Thursday, July 7, 2016

Shortage of Sovereign Debt?

The WSJ has a lengthy story today by Min Zeng and Christopher Whittall about how sovereign debt is in short supply.  How can that be?

The answer: central banks are purchasing record amounts of outstanding sovereign debt.  This is the very same debt that governments are issuing record amounts of.

This is the process:  the government sells bonds to the public, the central bank then buys them.  What is the difference between this process and the government simply printing money and buying things with the money printed?  The answer: absolutely nothing.

Here are the facts:  The Federal Reserve now owns more than 20 percent of all outstanding US Treasury bonds.  Bank of Japan owns more than 34 percent of all outstanding Japanese government bonds.  This represents a massive amount of money printing.

In the short run, a very, very weak economy can be propped up by printing money and spending it.  That's what is happening now in the US and in Europe. 

In the long run, as everyone knows, simply printing money and spending it will be inflationary.  Such a process is ultimately inflationary even if the economy has no growth, as we witnessed in the US in the 1970s.

The so-called "shortage of sovereign debt" is simply another way of saying that western governments and Japan are embarked upon a money printing spree.  That can't end well.

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