Is issuance of long term bonds sign of financial market maturity or destruction of the market economy?

Pick a macro or financial eco textbook and the standard narrative on bond market goes like this. Earlier, the governments just printed currency to finance deficits. This was called deficit financing which led to uninterrupted inflation. Then agreements were signed and this auto financing was stopped. The role of inflation management was given to central banks who started with monetary targeting and then gradually moved to inflation targeting.

One thing which developed due to this was the bond market. The governments needing money could not print currency so they started to issue bonds. Overtime, the governments issue bonds across time tenors to “manage the cashflows across time”. These bonds began to be traded and we eventually got an active yield curve. Then yield curve in turn becomes this public good which helps price other securities as well. So, if one is looking at pricing a security over a 10 years, then one uses the 10 year bond yield and so on. Thus, longer a yield curve it shows the markets are matured and so on. This leads to enormous literature on pricing financial securities across the yield curve and also figure whether it is efficient. There were later linkages of slope of yield curve to recessions etc.

This seems to be the standard narrative across most courses and books. However, most omit any criticism of  this standard narrative.

Joseph T. Salerno has a piece reflecting on the recent 70 year bond issue by Austria. He says bond issuance is the in thing given such low yields compressed artificially by the central banks. But a bigger question is why should govt issue bonds given they anyways issue fiat currency:

Nearly seven decades ago, Ludwig von Mises explained the seemingly irrational hunger among capitalists for long-term government bonds as based on an illusion. The illusion is that wealth once painstakingly accumulated in risky ventures can be removed from the competitive and uncertain sphere of the dynamic market process and preserved forever intact in a changeless realm of perfect certainty created by an imaginary political sovereign who is eternal, all-powerful, and unchanging.

…..

The issue of government bonds is actually more insidious and destructive of the market economy than the issue of fiat money for two reasons.

First, politically, the issue of long-term bonds and the relentless piling up of government debt perversely bolsters and perpetuates the myth that the State is an eternal entity that somehow is not subject to the disturbances and uncertainties of human affairs.

And second, economically, the existence of government debt as a safe haven for wealth and an inexhaustible fount of income diverts capitalists and entrepreneurs from devoting all their attention and resources to their vital function of allocating scarce resources to the most urgent of the anticipated demands of consumers.

In fact, in an economic system burdened with fiat money, it would be preferable to ban government borrowing altogether. This would force the government to cover all of its deficits with irredeemable paper fiat money, which does not pay interest. There would be substantial benefits from this course of action. It would demystify the inflationary process for the average citizen. Instead of the Fed camouflaging its creation of money by the hocus pocus of “setting interest rates” via buying and selling bonds, financing government budget deficits would entail a completely transparent operation in which the Fed prints up money and directly hands it over to the U.S. Treasury.

Also the Fed would become a division of the Treasury and would no longer be involved in manipulating interest rates, which is the root cause of business cycles. And lastly, banks and other financial firms, which now hold vast quantities of government bonds and are a powerful constituency in favor of maintaining the political status quo in order to keep their interest payments flowing, would no longer be “a partner of the government which ruled people and exacted tribute from them.” Keynes infamously called for the “euthanasia of the rentier”; Mises’s theory of the public debt leads us to call for the euthanasia of the parasitic, government rentier.

Hmm. An argument which turns the standard narrative upside down. The standard narrative argues for bond markets to limit printing of currency. This one says bond market just covers the issue without really solving it. Central banks were issuing currency earlier now also they do the same but show it as a bond exercise.

These are issues which need to be debated at the foundation level but hardly any attention is paid. What we are taught as market economics in macro/finance texts is just a variant of the managed one which we are warned against.

 

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