Why do governments borrow money?

[NewTeaBag]

The bonds FYP was Hilarious, ESP considering that the OP demonstrates a less than serious understanding of basic global finance.

[DcifrThs]

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If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest?

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Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread?

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How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest?

Same result, cheaper method.

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kimchi, you wouldn't have faith in somebody who only answered to themselves would you?

by answering to the markets, a necessary mechanism of restraint and trust is established.

Barron

[Orlando Salazar]

LOL, maybe you should learn macroeconomics (and not from a community college).
In all seriousness, the Gov't debt is indirectly financing our consumption. The biggest owners of our debt are our trade partners. They are giving us their goods for a promise that we will have something worth giving to them in the future.

[DcifrThs]

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LOL, maybe you should learn macroeconomics (and not from a community college).

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why are people ragging on kimchi like this?? he's a really smart guy, far smarter in trading than almost anybody on this forum.

he's asking about an area in which he doesn't have as solid an understanding.

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In all seriousness, the Gov't debt is indirectly financing our consumption. The biggest owners of our debt are our trade partners. They are giving us their goods for a promise that we will have something worth giving to them in the future.

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gov't debt grows now from 2 sources.

1) in response to federal spending deficits/promises/commitments etc.

2) holding the deficit growth constant, govt debt grows on itself to finance previous borrowing

the consumption being financed is a result of the US consumption of foreign goods. the rate at which the government can borrow was artificially pushed down by the chinese pegging their currency to ours. we'd have been paying a higher rate for our govt debt if china didn't buy some $1trillion of that debt.

i don't know to what extent our trading partners are financing our consumption (i.e. comparing % exports for us vs. trading partner vs. % of debt held by that trading partner) but i'm sure it is a lot.

the main point here is that i don't think phrasing it like "they are giving us goods for a promise of something greater in the future" is the best way to say it or how it plays out.

they get something NOW from this. they (the countries from which we net import) get higher growth now than they would not have gotten otherwise (if we didn't net consume so much). and the financing doesn't have to come from those countries as a proportion of the net amount we import. it just has to come from somewhere. foreign central banks are the main holders with china being FAR out in the lead.

Barron

[tolbiny]

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If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest?

[/ QUOTE ]

Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread?

[/ QUOTE ]

How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest?

Same result, cheaper method.

[/ QUOTE ]

kimchi, you wouldn't have faith in somebody who only answered to themselves would you?

by answering to the markets, a necessary mechanism of restraint and trust is established.

Barron

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I just posted this in BFI, but is relevant here as well.
web page

[Orlando Salazar]

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LOL, maybe you should learn macroeconomics (and not from a community college).

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why are people ragging on kimchi like this?? he's a really smart guy, far smarter in trading than almost anybody on this forum.

he's asking about an area in which he doesn't have as solid an understanding.

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In all seriousness, the Gov't debt is indirectly financing our consumption. The biggest owners of our debt are our trade partners. They are giving us their goods for a promise that we will have something worth giving to them in the future.

[/ QUOTE ]

gov't debt grows now from 2 sources.

1) in response to federal spending deficits/promises/commitments etc.

2) holding the deficit growth constant, govt debt grows on itself to finance previous borrowing

the consumption being financed is a result of the US consumption of foreign goods. the rate at which the government can borrow was artificially pushed down by the chinese pegging their currency to ours. we'd have been paying a higher rate for our govt debt if china didn't buy some $1trillion of that debt.

i don't know to what extent our trading partners are financing our consumption (i.e. comparing % exports for us vs. trading partner vs. % of debt held by that trading partner) but i'm sure it is a lot.

the main point here is that i don't think phrasing it like "they are giving us goods for a promise of something greater in the future" is the best way to say it or how it plays out.

they get something NOW from this. they (the countries from which we net import) get higher growth now than they would not have gotten otherwise (if we didn't net consume so much). and the financing doesn't have to come from those countries as a proportion of the net amount we import. it just has to come from somewhere. foreign central banks are the main holders with china being FAR out in the lead.

Barron

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Sorry, smugness traveled from NVG. But, I'd say to really get at his question, he'd need a pretty solid course in IEcon, just to get basic theory / assumptions down. This can take a while to explain properly, that's why I tried to keep an explaination simplistic.

