I have received several E-mails over the last few weeks that suggest that the economics…
Currency-issuing governments can keystroke their outstanding debt into oblivion
It is always a good sign when some fiscal deficit terrorist or another bleeds in the media that they’re not getting enough attention. Yesterday (October 12, 2016), the Forbes Magazine published an Op Ed (although I wouldn’t call the content educational in any way) by a commentator with the Twitter username @bthebudgetguy – The Deficit Was A Big, Big Loser In Sunday Night’s Debate Between Trump And Clinton. It is not the first time the author has entertained this theme. His bleat? That the current political farce that Americans call the Presidential election campaign is ignoring the state of the fiscal balance. Oh my! What a travesty. The two liars, masquerading as Presidential candidates, have the audacity to talk about other irrelevant things and leave the most irrelevant thing I can think of neglected. But what this tells me is that the millions that the likes of the Peter Peterson Foundation and its ilk have spent on trying to scare Americans witless about the fiscal debt and the US public debt situation has been wasted. That is something to celebrate in fact.
The Forbes author, one Stan Collender – but lets call him by his twitter name @thebudgetguy – it sounds so much more authoritative – writes that:
The deficit and debt weren’t even mentioned when there was talk about something that could have been related to the federal budget.
For example, neither Donald Trump nor Hillary Clinton bothered with the projected 10-year increase in government borrowing ($4.8 trillion from Trump; $200 billion from Clinton) from their opponent’s economic plan.
The projected increase in the deficit from repealing the Affordable Care Act that Trump pushed didn’t even seem to be an afterthought.
And what was said about the budget when tax cuts or infrastructure spending was discussed? Nothing.
… the federal budget debate one of the biggest losers of last Sunday’s debate.
I watched segments of the Presidential debate in question and given the quality of the material discussed I doubt that the candidates in question could have said anything coherent about fiscal matters anyway.
I also doubt that our ‘budgetguy’ has anything much of substance to say anyway about fiscal issues. His input would be along the same old lines – you know – the US federal government is spending like crazy, these election promises are unaffordable, the debt is going to go beyond any sustainable limits, and stuff like that
I note that these limits are never really specified but are always implied to be below the current public debt ratio. When they are specified we learn soon enough that spreadsheets have been fudged to get some answer like 80 per cent or some such as the insolvency threshold, which just goes to demonstrate how absurd this whole approach to the capacities of a currency issuing government is.
But the part of @thebudgetguy’s article I really liked was when he wrote that the candidates have ignored fiscal issues:
… in spite of the well-funded efforts of groups like the Peter Peterson Foundation to make the deficit and debt an issue in this campaign. Peterson, for example, has been running television commercials and doing things on its website during the campaign to get voters to “Ask the candidates for a plan.”
Doesn’t that make you feel a bit better.
The television commercials in question (which I won’t link to to avoid generating advertising revenue to these moronic organisations) are surrealistic.
This earnest voice overlay becomes a harbinger of doom as bits of public infrastructure (for example, bridges and roads) disappear because the ‘money has run out’ or school kids sitting in classrooms just evaporate before our eyes – “shrink to use the PPF terminology – because the public debt has surged out of control.
It is the stuff of make believe.
But to think that organisations like the PPF can expend millions in an effort to distort the public debate with lies and deceptions and see their efforts fall by the wayside is certainly music to any reasonable person’s ears.
This brings me to a Bloomberg article I read yesterday (October 12, 2016) – Preparing for the Post-QE World – which also touched on fiscal matters.
The basic thesis is that central banks have massive holdings of government bonds as a result of Quantitative Easing (QE) programs and “‘unwinding’ these positions:
… would almost certainly create deflation and a financial crash as it would lead to the withdrawal of massive amounts of liquidity from the financial system.
The alternative is so-called “permanent monetization”, where the government essentially repays itself for its own holdings of its own debt. If you comprehend that then you will know how ridiculous the whole neo-liberal narrative about the dangers of public debt actually is.
A previous Bloomberg article (June 2, 2016) – Japan’s Debt Burden Is Quietly Falling the Most in the World – informed readers that:
Japan is the country where public debt in private hands is falling the fastest anywhere.
We read that:
Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant.
In other words, a currency-issuing government can always absorb any outstanding liabilities (public debt) if it chooses, and, effectively, never have to repay the obligation.
It can do that by purchasing these liabilities in secondary bond markets, and then just ignoring the maturity obligations, and with the stroke of a computer keyboard set the value to 0.
Alternatively, it is obvious that such a government is never in danger of defaulting on any outstanding liabilities which remain in the non-government sector until maturity and presentation for repayment.
Alternatively, what this clearly demonstrates, is that such a government never has to issue debt in the first place.
