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[00:00:00] Well this budget is very focused like the first four were on cost of living pressures and particularly in this case from the war in the Middle East which is pushing up prices around the world and in our own economy. People shouldn't expect there to be big near term cash splashes in the budget, it's a very responsible budget, there's a lot of spending restraints. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.
[00:00:27] A very responsible budget, we've heard that before haven't we? That was Australia's Treasurer Jim Chalmers talking about how the government doesn't want to spend too much even though people are struggling. Isn't that the story the world over? Wasn't it the story of a decade or more of the UK's austerity years? But is it necessary and what's the power of bond markets in determining just how much money the government does spend? That's this week.
[00:01:01] So let's look at last week in a nutshell very very quickly just so we're all on the same page. By the way a friend of mine who listens religiously to the podcast said he was totally lost last week. So let's see if we can sort it out in 30 seconds. So what we said last week was government spending, this is fairly straightforward, government spending puts money into the broader economy. The government has the money, they give it to businesses, businesses pay people, the money is in the broader economy.
[00:01:24] What's happened is there's more money in the private sector, they've got a surplus against the deficit that's come from the government. So the government spent the money and it's ended up in the private sector. We only issue bonds because we don't want to see a massive negative number in the government's bank balance at the central bank. If we accepted that that could happen and it could keep on getting bigger and bigger and bigger, no problem with that. But we don't want that. We've got regulations all over the world to say that's not possible.
[00:01:54] So that's why... Not so much not possible is not allowed. Not allowed. Not allowed, sorry. Exactly. So that's why we issue bonds. So the issuing of the bonds actually doesn't change the amount of money that's in circulation because when those bonds are issued, they are basically bought, provided they are bought by commercial banks. So central banks can't buy them directly because that's... Again, because they're not allowed to. Absolutely no practical reason why the central bank couldn't buy those bonds.
[00:02:21] But it's seen as monetary financing and it's seen as a bad thing. It's the central bank... By people who never understood money in the first place, which we're trying to get rid of. So yeah, let's just do the practical thing. The bond sales, whoever the bond sales are made to, the revenue from the bond sales goes into the treasury's account. And if the rule is that the bond sales have to equal the deficit plus interest on previously existing bonds,
[00:02:44] which are the rules that have been imposed, then the inflow for those bond sales equals the gap between spending and taxation and means that the government's account at the central bank remains effectively at zero. That's... Right. But it has not changed the money supply at all in the process. No. The reason for that is because if it is bought by commercial banks, the commercial banks are basically buying those bonds with money that they've got sitting in reserves, in their reserve account. So it's an asset swap in effect.
[00:03:14] So it's... And that is... And those reserves are not money that goes into the border economy. So in effect, what we've had happen is that money has spread... You know, by that process, money that was sitting in reserves has been used to buy bonds. Those bonds have been used to try and balance out the account, to try and account for the money which has been spent in the border economy by the government. So that's the step-by-step process. That is the only reason we issue bonds.
[00:03:41] So the bonds aren't influencing at all the supply of money. It is simply for that very simple reason of trying to get rid of that negative number in the account. But it is interesting, isn't it? Because bonds are hellishly complicated. If we did... Let's start here. If we did have that direct financing by central banks and the central bank said, sure, spend away. We'll give you the money. There'll be no bonds issued.
[00:04:09] The finance sector will be looking pretty sick because they rely on bonds a lot. It's the finance sector that wants bonds to be issued and the finance sector that complains about how many bonds are issued at the same time. Because most of the... Not all, but a lot of the so-called deficit hawks come out... Work in or come out of the finance sector. And they're forever saying, oh, the government's got massive amounts of debt. Oh, there's going to be a crisis in footy. Oh, it's going to be terrible. Oh, we're all going to be ruined in the future by something that's not going to have any impact at all. And they just keep it up.
[00:04:40] And the thing is, I say, oh, okay, if you don't want us to issue any more bonds, we won't. Oh, hang on a sec. How are we going to balance our portfolios? Where are those bonds? I'd actually like to do it. I mean, I must admit, part of me would just love the malicious pressure of saying, okay, you don't like government debt. We're not going to issue any more bonds. And then keep on going.
