Sackerson emailed me a link to this fine article which explains the accounting tomfoolery which goes on when governments (via their central banks or treasuries) start buying up their own debt.
The article is slightly confusing because the author starts with the bold (but probably accurate) claim that the US government in all its guises (Federal Reserve, states, public sector pension schemes etc) owns 42% of outstanding US government debt, but then focuses purely on Federal Reserve holdings of about $1.6 trillion, which is only about 12% of all US government debt.
It is this 12% which could be written off and cancelled without anybody noticing (you can't owe yourself money!), the same does not necessarily apply to US government debt owned by individual states or public sector pension schemes.
Forbidden Bible Verses — Genesis 42:18-28
4 hours ago
10 comments:
@MarkW,
The idea is that the bonds back the currencies - i.e. there is an intention for the money to find its way back to pay off the bonds.
Cancellation those bonds will tell the world that those dollars (a mere 1.6 Trillion) will now not come back - fueling inflation expectation.
It is a bit like you having a piggy banks and raid it to buy an ipad but promises to refill it. If you bin the piggy bank, there there is less of a pressure to 'save' next time.
It is an expectation game...
Anon, it's far simpler than that - you cannot owe yourself money, full stop.
Purist QE, where e.g. Bank of England (a dept. of HM Treasury) 'buys' bonds issued by another department of HM Treasury (the Debt Management Office) is pure paper shuffling that has no impact whatsoever on the outside world.
If all the UK gilts held by BoE were thrown on the fire (let's assume they're bearer bonds, for simplicity), then there'd be no need to reprint them - what HM Treasury loses in assets (on the BoE side) it makes up for by ridding itself of an exactly and equal and opposite liability (on the DMO side).
Conversely, if DMO so wished, it could print several gazillion's worth of new bonds and place them in the BoE safe, what would this achieve? Precisely nothing.
@MarkW,
I am afraid it is the illusion that counts.. You cannot owe yourself money indeed - but you can make yourself believe that you owe your piggy bank money. Much like companies in a group can owe each other money too.
The Bonds are technically secured against taxation - which is one of the factor that makes the currency 'valuable'.
Again - if you cancel the bonds, it fuels inflation expectation as no bonds (theoretically means no taxation) and that acts as a massive monetary expansion.
Of course you can cancel the bond and still tax the same - then the result would be interesting.
Anon: "I am afraid it is the illusion that counts."
Yes, that is very true - but only as long as people believe in the illusion (i.e. lies). What happens if everybody sat down for a few minutes to think about it, and then looked at Japan just to check a real life example?
And I'm not sure that cancelling would lead to monetary expansion, doesn't everybody say that QE is 'printing money' and hence expansionary? That's not true to any great extent, of course, but if it were, then doing the reverse can't possibly be expansionary as well.
Hi Mark,
The bonds are used to influence the quantity of base money/M1.
If the money are moving too fast, then the Fed will sell the bonds on the book to get its base money back (reverse QE).
Sure - Fed can just issue its own FedBond for that matter - but that is not how the system works at the moment. But that is the illusion at the moment...
on Federal Reserve holdings of about $1.6 trillion, which is only about 12% of all US government debt
Federal Reserve is not government - it's a conglomeration of 12 private banks.
Anon, again, fair point - it appears that under US rules, 'monetary basis' includes cash in circulation and comm bank balances with Fed.
So if they take US Govt bonds out of circulation (which is money that can't be spent immediately) and replace it with deposits with Fed, then M1 increases. But, if the UK experience is anything to go by, those balance just stay on deposit with the Fed and are not in circulation.
To be honest, all these M0, M1 definitions are hogwash anyway. There is a world of difference between the few dollars you withdraw from the cash machine and the suitcases full of dollars that are sitting in attics, completely unbeknown to the people who bought the house from the heirs of the old person who stashed them there.
And a fully comprehensive M[large number] base which includes all deposits and all liabilities would always net off to zero.
JH, that's another of those legal technicalities. To all intents and purposes the Fed is the official US government bank - whether the bank belongs to the government or the government belongs to the bank is a separate topic.
ecomonomics crisis... again!
Right - but remember, the government had to borrow the money in order to buy its own bonds off itself, which it did so by issuing bonds - the price of which it was influencing by buying back other bonds. As a result the yields all went up and bank shares (owned by the government) fell which cancelled out the money they had borrowed to buy the bonds - but as there was a riot going on they took them all the same and assumed nobody would notice.
btw - has anyone noticed, all the so-called economists of the left (= scum far more worthy of being locked up for a long time than any looter) are now calling for "controlled inflation" (they suggest 6-10%) to reduce debt (and thereby make more borrowing to stimulate employment possible). They even say the problem is with pensions funds having such big payment obligations (so inflation would wipe that out) and people havr too much personal debt (ditto). No mention of government debt - suppose that's just too obvious.
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