Monetary Madness

GirafferesizedAlthough MMPI tries really hard to simplify financial jargon, sometimes the giraffe in the room is completely overlooked! Economists talk about the un-sustainability of national debt levels as if the plight of future populations is poverty and destitution – and a total retracement of several centuries of human progress. Gross exaggerations that need to be quashed at source!

The global Central Banks now own close to 25% on average of their respective countries’ national debt. Admittedly, this is not a good starting point but…..let’s try and break down exactly what this might mean. In an effort to spur economic growth over the past several years many Central Banks have been involved in so-called quantitative easing – pumping money into the economy to drive down interest rates and encourage economic growth. The mechanism chosen for “pumping money into the economy” has been the purchase of large chunks of government bonds. Government bonds are solemn promises issued by sovereign states that they will repay investors in their bonds at specified dates into the future. The money that Central Banks have used to buy the government bonds has been created out of thin air by adding zeros to the figures on their balance sheets.

So Central Banks around the world have been buying these government bonds – does anybody see the giraffe? Although most major Central Banks are self-governing and act in an independent and impartial manner they are “owned” by their governments – and ultimately the taxpayers. So the actual owners of the government debt that the Central Banks are holding are the governments themselves!! Who exactly owes money to whom??

Imagine you have a biscuit tin at home with small notes and coins for those little crises that crop up as the kids are heading out to school – money for this, that and the other. You are disciplined in using the biscuit tin holdings exclusively for the kids’ school needs. Until one day you raid it and buy yourself a bottle of wine. You later feel guilty and determine that you will pay it back. But who exactly owes money to whom??

You and your partner are fortunate enough to have some money set aside as an emergency fund. The account accumulates to a healthy amount and your partner convinces you that you have more than enough for any potential emergency and that you should splurge it on a lavish holiday. You both agree to pay it back but who exactly owes money to whom??

This is the kind of monetary madness that is facing governments and the Central Banks that are holding large portions of their debt. Who exactly owes money to whom? If you owe money to yourself is it really owed? If it is not really owed is it a debt? Can some clever aspect of creative accounting make the “non-debt” vanish back into the thin air from whence it came? In 1940 Hemingway pondered for whom the bell tolls. He didn’t get a response!