[00:05:04] And at that point, it's the finance sector that wants to use bonds as part of their portfolio management methods. So, it is to me ironic that they're the main ones who complain about a future catastrophe. But it's all based on misunderstanding, treating bonds as if they're like private debt. And this is where the errors start from.
[00:05:26] And that's why, I mean, my obsession with double-entry bookkeeping, as you know, what's the double entry for the entry that's made into deposits? If it's credit, the double entry on the other side of the bank's ledger, it's loans which go up. So, loans rise to match the increase in credit-created money. But what goes up to match the increase in fiat-based money, which is what happens when the government spends more than it takes back in taxation, are the reserves. So, that's – okay. So, people – the economists confuse.
[00:05:56] They think reserves are needed for loans. They talk as if the government has to – when the government is spending the bonds, that's where it gets the money from. And no, it doesn't. In fact, the only thing a bond sales can do is destroy money. Because if you sell the bonds to the non-bank sector, then they use their deposit accounts to buy it and they fall and that actually destroys money. Yeah. That's the other aspect which we covered off last week. So, that rounds off what we talked about last week. And the great example for that to me is when I buy premium bonds in the UK, for example.
[00:06:26] There's an example of actually buying government bonds which are sold directly to the public and have been for years. And that is money destruction in effect because the money that I would have been spending on a holiday in the Lake District or buying a new car or whatever, I'm buying premium bonds with it, which supposedly you're led to believe is funding the government. But actually, it's – the government is already funded. You're just taking money out of the coffers that would otherwise have been sitting – would otherwise have been commercial banks buying those bonds.
[00:06:53] And apparently, I don't follow the – I follow some of the legal, not all the time. But colleagues of mine tell me that America now allows households to bid in primary auctions. And in fact, when you look at this, this is Richard Vague's research. Richard really has gone through the numbers on this front. It wouldn't surprise me. Yeah. Yeah. What it means is – It wouldn't surprise me because we're buying ETFs for everything now. So, you could imagine you'd have a fund there for buying government bonds just because it's another asset class that people want to get their fingers into.
[00:07:21] So, what it means is the spending that's financed by the bill that creates – approves the spending in the first instance, that still goes ahead. So, you get whatever non-financial asset that the bonds were supposed to be covering. You'll have a – let's say you want to – I mean, I love using an example. What's that – the reflective pool? The reflective pool and – Yeah, in Washington. In Washington, yeah. So, you want to put another layer of plastic on top so it looks better than the previous layer of plastic. Okay.
[00:07:51] So, you pass a bill through Congress to put more plastic over the reflective pool and then that's authorised and the spending occurs. So, the reflective pool gets its extra green cover. But then when the bonds are sold back to the private sector, it means no money is created by that process. So, yeah. Do you – It would end up cancelling the creation of fiat money.
[00:08:14] So, do you think actually – just being a devil's advocate here, which you know I can do – do you think maybe there are minds that are across all of this and they're thinking, well, okay, there is a concern that too much money might be issued. So, if actually when we issue bonds, we don't issue them to commercial banks. We issue them to the broader economy. So, it's sub – does sub – reduce, basically.
[00:08:40] So, the amount of money that the government is spending is reduced if there's a concern that they might spend too much or it might be inflationary or whatever. So, next – Not a skerrick. Not a effing skerrick. Because that would be a logical reason to do it, wouldn't it? The logical reason – almost guarantees, therefore, that's not the reason. Okay? In our modern world, logic went out the window sometime after Descartes. It's just ridiculous how many illogical things we end up doing. As a policy, that's quite good, isn't it?
[00:09:08] Saying, well, how do we counter inflation if the economy is running too hot? I know what will buy – will issue bonds to the public to pull money out of the economy. That's a reason. That's a good reason. I'm actually making this argument at the moment in a couple of videos. This is a good reason to sell bonds to the central bank. Get rid of that stupid prohibition, which is based by people who don't understand fiat money creation and money period in the first instance.
[00:09:32] But if the government issued – ran a deficit, let's say it's 10% of GDP, that sort of thing, for whatever reason, and then therefore issues bonds equivalent to 10% of GDP to finance that deficit, then those bonds turn up in the – if the bonds are sold directly to the central bank, then the central bank now has bonds equivalent to 10% of GDP. And if it takes concern that was too much of a stimulus or the government realized it went too far, it monetarily was,
[00:09:59] it may be building something extremely important, you know, like a sprinkling system for the reflective pool, you know, something like that, really important. A sprinkle goal, of course. If you want to have this thing built, then you would – I've lost my bloody train of thought with a joke. Pardon me. I'll do that. So, yeah, I mean, you're trying to say – You could say, well, that's 5% too much. So, we're going to sell half the bonds you sold us to the private sector. Yeah.