FWIW, When you say 'rate' I want to make it clear you mean 'interest rate' or cost of borrowing fell was pushed down, not that level of debt issued decelerated.

Simple?
China/Jap are our largest trade partners. When we give them dollars for goods, a dollar excess is created on the currency markets. It is in the hands of people who want to covert it to back to goods and services. The more $ the spend, the less they can buy (reduced purchasing power for every dollar spent). A fall in the dollar's value reduce the value of these exporters work. When they get paid less, they work less = Bad for China's growth. China preserves their purchasing power, by making sure that there are fewer dollars on the market. They can do this by purchasing us bonds. Eventually this dollar propping won't be sustainable (not gonna get into why now).

Basically, China has given us a cheap line of credit so that we buy their goods and help their econ grow, and it would be stupid/ economically harmful for us not to use it. Now projects that would be -EV at one interest rate are +EV at a lower rate = Our econ grows. However, because the line of credit has to go through our treasury, the Gov't decides what to do with it first. The same credit china is giving us could be used by private businesses, and they would have more debt. However, the obligation to china is held at the govt level, then spent (poorly) on US private business (Blackwater, Raytheon, and other pork, private hospitals via medicare, etc).

[DcifrThs]

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[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest?

[/ QUOTE ]

Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread?

[/ QUOTE ]

How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest?

Same result, cheaper method.

[/ QUOTE ]

kimchi, you wouldn't have faith in somebody who only answered to themselves would you?

by answering to the markets, a necessary mechanism of restraint and trust is established.

Barron

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I just posted this in BFI, but is relevant here as well.
web page

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you have to excuse me tol, i just have such little tolerance for articles from mises.

it just rubs me the wrong way.

i'm sure alot of the analysis is good, but there are SOOO many words in these articles and the tone makes me uncomfortable.

things like this is where i stopped reading:

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There was a century of sound money. During one hundred years preceding World War I, government touched money hardly more than to establish standards of weight and measure, to lay down the laws of liability and to license bankers.
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In that century the wealth of the world increased more than in all preceding time of economic man.

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here he is trying to assert that the speed of the increase in wealth duringg the 100 years of untouched sound money is (by implication) caused by said sound money.

what about the industrial revolution? unheardof increases in productivity due to massive inventions like the steam engine, the locamotive etc. etc.

is he saying sound money did that or had a huge part in it?

there were also many banking crises (i.e. the failing of a bank...something like over a thousand) in that hundred years (far more in proportion than there were in teh following hundred years)

finally, the amt of wealth created during the NEXT 100 years far surpassed that created during that 1800-1900 period.

i dunno, maybe i'm hugely biased for the govt or just an idiot or an [censored], but i have virtually no tolerance for that type of prose and by extension for links from mises.

i asked borodog to link me to research to back his points NOT from mises and he has yet to do it in ANY other case than with the monopoly discussion (in which he linked non-mises links within minutes of me asking whereas when i asked for non-mises research for other discussion he never responded).

anyways, enough of my ranting.

Barron

[kimchi]

Thanks for the useful (and not so useful) replies.

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the OP demonstrates a less than serious understanding of basic global finance.....LOL, maybe you should learn macroeconomics (and not from a community college).


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Both statements are probably true.

My original question was more about why governments pay interest to private banks on something the banks don't have.

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The banks who buys those bonds need to have the money to buy them, pretty sure they are not getting them without paying.


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My (perhaps incorrect) assumption is that the government issues bonds which are bought by banks using government issued fiat currency that the banks have created (ie. don't own), so this looks like the banks are effectivley getting the bonds without paying.

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he'd need a pretty solid course in IEcon, just to get basic theory / assumptions down

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Without taking a course in IEcon. Here are my assumptions regarding money:

1-Money is someone else's liability and was created by banks against the obligation of the borrowers' promise to pay it back + interest.
2-Every time someone takes out a loan (government, corporate, mortgages etc) new money is created by the bank in the form of credit.
3-most money is created by banks in the form of debt – not the government.
4-This created money is convertible to government-issued fiat money, which is legal tender and thus we are forced to use it to settle debts.
5-The (defunct?) fractional reserve system allowed 9:1 ratio of lending against a real money (eg-gold). This borrowed money can then be deposited and used again as ‘fractional reserve’ by the bank as this money is loaned against the new borrowers promise to pay it back. The new borrowers’ loan agreements are essentially acting as the new ‘reserve’.
6-the method outlined in #5 can be repeated until the bank is effectively utilizing approx 90:1 lending ratio.
7-banks earn interest on all the money loaned in #6 even though most of it was created by them. They are lending (and receiving interest on) something they don’t have.

