Why the heck would you ever expect to pay back that debt? The central bank is nothing like an individual where debt is bad. The central banker is more like the bank in monopoly -- the less money there is in the bank, the better off the players are. Money is created through fractional banking, quantitative easing and government spending. Paying back debt destroys money, the money that is used in the economy.
The only reason to pay back debt is to prevent inflation from destroying the money through a different mechanism. But when inflation is under control, which it has been for 39 of the past 40 years, debt should not be paid back.
Expecting to pay off government and central bank debt is like expecting all the money to be returned to the bank by the end of a game of monopoly.
I don't think anyone does expect the debt to be paid back. However it is expected and required, that at the very least, interest payments on the debt are paid so there isn't a default, which would kill the bond market and end government deficit spending.
Interests rates do not need to increase very much at all at this point, so that 100% of tax revenues would be needed just to cover the interest owed by governments. At this point (actually before) the currency is effectively dead and hyperinflation is inevitable, unless:
1) there is a draconian cut to government spending to match tax revenue, or
2) the current system is abandoned to one that is backed by hard assets (which would include a severe cut in spending but could also include a taper)
1. is politically infeasible, so we will default to 2. after a significant amount of economic pain. The US Dollar and most western fiat currencies are dead and are already long in the tooth by historic standards.
> However it is expected and required, that at the very least, interest payments on the debt are paid so there isn't a default, which would kill the bond market and end government deficit spending.
Russia defaulted in the late 1990s and a few years later people were lending again (at higher rates). Greece had many well-publicized problems in the earl 2010s, and yet in 2019 their bonds had negative yields:
If the ECB buys the debt (it has an infinite supply of money after all), what is the problem? That should keep interest rates on sovereign debt down. Inflation right now is systemic, mainly the result of oil price surges - I'd argue that its OK, we want high oil prices because we want disincentives on activities that produce more CO2 and incentives for efficiency - hell, hike the price now. Of course the downside could be social, and that falls on governments to mitigate, which is why I argue strongly that they continue to heavily deficit spend and they get the support of the ECB to do so.
Italy's debt is almost 160 pct. of GDP and Italy's GDP stagnated over last 20 years. And budget deficit is very substantial (and will grow in comming recession)...
It means that Italy could afford to roll-over its debt only due to European Central Bank suppressing for years yields on Italian bonds. But now market yields go up as ECB is set to raise rates and withdraw QT.
If Italy were to pay market rate on its debt it would bankrupt its budget. Most of Italy's revenues would go toward coupon payments of debt leaving very little for pensions, infrastructure, healthcare etc.
So it is not about not repaying debt but about Italy's inability to roll it over in the markets.
Single currency and single central bank in eurozone implies policy fragmentation - ECB has to address different issues at the same time. High inflation in the North and stalled growth with high yields in the South.
If Italy were to pay market rate on its debt it would be negative as the implementation of negative intereset rates on cash reenables the market mechanism of allowing a debtor choose how much he wants to be in debt. The 60% debt to GDP mandate of the eurozone could become obligatory and would result in all EU countries refusing to take on more debt, forcing the interest rate into deep negative territory.
The only problem with debt and CB debt monetisation is what the debt is used for. If its used to keep pensioners solvent, social safety nets functioning, food on tables, education regardless of social class and general access to healthcare - then its absolutely fine by me (and most Europeans, I'd wager.) It should continue and increase, as necessary, especially if sovereign debt markets fail. The one policy that counts (and it affects north and south EU) is climate change. Debt, as a license to run dirty industry (public and private) and maintain fossil fuels, will need to be heavily reined back in those sectors as part of the quid pro quo for sovereign debt monetisation largesse. More europeans working shorter weeks, travelling less, but still enjoying social mobility and all the social needs from high spending countries (supported by ECB) is absolutely OK, just build a low carbon future - no more debt for dirty industries, or dirty imports. Smart, healthy people, backed by possibly heavily indebted countries supported by ECB in perpetuity, is frankly no problem.
The article doesn't talk about trying to pay off the debts at all. You have invented a straw man out of thin air to attack instead of engaging with the article at all.
Also, your "banks aren't households" argument, while deeply flawed, is useful to explain some very introductory concepts to people who don't understand rhe basics of how a central bank operates but has absolutely nothing useful to say about the very real dilemma central banks are facing.
a) We need to stop using the word debt for central banks. Consumers in their daily lives learn that debt is bad. For central banks is the way they work. (And companies try to have always some form of debt for liquidity and reducing risk.)
b) go on with our lives. The ECB has other issues that it should be criticized about -- mainly it is unsurprisingly a political tool and not having the economic growth, wealth, and stability of the EU members as its priority.
A new word makes sense. In my native Swedish the word for debt is also the word for guilt. Tells you something about our view of debt and why the national debt is so low.
You've missed his point. He isn't misunderstanding the term "debt", he's just saying there should be a different word for "good debt" that doesn't have the negative connotations that it does with personal debt.