[00:10:26] So, that would give the central bank an immediate control mechanism. Now, the way we do it at the moment, we throw the control mechanism into the hands of the public. Yeah. Okay? And into the markets. We do not use the capacity of the state to manage the money supply when we obsess about the fact that we think the state's doing too much to create the money supply. And we look at the stats, as Richard has done in great detail. They haven't created any of the money supply really in the last 45 years. It's all been the private sector. Yeah. All right.
[00:10:54] So, but if the government does this – so, I wonder whether, though – so, bonds react to government spending. So, if there's a big issuance of bonds, then the bond markets might say, oh, hang on a second. We're concerned about how much this country is spending now. So, we are going to – Oh, that's so nice of them to be concerned. That's such a nice thing. They're concerned for homeless people and pensioners. No, they're concerned for themselves. Let's be honest. Of course. Sorry. I forgot.
[00:11:23] So, they're saying if we're going to buy – Talking in the finance sector. So, you've issued so many of these bonds that if we're going to buy them, we want some sort of risk premium. We want a high yield for these bonds. So, we're going to pay less, in other words, because the lower the price, the higher the yield. That's the way it works, which we could explain if we've got time or we've got the inclination. But just take our word for it. That's the way it works. So, you're selling – so, you're buying – so, they say, well, you're issuing too many of these. There's so many of them now. They're not going to be worth as much. Therefore, we're not going to pay as much.
[00:11:52] And that pushes the yields up. Supposedly, everyone goes, oh, no, the cost of borrowing has gone up, which it has. Not for the government. But it has for everybody else, hasn't it? And that is in direct response to people thinking the government is spending too much. Therefore, the government is getting into too much debt. But it's not. I think this is another con job pulled by the finance sector on the rest of us. It's the way it works all over the world. Yes, I know.
[00:12:18] And I think – therefore, I think it's a con job pulled on the finance sector, by the finance sector and the rest of us. Because an ordinary business, when it's working out what its profit rate is, it looks at its cash flow, like its net cash flow, divided by the value of its capital stock machinery, all the stuff that it needs to actually create the goods and services that it's selling. Now, what banks do is say, oh, we're going to base our interest rate on the rate that the Federal Reserve pays on bonds.
[00:12:48] Okay? That's not a cost to the banks. That's part of their portfolio. Okay? The cost of the buildings, the machinery, the ATMs, the risk assessors, et cetera, et cetera, the people, that's their costs. So if you actually estimated the costs and the profits of the banks would be far higher than is implied by the gap between what they charge on loans and what they have to pay on deposits, for example. But people often make that comparison.
[00:13:17] I think if the rate goes up on government bonds, then effectively they think the banks are borrowing that money and have to make a margin on top of that money. They don't. The loans rate could be below the rate of bonds rate. In fact, that applies back in the high inflation dose. That's the con job in terms of how much banks are charging for loans. They should be basing their interest rate costs on their cost of creating the money in the first instance. And that is much more constant.
[00:13:47] It's basically you've got to – there are obviously costs in creating money. You've got to have a bank in the first place. You've got to have staff in the bank. You've got to have technology in the bank. You've got to – you take risk positions. There's enormous costs in managing a bank. But those are the costs that give you like how many – how much – if a loan of 100 – if they make a loan of a dollar, what are the costs in creating that dollar? And it might be – I'm only guessing, but I'd say two or three cents. That's at a level.
[00:14:17] That's fairly constant. That's the cost they should be putting their interest – if they make more than that, if they charge above the two or three percent rate, they're making a profit. So I think the whole comparison with bonds is just yet another way that people who are confused about money continue confusing other people about money. Well, they would say that we've also got to pay the interbank rate. So if we don't have enough money in reserves to – but then to cover off.
