Tuesday, June 27, 2017

Ellen Brown: Sovereign Debt Jubilee, Japanese-Style

Japan has found a way to write off nearly half its national debt without creating inflation. We could do that too.

Let’s face it. There is no way the US government is ever going to pay back a $20 trillion federal debt. The taxpayers will just continue to pay interest on it, year after year.
A lot of interest.

If the Federal Reserve raises the fed funds rate to 3.5% and sells its federal securities into the market, as it is proposing to do, by 2026 the projected tab will be $830 billion annually. That’s nearly $1 trillion owed by the taxpayers every year, just for interest.

Personal income taxes are at record highs, ringing in at $550 billion in the first four months of fiscal year 2017, or $1.6 trillion annually. But even at those high levels, handing over $830 billion to bondholders will wipe out over half the annual personal income tax take. Yet what is the alternative?
Japan seems to have found one. While the US government is busy driving up its “sovereign” debt and the interest owed on it, Japan has been canceling its debt at the rate of $720 billion (¥80tn) per year.

How? By selling the debt to its own central bank, which returns the interest to the government. While most central banks have ended their quantitative easing programs and are planning to sell their federal securities, the Bank of Japan continues to aggressively buy its government’s debt. An interest-free debt owed to oneself that is rolled over from year to year is effectively void – a debt “jubilee.” As noted by fund manager Eric Lonergan in a February 2017 article:


39 comments:

Andrew Anderson said...

Just more evidence that positive yielding sovereign debt sold to the public is "corporate welfare" (per Bill Mitchell) and more precisely "welfare proportional to account balance."

Of course, purchasing power creation must never be analyzed in ethical terms, must it? Because we all know that ethics is not practical, eh Progressives? /sarc

Noah Way said...

Never happen in the US, where debt slavery is the basis of the inequitable economy..

Six said...

Pretty silly analysis .. it's not really a "debt jubilee" since the Japanese have exchanged one debt (reserve balances) for another (bonds). Maybe she could call it an "interest jubilee" unless, of course, the Japanese are paying interest on reserves. In that case, nothing is happening at all.

None said...

Someone kindly explain this to me. "There is no way the US government is ever going to pay back a $20 trillion federal debt." I thought that in reality federal debt is not a debt at all, since it is denominated in dollars. And also, that the "debt" equals all the assets in the private sector--basic accounting identity.

So what is Brown talking about? What, if any, is the real problem and the real solution here?

Also, how are taxpayers paying interest on it?

Isn't all this just spreadsheet shuffling? If anyone has the time, a detailed critique of this article would be very helpful.

Kaivey said...

Yes, with my limited understanding of MMT I thought the same. Interest is not a problem on government bonds because the government can manufacture the money to pay it back. Bill Mitchel does say that this is free handout to the rich, though.

People are always free to leave replies on Ellen's site and leave links to informative articles.

Kaivey said...

I'm going to leave a link to this on Ellen's site and we will see if it turns up because comments have to be approved. I do like Ellen Brown, though, she's a socialist without realising it, or she keeps it quiet.

If she is misguided money it will be okay eventually because once she has fathomed out MMT she will be a big campaigner for it. I believed in her argument once, and I was a little disappointed by MMT at first, but then I realised that MMT was even better.

Michael Hudson:

However, the one kind of debt we are not worried about is government debt. That’s because governments have little problem paying it. They do not need to balance their budget with tax revenue, because their central bank can simply print the money. On balance, the overall public debt rarely needs to be paid down. As Adam Smith noted in The Wealth of Nations, no government in history ever has paid off its public debt.

Today, governments do not even have to pay interest on money their central banks create. (Think of the Civil War greenbacks.) Even for borrowing from bondholders, Treasury borrowing costs are now the lowest in history. As for the monetary effect of governments running budget deficits, there is little threat of commodity-price inflation. Price rises are concentrated where special interests are able to indulge in monopoly pricing and rent extraction.

http://neweconomicperspectives.org/2013/03/government-debt-and-deficits-are-not-the-problem-private-debt-is.html

André said...

