Prof. L Randall Wray dropping some knowledge on why bonds are sold and their effect on the overnight interest rate...
The govt can't sell its bonds unless you already have govt debt aka IOU's (dollars, reserves, etc.) to buy them. All it does when people/banks purchase bonds is shift the govt debt from an non interest bearing type to an interest bearing type. This is done so its central bank can hit its overnight interest rate target: bond sales drain reserves and less reserves in the system puts upward pressure on prices.
The govt can always afford to make the interest payments b/c like all govt payments they are done by crediting bank accounts. The money is keystroked into existence. By contrast when taxes get paid it's keystroked out of existence b/c accounts get debited.
Description:
"Professor L. Randall Wray discussing how bond sales work with a currency-issuing government with a floating exchange rate. Because the government can issue currency (and indeed must every time it spends) there is no need to issue debt in order to spend. What the debt accomplishes is to remove the excess reserves in the banking system that are created by government deficits (government spending creates reserves, taxes destroy reserves), which raises the interest rate. With excess reserves in the system, banks are not able to get rid of them through lending, so overnight interest rates will fall to zero. Selling bonds drains the excess reserves, causing interest rates to rise above zero.
So, the currency issuing government (with a floating exchange rate) doesn't need to sell bonds, and can control the interest rate. The position held by most adherents of Modern Money Theory is that the government should just stop selling bonds, and let interest rates fall to zero as the excess reserves accumulated. Part of the reason is that adjusting the interest rate is ineffective as a tool to stabilize the economy (see more on that here: https://www.youtube.com/watch?v=_E464...) and also partly because keeping the interest rates above zero is a subsidy for the top 1%. Since most of the government bonds are held by the wealthy, and most of the lending in the economy is done by the wealthy, the government keeping interest rates above zero enriches the already-wealthy.
Selling bonds is completely necessary on a fixed exchange rate, in order to lock up your excess currency to minimize your citizens' demands to convert to the reserve currency. But on a floating exchange rate, this is not a problem, because the government doesn't need to hold on to the foreign currency, because they have no peg to maintain."
The govt can't sell its bonds unless you already have govt debt aka IOU's (dollars, reserves, etc.) to buy them. All it does when people/banks purchase bonds is shift the govt debt from an non interest bearing type to an interest bearing type. This is done so its central bank can hit its overnight interest rate target: bond sales drain reserves and less reserves in the system puts upward pressure on prices.
The govt can always afford to make the interest payments b/c like all govt payments they are done by crediting bank accounts. The money is keystroked into existence. By contrast when taxes get paid it's keystroked out of existence b/c accounts get debited.
Description:
"Professor L. Randall Wray discussing how bond sales work with a currency-issuing government with a floating exchange rate. Because the government can issue currency (and indeed must every time it spends) there is no need to issue debt in order to spend. What the debt accomplishes is to remove the excess reserves in the banking system that are created by government deficits (government spending creates reserves, taxes destroy reserves), which raises the interest rate. With excess reserves in the system, banks are not able to get rid of them through lending, so overnight interest rates will fall to zero. Selling bonds drains the excess reserves, causing interest rates to rise above zero.
So, the currency issuing government (with a floating exchange rate) doesn't need to sell bonds, and can control the interest rate. The position held by most adherents of Modern Money Theory is that the government should just stop selling bonds, and let interest rates fall to zero as the excess reserves accumulated. Part of the reason is that adjusting the interest rate is ineffective as a tool to stabilize the economy (see more on that here: https://www.youtube.com/watch?v=_E464...) and also partly because keeping the interest rates above zero is a subsidy for the top 1%. Since most of the government bonds are held by the wealthy, and most of the lending in the economy is done by the wealthy, the government keeping interest rates above zero enriches the already-wealthy.
Selling bonds is completely necessary on a fixed exchange rate, in order to lock up your excess currency to minimize your citizens' demands to convert to the reserve currency. But on a floating exchange rate, this is not a problem, because the government doesn't need to hold on to the foreign currency, because they have no peg to maintain."
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