[00:14:42] If you spend your money – if we give you a loan and then you're going to spend it in another bank, we've got to be able to cover that off. So we've got to have the reserves for that. And if we don't have the reserves, we'd have to borrow them. So we have to pay whatever the interbank rate is to borrow those reserves. So that's another cost. Yeah. They've got to cover. Yeah, I mean – and that's where the government can set that rate because an interbank rate used to be set pretty close to just above zero because there was no interest paid on reserves.
[00:15:06] And if you wanted to top them up, then you either borrow them from a fellow bank or in desperate – so you borrow from the discount window. But, yeah, it's not – It's less of an issue now because there's so many bloody reserves out there. Yeah, that's the thing. And that's why they pay interest on reserves. So the other trick you could do is, oh, we're going to abolish interest on reserves.
[00:15:29] Now, that would cause a bit of a panic by the banks, okay, because they currently get a nice little earner for them now after the global financial crisis. So they're happy to leave them at 10% of GDP because they're getting a return interest rate just below the rate of bonds, which makes them actually a safer issue in some ways than the bonds are. And I can understand why banks are buying less of the bonds these days because being paid interest on the reserves.
[00:15:52] Two things about that, or one major thing, is that they're not affected by the rising interest rates. But because the central banks have become obsessed with increasing the interest rate to control the rate of inflation in their stupid models of the economy, by putting up that rate, they're reducing the value of bonds. Now, that makes bonds a losing asset for the banks. So a sensible move by banks in a world of rising interest rates is to stop buying bonds.
[00:16:23] So, okay, when we come back, I want to talk about how we arrive at the value of those bonds, though, because it's not just the setting by the central bank. The market has a lot to do with it as well. And the secondary market definitely sets the secondary rate. And the secondary market does influence the primary market as well. But look, we can argue over that in just a second. And we'll come back and talk about that on the Debunking Economics podcast. This is the Debunking Economics podcast with Steve Keen and Phil Dobby.
[00:16:59] So we're looking at bonds. And obviously, bond issuance is seen as being important in the banking sector, less important or not at all important when it comes to actually controlling the supply of money, which is interesting, isn't it? Because the supply of money is what the central bank is all about. Now, when they talk about monetary policy, they are talking about how they control the supply of money and how they control inflation by the supply of money. Is that still the argument they're using? Yeah.
[00:17:26] I mean, one of the reasons we talk so much about central banks these days is that neoclassical economists have built models of the economy in which the central bank is an integral part and it's controlled by neoclassical economists. Yeah. So they think that by putting up the rate of interest according to their models, that'll reduce the rate of inflation. And the reason is it'll reduce consumption. Now, this is the complete opposite of what was argued by back in the Keynesian days.
[00:17:51] This is before – with people between 45 and 75, roughly speaking, you had basically policies driven by the desire to achieve full employment. And central banks and economists were sidelined to some extent. And in those days, we did the empirical thing and said that if changing its race affects anything, it affects the net present value of future investments. So it was seen as investment was the thing that you were trying to control.
[00:18:19] And investment is clearly volatile. Investment is about three times as volatile as total GDP. Therefore, that means the remainder, which is consumption, is quite placid. It doesn't change at all – very much at all. However, in the models of neoclassical economists, what varies is consumption. So they have a model that says the opposite of what happens in the real world. And that's what they think they're controlling. So it's no wonder it's a mess.
[00:18:44] So, yeah, thinking through the rationale of all of that, if there's a certain amount of money in the economy and the government puts up interest rates, there's still the same amount of money in the economy. Yeah. So how is that slowing consumption given that the money supply is the same unless we see a slower turnover? No, mate, I'm sorry. You're showing an intellectual weakness.
[00:19:08] You're not thinking intertemporally in a – what's the term they use? I have to use a no Ponzi environment. They literally assume that when you go shopping, you are considering the utility of your entire dynasty. Not just you or your kids or your kids' kids or your kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' kids' literally out that far.
[00:19:34] They think you're going shopping with an infinite – you're making planning your consumption with an infinite future. And I'm quoting for the economics papers. Okay. You've said that before and I don't quite understand why because I'll give you a chance to explain that. But if I'm told that I've got a certain amount of money and a certain amount per year and everyone's more or less in the same boat, so the government puts it – or the central bank puts up interest rates, then what does that do to me? It does mean that I've got more to pay on a mortgage.
