Good question here from the Ask Cullen page which I am pulling onto Pragcap:
Question: Why does the federal government borrow money through issuing bonds when they can simply create it via the “printing press”?
Answer: The way I describe it is that the monetary system in the USA is bank centric. Because private banks rule the monetary system the rest of us, including the govt, are rendered as users of the private deposit system. The govt sells bonds to obtain private bank deposits and redistribute them just like a private corporation does.
Why does it do this? It does this because there have been specific checks implemented to create a firewall between govt and money. The private banking system is supposedly a better distributor of money than the govt is so the Fed Act basically tore monopoly money powers away from the Executive Branch (the Tsy) and the govt. Of course, this could all change.
If the govt distributed all of the money then you could have one of two systems:
1) You could have the govt operating as the banking system where it distributes the loans AND just prints money (instead of selling bonds). But then of course you’d have the govt issuing loans, which, as you might imagine, could be problematic as there’s no real profit motive to constrain the quality of lending at all.
2) You could have no borrowing and you could just have the govt increasing the money supply by $X every year as they please by spending new money into the economy without selling bonds.
These two options might not look very different from our current arrangement if you just look at the accounting, but they are totally different worlds from the current arrangement because you have basically given the govt a monopoly power over the money supply. In other words, from a political and real world efficiency perspective, these worlds have the potential to be totally different even if the accounting looks similar.
The arrangement at present, is a capitalist market based system where the banks issue the loans and the govt is a user (albeit, a very special user of the bank money. I say the govt is a “contingenent currency issuer” meaning that it could issue currency if it wanted). In doing so the govt ends up being a big support mechanism around a banking system that is inherently fragile. In other words, the govt ends up subsidizing the banks because their health is too central to the economy. So anyone who supports the current system implicitly supports private bank subsidies. It can be no other way.
I don’t know which is better or worse because I’ve never really seen the alternatives implemented, but that’s the basic gist of it.
Hope that helps!
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.