The more recent Bloomberg article cited above makes it clear that:
Since central banks are ultimately owned by governments, absorbing the QE purchases would effectively mean that governments would own their own bonds, assets that comprise a significant share of national debt.
Now isn’t that something to acknowledge. The obvious that is. The glaring reality of a currency-issuing government in a Fiat monetary system. The simple fact that the likes of the Peter Peterson Foundation try to obscure in their venal and expensive deficit terrorism – which if you believe @thebudgetguy hasn’t been particularly effective anyway.
Say it again out aloud – “central banks are ultimately owned by governments”.
Say it again out aloud – any public bonds on central bank balance sheets amount to the government owning its own debt. One computer keystroke turns the positive accounting balance for that debt into a zero balance with no consequences of importance whatsoever.
The Bloomberg article says that:
… this changes the national debt picture. The newly consolidated national debt will be markedly lower once the assets acquired by the central banks through QE are subtracted; indeed, debt would stand at historically acceptable levels. …
But, the author still can’t help himself, can he – he still wants to perpetuate myths about “acceptable” and, by implication, unacceptable levels of public debt.
Surely he can see through the logic of his own argument to understand that such a dichotomy has no application in this context.
For if “the major central banks have increased their balance sheets to $18 trillion from $6 trillion” through QE (as the author notes) and in the case of the US, these purchases have been of the order of around 20 per cent of GDP, and the US public debt ratio is just over 100 per cent of GDP at present, then it follows that the central bank could buy all of the outstanding debt if it so desired.
The author correctly notes that wiping off all this debt on the central bank balance sheet “is essentially an accounting change” – say that again until it really sticks.
A computer keystroke or two!
The author then incorrectly claims that this “accounting change would mean that governments would have greater scope to launch fiscal stimulus than previously anticipated”.
Think about it.
The claim is that a computer keystroke that deletes some positive number in an electronic ledger and types in a zero instead, suddenly, provides a currency-issuing government with a greater capacity to type positive numbers into other electronic ledgers, which are classified in the accounting system, as public spending.
When you put it in those terms you realise how absurd the proposition is.
The reality is that a currency-issuing government can purchase whatever is for sale in that currency whenever it so chooses, which is not the same thing as saying that it should.
The current public debt ratio and the current and previous fiscal balances (in absolute terms or relative terms) do not constrain or enhance the capacity of such a government to spend its own currency.
So it is perfectly true that such a government, through its central bank, can buy any debt that the government issues (either directly from the Treasury or indirectly in the secondary markets from the non-government sector), and, if it chooses, can keystroke that debt into oblivion.
Whenever it wants.
The Bloomberg also correctly notes that a:
A large-scale stimulus program focusing on infrastructure and boosting human capital would likely trigger a world economic recovery.
Which raises the question – what are governments waiting for?
Then, the neo-liberal scaremongering enters the picture.
We read that if this became standard practice – that is, the government spending without issuing debt to the non-government sector – then this would violate “The whole purpose of independent central banks” and push up public debt yields, making it more expensive for governments to ‘fund’ public spending.
Think about that.
Who believes in any of that?
We were told that QE would unleash massive inflationary forces. It didn’t.
We were told that government bond yields would surge. They haven’t. To put a fine a point on it some governments are now issuing 10 year bonds at negative yields.
The point is that the non-government sector has no control over public bond yields if the government chooses, either to set a fixed yield and allow it central bank to control the market through QE-type purchases, or, not to issue any debt at all.
Please read the following blogs for more discussion:
1. The sham of central bank independence.
2. Central bank independence – another faux agenda.
3. Bundesbank showed the way in 1975.
Conclusion
These articles were quite revealing.
The first provided information that is a cause for celebration. Those morons at the PPF are pissing millions down the drain and Hillary and Donald are ignoring them.
The recent Bloomberg article really exposes the underlying reality of a fiat monetary system, although the author cannot come to terms with the full implications of that because it conflicts with the neo-liberal Groupthink he appears to be locked into.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.
The core idea behind this neo-liberal groupthink is to protect the exorbitant free lunch enjoyed by the private banks for providing the government with loans of the government’s own money at interest.
Banks have attached themselves as a parasite onto the government and work very hard to convince the government and the voting public that this parasitic relationship is necessary for the health of all. An example of rentier rent extraction at the very highest level.
Dear Bill
Some people may fear that, if the truth that monetarily sovereign governments are not revenue-constrained becomes public knowledge, the masses will demand ever more government expenditures. Those who favor small government have an incentive to make us believe that all governments are revenue-constrained and that government debt jeopardizes the future of our children.
