I read an article in the Financial Times earlier this week (September 23, 2023) -…
Strange events come together sometimes. One was the continuing railing against the ABC, our national broadcaster by the failed former federal treasurer. He somehow thinks the national broadcaster continues to display left-wing bias. The other event was an astonishing interview on a popular national ABC program where the content was about as far away from the sort of thing the failed former treasurer was railing against. The ABC program interview will have New Yorkers marching in the streets to defend the buildings of their famous newspaper. Here is how the events unfolded.
Yesterday, the failed former federal treasurer Peter Costello wrote in his opinion piece in The Age that Everyone’s ABC? Only if you lean left. The thesis he mounts is that our national broadcaster is anti-conservative and therefore, anti-liberal. He said among other things:
With the ABC the line of questioning is always predictable. It always comes from the Labor/Green perspective … Labor will never be criticised for entrenching union power, or going soft on law enforcement, or spending money it doesn’t have … the flagship national current affairs programs – AM, PM, The 7.30 Report – have a consistent editorial perspective …
Five nights per week Phillip Adams broadcasts on Radio National. Adams claims that he has been close to every Labor leader from Whitlam to Beazley. Robert Manne has described Adams as “the emblematic figurehead of the pro-Labor left intelligentsia”. Back in 2001 the then managing director of the ABC declared he would look for a right-wing Phillip Adams to balance up that program. It must be an exhaustive search. The new managing director is now in his fourth year of office. Apparently the corporation is still looking.
Anyway what else would you expect from him. The government that he failed to lead but was an instrumental force in worked over the ABC so badly through funding cuts, constant criticism of its editorial positions, and forced enquiries into the same. Recall the poisonous appointment they made to CEO position. That obnoxious character left soon after – a total failure. But the constant harassment of the ABC did reduce its capacity as an independent broadcaster.
This was most evident in the types of economic commentary they relied on. Before the liberals took over, I was constantly on the ABC as an economic commentator. During the Howard years, my role was reduced – I was still heard but not nearly as much. I could (but I won’t) tell you some anecdotes about phone calls made and whatever about my appearances. Maybe in a book later on. But they relied on financial market types (bank economists) who had an obvious vested commercial interest in the matters they were giving expert commentary on. It was a disgrace. Night after night we heard the same neo-liberal mantras being rehearsed by the so-called experts. The interviewers were well versed in the standard neo-liberal lines about the benefits of budget surpluses etc etc. They just fed this to the bankers and we all heard the predictable responses – reinforcing the myths.
But, Costello’s on-going hatred of the broadcaster is not the story particularly.
The second related event occurred today. I was listening to the repeat of last night’s Late Night Live (this is the Phillip Adams’ radio show referred to above) because I was in-between meetings and had the radio on in my car.
Phillip Adams, the presenter started the program by referring to recent comments made by the failed former Treasurer Peter Costello and defended the independence and unbiased nature of the ABC. Anyway, having said that he moved into a segment about China and the global crisis.
Adams set about interviewing his regular financial commentator – one Satyajit Das who is a supposed risk consultant and author. His last book was Traders, Guns & Money: knowns and unknowns in the dazzling world of derivatives (Prentice Hall, 2006) and it is one book you can avoid buying given that it displays his fundamental lack of understanding of the way the monetary system operates.
You can listen to the segment if you dare but the relevant aspect of the interview goes like this:
PA: … Lets look at their stockpiles of US dollars. Tell, tell the listener,and in fact, tell me, about the foreign currency exchange system that China set up, set up under Deng Xio Ping.
DAS: Well it was actually very very interesting because Deng Xio Ping when he came to power in the 80s, reformed China economically up to a point. And essentially what they did was borrow from the Japanese which they would hate to admit and they essentially built an export built model. So what they did was set aside parts of the country as essentially special economic zones like around Hong Kong and they used their large labour force to import in goods then do some manufacturing on them and export them out. And this was the basic model they were going to use for two reasons. One, they had a large labour force to employ. But also on the other side they needed foreign capital and foreign technology and know-how. And that was the model they built.
