Abstracting from the fact that it’s become entrenched in common usage, it’s a rinky dink term that you wouldn’t use if you knew what you were talking about, unless you intended to deceive others. The ignorant do not need a special vocabulary in which to convey their ignorance, and liars don’t deserve to have a weasely jargon to assist them in defrauding the public. Thus there is no legitimate purpose served by the term.
Do you use the term? Do you think it makes sense to use it, whatever your opinion on ‘government borrowing’ might be? Then try the following. Ask yourself whether there’s any difference between the government borrowing money and the government printing money. Forget what you’ve learned about economics, just think it through logically. If you can suffer through the next few paragraphs, I’ll explain why this is important.
Suppose the government deficit spends (as usual, I’m talking about countries with sovereign currencies – countries like those whose official language is the one in which this blog is written). It spends more than it taxes. It adds reserves to somebody’s bank account and doesn’t take the same amount away from somebody else’s bank account. Net reserves in the banking system have increased. Suppose the government does nothing to follow this. Orthodox theory will then say that the government has ‘printed money’.
What happens next? If the new reserves start to push the interest rate down, the central bank, whose job is to control the rate, will sell gilts out of its own stock until the rate returns to target. If it ran out of gilts it could ask the Treasury to issue more, or it could control the interest rate directly through paying interest on reserve balances. Not a big deal.
On the other hand, suppose the government follows up the addition of reserves by selling gilts. Now orthodox theory will say that it has ‘borrowed money’ rather than ‘printing’ it. The new supply of gilts can have the reverse effect, bidding the interest rate up by providing a higher-interest alternative to holding savings in reserve balances and thus an arbitrage opportunity. Again the central bank will intervene to maintain its policy, this time by buying gilts. Of course it can’t run out of reserves with which to buy the gilts, since it issues reserves.
Have you noticed what’s happened here? In either scenario you end up with exactly the same result: the central bank makes sure that the ratio of reserves to gilts is whatever is necessary to maintain its target rate.
Relative to any consistent central bank policy, there is no functional difference between printing money and borrowing money. Both have exactly the same result.
So, functionally speaking, ‘government borrowing’ is the same as ‘the government printing money’. The latter term is more accurate. After all, what the government does when it deficit spends is create reserves out of thin air and spend them into the economy. It may or may not sell gilts afterwards, but with a consistent central bank policy this makes no difference. So call it ‘printing money’, not ‘borrowing money’.*
That may all sound technical. But it’s politically very important. The word by which we name an activity governs our intuitions about that activity, particularly about its risks. To speak of government ‘borrowing’ puts people in mind of silly, imaginary risks: the bailiffs banging on the government’s door, the ‘bond vigilantes’ clamouring for repayment and the government somehow not being able to cash up, despite the fact that it issues cash out of thin air. Most annoying is the ridiculous idea that future generations will be ‘burdened’ by our debts. Future generations will hold risk-free bonds, and nobody has to pay taxes to service a ‘debt’ owed by a government that issues the currency in which the ‘debt’ is denominated.
If you’re living in the UK, make no mistake: government borrowing is a big issue in voters’ minds. They’re convinced that there’s something wrong with it and want to vote for the party they think can ‘get it under control’. Convincing them that borrowing is unproblematic just feeds the delusion; it’s more effective as well as more truthful to argue that it doesn’t happen at all. What the government does when it deficit spends is print money. It doesn’t borrow anything.
There is another reason to change the conversation in this way. Speaking of government ‘printing’ instead of ‘borrowing’ puts people in mind of the real risk, namely inflation. Every pumped up pocket monetary theorist knows that printing money is linked to inflation; for many it’s all they know. But it doesn’t take much thought to realise that not all money printing can lead to out-of-control inflation. After all, all the money that exists must have been printed at some point, and inflation isn’t always out of control.
Controlling inflation is the job of the central bank. We have seen that deficit spending does not get in the way of central bank policy, whether it occurs through a reserve-add or through a gilt-add (and, given consistent central bank policy, these end up with the same result). Since inflation is the only risk associated with printing money (other than currency depreciation, which comes through the same channels) the government may as well keep on printing until the central bank proves unable to control inflation/depreciation. Then it can stop. Until then, print away! Buy everything the public needs and taxpayers aren’t willing to pay for! End all the silly debates about what the nation can ‘afford’ (rescuing drowning refugees, for instance). Why not?
Since ‘government borrowing’ really means ‘government printing’, the government’s deficit is the amount it prints each year, not the amount it borrows each year. The public debt is just the sum total of money that has been printed, whether in gilt or cash form. There go all the pig-ignorant arguments about reducing the horrible, terrifying, burdensome, future generation-impoverishing debt. Cut away the misleading term and all that bullshit drops off with it.
If you’re a spin merchant manipulating people into voting against everybody’s interests, or if you get a kick out of advertising your own ignorance, then go ahead and keep using the term ‘government borrowing’. Otherwise just stop.
* – By the way, the central bank operations of swapping gilts for reserves and vice versa don’t amount to printing anything. Assets are swapped; no net assets are created. The swaps are undertaken for the purpose of adjusting interest rates or moving the yield curve – that’s all. So Quantitative Easing is not ‘printing money’. Now you know. Spread the word.