"Federal debt" are the treasuries.

Some MMTers like to reinvent the dictionary and argue that treasuries are not debt, since they are denominated in dollars.

Whether you call it debt or not, a treasury is a promise to repay principal and interest to the holder at some specific future dates.

The government can (and do) issue dollar out of thin air to pay its promises. Some argue that it could be inflationary, some argue that it couldn't. But the truth is that most people don't even consider the possibility of currency issuance. They think that taxpayer's money services the debt. That's why that guy says that the debt is unplayable.

MRW said...

The interest on all outstanding treasury securities for the coming year are determined in late August of every year. The Federal Reserve tells the US Treasury what that amount will be. The US Treasury issues treasury securities to cover it. Doesn't cost a so-called taxpayer a penny.

MRW said...

Kaivey, Randy Wray spent a few years trying to explain MMT to Ellen Brown. Gave up.

SDB said...

The situation is super simple,

Right now there is almost 20 trillion dollars in U.S. government debt. This number is continually increasing...

What most people think is: oh my god, at some point in the future our taxes are going to have to be raised in order for the u.s. government to collect money to pay all this debt back. And this is what people mean when they say we're burdening our grandchildren with this national debt, that we're going to have to tax future generations a lot just to pay it back. It's a scary story. And it's completely wrong.

For one thing, look up the annual national debt numbers for the last 150 years. It simply doesn't get paid back. Paying it back is not a real thing. Not then, not now, and not in the future. In other words if you let 150+ years of history be a guide, it's clear that something is fishy about the scary story. You could stop here and say, well, apparently it doesn't ever get paid back, apparently it's not a problem, I don't understand why, but whatever, it's clearly not a problem.

Or you could go a step further and think about why it's not a problem. From the point of view of the private sector, businesses and households, U.S. government debt is just a bunch of savings accounts held by people, businesses, organizations and governments (state, local, foreign). The treasuries are already 'out there' in the economy. If you own $5000 of treasuries, that's just you putting $5000 of your money into a savings account that earns interest, instead of keeping it in your checking account. If the U.S. government were to put $5000 into your checking account and take it's treasuries back and destroy them, what changes for you? Nothing really. Right?

The idea that the U.S. government could eliminate the national debt tomorrow by taking back all the treasuries, replacing them by increasing the amount of money in everyone's checking accounts proportionately, to most people that sounds like printing money. Oh my gosh!! But it's not. It's just swapping one type of financial asset (treasuries) for another type of financial asset (money in your checking account). It's moving numbers down in your savings account and up in your checking account.

Much ado about nothing.

Doesn't Ellen understand this?!

(Perhaps there is a debate to be had about whether or not there should exist risk-free interest earning financial assets)

MRW said...

The government can (and do) issue dollar out of thin air to pay its promises. Some argue that it could be inflationary, some argue that it couldn't. But the truth is that most people don't even consider the possibility of currency issuance.

Creating treasury securities IS currency issuance. Treasury securities are cash equivalents. They also pay a yield, unlike physical cash. Reason why everyone worldwide wants them.

The difference between federal government issuance and redemption of marketable and non-marketable treasury securities is the “National Debt,” aka “Debt Held by the Public.” This is how the general public, the private sector, obtains “net financial assets.”

MRW said...

Doesn't Ellen understand this?!

Apparently not. Not according to Randy Wray. She's too fucking dense.

Schofield said...

http://www.taxresearch.org.uk/Blog/2017/02/27/solving-the-repayment-of-quantitative-easing-problem-for-good/comment-page-1/#comment-775053

MRW said...

Schofield, is a British gilt the same as out treasury security?

Tom Hickey said...

As a tax credit that is a government liability, currency is also a debt of the government that is "redeemed" by its use in paying tax obligations. Currency in circulation, bank reserves (rb and vault cash), and Tsys held by non-government are outstanding tax credits that have not yet been redeemed.