So far, I have no problems with that. The Chinese fell prey to the neo-liberal emphasis on development via exports. This deprives the domestic market of goods and services and ships them abroad. In return the Chinese are able to stockpile financial assets denominated in foreign exchange, presumably for strategic reasons, not the least being to keep their currency low to ensure exports sell. A self-reinforcing approach. Anyway, whether this is a sound strategy when you have massive poverty in most of the rural areas is questionable but beyond the aim of this blog.
The interview continued:
DAS: And then, miraculously in the late 1980s early nineties, they found a way to turbo charge it. The turbo charging was as they exported more than they imported they built up all this foreign exchange and they didn’t know quite what to do with it. But they hit upon accidentally I think, the ponzi schemes of all ponzi schemes.
Which is that they started to lend the money to the countries which were buying their goods like the United States. And the way this was done is that the Chinese central bank invest these dollars that they get when they trade, actually invest them in US Government bonds. And this had the miraculous effect of keeping US interest rates very low, and providing them with abundant money to fund the government deficit and it encouraged consumer borrowing at a level which we’ve obviously never seen before
Now the problem the Chinese have is that they have most of their $2 trillion in US dollars but most importantly its in fairly toxic assets I would argue which is US Treasury Bonds, because at the moment …
PA, interjected saying: Your not suggesting a US Treasury bond could be a toxic asset.
DAS: Oh indeed I am because at the moment Ben Bernanke and Larry Summers and Tim Geithner are printing them as furiously as they can. There is a rumour that they will take over the New York Times and use the printing presses actually to print dollars.
So there you have my American friends. The NYT is about to be taken over by the Federal Reserve and the re-appointed Bernanke and his Treasury pals are going to ramp up those printing presses. If this wasn’t so serious it would be laughable.
Late Night Live is a major national radio program which is listened to by a significant number of people. Having this character on as an expert – on a regular basis would seem to destroy Peter Costello’s allegations of left-wing bias in one fell swoop.
And if you listen to the interview in total you will see how the presenter “fawns” over Das and advances his genius. All this reinforces the veracity of the message he is presenting which when you bring it down to fundamentals is total, unadulterated nonsense. Having this character on as the expert and letting him ramble on which this rubbish without any significant challenge from the presenter or additional guests on the program is a disgrace.
Lets debrief … for those who might actually believe the stuff DAS is pontificating about. First, the Chinese knew exactly what they were doing. They wanted to keep their currency as devalued as possible against the currencies of their trading partners – to ensure their export-led growth model would operate in the best possible circumstances.
Second, they desired to build a stockpile of financial assets in US dollars because it wanted to export favourably into that country (given the size of the US domestic market).
Third, the Federal Reserve sets the interest rate in the US, the Chinese government does not. Buying US Federal Treasury bonds had little to do with it.
Fourth, the US government spends in US dollars. The Chinese government does not issue US dollars. Therefore it cannot fund any US dollar spending. That is complete nonsense. You will realise that the US government is sovereign in its own currency and does not need to fund its net spending. This is a common myth that I hear all the time.
Fifth, US government bonds are not capable of being toxic in the sense that DAS is using the term. The US government can never be insolvent in its own currency. It might (but won’t) for political reasons choose to default on its debt obligations. But that has nothing to do with running out of capacity to service or repay its debt.
The system actually operates in real world as follows: The Government sells a bond to the non-government investor and debits the bank account you hold and credits some account within the government reflecting your bond holdings. Numbers just go into ledgers. You get a letter outlining the parameters of the bonds you just bought which includes the maturity date and the interest to be paid on the face value. On maturity, some operator in the Government reverses these transactions – credits your bank account with the bond repayment plus interest and debits the account recording your bond holdings.
There is no financial constraint on meeting all obligations in their own currencies irrespective of how large these obligations are. Even if the private markets “stop buying the debt” the government will still be able to spend. The debt after all does not finance the net spending!
