Debt/GDP ratio in a post-gold standard, post-QE world

“Reform lies dormant as Tokyo proves ‘Modern Monetary Theory’ —badly —but bond markets are unperturbed.”—William Pesek, Asia Times, March 2019

To be fair to MMT, most articles like this are written by folks who haven’t yet fully-grasped the pure MMT insight, which is that Japan’s ‘debt’ isn’t an *actual* debt (like a household debt).

Said in another way, a lot of the criticism of ‘description’ MMT emanates from a gold-standard-era mentality where Japanese Gov’t Bonds, aka Japan’s national debt, or US Treasury bonds, aka the US national debt—which are now denominated in a fiat currency—is still a ‘debt’ to the issuing monetary sovereign of that currency (as if IBM were in ‘debt’ of IBM stock).

In addition, to be fair to Japan, Japan’s government Debt/GDP ratio reached 253% in 2017—but is it an *actual* ratio of 253%?

In a post-gold standard, post-QE world, if Japan has a 253% Debt/GDP ratio BUT their central bank bought back 40% of their bonds, perhaps it’s more like a net 152% Debt/GDP (60% of 253).

In other words, don’t count the bonds at the federal government’s own central bank (nor the newly-created reserves that replaced them) as part of the Debt/GDP ratio. Don’t take my word for it, ask someone in finance that’s worth their salt if bonds that are ‘called’ back from bondholders, by the bond issuer, are still a debt to that issuer?

First of all, what is ‘QE’? Quantitative Easing (coined in the 1990s by Richard Werner who as chief economist of Jardine Fleming Securities Asia used this expression during presentations to institutional clients in Tokyo) was first tried in Japan. QE (also known as ‘credit-easing’ or ‘Large Scale Asset Purchases’ in the US) is a gov’t bond ‘buyback’ done by the issuer of a fiat currency. After a QE is done, it is as if the federal gov’t never collected that amount of money from investors, nor issued them any gov’t bonds in the first place; and the federal gov’t instead simply financed that amount of deficit spending by ‘paying cash’ with newly-created money (without going through the charade of ‘borrowing’ the money to finance it). The reason why monetary policymakers (the anesthesiologists) at central banks do a QE, is to lower long-term interest rates—to ‘accommodate’ the economy—which is not to be confused with ‘stimulus’ done by fiscal policymakers (the surgeons). Central bankers have been ‘targeting’ interest rates since the 1980s once the notion of targeting the quantity of money in the money supply was debunked—or as those initiated to MMT would say: ‘It is the price (of money), not the quantity.’

During their decades of quantitative easing, the Bank of Japan created reserves to buy the Japanese Gov’t Bonds. Meaning an increase (a net addition) of yen going into their banking system (that normally doesn’t occur without QE). Which begs the question, why even count those JGBs as debt if they’re now held at the BOJ? That would be like counting your own IOU that you just bought back and stuck in your own pocket—as still being debt.

Getting back to Japan’s private sector, the public-held debt in that 253% Debt/GDP was broken up. 101% of it (40% of 253) went to the BOJ—leaving a net 152% Debt/ GDP (60% of 253) in the private sector.

That 101% became newly-created reserves that the BOJ paid (for the bonds that replaced that 101% of that 253% Debt/GDP out from the private sector).

Meaning that (not including the 101% of JGBs that left the private sector and went to the central bank’s balance sheet) the 253% Debt/GDP is actually 152% Debt + 101% reserves / GDP in the private sector.

Furthermore, why count those reserves as debt (why include those reserves in the Debt/GDP ratio) if after all, those reserves are not debt. They are liabilities, yes; debt, no.

So that 253% Japan Debt/GDP ratio (that Godzilla) is more like 152%…

…and that’s even if you consider it a ‘debt’ (if you consider it a real monster).

Thanks for reading,

Pure MMT for the 100%

Real Macro for the 100%

P.S. As per MineThis1, “The nation is selling out its national wealth as Debt to GDP rises (as Debt to Asset rises)”; and as per Charles Kondak, “One could argue that Japan is a classic example of when deficit spending has the effect of diminishing marginal returns on the productive economy.”

So rather than thinking that Debt/GDP being HIGH is bad (or even considering it actually being a ‘debt’ that is even actually that ‘high’), if it’s RISING is the real warning indicator. Furthermore, rather than thinking of the national ‘debt’ as a monstrous Godzilla, better to think of the central bank as Godzilla.

Here’s the same picture as above showing the screaming people running from Godzilla (or more specifically, the people screaming trade orders while front-running Godzilla).

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