It’s Not ‘Debt’

The world is “awash” in debt. It’s not “sustainable.” “Something’s gotta give.”

Familiar refrains, all. But in many cases, wholly misleading.

2020 has not been defined by good news, that’s for sure. But in a year almost totally devoid of silver linings, one positive development is that thanks to the proximity of monetary and fiscal policy reactions to the pandemic, the public now has a better understanding of how money works. In the same vein, voters in advanced, developed economies are beginning to come to terms with the fact that discussions around government debt and deficits have, for years, been defined by misleading narratives.

The chart is simple, but it makes a crucial point. Note the emphasis on the word “proximity” in the passage above. That’s important.

Over the past decade, ongoing, “background” purchases of government debt by central banks were generally credited by market participants with helping support risk assets, underwriting the carry trade, suppressing volatility, and exacerbating the wealth gap. But the average citizen knew little to nothing about QE. It’s safe to say, for example, that the vast majority of Americans couldn’t even tell you what the Fed does, so the notion that the average person could explain what “quantitative easing” means is laughable.

But even a hypothetical voter who understood that QE involves the central bank purchasing massive amounts of government debt issued by the sovereign, was tacitly encouraged not to connect the dots. The arm’s length nature of the buying (through primary dealers) and the lack of a one-to-one, short-term relationship between the purchases and government spending, obscured the reality, which is just this: Governments issued debt and the folks “across the street” (as it were) bought it. Not all of it, but quite a bit of it. The Bank of Japan is, of course, the quintessential example (figure).

What the first chart above shows is, basically, a one-to-one, short-term relationship between central bank purchases and government spending to combat the pandemic. The visual is idiot-proof, as it were. This should be an “Aha!” moment for the public, setting in motion what one hopes will be a discovery process, although I have my doubts.

Without someone to keep the issue front and center, most people will go back to thinking about government finances the same way they think about their own checkbook, or the same way they think about state and local government budgets.

Analysts, meanwhile, will persist in conflating the finances of the US (for example) with countries that belong to currency blocs, maintain dollar pegs, or borrow heavily in foreign currencies.

To be honest, the first visual above doesn’t go far enough, although the header and sub-header on the chart drive the point home. It’s not really “debt.” Not for the US, Japan, the UK, Australia, Canada, New Zealand, and other advanced, developed economies with sufficient monetary sovereignty, anyway.

I’d wager fewer than 5 of the 49 people who initially clicked the “like” icon on the following tweet this week understood the joke:

The joke wasn’t that Mnuchin has presided over an explosion in deficit spending. Rather, the joke was that Treasurys (I prefer the less common spelling, but I use the reader-friendly version for Twitter) aren’t properly “debt.” You can’t really “owe” a sum denominated in a currency you issue. Hence the “nonsense” characterization in the first visual above.

You would think that if ever there were a time when a responsible media would be keen to explain this to the public, it would be now. People are hungry, jobless, and desperate in advanced, highly-developed economies with monetary sovereignty.

And yet, we continue to tell ourselves the same, old ghost stories. We can’t quite connect the final dot. Or, if we can, we’re just not willing to “go there.”

A version of the first chart shown above ran in a Bloomberg article dated October 13. And yet, just a few days later, on Friday, Bloomberg dutifully ran this headline: “U.S. Budget Gap Triples to Record $3.1 Trillion on Virus Relief.”

Cognitive dissonance or tragic irony? It’s a little bit of both.


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18 thoughts on “It’s Not ‘Debt’

  1. We don’t have responsible media but you know this. There is slight increases in awareness but as long as the general population believes what mainstream media pumps out and fails to seek knowledge on their own it’s a long journey ahead.

    1. I do, yes. Obviously I don’t take all of the pictures, but they are all done in Photoshop by me using open-source, royalty free (i.e., legal) image libraries.

      I’ve put some of them on a custom clothing line, which I briefly thought about adding to the site, but somehow I doubt there’s too much interest in that, so for now, I’m the only one wearing any “Collapse Art by Heisenberg” apparel. haha

        1. well, i’ll take that into consideration. there’s been some interest over the last year, but by “some” I mean not enough to justify ordering more than I’ve ordered for myself. that said, i suppose there’s no harm in doing a trial run at some point.

  2. Samuelson 101 having been left behind we deal with the ingenuity of man to extricate from a dilemma that was way beyond his control to avoid . Many reasons exist for this one reason being competition between developed and undeveloped countries and their respective interests… Just as the growing list of Nations with ‘sufficient monetary sovereignty ‘ grows so does the gap between objective and subjective reality… Yes we try hard to ‘get the joke’ and to extent we all do thanks to the owner of this post who really does motive us to thinking in terms that are new revolutionary, perhaps of absolute necessity.
    I do see the goings on to be a test of MMT as well as entrenched concepts whose basis is History.The one true regret is that for some of us the final chapters will not likely be in the reach of our lifespan so we won’t be able to witness whom the joke was on.. There are pitfalls in this road away from the conventional and avoiding them is not optional … So it’s gonna’ Grandma Geopolitics again just maybe ?