In each of the budget deficit countries (where the currency is not convertible and the exchange rate flexible), the national government is not revenue constrained. So the concept of “financing” net government spending is inapplicable. Households need to finance their spending – sovereign governments do not.
These so-called ballooning deficits are all denominated in the currency of issue in the respective countries. Take the US as an example. The US Government spends in $US. It does so by crediting bank accounts (using electronic delivery systems) or writing cheques. The US dollar is the sole creation of the US Government just as the Chinese Government, for example, is the sole issuer of the Yuan. So it would be impossible for the Chinese to finance US Government spending in US dollars.
So what this twisted logic is trying to get to is the story that the Chinese trade surpluses with the US (for example), generate holdings of US dollars which are then used, in part, to buy US Treasury bonds. The mistake is then made that these bond sales by the US Government provide it with increased capacity to run deficits. Accordingly, as the trade surpluses grow, so do the Chinese holdings of US bonds and hence they have been increasingly unwriting the “over-consumption” of the US Government.
You might like to read this blog – The piper will call if surpluses are pursued … to work through the trade issues.
But the message is clear from DAS that US consumers have had to borrow $ trillions from the Chinese to keep consuming whereas in fact the modern money reality is that the US consumers are funding $trillions in foreign savings (accumulation of $US-denominated financial assets by the Chinese).
It is through this route that foreigners can gain access to the domestic currency and, in turn, use that currency to purchase things denominated in it (including financial assets).
In the blog – Debt is not debt! – I provide a transaction-by-transaction analysis of the implications of all of this.
The Late Night Live Radio audience is being grossly mislead by DAS. The build-up of US Government debt in the hands of foreigners presents no particular problems to the US economy quite apart from the fact that the debt was voluntarily issued in the first place and of no consequence to the ability of the US government to spend (in US dollars) whenever its chooses.
To really understand how the public component of the “national debt” is paid off you have to understand the operational mechanisms. Most commentators (and politicians etc) who make statements about these sorts of things haven’t the slightest conception of how the accounting transactions actually unfold.
What we call money and what we refer to as Government debt are really just numerical entries that appear in the government accounting structure. If a US commercial bank buys a government bond (for the Chinese Government) then the monetary system records the following impacts.
- The US Government debits the commercial bank’s account with the Government (used to transact government bond sales and purchases). So the account balance is reduced. Simultaneously, the US Government credits the commercial bank’s bond asset account held with the Government for the same amount – recording that the bank now holds $US x worth of government bonds. These are electronic adjustments to numbers in the accounting system. Nothing real is transferred other than a an official receipt!
- The transaction provides the government with no greater capacity to spend. Anytime it wants to spend it just credits whatever relevant bank account it wants in the private sector) to signify it has spent $AUD.
- On the day the bond matures its face value and interest has to be paid in full. The US Government would once again make two electronic adjustments to the accounts – one up and one down. They would debit (reduce) the commercial bank’s bond asset account held with the Government by the value of the bonds being repaid. They would credit the commercial bank account held at the Government to record bond issue sales by the same amount. Once done – two keystrokes – the debt is repaid – nothing real changes hands (except for another bit of paper sent by the Government to the Chinese representatives that they no longer hold the bonds).
- Interest payments are similarly handled – nothing real is involved.
The sky remains in place above our heads!
Anyway, if you thought the statement that the NYTs building is about to be stormed by Ben and his fellow Fed Reserve Brigands was bad enough, the interview deteriorated from there. Here is the next bit which followed some exchange about Bernanke being reappointed.
PA: … You don’t like Bernanke much do you.
DAS: I don’t actually like Bernanke for a couple of reasons. One is I think overall he is cut from the same cloth as people like Friedman and Greenspan and I find this sanctimonious thing that he actually saved the world to be kind of anomalous. When firstly he said that he, like Greenspan, could never see a bubble and therefore did nothing about it. Now then he also blamed the entire crisis on exactly the process we were talking about which is in fact was the Americans weren’t borrowing but everybody else was saving too much. And finally he has built up an enormous infrastructure where the Federal Reserve’s balance sheet has become something like 30 per cent of the US economy and he actually is saying that this is going to save the United States.
