Sunday, January 8, 2012

Bonds do not finance government.

Positing a hypothesis that the sale of bonds by a sovereign state, which has a monopoly on the creation of its own currency, does not serve to finance any government functions. It is assumed that all bonds are sold and redeemed only in the sovereign currency, a necessary condition if the sovereign is to retain the monopoly control of its money supply.

A moment's reflection might make it clear that for a bond to be purchased, it was necessary for the sovereign to have previously issued the money. The sale of the bond then becomes an exchange of one form of liability for another. This exchange does not result in any increase in the money holdings of the sovereign state. In a fiat currency system the state cannot accumulate wealth outside of capital goods it may acquire. Rather like a wizard that can control the weather who doesn't have storms stored away nor is there a place to put them when they are no longer desired, the state neither has nor doesn't have money.

The sovereign would easily issue the necessary currency for its own expenses. When an appropriation is authorized, there is no " bank account" whose balance must be checked. There is a simple entry made on the sovereign's spreadsheet that places the necessary funds in the reserve account of the appropriate bank.

There is no burden placed on the state by the redemption of bonds. Such redemption's, as noted above, are only paid in the sovereign's currency and there is an unlimited supply of that.

Bonds do serve the state as a means of controlling interest rates, if it desires, but the intent to raise operating funds loses its meaning when a country leaves a commodity base currency, such as the Gold Standard.

In the United States there is an artificial constraint placed on the government's operation, the Debt limit. This has served no useful purpose except to allow for political theater and posturing. I suggest that it is a useless appendage and probably unconstitutional.