None said...

@ Tom
I think all "operational reality" amounts to spreachsheet shuffling.

To all, thank you for your comments.

None said...

Sorry for the typo: spreadsheet shuffling.

Tom Hickey said...

I think all "operational reality" amounts to spreachsheet shuffling.

That is partially true but not the whole of it. The rest is institutional arrangements for doing so.

Kaivey said...

I saw her at a Steve Keen lecture asking him to explain further how the interest loans gets paid when the banks don't issue the interest. (If they did, entry wouldn't get paid, they worked be handing out free money). But to the ordinary person it does look like there is a problem with paying the interest unless is manufactured somewhere. Steve keen was explaining how money paid into the bank is paid out again and so the same dollars can go back and forth in and out of the banking system several times. Steve Keen called it the velocity of money and in this way the interest gets paid. Bank staff also spend their wages back out into the community. Steve Keen went over it again with her but she still insists that as banks don't issue the interest there's a problem. Despite Steve Keen's impressive computer modelling showing this some academics say he has got it wrong.

Neil Wilson said...

Interest is denominated in $/month and loans are in $.

Mixing the two up is the same as mistaking miles per hour for miles.

Neil Wilson said...

To use an analogy, if you go and watch a motor race around a track and the cars go from 100mph to 200mph would you worry that they will run out of track?

Ralph Musgrave said...

Milton Friedman and Warren Mosler argued for a zero debt regime: i.e. they claimed the only state liability should be zero interest yielding base money. I think that's right, or very nearly so.

Possibly base money holders should be induced by lock up their money for extended periods in the form of low interest yielding government bonds because that makes it more difficult for "holders" to suddenly spend their stock of money all at once, given an outbreak of irrational exuberance, and cause hyperinflation.

Matt Franko said...

" It's just swapping one type of financial asset (treasuries) for another type of financial asset (money in your checking account). It's moving numbers down in your savings account and up in your checking account. "

Another oversimplification by the MMT elites.... it would cause GFC 2 as banks don't have enough regulatory capital to accommodate the new 20T of Cash Assets .. they would have to mark down the prices of all the other assets they have... same with the coin....

We have to watch this in light of Mnuchin saying he has "Treasury Superpowers" to deal with the debt ceiling.... these idiots may crash the whole thing again...

Matt Franko said...

And btw Japan grew 0.3% in latest qtr reported.... i.e. shitty... they have to stop doing this and so does US... if higher growth rate is desired...

Neil Wilson said...

"Possibly base money holders should be induced by lock up their money for extended periods in the form of low interest yielding government bonds because that makes it more difficult for "holders" to suddenly spend their stock of money all at once"

It doesn't if it is marketable in a liquid market. It's a complete myth.

neo-liberals think bond markets are illiquid and currency markets are fully liquid. It's the opposite way around.

Neil Wilson said...

" it would cause GFC 2 as banks don't have enough regulatory capital to accommodate the new 20T of Cash Assets"

They just buy whatever capital is required at the current price. The authorities then note the price and level of loans and they relax whatever ratio is required to get the level of loans they think is required.

Loans are a pipeline taking time to complete. You don't need capital until drawdown. That's plenty of time to get the required capital and lobby the regulators.

We've already seen Carney do that here in the UK. From last July:

"The counter cyclical capital buffer rate for U.K. banks was cut with immediate effect to 0 percent from 0.5 percent of financials' U.K. exposure, the BoE said on Tuesday in its biannual Financial Stability Report — the first to be published since the Brexit vote. This will reduce regulatory capital buffers by £5.7 billion ($7.5 billion), raising banks' capacity to lend to households and businesses by up to £150 billion"

Matt Franko said...

Well you have competent people in the UK right now we don't

Tom Hickey said...

Interest is revenue for the bank. Saying that interests is a problem is like saying profit is a problem.

Revenue minus expense is profit. Those profits are either invested, retained, or distributed to ownership.