So back to my original question – Why would governments pay interest on created money from bansk, when they can create their own money interest-free?

Sorry if that question has been answered, but if the above assumption are correct, the rationale behind government’s decisions to borrow from banks doesn’t make sense.

Go easy on me ladies [img]/images/graemlins/frown.gif[/img]

[Bedreviter]

"-Money is someone else's liability and was created by banks against the obligation of the borrowers' promise to pay it back + interest.
2-Every time someone takes out a loan (government, corporate, mortgages etc) new money is created by the bank in the form of credit.
3-most money is created by banks in the form of debt – not the government."

-Money, at least in the US is made by the government, and its value is backed up by faith in the governemnts will and ability to honor the stated value of the money.
-Banks cannot suddenly say "wow, looks like we have 20 billion dollars suddenly", just by typing in "20,000,000,000$" on a computer-screen. Banks borrow money from government, they borrow money from people, and they lend it out to government and people and corporations and so on. When the government borrows money from a bank its not enough that the bak says "sure, here is 10 billion, have a nice day", they must actually transfer money to the government.
-Any bank that is willing to lendmoney to the government or yourself must be able to get those money from somewhere, they have to balance it. If they lend out 10 billion they either need to have that capital themselves or raise it somewhere else, its not like they can magically make them appear.

The only real value of the dollar is in the faith that the government promises to to honor the said value of the dollar, the governments ability to collect taxes play an important role in this.

You seem to be under the misconseption that banks are somehow able to produce money at will with no security behind it or with out it representing any true value. If that was the case the economy of this country and the rest of the world would be in total chaos and any sane person would trade his dollars for minerals or land or animals or properties.

[Copernicus]

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Thanks for the useful (and not so useful) replies.

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the OP demonstrates a less than serious understanding of basic global finance.....LOL, maybe you should learn macroeconomics (and not from a community college).


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Both statements are probably true.

My original question was more about why governments pay interest to private banks on something the banks don't have.

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The banks who buys those bonds need to have the money to buy them, pretty sure they are not getting them without paying.


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My (perhaps incorrect) assumption is that the government issues bonds which are bought by banks using government issued fiat currency that the banks have created (ie. don't own), so this looks like the banks are effectivley getting the bonds without paying.

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he'd need a pretty solid course in IEcon, just to get basic theory / assumptions down

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Without taking a course in IEcon. Here are my assumptions regarding money:

1-Money is someone else's liability and was created by banks against the obligation of the borrowers' promise to pay it back + interest.
2-Every time someone takes out a loan (government, corporate, mortgages etc) new money is created by the bank in the form of credit.
3-most money is created by banks in the form of debt – not the government.
4-This created money is convertible to government-issued fiat money, which is legal tender and thus we are forced to use it to settle debts.
5-The (defunct?) fractional reserve system allowed 9:1 ratio of lending against a real money (eg-gold). This borrowed money can then be deposited and used again as ‘fractional reserve’ by the bank as this money is loaned against the new borrowers promise to pay it back. The new borrowers’ loan agreements are essentially acting as the new ‘reserve’.
6-the method outlined in #5 can be repeated until the bank is effectively utilizing approx 90:1 lending ratio.
7-banks earn interest on all the money loaned in #6 even though most of it was created by them. They are lending (and receiving interest on) something they don’t have.

So back to my original question – Why would governments pay interest on created money from bansk, when they can create their own money interest-free?

Sorry if that question has been answered, but if the above assumption are correct, the rationale behind government’s decisions to borrow from banks doesn’t make sense.

Go easy on me ladies [img]/images/graemlins/frown.gif[/img]

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There isnt a single one of your assumptions that is entirely correct, and the intial ones are entirely wrong.