Sunday, 12 September 2021

The futility of interest on government debt – and other anomalies


Paying interest on reserves and government debt really is a genius idea. It amounts to rewarding those who hoard cash by paying them interest. That interest has to be paid for somehow: in effect it's paid for by taxes on the section of the population which DOES NOT have cash to hoard. At least that's true assuming the economy is at capacity and the interest cannot be funded simply by printing money. And if THERE IS scope for money printing, then donating that money to money hoarders is not number one priority for about 99% of the population, I'd guess.

It might seem tempting to claim that interest on reserves is paid to banks, not depositors. The answer to that is that ANY INCREASED INCOME enjoyed by banks inevitably trickles down to bank shareholders, depositors, those who borrow from banks and anyone who has anything to do with banks. i.e. that increased income absolutely must end up on SOMEONE'S pocket, including the pockets of depositors. And the fact is that cuts in bank costs over the decades and centuries (e.g. thanks to computers) have not benefited JUST shareholders: proof of that lies in the fact that the return on capital that banks manage has always been comparable to that obtained in other industries, over the medium and long term.

And the idea that government liabilities should pay no interest is not some sort of new crank idea: Milton Friedman (and MMTers) claim/ed there should be a zero rate on government debt. Like Milton Friedman, I wouldn't TOTALLY RULE OUT interest rate hikes in emergencies.  But the above daft aspect of interest on government liabilities (subsidising the rich) does support the claim by Friedman and MMTers that the best rate of interest on state liabilities is zero. (For Friedman, see his para starting “Under the proposal..” in his 1948 AER paper.)

Of course it might be argued that interest on government debt would be justified where relevant sums fund public INVESTMENTS like infrastructure. But government debt in most countries just isn't limited to funding those investments. So that point is irrelevant for the moment.


That strange deposit insurance limit.

Another anomaly here is as follows. Most countries limit the amount per person deposited at banks which is covered by deposit insurance (€100,000 in the EU and £85,000 in the UK). But in the UK, and maybe other countries, you can deposit up to £2million at the state run savings bank National Savings and Investments. And your money will be totally safe because NSI invests only in base money (i.e. reserves) and government debt.

Moreover, even if institutions like NSI didn't exist, anyone is free to buy as much government debt as they like. Of course if you buy debt which still has several years to run before maturity it's possible to lose money. But if you buy SHORT TERM debt, it's near impossible to lose out.

The above anomaly is not easy for governments to resolve: to resolve it, i.e. ensure that no one holds more than a limited amount of government liability, they'd have to check up on how much each person has in state run savings banks AND how much government debt they hold DIRECTLY. And to add to the complexity, they'd need to check up on how much each person had in mutual funds which specialise in holding government debt.

But at least a near permanent zero rate of interest on government liabilities would HELP cut down on all the above anomalies.


P.S. 16th Sept 2021. I'm please to see Warren Mosler (founder of MMT) agrees with the point made in the above first paragraph. Warren has actually made the above point about money put into government debt amounting to placing money in a term account at a bank called "government": he's made the point several times in his books and articles far as I remember.

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