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Main ForumMedia Is Gloomy For The Wrong Reason

  • Parts of the mainstream media continue their misunderstanding of the monetary framework in which countries that issue their own currency operate. I would recommend reading a few articles from Professor Bill Mitchell who holds the Research Chair in Economics at the University of Newcastle.

    The media continually references the US's ability to print money as a basis for predicting economic doom. Unfortunately the concept of printing money connotates that the US is spending beyond its means and therefore what eventually follows is financial Armageddon. Japan has a debt to GDP ratio of 226%, and has spent more than the revenue it collects for 20 years. Japan's 20 year bond rate is around 1.7%. Rather than say increasing government debt to GDP ratios is bad, the question that should be asked is: why hasn't it been?

    All government spending is printing money, and Australia does $350 Billion of it a year. When the government spends a dollar it in effect overdraws its account with the RBA. Every dollar spent by government is then deposited into somebody's bank account. That dollar may pass through a few hands, but by the end of the day it is still a deposit in a bank account and sits as excess reserves in bank accounts with the RBA. A bank's surplus dollar matches off with the spending of the government. The process is purely an accounting treatment, with no shortage or surplus to be concerned about. Government spending creates its own deposit. Countries who issue their own currency have no problem funding their debt since the spending creates the deposit to fund it.

    So government debt is exactly equal to private sector financial savings. So when mainstream media says that excess government debt is bad they are also saying that private sector savings is bad. Is it? You could say that excess savings should cause inflation, which is where the hyperinflation Zimbabwean argument comes from. This is wrong at two levels. Inflation is generally considered to be caused by excess demand. Does anybody reasonably consider that the world is suffering from excess demand? I think not. And Japan realizes this and so does the US, which is why they conduct their monetary policy the way that they do. Secondly, Zimbabwe, the German Weimar Republic and other hyperinflationary events are generally associated with a country borrowing in a foreign currency. The governments of Japan, US and Australia do not borrow in a foreign currency. Mainstream media references capacity to create money as a basis of their argument rather than the level of governments' external debt. And because a government prints money it therefore incorrectly justifies the consideration that the US credit rating should be lowered.

    Misjudging the effects of monetary policy can and does cause investor losses. Operator of the world's largest bond portfolio, the $240 Billion Pimco Total Return Bond fund, is up only about 1% year to date, ranking 536 out of 584 managers. Pimco made a major tactical error in the first half of the year by avoiding U.S. Treasury securities, asserting that they didn't pay enough to make them worth holding. But the world continued to flock to Treasuries, pushing bond yields from 3.72% in February to a low of 1.78% in October. Clearly something is terribly wrong with the continual doomsday analysis. Comparing the financial constraints of households and corporations to that of governments that issue their own currency is fraught with danger. In the paradox of thrift, it may be commendable that individuals maximise their savings, but if all individuals saved then it would be disastrous for the economy.

    I would not attempt to dismiss the problems besetting the world, but it is important to argue within the financial structure in which we operate.

    Michael Cornips

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