Regards. James
While the subject of the debt isn’t coming up much (except in a new back of Peterson ads), our presumptive winner, Ms. Clinton, is definitely a deficit hawk, and almost certainly will be competing not to be outdone by her husband’s “balanced” budget during his administration. Couple this to the expenses for all the new wars she seems to want to get into, and my prediction is that she’ll have to go after the large entitlements if she believes she can do both balanced budgets and wars. My guess is for another economic crash a few years out once she starts trying to put numbers to a budget.
great blog , Bill which points out all the illogicality of the deficit ‘terrorists’.
but what we need is a psychological/psychopathological explanation of WHY politicians and economists cling to myths- is it:
1) To maintain psychological security in holding on to ideas that cannot be admitted to be dinosaurs?
2) To maintain vested interests (at the cost of society as a whole) so that:
a) Asset prices don’t fall (particularly land and property)
b) The bond dealers don’t have to resort to food banks
c) Politicians can better control a fearful populace.
3) or is it pure ignorance?
4) or is it a fear that if politicians told the public this underlying reality, they would not be believed?
5) or is it that the public wouldn’t accept it because they would not psychologically cope with the stark truth of being ripped off for so long?
“an effort to distort the public debate with lies and deceptions”
It’s a common characteristic for everyone who has any kind of theory to believe that the theory is obvious to everyone else. So if everyone else is attacking the theory it’s not because they disagree, but because they are lying and decieving.
But the truth is that they are not able to understand how the financial system works because it’s quite complex. It’s irresistible to compare government finances to household finances, unfortunalety.
To say that they know better and are lying isn’t helpful.
“But the truth is that they are not able to understand how the financial system works because it’s quite complex. It’s irresistible to compare government finances to household finances, unfortunalety.
To say that they know better and are lying isn’t helpful.”
They know alright. And if they didn’t know before they started the job, you can be sure it’s explained to them fairly promptly – even if they struggle to get it.
This was Phillip Hammond, UK Chancellor of the Exchequer, addressing the Tory Party Conference last month:
“I had no idea until a few weeks ago how much I didn’t know,” he continued. Better late than never. “And even less idea how much I wouldn’t be able to understand even once it had been explained to me.”
https://www.theguardian.com/politics/2016/oct/03/vampire-of-the-spirit-philip-hammond-takes-dullness-to-a-whole-new-level
Unfortunately, what they do with all that new-found knowledge is another matter.
One computer keystroke turns the positive accounting balance for that debt into a zero balance with no consequences of importance whatsoever. Bill Mitchell
The purpose of sovereign debt as an asset on the central bank’s balance sheet is that it can be sold to “sterilize” its liabilities – should that ever be deemed necessary.
However Federal taxation serves the same purpose (removing fiat from the economy) and does so without providing welfare proportional to wealth as positive interest paying sovereign debt does.
Still that leaves the ethical possibility of a central bank selling negative to zero interest paying sovereign debt as a means to sterilize its liabilities which implies even more negative interest on account balances at the central bank to make that debt attractive by comparison and perhaps restrictions on the use of physical fiat as a means to escape negative interest.
Our economy is being run in a particular way to serve particular interests. The particular way is basically neoliberal monetarism. The particular interests are those of the global plutocracy, the so-called 1% but really the 0.01%. The value of money is being protected by policies designed to protect fictitious capital.
“Fictitious capital contrasts with what Marx calls “real capital”, which is capital actually invested in physical means of production and workers, and “money capital”, which is actual funds being held. The market value of fictitious capital assets (such as stocks and securities) varies according to the expected return or yield of those assets in the future, which Marx felt was only indirectly related to the growth of real production. Effectively, fictitious capital represents “accumulated claims, legal titles, to future production” and more specifically claims to the income generated by that production.
“Fictitious capital could be defined as a capitalisation on property ownership. Such ownership is real and legally enforced, as are the profits made from it, but the capital involved is fictitious; it is “money that is thrown into circulation as capital without any material basis in commodities or productive activity”.
Fictitious capital could also be defined as “tradeable paper claims to wealth”, although tangible assets may themselves under certain conditions also be vastly inflated in price.
In terms of mainstream financial economics, fictitious capital is the net present value of expected future cash flows.” – Wikipedia.
We can understand fictitious capital by understanding the more extreme version of it on the stock market. Speculation which pushes up the value of stocks (without any more real assets or real production occurring in the present) creates fictitious capital.
The current system operates to protect current systems of ownership, especially shareholder and rentier capitalism, and the value of fictitious capital as this guarantees the call that the wealthy have on real assets. The current system operates to inflate the value of fictitious capital. We see this as asset inflation and shares (stocks) inflation. This process is creating an ever greater imbalance in the economic system where asset and share prices do not reflect fundamental values.
“In finance, intrinsic value refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value. It is worthy to note that this term may have different meanings for different assets.” – Wikipedia.