[00:20:03] Yeah, in the real world it does have impacts on your capacity to finance and your debts. Yes, definitely. Yeah. So – but I'm still spending the same amount of money, I guess, but I've got less money to spend on – consumption of other stuff other than my mortgage, I guess, is the – Yeah, yeah. So it does affect the consumption in that sense, okay? But their theory about how it works is – If I don't have a mortgage, actually, I might say, well, okay, I'm going to put that money into a savings account. I'm going to put more money into a savings account because I'm going to get a better interest rate from that. Yeah, and people – and the rate goes up. People who own bonds get more money.
[00:20:32] So there's actually – particularly when you're talking government debt being 100% of GDP, then a 5% rate of interest is creating 5% of GDP worth of money every year. So there's the ironic way in which we actually inflate the economy by putting up the interest rate. And that's not at all taken into account by the neoclassical models. They treat interest as a cost. They don't treat it as an income to somebody else. And this, again, is why I'm obsessed with stock flow consistent modeling because one person's cost is another person's income.
[00:21:02] Now, unless you have the integrated view, you can't see that. And the neoclassical models basically really reduce everything to what they call a representative agent, which is another farce we can talk about someday. But they basically pretend that consumption is a volatile component. They say consumption can change instantly. Investment takes longer to change. Therefore, the ups and downs of the economy, they blame on sudden changes in consumption patterns due to exogenous shocks to technology and preferences, as they put it. All nonsense.
[00:21:31] But that's the reason that we talk about the interest rate these days is that's the control mechanism in their models. That's what they tell the journalists they're controlling things with. So everybody thinks they're using interest rate as a control mechanism. But when you look at the logic, it's a bit like having kids in the backseat of a car with rubber wheels, plastic wheels to play with, pressing buttons. And you basically shut them up. They don't disturb you. They're, are we there yet? Question. Well, you've got the car. The economy's run by kids in the backseat, not by the actual driver.
[00:22:01] I love it when you talk about being a father. It's like, yeah, here's something he has no experience of whatsoever, but he's still putting confidence about it. It makes me question everything else you're saying now. So we can bullshit your way through that one. But I mean, actually, it's interesting, this thing about interest rates. There's another scenario about that where if you put up interest rates and I've actually got a set amount of money that I pay in my mortgage each month and interest rates go up. I might go, well, do you know what?
[00:22:31] I'm going to keep paying that set amount. But it means there's less being paid off back to the bank. So the speed at which I am destroying money actually slows as a result of that, if you get what I mean. So actually pushing up interest rates is actually slowing the destruction of money. So it's actually helping add, in that case, to the amount of money that's in total circulation. And I think I'll look. I think that one's true. I'm not much. Well, let me, okay, step by step, I pay a certain amount of money.
[00:22:59] And this is quite common where people say, okay, I'm going to overpay my mortgage because I can afford to. And then you get to a stage where the interest rate goes up and you go, okay, well, I can't overpay my mortgage quite as much now because interest rates have gone up. Therefore, I'm going to pay off less of my mortgage. Therefore, the payment back to the bank is less than it would have been. Well, yeah.
[00:23:27] Well, you know, the thing is the payment of the bank remains the same in your little analogy. Oh, yeah. So actually – It's the amount – sorry. Let's leave that one. After a few more cups of coffee and another session on that one, I think. Okay. Well, actually, probably the net effect is zero, in fact. Yeah. Quite possibly. I'll never work it out. It's had no effect whatsoever on the – because I think that's been a bit of a phenomenon, actually, because it's one of the question marks over even the conventional understanding of how social banks work.
[00:23:55] That's the situation in countries like Australia with floating exchange rates on mortgages. Americans generally have fixed rates. So the only impact you get – the impact you get in Australia is on every consumer, okay, because all of them, when the rates go up, all of them have to pay more interest on their existing debt. And therefore, some of them, like in your situation where they're paying more already, so they pay – they continue paying the same amount, but less of that goes off their mortgage. Yeah. But in America, it's only new buyers.
[00:24:25] So it's only the new buyers that face the higher rates. Now, in some sense, that means that's actually more volatile for the buying side of the American market. But in Australia, it means that the impact of a higher interest rate hits consumers – well, it doesn't change their consumption pattern, but it reduces the amount – well, in fact, the interest rates – sorry, that's backtracking again. The interest rates in Australia – Do you know what I said? We've gone down an avenue. I always said never gone down now. Exactly. Exactly. It's a bit too damn complicated.
