{"id":34594,"date":"2016-10-13T13:28:03","date_gmt":"2016-10-13T03:28:03","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=34594"},"modified":"2016-10-13T13:28:03","modified_gmt":"2016-10-13T03:28:03","slug":"currency-issuing-governments-can-keystroke-their-outstanding-debt-into-oblivion","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=34594","title":{"rendered":"Currency-issuing governments can keystroke their outstanding debt into oblivion"},"content":{"rendered":"

\t\t\t\tIt 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<\/a>. 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.
\n<\/p>\n

The Forbes author, one Stan Collender – but lets call him by his twitter name @thebudgetguy – it sounds so much more authoritative – writes that:<\/p>\n

\nThe deficit and debt weren’t even mentioned when there was talk about something that could have been related to the federal budget.<\/p>\n

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.<\/p>\n

The projected increase in the deficit from repealing the Affordable Care Act that Trump pushed didn’t even seem to be an afterthought.<\/p>\n

And what was said about the budget when tax cuts or infrastructure spending was discussed? Nothing.<\/p>\n

… the federal budget debate one of the biggest losers of last Sunday’s debate.\n<\/p><\/blockquote>\n

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.<\/p>\n

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<\/p>\n

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.<\/p>\n

But the part of @thebudgetguy’s article I really liked was when he wrote that the candidates have ignored fiscal issues:<\/p>\n

\n… 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.”\n<\/p><\/blockquote>\n

Doesn’t that make you feel a bit better.<\/p>\n

The television commercials in question (which I won’t link to to avoid generating advertising revenue to these moronic organisations) are surrealistic.<\/p>\n

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.<\/p>\n

It is the stuff of make believe.<\/p>\n

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.<\/p>\n

This brings me to a Bloomberg article I read yesterday (October 12, 2016) – Preparing for the Post-QE World<\/a> – which also touched on fiscal matters.<\/p>\n

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:<\/p>\n

\n… 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.\n<\/p><\/blockquote>\n

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.<\/p>\n

A previous Bloomberg article (June 2, 2016) – Japan’s Debt Burden Is Quietly Falling the Most in the World<\/a> – informed readers that:<\/p>\n

\nJapan is the country where public debt in private hands is falling the fastest anywhere.\n<\/p><\/blockquote>\n

We read that:<\/p>\n

\nAccounting 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.\n<\/p><\/blockquote>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Alternatively, what this clearly demonstrates, is that such a government never has to issue debt in the first place.<\/p>\n

The more recent Bloomberg article cited above makes it clear that:<\/p>\n

\nSince 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.\n<\/p><\/blockquote>\n

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.<\/p>\n

Say it again out aloud – “central banks are ultimately owned by governments”.<\/p>\n

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.<\/p>\n

The Bloomberg article says that:<\/p>\n

\n… 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. …\n<\/p><\/blockquote>\n

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.<\/p>\n

Surely he can see through the logic of his own argument to understand that such a dichotomy has no application in this context.<\/p>\n

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.<\/p>\n

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.<\/p>\n

A computer keystroke or two!<\/p>\n

The author then incorrectly claims that this “accounting change would mean that governments would have greater scope to launch fiscal stimulus than previously anticipated”.<\/p>\n

Think about it.<\/p>\n

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.<\/p>\n

When you put it in those terms you realise how absurd the proposition is.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Whenever it wants.<\/p>\n

The Bloomberg also correctly notes that a:<\/p>\n

\nA large-scale stimulus program focusing on infrastructure and boosting human capital would likely trigger a world economic recovery.\n<\/p><\/blockquote>\n

Which raises the question – what are governments waiting for?<\/p>\n

Then, the neo-liberal scaremongering enters the picture.<\/p>\n

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.<\/p>\n

Think about that.<\/p>\n

Who believes in any of that?<\/p>\n

We were told that QE would unleash massive inflationary forces. It didn’t.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Please read the following blogs for more discussion:<\/p>\n

1. The sham of central bank independence<\/a>.<\/p>\n

2. Central bank independence – another faux agenda<\/a>.<\/p>\n

3. Bundesbank showed the way in 1975<\/a>.<\/p>\n

Conclusion<\/h2>\n

These articles were quite revealing.<\/p>\n

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.<\/p>\n

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.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2016 William Mitchell. All Rights Reserved. \t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

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