Why does the US government borrow its own currency and issue bonds despite printing money? Explore this viral clip with Jared Bernstein, Chair of the White House Council of Economic Advisers, and uncover the reasons behind this economic strategy. What are your thoughts based on economic theory and empirical research? Let’s delve deeper into this intriguing topic! #USgovernment #WhiteHouse #economics #findingthemoney #JaredBernstein
When the government builds a road, it uses resources like gravel, cement, bulldozers, road engineers’ time, etc. Those resources are therefore not available to the private sector. Hopefully, the road will mean that overall way more resources are available to the private sector in the future, but right now they’re not available. Similarly, when a government pays benefits or pensions, that is because they want the recipients to be able to get resources like food and shelter. This means that some other people have fewer resources for their own consumption (with food, that tends to shake out as less animal feed, at least in the short-term). Basically, resources have been transferred from one use to another.
The government could get those resources by just taking them, known as “direct requisition”, or in the case of labour like the road engineers, “conscription”. But generally it’s a lot more practical to use money to buy them.
The government can get the money by taxing, by borrowing, or by printing money.
Printing money has the disadvantage that it doesn’t magically create any more real resources so instead it results in inflation, if done at any sizeable scale. (There are some cases where printing money might create more real resources by getting an economy out of a slump, but that’s inherently limited).
Both taxing and borrowing mean moving around real resources – with taxes this is obvious. With borrowing, let’s say I decide to buy government bonds instead of investing in a friend’s fur-bearing trout farm scheme. So the government builds a road rather than my friend building trout ponds.
The US government borrows partly from US residents and partly from foreigners. So some of the resources it uses comes from foreigners not investing in things in their own countries (or a third country).
The US is able to borrow in its own currency because both domestic and foreign investors have a reasonable degree of trust that the US government won’t resort to inflation to pay its debts. You’ll sometimes run across some nonsense about the US being able to do this because it’s a reserve currency – for some reason the “reserve currency” concept attracts a lot of cranks – but a number of other countries can do so, such as Australia and New Zealand. There are many other countries that can’t borrow in their own currency because there is no such trust. Instead they can only borrow in the US currency or the Euro or the Swiss franc or similar.
There are a band of cranks active on the internet known as Modern Monetary Theorists (MMTs), who talk a lot about money and government spending in a way that is highly misleading. I think the best defence against them is to think in terms of the real resources involved.