Thread: Government Finance 101

The Federal Government's not a household, and you can't judge its financing based on household financial rules. The simple fact is, the folks with the most money, and the folks who control the most money, big banks, financial investment groups and the like, would rather lend their money to the Federal Government than to private businesses at the moment. That's why your yield on your T-bills are so low. People are buying them now at close to the value they'll be at maturity. So not only would these folks rather lend money to the government, they're not that chuffed about inflation either.

Perhaps a simple lesson about the evolution of government and government finance would be in order. We don't have to go that far back, not even to tribal, hunter-gatherer times. The era of feudalism is sufficient. Back then, if your government, which was just your local lord or king, decided to do something, he just took whatever he needed to do it from whoever had it that he had authority over. Your lord decides he wants to throw a party for his kid getting married? He takes the food from the farmers and butchers. And he doesn't give them anything back for it either, maybe some scraps of food while they're working if they're lucky, and if they try to resist, he sticks 'em on the end of a spear. Same for everything else he needs for that party, clothes, decorations, entertainment, etc. Of course, even back then, government wasn't always corrupt and wasteful, rather like today, just mostly corrupt and wasteful. Sometimes they did something worthwhile that everybody benefited from. Occasionally, they'd build roads, or clear access to water or other resources, or establish schools and hospitals.

Of course, money, or finance, makes the story somewhat more complicated. When people used bits of gold or ious for gold as currency, the government just took the currency, instead of the resources and manpower itself. That way, they could pay for the resources and manpower they needed to do what they wanted to do. As I'm sure anybody can tell you, paying for things gets you better service than threatening people with pointy sticks. But if there isn't any currency to take, governments are perfectly happy to resort to the pointy-stick method of resource acquisition for their projects.

Now, smart governments, when they took the gold or ious for gold as taxes, were perfectly happy to accept either, but when they spent, to buy that roast suckling pig for the party, let's say, they only spent in ious. Their ious. The ones they printed. They put the gold itself in a vault. And they eventually started printing more IOUs than they had gold, because they knew that most people didn't really want the gold, they wanted the goods and services they could buy with the gold, and the iou was perfectly good for that, so who cares, really, so long as everybody's happy? Printing more ious than we have gold or than we collected in taxes means we don't have to collect as many taxes, which makes people less mad at the government, and if nobody notices, then so what? Eventually, they even decided to stop exchanging their IOUs for gold at all, because it turned out that actually trying to make those ious have some semblance of a relationship to gold was responsible for a lot of unnecessary recessions. The economy needed more money than gold supplies could keep up with. And that's where we're at now.

So when we look at the government deficit, we have to realize that taxes are just the government taking it's own ious, and spending is just the government printing more ious. The "deficit" is just the difference between taxes and spending, when spending is bigger, and the accumulated debt is just the amount of base currency, that is, currency not backed by private debt, in the economy both in circulation and not in circulation. Reasons for maintaining a deficit, or growing the debt include maintaining prices in a growing economy, where otherwise the amount of money available to be spent remains the same, yet the amount of goods and services to be bought with that money increases, lowering prices, which hurts investment. Also, stimulating production in a stagnant economy by provoking some inflation. You can use some private debt to do that, which is what lowering interest rates is all about, except when interest rates are already at or near zero. But the interest on private debt creates its own pressure for increasing base currency, as the money created by private lending is destroyed as that loan is paid back.

Besides, even if you think there's something flawed in that explanation I gave above, and you just don't buy it, you'd have to admit that you'd have to be stupid to not take out a zero-percent interest loan if it were available to you. With yields on T-bills as low as they are now, that's essentially the interest rate they're getting. Even yields on the 30-year bill are down to 3.1%, when this time last year yields were as high as 4.71% and in 2007, the year before the crash, yields got as high as 5.28%. And the yields on shorter term t-bills, which is where the bulk of the borrowed federal financing, is vastly smaller. Current yields on the 1 year T-bill are 0.14%. You have to get as long term as the 7-year T-bill before the yield even breaks 1%.

Just get that through your heads for a minute. Big banks and private lenders, which is who the government borrows money from when it borrows after all, would rather lend to the government for a 14 cent return on a $100 one-year investment than risk loaning it to a private individual for a higher return or buying private stock or commodities with it.

Originally Posted by Kantian Pragmatist

The simple fact is, the folks with the most money, and the folks who control the most money, big banks, financial investment groups and the like, would rather lend their money to the Federal Government than to private businesses at the moment.

It could also be that private businesses aren't seeking loans at the moment.
If I own a bank and businesses are making lots of deposits but not taking any loans, that leaves me with a lot of money over the required reserve amount. In that case I'd be happy to buy securities from the Fed at little interest than let the money sit and collect no interest.

Originally Posted by HNSB

It could also be that private businesses aren't seeking loans at the moment.
If I own a bank and businesses are making lots of deposits but not taking any loans, that leaves me with a lot of money over the required reserve amount. In that case I'd be happy to buy securities from the Fed at little interest than let the money sit and collect no interest.

There is not much economic difference between a potential borrower not seeking lenders and a potential lender not seeking borrowers. Both banks and borrowers use the same metric when deciding whether to take out a loan: what are the odds of paying it back? Private business doesn't see themselves as worth the risk to seek out loans and obligate themselves to payments. And go back and look at that yield again. 14 cents on a 100 dollar, one year investment. That's all they're getting from the Feds for lending money to them. How gloomy does your outlook on the prospects of American production have to be to accept a 14 cent per year return on a 100 dollar investment? You might as well have buried that $100 in a tin can in your yard for a year.

I don't blame banks or businessmen for having a gloomy outlook for future production and consumption. I do blame government when it has it within its power to turn things around, and, because it's been bought out by wealthy interests or overrun by ideologues, it fails to do so. There's corruption on both sides of the aisle, but only one party is plagued by both the corrupt and the ideological.

Originally Posted by Kantian Pragmatist

only one party is plagued by both the corrupt and the ideological.

The Green party?

Originally Posted by hoglahoo

The Green party?

The Greenies aren't all that corrupt. They also don't have any power or influence, which is probably why they aren't all that corrupt.