Government Coffers

[bigfield]

coffer
noun
plural noun: coffers

1. a strongbox or small chest for holding valuables.
2. a decorative sunken panel in a ceiling.
3. A popular buzzword among political pundits (in Australia at least)

As far as I understand it, money received by the government is effectively annihilated, and money that the government spends is effectively created as it is spent. Governments don't actually have 'coffers' because they don't keep money. The government has no savings and cannot go broke, although it can create too much money and cause hyperinflation.


I invite you to correct or expand upon my understanding of government 'coffers'.

 

[Loren Pechtel]

Your understanding would be correct if it was the government that created the money. That's the job of the Federal Reserve, though--deliberately kept semi-independent to protect it from political manipulation.

 

[bigfield]

Your understanding would be correct if it was the government that created the money. That's the job of the Federal Reserve, though--deliberately kept semi-independent to protect it from political manipulation.

The relationship between the central bank and the government is not entirely clear to me.

When you pay taxes, where is the money deposited? When the government spends money, where is the money withdrawn from?

 

[bigfield]

I'm also trying the understand why governments go into debt (by selling bonds) as opposed to simply creating more money.

If I understand correctly, government create money by selling bonds to the central bank. This would also means that government destroys money by buying back bonds issued to the central bank. Why don't governments sell all of their bonds to the central bank in order to fund their budgets instead of selling them to other parties?

 

[bigfield]

When I pay taxes to the tax office, the tax office doesn't just keep that money; they transfer it to some other part of the government. According to their annual report, the Australian Tax Office transfers that money into something called the Official Public Account, which is a account managed by the Reserve Bank of Australia, our central bank.

https://www.finance.gov.au/resource-management/pgpa-glossary/official-public-account/

The Commonwealth's central bank account. The OPA is one of a group of linked bank accounts, referred to as the Official Public Account Group of Accounts. OPAs are maintained with the Reserve Bank of Australia (RBA), as required by subsection 53(3) of the PGPA Act.

And according to their Annual Report, the Department of Human Services (responsible for welfare payments) withdraws money for appropriations from the OPA at the central bank. So the Australian government does in fact have a bank account that it puts money into and withdraws money from, as if it were a plain old bank account.

The federal Government appears to function as a customer of the RBA, and the OPA account could be the government's 'coffers'.

The Australian Government maintains a group of bank accounts at the Reserve Bank of Australia (RBA), known as the Official Public Account (OPA), the aggregate balance of which represents its daily cash position. The AOFM is responsible for management of the aggregate OPA balance.

The AOFM’s primary objective in managing the OPA balance is to ensure that the Australian Government is able to meet its financial obligations as and when they fall due. Other objectives are to minimise the cost of funding and to invest excess OPA balances efficiently.


Meeting this primary objective requires close attention to the within-year variability and uneven pattern of the Australian Government’s receipts and expenditures. There is often considerable cash flow volatility as a result of mismatches in the timing of revenue receipts and expenditures.


Cash proceeds not required for immediate purposes are invested in term deposits with the RBA. During periods when there are short-term funding needs, these can be met by increasing the volume of Treasury Notes on issue and/or redeeming term deposits.


As part of the Australian Government’s banking arrangements with the RBA, the RBA provides an overdraft facility to the government. The terms of this facility provide that it may only be accessed to cover unexpected temporary shortfalls of cash (for example, to cover a sudden previously unplanned outlay). This means it is used very infrequently.

http://aofm.gov.au/cash-management-and-investments/cash-management/

The AOFM (Office of Financial Management) is responsible for managing the balance in the OPA and managing government debt. To increase the balance of the OPA, the AOFM issues securities (AGS) to investors, using private banks as intermediaries.

However I'm still unclear what mechanism is used that allows the government to 'print money', ie. get money from the central bank beyond its OPA balance. The RBA holds AGS, but the purpose of these securities is to issue them to private banks as a means of controlling the money supply. Can the Government (AOGM) issue bonds (AGS) to the central bank (RBA) in exchange for more money in the government's bank account (OPA)?

 

[fromderinside]

Loren Pechtel missed the point. Government is what is established by the compact whether written or historical. In the case of the US the constitution provides for the government to print money so treasury is part of government. It is a part that is not balanced against legal and administrative and legislative as are the other three branches though. Money dependent on the three. It is printed by administrative, spent by administrative, determined by legislative (House), concurred by Senate, and adjudicated by legal (courts).

the Constitution gave Congress the power to coin (create) and regulate the values and weights of foreign and domestic monies. The fifth clause of the Article I, Section 8 gives Congress this power as well as the power to prosecute counterfeiters.