[00:24:54] That's why I like tables, okay? Just put it up on paper and I can work out the logic and whether we're making a mistake or not. The trouble is the people who manage the economy don't have those tables in the first place. Right. Let's have a look at, though, how bond prices are arrived at and the influence it has globally. Because even though we're saying it's a nonsense, it's the way the world economy works, isn't it? So, in fact, very often interest rates that are set by the central banks do relate to what's happening on the secondary market.
[00:25:24] So, if bond yields are very high – and bond yields could be high because people go, ooh, you know, I'm not very confident about the way the UK economy is being managed at the moment. Therefore, I'm not going to pay as much for those bonds. Therefore, I want a net effect is I get a higher yield for buying guilt yields. And very often it's sort of like the longer dated bonds, like the 30 years. I think there's real serious trouble in that economy. I'm so concerned. What's it going to be like in 30 years' time?
[00:25:53] I want this risk premium factored into the price I'm prepared to pay. But in the shorter term, central banks are looking at that as well because they can't be so out of kilter. So, you can't have, for example, a yield of 4% and then the central bank says we're going to give 1% as our interest rate. They do have to tally because otherwise everyone would just either rush to – well, the commercial banks would say, well, we're not going to buy them at 1% because we can buy them on the secondary market at 4%. So, we're going to do that.
[00:26:23] And they don't want them to buy on the secondary market. If they knew what was going on, they certainly wouldn't want them to buy on the secondary market because that would be taking money out of the secondary market. You're assuming they know what they're doing. But they do follow. So, central banks follow them. They follow what they lead as well. I mean, let's go back to the days when Vodka was putting up rates by 1% a month. Yeah. Okay. He chose the step size. Okay. It used to be 1% moves every meeting.
[00:26:52] Now, it's one quarter of 1%. That shows that – though they don't even talk about it, that shows that private debt is that much higher these days, that the impact of the rate change is much higher than it was back in the 50s when private debt was one third the level that it is now. So, that's some sort of concession to reality there. But the rates on bonds can be manipulated by the Federal Reserve as much as it wants. The question is how far it goes in doing it.
[00:27:21] So, yes, it will take a look at the secondary market and do it with reference to where the secondary market currently is. But if the Fed won rates go down, it puts the rate down in the bond market. It wants them to go up, it puts them up in the bond market. But it's got complete independence to set that rate. And there used to be a whole mechanism behind the central bank and treasury relationship to make sure that there were sufficient reserves to buy bonds at all times.
[00:27:50] That's no longer necessary with the 10% of GDP level of reserves right now. But if I wanted to influence banks to buy my bonds, I'd drop the rate on reserves because that's the main comparison, okay? If you say, we've got to look at what the secondary market is doing, but we've got control of the rate on reserves and we've got to set the rate for bonds. Well, an easy way to make sure your bond auction went through would be saying, we're going to cut the rate on reserves by 1%.
[00:28:19] Now, there's absolutely no need, no requirement for the central bank to give interest on reserves. That's only happened since the global financial crisis, which they had no idea was coming because they were neoclassical economists who don't understand economics. And they've put the rates up ever since then. Now, they could easily say, oh, we're going to abolish it. Well, that would cause fun.
[00:28:43] I'd like to see that one going down in the finance sector because with reserves running at 10% of GDP, it's a substantial income source. When you're being in interest on 5% rate of interest on bonds equivalent to 100% of GDP, that's a large amount of money. Now, if we say we're going to reduce that, then you get some interesting reactions out of the bond market.
[00:29:06] So the fact that we don't have to have bonds for government spending, we've already shown it is very influential in the way economies work. And also how the relative positions of economies work. And I think this is an interesting point to finish off from a couple of angles. So if yields are very high in one country versus another, capital flows into that country because everyone's chasing the yield.
[00:29:33] So an example is just this last week. Japan's been trying to push up the yen because it's been undervalued. The United States, for the first time, I think this has ever happened. I love this because Donald Trump's been talking about currency manipulation, but now he's giving it a try himself. So the US has been selling euros to buy up Japanese government bond yields along with the Japanese government.
