{"id":4603,"date":"2009-08-27T21:33:03","date_gmt":"2009-08-27T11:33:03","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=4603"},"modified":"2009-08-27T21:33:03","modified_gmt":"2009-08-27T11:33:03","slug":"fed-reserve-about-to-take-over-new-york-times","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=4603","title":{"rendered":"Fed Reserve about to take over New York Times!"},"content":{"rendered":"

\t\t\t\tStrange 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.
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\nYesterday, the failed former federal treasurer Peter Costello wrote in his opinion piece in The Age that Everyone’s ABC? Only if you lean left<\/a>. The thesis he mounts is that our national broadcaster is anti-conservative and therefore, anti-liberal. He said among other things:<\/p>\n

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 …<\/p>\n

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

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.<\/p>\n

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.<\/p>\n

But, Costello’s on-going hatred of the broadcaster is not the story particularly.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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<\/em> (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.<\/p>\n

You can listen to the segment if you dare<\/a> but the relevant aspect of the interview goes like this:<\/p>\n

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.<\/p>\n

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

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.<\/p>\n

The interview continued:<\/p>\n

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.<\/p>\n

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<\/p>\n

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 …<\/p>\n

PA, interjected saying: Your not suggesting a US Treasury bond could be a toxic asset.<\/p>\n

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

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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).<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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!<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

You might like to read this blog – The piper will call if surpluses are pursued …<\/a> to work through the trade issues.<\/p>\n

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).<\/p>\n

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).<\/p>\n

In the blog – Debt is not debt!<\/a> – I provide a transaction-by-transaction analysis of the implications of all of this.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n