Article 1: Section 8, clause 5: To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

My take is congress can permit the coinage of a trillion dollar coin and that since it makes money all it need do is keep from flooding the market with money. If about 2-0 trillion coins are produced then can be used to pay existing debt. The twenty trillion dollars then be reclaimed by similar congregational action and executive administration.

 

[bigfield]

Loren Pechtel missed the point. Government is what is established by the compact whether written or historical. In the case of the US the constitution provides for the government to print money so treasury is part of government. It is a part that is not balanced against legal and administrative and legislative as are the other three branches though. Money dependent on the three. It is printed by administrative, spent by administrative, determined by legislative (House), concurred by Senate, and adjudicated by legal (courts).

Thanks but that's too vague and abstract.

My take is congress can permit the coinage of a trillion dollar coin and that since it makes money all it need do is keep from flooding the market with money. If about 2-0 trillion coins are produced then can be used to pay existing debt. The twenty trillion dollars then be reclaimed by similar congregational action and executive administration.

The minting of hard currency is not that important, as most money creation occurs through other means, such as via banks who loan out the same dollars multiple times. Besides, the government doesn't pay its expenses using hard currency; they do it mostly via electronic payments with money that exists only as a record on a database.

I'm chiefly interesting in how new electronic money is created for use in the government budget. How does the government 'print money' to pay for things? While I've been focusing on the Australian monetary system, that is purely a matter of convenience borne of familiarity, and I am happy to receive explanations using other countries as examples.

 

[laughing dog]

I'm also trying the understand why governments go into debt (by selling bonds) as opposed to simply creating more money.

Debt has a limited life while currency can last longer.

If I understand correctly, government create money by selling bonds to the central bank. This would also means that government destroys money by buying back bonds issued to the central bank.

Correct.

Why don't governments sell all of their bonds to the central bank in order to fund their budgets instead of selling them to other parties?

Because
1) the public may wish to buy the bonds, and
2) the central bank may not wish to buy the bonds.

 

[bigfield]

Thanks for the answers.

Debt has a limited life while currency can last longer.

That makes sense. And in order to buy government debt, one must use money that is already in the money supply.

Why don't governments sell all of their bonds to the central bank in order to fund their budgets instead of selling them to other parties?

Because
1) the public may wish to buy the bonds, and
2) the central bank may not wish to buy the bonds.

The relationship between the central bank and the government isn't clear to me, besides a vague understanding that the central bank is usually semi-autonomous.

This may seem like a stupid question, but why can't the government just force the central bank to buy the bonds? My guess is that the central bank is tasked, by the government, to regulate the money supply, and buying government bonds whenever the government wanted would represent an unwanted increase in the money supply.

 

[Horatio Parker]

Thanks for the answers.


That makes sense. And in order to buy government debt, one must use money that is already in the money supply.

Yes. It's a swap. The amount of securities purchased can only equal the amount of new money spent into the economy. The "crowding out" theory is a myth.

Why don't governments sell all of their bonds to the central bank in order to fund their budgets instead of selling them to other parties?

Because
1) the public may wish to buy the bonds, and
2) the central bank may not wish to buy the bonds.

The relationship between the central bank and the government isn't clear to me, besides a vague understanding that the central bank is usually semi-autonomous.

This may seem like a stupid question, but why can't the government just force the central bank to buy the bonds? My guess is that the central bank is tasked, by the government, to regulate the money supply, and buying government bonds whenever the government wanted would represent an unwanted increase in the money supply.

I believe they can force the CB to buy the bonds, or the CB is obligated to buy all issues.

Some call for direct govt expenditure, or "debt free money".

 

[laughing dog]

Thanks for the answers.


That makes sense. And in order to buy government debt, one must use money that is already in the money supply.

Why don't governments sell all of their bonds to the central bank in order to fund their budgets instead of selling them to other parties?

Because
1) the public may wish to buy the bonds, and
2) the central bank may not wish to buy the bonds.

The relationship between the central bank and the government isn't clear to me, besides a vague understanding that the central bank is usually semi-autonomous.