I guess kind of like how mortgages aren't seen as bad even though they're debt. Fairly safe debt, sure. But still debt.
I don't know if a new word would help but you've misunderstood anyway.
Agreed, I would also agree it is trapped but not for these reasons. They all want to control inflation, and are all considering or trying the same methods of doing so.
The EU and Eurozone's lack of "fiscal union" is unique, but not really that relevant. The Central Bank there is going to crater the credit market, just like the Central Bank in the US is going to do.
They are the biggest financial whales and they
1) stopped buying
2) now have trillions to sell, and are going to sell at a massive scale that's unheard of, to whom? good question, can the market absorb this much? At what price if the market literally isn't big enough for this amount of selling pressure? and its still too small of a scale for what they are actually trying to do
3) are going to let some bonds mature, and not let the paid back money get into circulation again, so there is just less of it for everyone else
(note: sometimes they say they are only going to do 3) and not 2), very confusing)
It doesn't matter that the EU one has a bunch of member-state debt, while the US Central Bank largely ignores municipal bonds and while having a bunch of national govt bonds (treasuries) on its balance sheet. They both hold corporate bonds now, and mortgage backed securities. Neither own stocks (although the US one bought some bond ETFs, which are stocks of funds that only own some bonds).
They both stopped buying, are letting things mature, and also directly selling.
Its going to be bad for everyone partially because its only an attempt to control inflation. Case in point being that energy costs will remain high either way. They're aiming to destroy optimism and re-range asset prices, where the yield of those assets are a higher ratio to their price. (aka stock prices more closely matching their profit or revenue growth or dividend payouts, bonds yielding higher)
It conveniently omits the debt held by the US on the federal level, which is 133 % of GDP, or more than any of the countries listed except Italy at 151 %. And there is no debt on the EU level.
If I read it correctly this is mentioned with the caveat that the federal reserve can adjust monetary policy to address that whereas the individual European countries mentioned are unable to.
Normal sovereign economies have 2 levers. Fiscal and Monetary Policy.
The Eurozone doesn't have this setup as monetary policy is bloc-wide whereas fiscal policy is national.
With these levers working at different scopes this problem will always exist. And it's not the first time either. Remember Grexit? Same thing then.
We either need a United States of Europe with fiscal transfer between countries or the euro should be scrapped so we can go back to lira, marks and drachma.
That's not how the EU works. EU is driven by compromises between states. When a compromise is hard politically (like common debt was during Grexit) it gets shelved until a crisis rebalances things and a new compromise can be reached (as it was with common debt during Covid).
So basically, if fiscal transfers are needed at some point to rebalance debt, we will get to that point and the EU will compromise again. Is there risk in this approach? absolutely, but it's pragmatic and based on a democratic process (the public opinions of all member states) rather than dogmatic based on some red/blue ideology/political split where compromise is unreachable, as in the US.
In other words, even if the article is right, I don't necessarily see the trap; it's a trap now, based on current compromises. Those are (thankfully) elastic, as it's been demonstrated many times in recent history.
Firstly my comment was about the Eurozone, not the EU.
Secondly, Central banking is NOT democratic.
When last did you vote for your country's central banking head?
When were members of that bank's monetary policy committee subjected to public scrutiny? Most people have no clue who they are, what their background is, and whether they are to be trusted tinkering with our money or assets.
Who influences the dovish/hawkish make up of that group and, as a result, the bank's policy response?
This is true, but it isn't uncommon. Almost all countries have different levels of government - national, regional, subregional and municipal - all of which have some degree of autonomy with regards to executing their own fiscal policy, whereas monetary policy is always country-wide.
> However, the European Central Bank arguably has the hardest job of all.
This was very apparent in the head of the ECB Christine Lagarde’s recent interview.
She was asked, “how will you get the balance sheet down?” while being shown the ECB balance sheet on a screen.
She answered, “It will come. It will come. In due course, it will come.”
The interviewer paused, confused, and then asked, “…how?”
And she answered, “In due course, it will come.” And then smiled.
She offered no answer, no description, no clarification, and had rather awkward expressions throughout the exchange.
This is because, like most central banks, there is no plan. It won’t come. Sovereign debt will be monetized to whatever extent it needs to be, or it’ll collapse.
Chance the Gardner: As long as the roots are not severed, all is well. And all will be well in the garden.
President “Bobby”: In the garden.
Chance the Gardner: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
Terrible article as usual from this author. She has no formal training in economics and as a result gets everything wrong. Why does she keep writing articles about economics if she doesn't know anything about this subject? I don't understand.
Readit News
The only reason to pay back debt is to prevent inflation from destroying the money through a different mechanism. But when inflation is under control, which it has been for 39 of the past 40 years, debt should not be paid back.
Expecting to pay off government and central bank debt is like expecting all the money to be returned to the bank by the end of a game of monopoly.
