What rate should a monetary sovereign pay?

[William Meyer]

According to Friedman, the USA paid a maximum rate of return of 15 percent to treasury bond holders during the Civil war in terms of gold - this includes the gain the greenback had due to resumption of gold payments.  

Coincidentally, the british paid a very similar maximum rate of return in terms of gold during the napoleonic wars (according to ai at least).

The USA had to pay returns well in excess of 15 percent in the early 80's - not for any real world crisis but just to stamp out inflation.  Monetary sovereignty backfire?  What rate does mmt say should be paid? Minsky?

[Joe Leote]

Sparse online reporting says Russia has recently suspended bond sales due to markets demanding in excess of 16.5%, the central bank unwilling to sponsor bond sales in excess of that rate ceiling, and now Russian government may be making efforts to force captive banks to purchase bonds directly to increase the money supply while holding government debt as assets. Reports seem plausible although I often feel there are not reliable enough sources of information concerning online stories about government or central bank finance operations.

During World War II the US federal government used multiple policies to expand deficit spending without causing rampant inflation. These included encouraging banks and nonbanks to buy war bonds as patriotic contributions, central bank interest rate and yield control policy, emergency price control legislation, Office of Price Administration (OPA), coupon rations for scarce goods, etc. I think Abba Lerner saw these government-led political-economic efforts as the successful application of Functional Finance.

To my knowledge Warren Mosler claims to have developed MMT independently in 1992. I think Bill Mitchell (Billy Blog) claims to be a co-founder of MMT. Other MMT proponents or critics often say it incorporates Abba Lerner's prior Theory of Functional Finance:

Lerner Functional Finance.pdf

where the central idea is that government fiscal policy should be judged by its results and should not be constrained by any prior theory of sound or unsound finance. This raises another political debate within economics: Sound Finance vs. Functional Finance. Functional Finance argues that the government deficit or surplus is a policy tool, independent of the level of national debt, so fiscal policy can and should be used to produce better political-economic results for society such as full employment and mild inflation. Sound Finance is the idea that a balanced government budget is always the best policy although advocates of sound finance might also be minarchists who think less government spending, taxes, and credit policy is always better than a larger fiscal government.

Hyman Minsky describes automatic government stabilizer policy in his 1986 book Stabilizing an Unstable Economy which was republished in 2006. This is coherent with Lerner's description of the government running a deficit or surplus as needed to sustain full employment of resources with mild, moderate, or minimal inflation. Minsky argues that the big federal government in theory ought to be able to run a tax surplus to secure confidence in its deficit and debt position. When markets are pricing for inflation Minsky argues that the federal government is forced to pay higher interest on the debt. MMT argues that the central bank as monetary authority sets the short term interest rate, and this impacts the interest paid on the national debt, so the interest paid on the debt is a public policy choice. I think MMT argues raising interest rates is not effective for controlling inflation or levels of employment. The policy rate should be set at zero, meaning government deficits are covered by issuing high powered money to banks and transaction accounts to nonbanks, and let the markets set long term interest rates on private debt instruments.

Joe

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[William Meyer]

I think Friedman might argue that speculators have an essential role to play in controlling inflation by providing a source of foreign exchange.  By denying them that role by not issuing sovereign interest bearing debt it can put the state in an impossible situation if the balance of trade isn't cooperating.

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[Joe Leote]

Below are quotes from Warren Mosler's paper:

Soft-Currency-Economics.pdf

" When the federal government spends and then borrows, a deposit in the form of a treasury security is created. The national debt is essentially equal to all of the new money directly created by fiscal policy. " - see page 3.

" Over the course of time the total number of dollars that have been drained from the banking system to maintain the fed funds rate is called the federal debt. A more appropriate name would be the Interest Rate Maintenance Account (IRMA). The IRMA is simply an accounting of the total amount of securities issued to pay interest on untaxed money spent by the government." - see page 9.

Mosler consolidates the federal government and central bank into one Sovereign sector. He treats the liabilities of the Fed as high powered money and the Treasury securities as high powered savings accounts. The Treasuries float is similar to bank liabilities, and, in Mosler's view, would exist in the float of bank liabilities if the government did not sell Treasuries to help Fed control the interest rate. In that case the monetary policy rate would be driven to zero because the banking sector would be stuffed full of excess reserves. The conventional view is that banks try to get rid of non-interest bearing reserves and so excess reserves would drive bank credit expansion which would drive inflation. Mosler apparently rejects that model for how banks make decisions to extend credit in the real world. In terms of the FX speculators they interact with market makers and bankers to swap funds on the aggregate bank balance sheets in respective nations. Mosler is saying that if the government did not sell Treasuries then the accumulated national debt would revert to aggregate bank liabilities. So there would be more aggregate bank liabilities for speculators to provide donations to hedge managers in FX markets when wrong on the market direction or to drive up costs of FX transactions for non-speculators when speculators are right on the market direction.

Joe

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