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Money Reform II and Paying off Debt

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RinNatsume
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Post: #1
Money Reform II and Paying off Debt

http:// http://www.ars-regendi.com/state/173082/haushalt.html

Look at that debt. Seriously. Look at that debt. Just how do I pay it off?

And Money Reform II. What are the effects of implementing Money Reform II? Will it pay off your national debt and have some gritty effects?

11.11.2014 14:05
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Helsworth
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Post: #2
RE: Money Reform II and Paying off Debt

RinNatsume Wrote:
http:// http://www.ars-regendi.com/state/173082/haushalt.html

Look at that debt. Seriously. Look at that debt. Just how do I pay it off?

And Money Reform II. What are the effects of implementing Money Reform II? Will it pay off your national debt and have some gritty effects?

MR2 will leave you with 0 national debt and a high nominal interest rate. Overall, it should have a mild (good) impact on your popularity.
I don't know why you are worried about your national debt, it's just under 100% of GDP.
In real life, the national debt represents private sector savings. The national debt represents the government debit at interest. The national debt is the movement of 2 buffer stocks: the currency and reserves. When the government runs a fiscal deficit, the Central Bank is simply debiting the government's securities account and crediting in consequence the private sector's reserve account.
Issuing public debt is part of monetary policy, not fiscal policy; it is a reserve drain operation. Fiscal deficit funds enter the economy as excess reserves - upon which the banks compete to turn into loans and deposits. This excess of reserves puts downward pressure on the interest rate in the market. Thus, in order to defend the overnight rate, and in order to provide a vehicle for institutional savings (i.e. pension funds) - the Central Bank intervenes with a SWAP operation to drain the excess reserves offering government securities in exchange.
Banks earn around 1/4 of a percentage point in interest on reserves. They earn more on government securities. The money for public utilities and pension funds - it all comes from the government debt.
Issuing public debt is a remnant of the old gold standard era; it's not some implacable operational necessity. Governments with their own sovereign currency can run fiscal deficits without having to issue debt.
The Central Bank can defend the overnight rate via the federal funds market.
Paying off government debt via fiscal surpluses is BAD for the economy; for fiscal surpluses represent (nongovernment) private sector deficits. One way to 'pay it off' without fiscal surpluses, is to run fiscal deficits without issuing new debt. Ergo, gov securities at 0% and with no maturity dates.
All the money to pay taxes and to buy government debt, it all comes from government spending.


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This post was last modified: 11.11.2014 17:39 by Helsworth.

11.11.2014 17:21
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RinNatsume
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Post: #3
RE: Money Reform II and Paying off Debt

Thank you for a thoughtful reply of how the real world works.

I've read you often on this forums and before that, I always thought Japan was in a lot of trouble because of a 200% National Debt.

12.11.2014 10:25
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Helsworth
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Post: #4
RE: Money Reform II and Paying off Debt

RinNatsume Wrote:
Thank you for a thoughtful reply of how the real world works.

I've read you often on this forums and before that, I always thought Japan was in a lot of trouble because of a 200% National Debt.

Glad to know I'm being read Happy
Japan would have been in trouble if that debt would have been owed in foreign currency or in commodities (like metals). Debt to GDP ratio or deficit to GDP ratio don't tell you anything about a certain economy in and of themselves. You've got to look at the whole context to judge it accordingly. Likewise, the issuing of public debt can also happen even under a fiscal surplus. Australia is a case in point. If banks have a strong enough demand for government securities, the Central Bank (the conductor of monetary policy) accommodates that desire.

As for debt monetization fears, usually spewed by doomsday goldbugs and cyber-libertarians... it is a non sequitur. Once the overnight rate target is set the central bank should only trade government securities if liquidity changes are required to support this target. Given the central bank cannot control the reserves then debt monetization is strictly impossible. Imagine that the central bank traded government securities with the treasury, which then increased government spending. The excess reserves would force the central bank to sell the same amount of government securities to the private market or allow the overnight rate to fall to the support level. This is not monetization but rather the central bank simply acting as broker in the context of the logic of the interest rate setting monetary policy.

Ultimately, private agents may refuse to hold any further stocks of cash or bonds. With no debt issuance, the interest rates will fall to the central bank support limit (which may be zero). It is then also clear that the private sector at the micro level can only dispense with unwanted cash balances in the absence of government paper by increasing their consumption levels. Given the current tax structure, this reduced desire to net save would generate a private expansion and reduce the deficit, eventually restoring the portfolio balance at higher private employment levels and lower the required budget deficit as long as savings desires remain low. Clearly, there would be no desire for the government to expand the economy beyond its real limit. Whether this generates inflation depends on the ability of the economy to expand real output to meet rising nominal demand. That is not compromised by the size of the budget deficit.


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12.11.2014 11:04
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