PA then talked about how many commentators are coming to a consensus about China and the dangers it poses the world economy:
DAS replied: I think generally speaking almost there is now a consensus building that this Chinese growth and this whole way that we are trying to get out of the recession is highly flawed and I think the test will come over the next 18 months or 24 months as we see the withdrawal of the effects of the stimulus … I mean China’s extraordinarily their growth is about 8 per cent, 6 per cent of that comes from government spending but more importantly, their banks have lent a trillion dollars this year. Now to put that in perspective that is 25 per cent of their GDP that they have lent .. that is an astonishing figure.
PA: Are you not also concerned that China is producing its own stock market and indeed property bubble.
DAS: Oh absolutely, because of that 20 trillion dollars of lending the statistics that are coming out … is roughly 20 to 30 per cent ended up in stocks and the other 20 per cent ended up in property which has essentially propped up these markets and, effectively what they have done is created their own sub-prime mortgage problem. Because essentially the bank lending that’s going here is not to productive assets as to productive speculation. And I think that’s going to come home to roost.
First, the banks doing the lending in China are State-owned. State-owned banks lending in their own currency cannot go broke. There is nothing remotely like a sub-prime meltdown coming in China as a result of this.
Second, note the bias against public spending. When you are building your economy on a net export strategy and exports fail you have to replace it with domestic sourced spending. China has relied on public demand for years as a major contributor to its growth (particularly in infrastructure development). To claim that the high percentage contribution is something new is to totally misrepresent the last decade.
You might like to read this blog – When crisis means death! – which gives a much different view of the way in which the Chinese government has redirected spending.
All you New Yorkers who love your paper get out in the streets and picket all Federal Reserve buildings to keep Ben and the Brigands (sounds like a blues band!) from taking over.
If it wasn’t so serious that this rubbish is allowed unfettered and unbalanced time on our national broadcaster then we could have a real laugh about it.
Digression: Why does the US government issue bonds when it doesn’t need to?
A regular reader sent me an E-mail yesterday that went like this:
Indulge me for a moment. Since we agree as a first principle that the government is never operationally constrained on fiscal policy (assuming a freely floating non-convertible exchange rate), and since we agree that bonds are nothing more than a defensive measure by the Fed designed to maintain a set reserve rate, I have the following question:
Today, the FT has a front page headline: “US says debt outlook worsening”. The article is below. Of course, this is based on the usual gold standard type thinking that afflicts organs of traditional orthodox economic thinking such as the FT. But since Bernanke has already said that it would likely be years before it would be considering raising interest rates, why bother issuing bonds at all?
This is not an uncommon question. This was my reply.
The answer to your question as far as I can tell is ideological. They have fallen prey to the seigniorage arguments from the gold standard and hate the concept of the central bank monetising the government spending. Not that the central bank can do that anyway with a positive interest rate target (but the neo-liberals don’t understand that).
They firmly believe that the government has to finance its debt. They see debt issuance as a fiscal policy act rather than what is – a part of monetary policy (interest maintenance). They believe the fiscal policy will become undisciplined if it is not backed by rising debt – the latter imposes a political penalty on governments who somehow know the public hate public debt. It is a self-reinforcing script.
In the US it is illegal not to issue debt $-for-$ with net spending. In Australia in the last two decades we have moved in that way too – the government now has operating regulations forcing it to cover the deficits to the cent in private markets.
Nonsensical in the extreme.
The reply I received was:
So it’s a legal constraint based on a totally false paradigm! The Treasury by law has to “fund itself” even though in actuality it doesn’t actually fund itself! So the law establishes an operational constraint, in effect legally circumscribing full prosperity and employment. It’s enough to turn one into a Marxist!
I warn anyone against dangerous tendencies but I have started calling the reader “comrade” just in case.
But even with the stupidity of it which effectively takes it back to a gold standard approach the national governments can still use fiscal policy to maintain full employment as they did more or less between 1945 and 1975. But then they have to deal with the political issue of rising debt.
Nonsensical in the extreme.