[00:30:01] Because if they do that, then they're hoping that that demand will push up the yield and that will drive more people to buy the yen. So the yen increases in value. So there is a relationship between bond yields, even though we don't need bonds, and the exchange rate, which really does influence the way trade operates.
[00:30:24] And that interplay for something that we don't need, theoretically, is having a big impact on the way the global economy works. And if you break that down to the root of all of that, those yields are high because people think governments are spending too much money. Now, whether it's – whether they're right or not. When they're not spending enough, yeah. Yeah, well, maybe they're not spending enough. But whether they're right or not, that is what the perception is.
[00:30:50] And that's why the relative spending of different economies is reflected in bond yields, which then gets reflected in exchange rates as well for something we don't need. Yeah, the finance markets have got to buy the balls. But I mean – but I do wonder whether – and if you take it back to the – you know, right back to the beginning. Is there a point, though, that actually government should be penalized if they're spending too much relative for everybody else?
[00:31:20] The thing is they're not spending enough. And this is the frustration, all this stuff. Obviously, we should spend money on bombs and killing people in other countries, okay? Yeah, yeah. And keeping them out of our country. We shouldn't spend them on health or education or infrastructure. Okay, yeah. I've got a great example on that, actually, because the Y Curve, another podcast I do this week, we're looking at homelessness in the UK. Yeah. Which – and like many parts of the world, but particularly in the UK, it's increasing. And the reason is – the person who had it on and said it's very easy to fix. Just more social housing. Very simple.
[00:31:49] And one of the scary factors was – I mean, it's sort of like doubled in 10 years, the number of people who don't have a home. And four of them are killing themselves each day because there's not enough money. So – because governments are constrained. So that's a horrific thing to think about. It's horrific.
[00:32:07] This is why modern monetary theory has got the attention it has, so people can just see the horrific effects of this obsession with not running a government deficit, what it's done to the state of societies over the last 40 or 50 years. And it was supposed to increase – the whole idea of let the experts take over was going to have a faster rate of growth than when the amateurs were in charge after World War II between 1945 and 1975. Look at the rate of economic growth. On average, it's fallen by 2% per annum. That's averaging all countries.
[00:32:36] For America and the UK, it's about a 0.8% fall in the rate of per capita economic growth. But all this stuff with market – so-called market-oriented stuff with so-called experts on the economy, neoclassical economists running everything, the economy has grown more slowly. And then as well as the – Well, it can't grow without more money, can it? I mean, that's – Yeah, that's right. And they've been strangling the money supply and they wonder why it's not growing so rapidly. You know, there's so many ironies in what's been done by the mainstream.
[00:33:02] And yet we're still stuck inside their roving window. So the regulation in the UK, actually, which inhibits from the central bank from getting too much into debt, is actually – I mean, there probably was regulations before, but it's still the euro regulation that is followed. Now, I can see – again, it gets back to this idea of comparative spend by different governments.
[00:33:27] But for the euro area – and this is a real problem, isn't it, for when you've got a common area where you're trying to create common regulations – there would be a concern if Spain was to say, right, we are going to spend a whole load of government money and we're going to prop up industries, for example. And France said, but we're not going to do that. And France is a competitive disadvantage. Or Spain says, well, you know, just by spending more money, we're going to have more money in our economy.
[00:33:55] So we're going to go great guns. And France says, well, we're not going to spend quite as much. So there's that relative position between different countries, which in Europe is a real problem because they're all supposed to be competing equally. But just taking it on the global scale as well, which gets, you know, to my point, is it fair enough to penalise people with higher bond yields if they're spending too much relative to another country? And does it make sense that money should be – It doesn't make any sense at all.
[00:34:25] It doesn't make any sense at all. But how do you deal with the relative spending then by different governments around Europe? Relative spend – I mean, what you have to have is constraints on attempts to get large trade surpluses in your favour. Of course, you know, I think the MMC's argument of that is garbage. I'm not going to bother engaging with it right now. But the export surplus is what countries are trying to achieve to some extent with things like industrial policy.
[00:34:52] And if Spain tries to build its industry up, they're trying to revitalise something which has been falling in your economy and falling in your rivals inside Europe as well. So if you try to take a national decision to raise it, then you get these international barriers caused by the Maastricht Treaty, which is a real nuisance. It's a real restriction on what those economies can do. So there's nothing to stop every government on the planet running a deficit.