    1. Yes, timing is everything. The patriotic buyers of “War Bonds” during WWII were screwed with post-war inflation. I also think there will be a comeuppance for MMT’ers but don’ know if it will happen in my lifetime. So I hold some of those shiny yellow doorstoppers, but at the same time have just locked in some money at a low rate for five years because I just don’t know when.

  3. Terminology has clouded meaning and effective communication to the public on this subject. It is convenient for the Fed and central banks to call it “quantitative easing,” a term that by itself coveys nothing about what it represents and what the Fed is doing, this simply leads to confusion. If more people start calling it debt monetization or purchase of government debt the meaning and the true mechanics of the act will become clearer to many. QE sounds like something involving quantum mechanics or rocket science, so most folks won’t even bother trying to comprehend what it entails, which is very unfortunate because most people would likely understand easily the implications of our central bank buying the debt issued by our own government.

  4. Indeed, and then there is the next level ruse, which Lacy Hunt and others have explained step by step: that when the FED buys Treasuries from the primary dealers, they only credit their reserves on account at the FED, which cannot by law (yet) be withdrawn. To the extent that banks remain unwilling to create new credit, i.e. endogenous money, not only is all of this artifice not debt, it is not necessarily even expansionary. And everyone is still scratching their heads after a decade why there is no inflation.

  5. I don’t know. I thought Margot Robbie in her bathtub did a pretty good job on MBSs… Maybe we should all donate so that she does QE? I’ll gladly volunteer as a soundman, camera guy or director of photography…

  6. I just bought 2 pairs of jeans and it cost me $140. These aren’t fancy or brand name. They are, however, an odd size which used to be carried by stores like Marks Work Warehouse. When $140 dollars buys you 2 pair of everyday jeans and I then read that there is no inflation … I wonder what world some people live in. (And I think Anaximander was being facetious.)

    1. Hedonic adjustment. These new jeans last 27 months longer than the previous jeans at $40 / pair do the longevity enhancing effect of the cotton-poly blend. They are twice the price but last 2.1 times longer, so you are actually coming out ahead.

  7. I wholeheartedly agree that too few people understand the mechanics of QE (and monetary mechanisms in general) but I do wonder whether lifting the veil might have some unintended consequences. Assuming expectations play a significant role in the determination of inflation , there is a reasonable chance that the current, flawed, analogy around household budgets has helped to anchor inflation for the past generation. Greater understanding of monetary dynamics could shift these expectations. One could argue that that’s a good thing but we should at least recognize the complexity of this particular system while we seek to tear it down.

  8. My country has a dollar peg. Could you please briefly explain why it cant do the same? (i.e. have the CB buy government debt to effectively finance its expenditure?)

    1. If you’ve got a dollar peg, you usually need to hoard dollars (i.e., Treasurys). You’re promising a conversion rate, but you don’t issue what it is you’re promising to deliver. At a simplistic, conceptual level, it’s similar to a gold standard — you can promise to convert a currency to gold at a set rate, but since you can’t print gold, the market’s faith in that promise waxes and wanes. If the peg comes under siege (from speculators or due to some exogenous shock, like war), the market may question your capacity to maintain the peg. If you’ve got a source of USDs (e.g., FX reserves so large that the market isn’t willing to test you or something you export that gives you a steady stream of hard currency) you’ll probably be ok. But ultimately, pegging to the dollar means you need a large stash of USD which you can use to defend the peg and otherwise manage the currency. It also generally entails borrowing in dollars, both by the government and the private sector. When you borrow in a currency you don’t issue, you are taking on the risk of not being able to pay it back. This is mitigated to a greater or lesser degree for oil exporters, but even there, you’ll see the market start speculating against the peg during times when oil prices crash or when there’s sectarian tension in the Mideast (e.g., last year’s attacks on Abqaiq and Khurais).

      1. Thanks, this was very helpful.

        I’m guessing that the government may opt for borrowing in USD because it doesn’t want to increase the local currency in circulation which it promises to convert to USD (upon demand).

        But why would the private sector opt for borrowing in USD? Would that generally only be the case if they wanted to tap international (and not just local) investors, and where I guess some of those international investors had concerns about the durability of the peg or simply don’t want to bother investing in debt denominated in such a currency?

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