Posted by Warren Mosler, new "guest blogger" on Mike Norman Economics!
Mosler critiques an excerpt from a recent, John Mauldin piece. (Mauldin is severely out of paradigm. I don't read his stuff at all anymore!)
THIS IS THE PROBLEM- NO ONE SEEMS TO UNDERSTAND THE MONETARY SYSTEM:
Where do we find the money?
Obviously, governments may buy a portion of these bonds themselves, but they cannot afford more than a fraction of the total unless they want to challenge Mugabe as the ultimate master of illusion.
NO, THE 'FUNDING' OF THE BONDS HAS NOTHING TO DO WITH INFLATION. THE SPENDING IS AN INFLATIONARY BIAS, IN THIS CASE MEANT TO FIRST STOP THE CURRENT FORCES OF CONTRACTION.
Neither should investors hold out for sovereign wealth funds to do the dirty work. As is clear from chart 9, the total amount of wealth accumulated in these funds is pocket money when compared to the projected bond issuance over the next few years.
Hence it comes down to the price at which governments can attract sufficient demand from people like you and me.
NO, THE GOVERNMENT SETS ITS OWN INTEREST RATE. JUST LOOK AT JAPAN. MORE THAN DOUBLE THE DEBT OF THE US FOR DECADES AND RATES NEAR 0 THE ENTIRE TIME. AND THAT'S AFTER BEING DOWNGRADED TO WAY BELOW INVESTMENT GRADE.
One of two things may happen. Either this crisis will ignite such a bout of deflation that investors will happily own government bonds yielding 2-3% or the deflation scare goes away ultimately, the global economy recovers and bond investors demand much higher yields for taking sovereign risk.
NO SUCH THING FOR A GOVT THAT ISSUES ITS OWN NON CONVERTIBLE CURRENCY
I am not yet sure which scenario will prevail, but I do know that both are quite bad for equities longer term. Take your profits!
THAT PART MAY BE RIGHT!
Niels C. Jensen
THE FUNDS TO PAY TAXES AND/OR BUY GOVT SECS COME ONLY FROM GOVT. SPENDING AND LENDING AS A MATTER OF ACCOUNTING. THIS IS ACCOUNTING FACT, NOT THEORY.