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"By the end of 2020, the Bank of Japan owned 45% of government debt outstanding."
https://twitter.com/DonLawson_/status/1488626926709194752
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If a government owes money to a branch of itself - is it really debt?
Why doesn't Japan buy up all the remaining debt - then forgive all the outstanding debt too?
Thoughts anyone...
You are into something very interesting. Debt is almost meaningless if it is owed to yourself, in your own currency. Imagine owing yourself $100. What interest, ...etc
So, what does happen when the government wants to spend more than it raises in tax revenue? It needs to borrow money (known as deficit financing), and so instructs the Treasury to issue debt.
There are three major types of debt: treasury bills, treasury notes and treasury bonds.. Treasury bills have the shortest maturity (less than a year) while treasury bonds have maturities of ten years or more. They all must be paid back in the future.
The debt is typically held by banks, institutional investors and managed funds (such as Kiwisaver accounts). Because the government is not expected to default on the loans, the debt is considered to be secure. So, these bonds can typically be issued at lower interest rates than bonds from other financial entities.
Where government debt goes
When the Res BANK engages in “quantitative easing” it essentially buys up these government issued bonds. To do this, it prints currency to pay for the bonds and this currency goes into circulation, increasing the money supply.
Quantitative easing floods the system with liquidity — the amount of money readily available for investment and spending. In turn, this should put downward pressure on interest rates because money is cheaper to borrow when there is more of it.
The Reserve/Central Bank can also lower the official cash rate (OCR) to push retail interest rates (on mortgages and savings deposits) down. The aim in both cases is to make borrowing cheaper in the hope that businesses will borrow money to invest, in turn creating more jobs.
If the RES BANK is buying government bonds from the banks and investors who had bought them earlier, it follows that the creditors have been paid off. So why can’t the government simply write off this debt?
Firstly, this takes away the RES BANKs ability to act as an independent entity, which in itself is problematic. But even so, the debt does not disappear, it just takes the form of that additional amount of money floating around the economy.
At some point this extra money will end up being deposited in commercial banks and be held as reserves which earn interest from the RES BANK.
The currency in circulation is also legal tender backed by the authority of the government. If no one else wants to accept it, holders of this money should be able to sell it back to the RES BANK for something of value in return (US dollars, say).
One way or another, sooner or later the debt will have to be honoured....END OF PART 1
PART 2
The risk of inflation
In the meantime, if lower interest rates do not lead to business expansion and higher production (and there are good reasons to suppose they may not) then the net result is a larger amount of money circulating in the economy with no new production happening.
This will eventually set off inflationary pressures, which make savers worse off and provide a disincentive for saving. But saving by households is fundamental to making funds available for businesses to borrow.
In the absence of increased production this extra money may also make its way to non-productive financial assets such as equity and houses, setting off speculative bubbles in those markets. HAPPENING NOW
Why might businesses not expand, even with lower interest rates? In deep recessions it is not the lack of credit that holds them back, it is that they cannot sell their goods at prevailing prices. This reduces demand for labour, further reducing demand for goods because more customers are unemployed.
It becomes a vicious cycle of insufficient demand, where the key issue is not credit or liquidity but rather a crisis of CONFIDENCE. Monetary policy loses its teeth at this point, leaving fiscal policy (via deficit financing or tax cuts) as the only option.
It’s all about TRUST ...
However, government borrowing is a long-term game. The entire system, whether deficit financing or printing money, is based on trust — that the government will honour its debt.
Simply put, no government could satisfy all its creditors if they wanted their money back at the same time! But as long as the government keeps making the interest payments on the loans, or at least has the capacity to pay back some of those creditors (sometimes by borrowing even more), the economy remains stable. The juggler’s balls stay in the air.
If for some reason trust in a government goes, watch the balls come crashing down. Any hint of default or not honouring debt obligations will lead to long-term damage to a government’s reputation and its future ability to borrow. No one will want to hold the government’s debt in the form of government bonds.
When that happens, we see capital flight — money flows out of the country as people seek a return elsewhere. The value of the currency goes through the floor, with catastrophic effects on the economy, such as occurred during the Asian financial crisis in 1997.
The economic crisis MANY COUNTRIES is facing is real and deep. Attempting to cancel debt would only reduce trust in the government and risk making the crisis worse.
According to proponents of MMT (modern Money Theory), a country that issues its own currency can never run out and can never become insolvent in its own currency. It can make all payments as they come due. Therefore, there is no risk of defaulting on its debt...
Lots to think about, but what you dont do is take on debt in someone elses paper promises. USA rule book
best
the Gnome
Hi Cowichan,
So scrap the present unfit for purpose system, turn all the debt registers to zero and have a fresh start
II. Total debt relief by multilateral institutions—Would it help the attack on worldwide poverty?
What is the argument for total debt cancellation? Some argue that the further reduction of debt service obligations would allow the HIPCs to make more poverty-related investments. But the HIPC Initiative is already changing the picture. So far, after debt relief, social expenditures in the 23 HIPCs mentioned above are projected to rise by an average of some US$1.7 billion per year during 2001-2002. Most of these resources will be directed toward health, education, HIV/AIDS programs, basic infrastructure and governance reform. And contrary to the statements of some debt campaigners, HIPCs will spend on average much more—not less—on priority social investments than on debt service. After HIPC relief, these countries will spend about 2 percent of GDP on debt service-well below the level in other developing countries-compared to about 7 percent on social expenditures.
To be sure, the HIPCs have a continuing need for targeted investment that benefits the poor. But the critical question is whether complete debt cancellation is the most effective and equitable way of supporting these efforts.
https://en.wikipedia.org/wiki/Government_debt
https://www.theguardian.com/politics/2005/jun/11/uk.g8
https://www.imf.org/external/np/exr/ib/2001/071001.htm
This article is more than 3 years old.
Government debt is finite, or so we have been told. There is an absolute limit to the amount of debt that a government can issue. If it exceeds that limit, the government will default. Debt is the accumulated deficits of all past years, so persistently running deficits means that at some point the dreaded default trigger will be reached and the government will default. Therefore, governments must observe fiscal discipline and avoid deficits like the plague.
https://www.forbes.com/sites/francescoppola/2018/04/17/everything-youve-been-told-about-government-debt-is-wrong/?sh=315cd796314f
I don’t like to speak against the elimination of poverty but the problem is at the moment if we eliminate poverty we will simply increase the speed at which we are making the planet uninhabitable for humans (maybe not such a bad thing).
The planet cannot support the current human population even with a significant number living in varying degrees of poverty, imagine if we were all consuming at the level most of us take for granted.
The root cause of all humanity’s problems whether economic, environmental or social stems from our mindless goal of achieving perpetual growth in an environment with finite resources, unless we take action to cease population growth & indeed dramatically reduce the current human population we, as a species are doomed. Considering our inability as a society to make hard decisions that involve us putting up with any form of hardship I personally am betting on the doom outcome :)
There aren't too many people.
We just need to stop wasting food (and the resources used to produce the wasted food).
https://www.theworldcounts.com/challenges/people-and-poverty/hunger-and-obesity/food-waste-statistics/story
'If “Food Waste” were a country it would be the world’s 3rd largest emitter of CO2 after China and the US.'
'An area the size of the US, India, and Egypt combined is used to grow food that is never eaten.'
Hi Tibbs - it does appear at some point starting fresh might be the only alternative to drowning in debt!