Tag Archives: United States

The Japanese own their own debt so they don’t have a problem. Right?

Wrong.  Even though those of us who argue that National Debts are not quite the huge monsters of popular neo-liberal supposition often point to Japan.  Japan manages to function very effectively with a debt to GDP ratio which is over 200%,  and more than double the US and UK’s national debt ratios.

All debts and deficits are caused by people, organisations, and countries wishing to save ££, $$ or Yen or whatever. If money issued by the US, UK or Japanese governments ends up being held by the central banks of the big exporters, or by their own citizens,  and who don’t wish to spend it, then these countries have to be in debt in accounting terms.

The only solution, if indeed there is a problem of debts owned by foreign countries, is to go back to countries imposing tariff barriers to protect their trade zones and prevent the build up of these kinds of financial imbalances. That caused wars in the past and would again in the future. It isn’t a good option.

It is usually pointed out by supporters of the neo-liberal orthodoxy that Japan manages to have such a high state debt by also having lots of savers who lend the money to the government. It is, therefore, not external debt and so is a lesser problem  True, Japan usually has a trade surplus and “pays its way” abroad.

However, internal debt can be more destabilising than external debt. If Japanese savers get spooked about a potential inflation they would all start over-spending simultaneously which could set off the problem they most fear. It would be politically very difficult for the Japanese government to control that by applying taxes on its own citizens. So whereas the debt isn’t at all a direct problem for the Japanese Government, the ownership of too many financial assets by the Japanese population could give them one.

On the other hand, if their debt were owned by a foreign country, say in the form of Japanese treasury bonds, it would be somewhat different. All that country could do , if it wanted to spend its Japanese Yen, would be to give large orders for real goods and services to Japanese industrial companies. It would boost Japanese exports tremendously. That too could be inflationary, but the situation would be more manageable. The Japanese government would be able to negotiate with its foreign creditors to spend at an agreed rate. As a last resort it could even impose a tax on its own exports.

That’s essentially the position the USA is in with regard to its Chinese creditors. If there is really a problem with debts,  it is China who has the bigger one than the USA. Japan has a bigger problem too. Not so much because it has a larger debt but because it is, rather than isn’t, largely owned by its own citizens.

Neo-liberal thinking!

How many basic errors can you pick up in this posting?
http://johnredwoodsdiary.com/2013/12/21/rebalancing-the-economy-2/

To be fair to Mr Redwood, he does allow some reasoned criticism of his postings , but he didn’t allow this one past!

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@Mr Redwood,

 “the same rules apply to a government as to a company or person” 

But they don’t! Not governments like the UK , Australia, USA, Japan etc who are in control of their own currencies. Companies and people are users of a currency. We have to get money before we can spend it. Governments are issuers of a currency. They have to issue the currency before anyone can spend it. Where else can we get it from? Any government which issues its own currency has to be in debt. If it isn’t, it means it hasn’t issued anything.

Governments like Greece are also users of a currency. Thay have exactly the problems you describe.

Governments which issue their own currency have to get it right. They should issue not too much. This causes inflation. They need to issue not too little either. This causes deflation or depression. People lose their jobs.

One mistake often made by sovereign currency governments is to try to peg their currencies to another currency- as with the examples you give (Argentina, 60′s and 70′s Labour governments) . They had to borrow at high interest
rates to try, usually unsuccessfully, to maintain that peg. They are losing a key advantage in having their own currency.

Mrs Thatcher’s government was originally much smarter and allowed the pound to fall close to parity with the US$ in the early 80′s. Life went on pretty much as normal and hardly anyone remembers this now. They haven’t forgotten the events of Black Wednesday though! That was again caused by the UK government trying and failing to maintain a peg with the DM. Big mistake!

The ‘unsustainable burden for future taxpayers’ argument is odd. Future taxpayers will consume the products of their future economy. They won’t be able to send anything back in time to us, and we won’t be able to leave them
anything much to consume directly. If at some future time the Chinese decide to spend some of their accumulated money, that will be good. If they decide to order lots of Rolls Royce jet engines, for example, politicians will
try to take credit for the order. It will be hailed as a good thing and of course it will be.

What we can leave future taxpayers is a successful and well functioning economy.

PS: and a clean and safe environment.

Who controls the economy?

Economic control is to some extent decided  by the democratic process – but nowhere near to the extent that most voters would think.  Naturally, those who have the most money have the most influence.  If they decide to spend big time then the government needs to increase taxes to slow down the economy and prevent inflation. These are levied largely on those who have much less. If the very wealthy decide to acquire a mountain of cash, then the government needs to run high budget deficits to keep the economy moving.

That may be acceptable if the extent of inequality was close to what most citizens would consider reasonable.

But, is it?

This is the extent of the inequality, and the perceived inequality,  in America and it’s probably not much different elsewhere.

Can commercial banks create money out of thin air? (2)

Since my first posting on this topic it has occurred to me that each bank behaves exactly like a government with a fixed rate currency to support. That was the situation with most countries up until the 1970’s when national currencies were fixed against the US$. In the UK I remember the rates were around  $2.40 to £1.00 in the final days of a fixed exchange rate.

The UK government could print, or create, as many £ as it liked but it had to have a sufficiently good financial base to support that rate. If the reserves dropped too low then the currency speculators would take positions against the pound bringing it under downward pressure.

How does that work with a bank? Well for a start we know that the neo-classical multiplier  doesn’t fit the observable facts so we can forget all reference to that theory. There are those who claim that banks can create their own money without limit. That seems to be going much too far in the opposite direction. If they could really do that they could grow without limit, and never ever fail or fall into bankruptcy.

What could be a better theory? If I look in my bank account I can see, say $2000. but are they really dinky-di Australian dollars?  Sure I can put my card into the ATM and out do pop the genuine article. But what about the rest? I would argue these Commonwealth Bank IOUs  are actually Commonwealth Bank Australian dollars – which can be considered a sub-currency. The Commonwealth Bank can create, in theory, as many of these as they like, by keystoke. However they can’t overdo it. They can’t create CBA_A$ without limit. They do have to maintain the confidence of the market that they are have enough reserves to maintain their peg to the Australian dollar. So, the more they lend, the more reserves (or capital base) they need to do this.

Of course it’s the same story with all the other Australian banks. There are ANZ_A$ , Westpac_A$ etc. Providing all these banks are in good financial shape,  there is no effective difference between their IOUs or sub-currencies and and the Reserve Bank of Australia issued currency. But if any of these banks ever fell into difficulty that link could be broken and some deposit holders could find they lose part of their savings.

This theory is consistent with the observation that QE doesn’t work in the way intended. Once the bank has decided what reserves it needs it doesn’t make any difference whether they are in bonds or cash. It won’t change the bank’s lending practice.

I haven’t seen anyone else make this observation so it is possible there is a flaw in the theory. Any comments either for or against are welcome.

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The previous posting on this subject generated quite a bit of heat. The line I’m advocating didn’t go down well with those who were of the opinion that commercial bank lending goes much further.   That is a pity because I would say they, like the proponents of MMT, are motivated to have a better functioning economy, and do advocate full reserve banking as a key policy towards this end.

I’m not sure that FRB is necessary but, if it is, then it should only be done with a a full understanding of the issues involved. Goodwill isn’t enough.  Changing things and hoping for the best isn’t ever going to work. The basic theory needs to be right.
I’d make the same argument to people like Russell Brandt who argue for revolutionary change. OK, so we have a revolution, and then what?