Central Banks Neither Own Debt nor ‘Print Money’ to Buy It

It’s popular among the conspiracy-minded and central bank-obsessed (frequently the two go together) to suggest that governments establish central banks to buy their debt. The very notion is self-discrediting.

How could a creation of government serve as the financier of same? How indeed. The answer here is that central banks neither own debt nor print money to buy it.

If they could, it’s important to first point out that the Soviet Union would still exist. If collectivism was bankrupting the former nation, why wouldn’t Mikhail Gorbachev have just ordered Gosbank (the Soviet central bank) to buy up billions and trillions worth of debt to keep it afloat? More modernly, and with the Russian Army supposedly a bit resource constrained, why wouldn’t Vladimir Putin simply order the Central Bank of the Russian Federation to finance a more robust war effort?

The answer to the above questions can be found in the simple, but nearly always elided truth that no one buys, sells, borrows or lends with money. All money flows involve products for products, and applied to the U.S.S.R.’s Gosbank and/or the Central Bank of the Russian Federation, neither has resources. Just the same, government has no resources. By extension, central banks that are outsourced creations of government can hardly finance the government that created them.

Some will surely reply that central banks can “print money” to buy the debt of governments, but even if true, governments wouldn’t need central banks in order to enlist printing presses. Furthermore, the firing up of printing presses would hardly render governments flush. That is so given the always worth repeating truth that no one buys, sells, lends or borrows with money. Money flows signal the movement of real goods, services and labor. Which means the exchange of printed money for debt securities would be nothing of the sort: the government taking in the printed money would find that it exchanges for little or nothing in the marketplace, and the owner of the printing press would find the debt securities purchased with the printer similarly worthless.

Bringing it all to the United States, it’s especially popular among the self-proclaimed free market Schools to suggest that the Fed is the entity that has enabled the massive growth of federal debt that presently sits around $33 trillion. The Fed can “print,” get it? Market signals mock the presumption.

Figure that in 1980, total federal debt was $900 billion and the yield on the 10-year Treasury note was 11 percent. In 2024, and with $33 trillion in debt, the yield on the 10-year is 4.31%. About these numbers, don’t forget that Treasuries are the most owned asset in the world. If they were merely paying out dollars that were a creation of printing presses on overdrive, then it seems yields today would be much higher than 4.31%, no? To suggest otherwise, is to suggest that markets are stupid. And it’s also to raise yet again the question why Putin wouldn’t do as our leaders are said to be doing.

The answer is that our leaders aren’t doing what the conspiracy-minded and central bank obsessed think they’re doing. And just the same, central banks aren’t doing what they’re said to be doing. Creations of government couldn’t manipulate the yields on government debt on their best day. How could they? They have no resources.

All of which raises a question about what keeps yields on U.S. Treasuries so low? The answer is simple. While our federal government has no resources, it has taxable access to those who do have resources. In other words, our Treasury has taxable access to the earnings of the richest, most productive people on earth. That would be the U.S. citizenry. Since they produce in abundance now, and since they’re expected to produce even more bountifully in the future, Treasury can borrow very cheaply.

Yet there’s still the question of central banks, including the Fed’s “ownership” of lots of Treasury debt. The Fed’s size buying of Treasuries doesn’t keep yields low as much as low yields are what enable a central bank backed by taxpayers to buy lots of the debt. Our federal government and our Federal Reserve are both backed by the U.S. taxpayer, and because they are Treasury can run up lots of debt and a central bank that’s a creation of the federal government can buy lots of debt.

Let’s just not fool ourselves as to who owns it. We the people own the debt that our government issues, and that our central bank buys.

Originally published by RealClearMarkets. Republished with permission.

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