The amount spent funds circular flow in the economy. The amount saved doesn't.

According to MMT, government must make up for nongovernment saving to maintain full employment.

Most people seem to find this baffling even though only all that is involved in understanding the conceptual model is a bit of mental arithmetic and some very simple algebra to understand the conceptual model.

The problem is not so much the ability to understand as the fixed ideas and cognitive bias that get in the way of correct understanding.

Matt Franko said...

Neil for banks to raise capital like that is much easier said than done

Matt Franko said...

Tom she is a trained lawyer

Matt Franko said...

Carney stayed out of it in Canada too...

Tom Hickey said...

Warren did say as bank owner then that raising capital in not an issue although I don't recall him explaining the procedure. He said banks don't like a higher capital ratio (leverage ratio) because it reduces leverage and bank profit comes from leverage. IIRC he also said that banks don't run at exactly the leverage ratio but leave a bit of space to work with even though it costs them a bit, and they add capital as needed. He shrugged it off as an issue.

Matt Franko said...

Right and all these people running banks have Warren's knowledge.... c'mon...

beowulf said...

Oh brother, doesn't she know that the interest on reserved the Fed pays out is funded by deducting it from Tsy rebate? If the Fed buys up all $20T public debt, interest collected would go towards paying IOR on (the suddenly $20T larger) bank reserves. Simpler way is, as I suggested in universal healthcare piece discussed here yesterday, to cut net interest costs by > 90% with a new law to lock in 0.375% WWII rate cap for T-bills (+ IOR) and bar further sale of T-Notes & T-bills.

Andrew Anderson said...

with a new law to lock in 0.375% WWII rate cap for T-bills (+ IOR) and bar further sale of T-Notes & T-bills. Beowulf

Why pay ANY welfare proportional to sovereign debt holding since, except for physical fiat, aka "cash", it is risk free?

To accommodate the usury cartel and Wall Street?

Ralph Musgrave said...

I'm fascinated by Neil Wilson's claim that bonds are more liquid than cash. Look forward to an explanation. Strikes me that cash is more liquid for two reasons:

First, a holding of cash can easily be split up into any number of smaller holdings of any size you like. E.g. if you have $1,000 in the bank, you can spend $1, $67 or any figure you like. In contrast, if you have $1,000 of Treasuries, is Neil trying to claim you can go out to the shops and buy $67 of goods with a $67 chunk of that $1,000 holding?

Second, in the case of a mass attempt to spend cash / bonds, dollars will never lose value in terms of dollars, whereas bonds CAN lose value in terms of dollars. E.g. in the event of a mass attempt to cash in Treasuries, Treasuries would lose value (apart from very short term Treasuries). That is a DISINCENTIVE to join in a mass sale of Treasuries.

And finally I am not claiming there is a HUGE difference in liquidity as between cash and bonds. That is why I said in my first above comment that it is "more difficult" to spend bonds than cash. I did not say cash was "vastly more" liquid than bonds or anything like that.

Matt Franko said...

B, imo they need these reforms to go with it sounds like Trump can do it himself:

https://www.bloomberg.com/news/articles/2017-06-23/traders-wager-on-liquidity-wave-from-easing-of-bank-regulations

MRW said...

To accommodate the usury cartel and Wall Street? And retirees, whose retirement funds cannot be held safely in commercial bank accounts if they exceed the FDIC-guaranteed $250,000. Where do you think pension funds are?

Andrew Anderson said...

And retirees, whose retirement funds cannot be held safely in commercial bank accounts if they exceed the FDIC-guaranteed $250,000. MRW

We can and should have negative to 0% yielding sovereign debt for safe storage needs.

And we should have generous, universal pensions so that no one need suffer if they fail to invest or their investments don't pan out.

But welfare proportional to sovereign debt account balance? No. Instead, if someone wants a deluxe retirement income then let them take investment risks to obtain it. And if their investments fail to provide for a deluxe retirement they would still have a generous, universal pension to fall back on.