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Originally Posted by bobman0330
So this is the MMT thing where trivia about the workings of the financial system are repeated with great seriousness in the hopes of tricking people into thinking they're deeply meaningful. The Fed buys and sells government debt to manage interest rates because that's it's job. The Treasury, on the other hand, sells huge amounts of Treasury securities in weekly auctions *to pay for things* because Treasury's job is to finance the American government, which it does by collecting taxes and selling government debt.
Deficit spending puts downward pressure on interest rates.
Treasury securities, as they relate to deficit spending, are sold in order to maintain a positive overnight lending rate.
It is not strictly to finance the government because the Treasury is able to finance itself in multiple other ways e.g.:
Modern Money Theory and Interrelations between the Treasury and the Central Bank
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Under the current budgetary procedures, the Treasury must issue securities to economic units other than the Federal Reserve to be able to fund a deficit (provided there are not enough funds in the TGA and TT&Ls). The Treasury has at least four ways to bypass this budgetary procedure. The first one is to issue its own monetary instrument. The second way is to allow banks to buy treasuries by crediting TT&Ls. The third way is to allow the Federal Reserve to provide a direct emergency or regular credit line to the Treasury. The fourth way is to have the Federal Reserve indirectly provide funding to the Treasury through banks. The Treasury uses, or has used, all these different techniques.
more on the same subject:
Can Taxes and Bonds Finance Government Spending?
Deficit spending 101 – Part 3
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This is another big snoozer, like all accounting. It proves nothing. There's no way to demonstrate, purely from rearranging equations, that the offset to net government saving doesn't come in the form of reduced foreign holdings. Indeed, given that other countries have vast holdings of US government debt, that's a natural place for redemptions to come from.
The classic idea of the relationship between the deficit and exports is that as the deficit rises, money that non-residents would have used for imports is instead used to buy debt instruments. There is probably some truth to this, but very unrealistic imo to expect a 1:1 correlation at all times between a marginal increase in the deficit and change in foreign holdings; if I’m right, excess government spending will tend to be soaked up in part by the private sector:
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Right, and this is dumb. No one holds dollars to pay their taxes. (Your taxes are mostly paid by your employer. Your employer is a fairly sophisticated business who could dollars or Swiss francs or yuan or whatever on the spot market to meet payroll tax obligations.) People hold dollars to buy stuff or as a store of value. Do tax obligations contribute to the value of the dollar? Likely so, but its use to access the USD payment system to process transactions is hugely important too. The proof is cryptocurrencies, which have no tax or inherent value, but still have market value due to their exchange function.
'The dollar has value because you can buy things with it' etc. begs the question.
If the US government switched to using bitcoin, and accepted bitcoin for taxes, the value of the dollar would drop precipitously. People do use the dollar to buy things, and to store value, but the reason a dollar is viewed as something more than just a piece of paper is fundamentally due to the government using and demanding it.
The Real Reason the U.S. Dollar Has Value.