Of course, nobody accurately knows whether fundamental value will actually be realised, exceeded or fallen short of in the long run. Hence there will always be entrepreneurship, judgement calls and speculation. But in the main, as an average, we can expect that fundamental value will prevail most of the time at least for established and well understood real assets and businesses.
This indicates (if we look at the current economy in detail) that many asset values are inflated and unsustainable long term. The Australian housing market is a case in point. However, one cannot predict when the bubble will burst. What one can predict is that unsustainable bubbles will burst eventually. We are running the economy in a manner which creates unemployment, capacity underutilisation and unsustainable finance and asset bubbles. This will not end well. It’s unfortunate but the modern media-dumbed-down public does not understand any of this. Our society will have to learn the hard way (again) from a major economic crash at some point.
On the subject of whether commentators in newspapers really know what they are talking about, I’m not sure whether Nils Pratley in The Guardian is “MMT aware”, but he seems to talk sense on general matters.
However, in this piece https://www.theguardian.com/business/nils-pratley-on-finance/2016/oct/11/regardless-of-brexit-sterling-was-screaming-out-for-a-devaluation although he is sensibly relaxed about the pound’s reduced exchange rate, he seems to slightly spoil it with:
.
But why should gilt yields explode? And if they did, the government could (I believe), if it chose and was prepared to relax its own “rules”, simply stop selling them.
And if they did, the government could (I believe), if it chose and was prepared to relax its own “rules”, simply stop selling them. Mike Ellwood
It should stop selling them – on ethical grounds – since sovereign debt is risk-free and thus positive interest sovereign paying sovereign debt is welfare proportional to wealth, not need, i.e. a disgrace.
This doesn’t rule out negative to zero percent yeilding sovereign debt though.
In 1942, after the US entered WWII, Congress passed a law allowing the Federal Reserve to purchase War Bonds. I haven’t found how many they purchased, but it was substantial. My guess is somewhere between 25 and 50% of all of the $390 Billion (thousand million for Brits) was purchased by the Fed. I have yet to find out what happened to those bonds after the war or whether the law is still on the books. But, as you can see, when there’s a war to be won fiat currency and a central bank CAN DO the job! But not for ordinary folks like the regular citizens. Other countries with central banks did much the same thing. Whether it required a special law or not I don’t know. Maybe the historians can update this data.
“But why should gilt yields explode? ”
It doesn’t look like Nils is much of a twitter fan either, so it’s difficult to ask him how this can come about.
Ultimately if yields ‘explode’ then Government will start talking about reigning in spending, which reduces demand causing the Bank of England to want to do interest rate cuts, which it can’t because they are already rock bottom. So instead they will do more QE – buying up government bonds at their now reduced price sending them back up again and reducing the yield.
The feedback loop via the standard interpretation is blisteringly obvious. It just needs explaining in those terms.
“The feedback loop via the standard interpretation is blisteringly obvious. It just needs explaining in those terms.”
Experience shows that what is blisteringly obvious to one is complete nonsense to another. How we can fix this is not something I know.
Hi All,
Tony Benn MP once said: “If you can have full employment by killing Germans, why can’t
we have full employment by building hospitals, building schools?”
I have always wondered why the 1% are always so keen on non-interventionist government
policies, I would have thought a state of full employment would be good for business?
However, when James Schipper said: “the masses will demand ever more government expenditures” the
scales fell of from my eyes.
The people who really run this world are like Alan on “Two and a half men”, always leaving their wallet at home, but not to “save” money by being fiscally “prudent”, rather to purposively entrench relative disadvantage.
bob
Hey Bill….I’m a fan…am staggered by the amount and quality of your output daily-and at 82, a most ardent student….but take issue [resent] lumping Hillary and Donald together on any level-i.e., “The two liars, masquerading as Presidential candidates”-Trump is not only a liar, but a dangerous narcissistic demagogue-most likened to Mussoloini, who poses a threat to everyone should he be elected–[our polls are all pointing to Hillary by a land slide]-but regarding Hillary-I am fed up with the BS that she is a “liar”-she is a person of particular integrity-and it sounded like you were parroting our right-wing propaganda where if something is said often enough [even if patently false] it starts being accepted as true….IMHO
What you are saying obviously does not apply to the Kingdom of Saudi Arabia, incidentally a country with huge foreign exchange reserves and a near-zero forex-denom-debt-to-GDP ratio. But no matter.
Bloomberg, May 2016:
“…The kingdom’s credit rating was reduced to A1 from Aa3 last month in the second cut this year by Moody’s Investors Service. The kingdom’s rating was also lowered by Fitch Ratings and S&P Global Ratings earlier in 2016.
The country has been financing its budget deficit by selling local debt and drawing down foreign reserves.”