[00:35:20] But there is something to stop every country on the planet running a trade surplus or trade deficit. So you need rules to restrain that. And that's what Keynes proposed for the old Bancor idea, that there'd be restraints on how much you could do in that particular direction. But they have to be – countries are still going to indulge in industrial development policies if they're sensible because that's what China has been doing dramatically.
[00:35:45] And it's industrially developed far, far faster than the West has done, where the West is stuck with these stupid rules that constrain it, which are basically irrelevant. So just final point then on inflation. So that is the issue, isn't it? It's if you're helping to give yourself a competitive advantage over others. We therefore need something like the Bancor that we've talked about so many times, which would help to equalise that. It's not going to happen, of course. But everything, which would help, is not going to happen.
[00:36:12] But yeah, so the inflation aspect of all of this, that's for the government to figure out. If they spend too much – I mean, this is very easy to understand, isn't it? If they spend too much, they place demand on goods for which there's not the supply, they push prices up. So go easy on spending. That's the basic theory, which is wrong, both empirically and logically. Oh, is it? Because again, the government hasn't created any money in the last 45 years, given the fact that the secondary sales cancel it.
[00:36:38] I've got to put a presentation together using Richard's data and Richard Avaig's data on that fund. So where's inflation coming from then? It's coming from basically where it's always come from, conflict over the distribution of income. And the private sector accommodates that. This is the mistake people make. They see money as a constraint on what can happen in the real economy. It actually accommodates what's happening in the real economy.
[00:37:01] So if the credit card is your best example, the level of unutilized credit cards in America is equivalent to something like about half the GDP. I mean, it's really, really very high. Maybe not that high, but certainly a substantial percentage of GDP. There's nothing stopping it. If everybody went out and bought a new Chinese car today by swiping their credit cards, they'd create the money by swiping the card.
[00:37:28] So we've got the money system accommodates what happens with the price system. But the price of the car would go up as a result of that. The price of the car might well go down because you increase capacity utilization in that factory and reduce the cost of production. Again, these are things where conventional notions in our head about rising supply curves are simply empirically false.
[00:37:46] But if the government spends 20% more in a year and that finds its way into a 20% increase in the money supply in the private sector and the ability for the private sector to produce the stuff that people want to buy only grows by 10%, then surely prices are going to go up by 10%. No, because again, you're saying if the costs for the firms go up, often the costs go down.
[00:38:10] But yes, when the government injects a large amount of money into the economy like during COVID, what that signals to – first of all, it does increase economic activity. Otherwise, we would have had a collapse at that stage. So it does increase economic activity, which often reduces costs initially. In that situation, it didn't because of the supply constraints. But what it means is there's so much money in the economy that firms think, oh, we can put our prices up and we'll still have the same – Well, that's inflation. And workers can say – so there is that effect.
[00:38:39] And you can – when you take apart the inflation that occurred during COVID, it was initially a wage surge. Then it was a surge in markups and then underlined all the way by a drop in productivity courtesy of the – Yeah, the markups are from what I said. We've got 20% more money and they're going, well, we either – we can't or we don't want to produce 20% more. So there are circumstances in which government money creation like that can enable people to push prices up. Yeah. So the upshot is it's up to the government in this world rather than usually in the bond market.
[00:39:08] The thing is the government hasn't – in the aggregate, it hasn't created money for 45 years. We're arguing about zero. Yeah. The only explanation you've got for inflation since 1980 is private money creation. And the private money system accommodates what happens in the price system because we all have lines of credit in a sense. Yeah. Credit cards, okay? So it's not a control. It's an accommodating system.
[00:39:35] And if there's an increase in inflation, then that'll cause an increase in the money supply. It's the opposite causation to what people think is the cost. Which gets back to your central theme, Steve, which has always been about the growth in private debt rather than the growth in government debt. Yeah. Okay. Good point to leave it on. Thanks for joining us again. We will talk about something else next week. Not about bonds or government spending. Let's get away from bonds. Yeah. Let's get unbonded. Okay. All right. See you next week. Cheers. Okay, mate. Bye.
[00:40:07] If you've enjoyed listening to debunking economics, even if you haven't, you might also enjoy The Y Curve. Each week, Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively. It's fun. It's informative. What more could you want? So search The Y Curve in your favourite podcast app or go to ycurve.com to listen.