This may seem like a stupid question, but why can't the government just force the central bank to buy the bonds? My guess is that the central bank is tasked, by the government, to regulate the money supply, and buying government bonds whenever the government wanted would represent an unwanted increase in the money supply.

The relationship between the gov't and central bank is determined by the gov't. If the bank is independent, the gov't would have to change the law concerning their relationship - something that is not always easy. If the central bank is semi-autonomous, the gov't could force the bank to purchase the bonds, either through discussion, replacing governors or more forcible means. However, financial markets do pay attention to such actions, and a gov't may have to be careful. If the central bank is part of the gov't, then there is no need to force anything.

 

[Loren Pechtel]

Loren Pechtel missed the point. Government is what is established by the compact whether written or historical. In the case of the US the constitution provides for the government to print money so treasury is part of government. It is a part that is not balanced against legal and administrative and legislative as are the other three branches though. Money dependent on the three. It is printed by administrative, spent by administrative, determined by legislative (House), concurred by Senate, and adjudicated by legal (courts).

the Constitution gave Congress the power to coin (create) and regulate the values and weights of foreign and domestic monies. The fifth clause of the Article I, Section 8 gives Congress this power as well as the power to prosecute counterfeiters.

Article 1: Section 8, clause 5: To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

My take is congress can permit the coinage of a trillion dollar coin and that since it makes money all it need do is keep from flooding the market with money. If about 2-0 trillion coins are produced then can be used to pay existing debt. The twenty trillion dollars then be reclaimed by similar congregational action and executive administration.

But who wants the coin? It's just going to sit there doing no good.

 

[bigfield]

The relationship between the gov't and central bank is determined by the gov't. If the bank is independent, the gov't would have to change the law concerning their relationship - something that is not always easy. If the central bank is semi-autonomous, the gov't could force the bank to purchase the bonds, either through discussion, replacing governors or more forcible means. However, financial markets do pay attention to such actions, and a gov't may have to be careful. If the central bank is part of the gov't, then there is no need to force anything.

So in the case of semi-autonomous central banks, the financial markets provide a disincentive for the the government: creating money for use in the public budget may be met by a negative response from the markets (because no-one likes rapid inflation).

 

[fromderinside]

But who wants the coin? It's just going to sit there doing no good.

The government wants the coin to pay off the debt. The government can use existing circulating money to convert the coin into individual debt holder payoffs putting most of that money back into investing and spending. Money supply is reduced which, given our current amount of circulating money, is a good thing. Setting the coin aside with reduced money supply should be credit supporting. Debt retired and excess money supply resolved the coin can be retired. used for acquiring infrastructure, paying off health care debt into the future, etc.

 

[Loren Pechtel]

But who wants the coin? It's just going to sit there doing no good.

The government wants the coin to pay off the debt. The government can use existing circulating money to convert the coin into individual debt holder payoffs putting most of that money back into investing and spending. Money supply is reduced which, given our current amount of circulating money, is a good thing. Setting the coin aside with reduced money supply should be credit supporting. Debt retired and excess money supply resolved the coin can be retired. used for acquiring infrastructure, paying off health care debt into the future, etc.

You haven't explained why anyone would take the coin.

 

[fromderinside]

You haven't explained why anyone would take the coin.

There needn't be anyone. All that matters is it's value in coin of the realm. People will take fractions of it to the point where , in aggregate, they take the total value of the coin. The state may then either eliminate it to keep a newly engineered balance or it set it aside as a credit against which the government can charge.

 

[Loren Pechtel]

You haven't explained why anyone would take the coin.

There needn't be anyone. All that matters is it's value in coin of the realm. People will take fractions of it to the point where , in aggregate, they take the total value of the coin. The state may then either eliminate it to keep a newly engineered balance or it set it aside as a credit against which the government can charge.

How do you take a piece of a coin?

 

[bilby]

There needn't be anyone. All that matters is it's value in coin of the realm. People will take fractions of it to the point where , in aggregate, they take the total value of the coin. The state may then either eliminate it to keep a newly engineered balance or it set it aside as a credit against which the government can charge.

How do you take a piece of a coin?

If you couldn't take a piece of a coin, how would you get a shave and a haircut for two bits?

Making change is surely not a completely alien concept to you, is it?

If you mint a trillion dollar coin, you can ask the reserve bank to change it for a million $1000 bills, and they would have no reason to refuse.

 

[fromderinside]

What bilby wrote.