What if the government could only issue inflation-protected securities to borrow money?

How would our economy and government change if starting tomorrow the government could only issue inflation protected securities to borrow money? For example, U.S. Treasury Inflation Protected Securities (TIPS) can be used. Would we have a more stable consumer price level? Would worker wages change?
Question came to mind in relation to the recent talk about inflation risk in the U.S. because of the growing deficit and large amounts of money the government is creating. The government has the power to control the money supply and in a sense inflation. They could issue a lot of treasury bonds to borrow today and change monetary policy to inflate the value of the currency to pay back the debt for less than they borrowed in real terms.

If they’re available now and people don’t buy preferably them, then they’re not a good investment. It’s hard to see how mandating a poorer investment would help anybody.

There is no inflation risk today, despite what some people say. Here’s a chart of inflation rates over the last decade. Now compare that to bond yields. And to TIPS yields. Right in the same ballpark. The ten-year bonds are about at the same point in both. That tells me that investors believe that both sets of bonds are priced correctly.

Currently, you’re allowing the market to make continual appraisals of the state of the economy, with inflation being only one of the factors. That you think inflation is primary is a big problem. That you think that the government could game the system without investors fleeing is another problem. The government wants as many investors as possible today and tomorrow and forever. That leads to a logical question that I can’t answer: would a guaranteed net-zero result (yield minus inflation) produce more sales than letting the market guess what the net will be in ten years? As long as we don’t have a guaranteed yes to that answer, though, it’s a risky choice to make for government.

I was hoping to look at this more from a government fiscal policy and management perspective rather than an securities investment perspective. I am curious about how social spending and the such would look if the government was limited in it’s borrowing power. Would we have fewer sovereign defaults because there is more transparency in the purchasing power of the money borrowed by governments?

Well, we don’t know if the government would be limited by TIPS. And there haven’t been any sovereign defaults, although I assume you’re referring to the Greek crisis. I don’t see a connection between that and the U.S. situation. The U.S. problems had essentially zero to do with the rate of treasury bonds.

The rest of your question is equally speculative, so this really belongs in GD. If the U.S. is running a deficit now under the current policies, why wouldn’t it continue to run a deficit? Possibly that would be an impetus to raise taxes to keep spending at par. The Greeks had a large percentage of their population employed directly by government, but that’s not true for the U.S. Government spending is a small percentage of the overall economy and government employment even less.

I’m not really sure I understand your question, since I can’t understand any scenario that would make it happen. Without knowing why it happens I don’t see how you can say what happens next. However, I’d welcome others to correct me.

There’s nothing more transparent than a fixed rate of interest.

Also, TIPS would not restrict government borrowing. If anything, they might make it easier because TIPS are cheaper for the government except when there’s inflation. So a low estimate of inflation would let the government use lower cost estimates for debt servicing.

You also seem to think that governments can manipulate inflation just to reduce their debt. There are huge side effects to inflation and the damage to banks and individuals would be significant. It would be a case of throwing the baby out with the bath water.

Why do you suppose limiting the flexibility of the bond seller will limit the amount of bonds? I see no connection between the two. With inflation adjusted bonds you are transferring more risk onto the seller, hence lower real prices for the buyer. Interest rates are largely a measure of risk. If the Gov’t assumes more risk, then the price will drop. Other than that I don’t see any particular reason to do this. The price over time will adjust. Are you assuming that inflation adjusted bonds will reduce the borrowing power of the Gov’t? Why?

The question is unknowable. Any answer must necessarily be speculative. Because of that, I don’t feel like I’m threadshitting by pointing out how absolutely ridiculous the fear of inflation is right now. Seriously. There was nearly half a percent of DEFLATION last year, and the government has literally tried every possible method at their disposal to create a bit of inflation, with extremely disappointing and lackluster results pretty significantly below “normal” rates of inflation. If deflation happens again, the government is literally out of options for fighting it. What you ought to be terrified of right now is the opposite of inflation.