Interests rates do not need to increase very much at all at this point, so that 100% of tax revenues would be needed just to cover the interest owed by governments. At this point (actually before) the currency is effectively dead and hyperinflation is inevitable, unless:
1) there is a draconian cut to government spending to match tax revenue, or 2) the current system is abandoned to one that is backed by hard assets (which would include a severe cut in spending but could also include a taper)
1. is politically infeasible, so we will default to 2. after a significant amount of economic pain. The US Dollar and most western fiat currencies are dead and are already long in the tooth by historic standards.
Russia defaulted in the late 1990s and a few years later people were lending again (at higher rates). Greece had many well-publicized problems in the earl 2010s, and yet in 2019 their bonds had negative yields:
* https://apnews.com/article/067eda5047d740f9a15692dea5944326
It means that Italy could afford to roll-over its debt only due to European Central Bank suppressing for years yields on Italian bonds. But now market yields go up as ECB is set to raise rates and withdraw QT.
If Italy were to pay market rate on its debt it would bankrupt its budget. Most of Italy's revenues would go toward coupon payments of debt leaving very little for pensions, infrastructure, healthcare etc.
So it is not about not repaying debt but about Italy's inability to roll it over in the markets.
Single currency and single central bank in eurozone implies policy fragmentation - ECB has to address different issues at the same time. High inflation in the North and stalled growth with high yields in the South.
Also, your "banks aren't households" argument, while deeply flawed, is useful to explain some very introductory concepts to people who don't understand rhe basics of how a central bank operates but has absolutely nothing useful to say about the very real dilemma central banks are facing.
b) go on with our lives. The ECB has other issues that it should be criticized about -- mainly it is unsurprisingly a political tool and not having the economic growth, wealth, and stability of the EU members as its priority.
They are issuing fixed coupon, fixed term credit obligations. What do you want to call it? A bicycle?
There happens to be a word for this particular scenario where someone lends you money and you create a contract to pay it back. It's called debt.
The entire finance world isn't reworking itself around your misunderstanding of the issue.
I guess kind of like how mortgages aren't seen as bad even though they're debt. Fairly safe debt, sure. But still debt.
I don't know if a new word would help but you've misunderstood anyway.
The EU and Eurozone's lack of "fiscal union" is unique, but not really that relevant. The Central Bank there is going to crater the credit market, just like the Central Bank in the US is going to do.
They are the biggest financial whales and they
1) stopped buying
2) now have trillions to sell, and are going to sell at a massive scale that's unheard of, to whom? good question, can the market absorb this much? At what price if the market literally isn't big enough for this amount of selling pressure? and its still too small of a scale for what they are actually trying to do
3) are going to let some bonds mature, and not let the paid back money get into circulation again, so there is just less of it for everyone else
(note: sometimes they say they are only going to do 3) and not 2), very confusing)
It doesn't matter that the EU one has a bunch of member-state debt, while the US Central Bank largely ignores municipal bonds and while having a bunch of national govt bonds (treasuries) on its balance sheet. They both hold corporate bonds now, and mortgage backed securities. Neither own stocks (although the US one bought some bond ETFs, which are stocks of funds that only own some bonds).
They both stopped buying, are letting things mature, and also directly selling.
Its going to be bad for everyone partially because its only an attempt to control inflation. Case in point being that energy costs will remain high either way. They're aiming to destroy optimism and re-range asset prices, where the yield of those assets are a higher ratio to their price. (aka stock prices more closely matching their profit or revenue growth or dividend payouts, bonds yielding higher)
2) Confusing yearly numbers like GDP to long-term Debt. Debt/GDP are just a ratio, we don't know what the upper limit it or does it even matter.
3) An inflationary era also means higher tax receipts. https://rollcall.com/2022/05/09/tax-revenue-boom-fuels-steep... which can easily cover any extra interest you may have to pay
The Eurozone doesn't have this setup as monetary policy is bloc-wide whereas fiscal policy is national.
With these levers working at different scopes this problem will always exist. And it's not the first time either. Remember Grexit? Same thing then.
We either need a United States of Europe with fiscal transfer between countries or the euro should be scrapped so we can go back to lira, marks and drachma.
So basically, if fiscal transfers are needed at some point to rebalance debt, we will get to that point and the EU will compromise again. Is there risk in this approach? absolutely, but it's pragmatic and based on a democratic process (the public opinions of all member states) rather than dogmatic based on some red/blue ideology/political split where compromise is unreachable, as in the US.
In other words, even if the article is right, I don't necessarily see the trap; it's a trap now, based on current compromises. Those are (thankfully) elastic, as it's been demonstrated many times in recent history.
Secondly, Central banking is NOT democratic.
When last did you vote for your country's central banking head?
When were members of that bank's monetary policy committee subjected to public scrutiny? Most people have no clue who they are, what their background is, and whether they are to be trusted tinkering with our money or assets.
Who influences the dovish/hawkish make up of that group and, as a result, the bank's policy response?
You? I don't think so.
President “Bobby”: In the garden.
Chance the Gardner: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.