the Bonds sold to the private banks. It certainly has no impact on the core fact that the government creates Fiat money by spending more than it gets back in taxation, which in turn increases private sector bank deposit accounts by precisely the same amount.
This changes the situation shown in Figure 1 in one important respect: as well as the Fiat creating money for the private non-bank sector, interest payments on bonds create money for the banking sector.
The reason that I describe the sale of bonds to banks as a gift is that, because of this sale, the Government pays the banks an income stream which it could easily avoid by having the Central Bank buy all the bonds issued by the Treasury.
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Why should the government bestow this gift on the banks? One good reason is that the interest payments compensate the private banks for the costs they incur by running the economy's payments system. Without interest on government-created money, the banks would have to profit solely from their dealings with the non-bank public: from charging interest on private debt, fees on depositors, etc. They do that anyway of course, but the higher the income banks make directly from the government, the less is the pressure on them to entice the non-bank public into debt.
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If we had people in charge of the monetary system who actually understood how money works, then private debt, not government debt, would be kept low, the Deficit Fiat would be kept at a level commensurate with the needs of the private sector for money for commerce and savings, and the finance sector would be kept in check.
Instead, with the anti-government debt obsession, we have inadequate government spending on vital services, inadequate amounts of Fiat money in circulation, and the Dealers rather than the authorities, are in charge of the joint. The "War on Deficits Fiat" has been about as successful as the "War on Drugs".Sleepers, awake!
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Modern Monetary Theory (MMT) (Read 85314 times)
