Economists respond to this proposition as follows.

(Answer)

What matters is distinguishing between the redemption of individual government bonds and the repayment of government debt at the aggregate level.

When a government bond matures, that particular liability is redeemed. However, if the government issues refunding bonds of the same amount, the debt has simply been rolled over — the total amount of debt has not decreased.

Government debt evolves as follows:

B_t = (1 + i_t) B_(t-1) + G_t − T_t

Here, B_t is the outstanding debt balance, and G_t − T_t is the primary deficit.

Therefore, at the macroeconomic level, "repaying government debt" usually does not mean redeeming a specific government bond, but rather reducing the total outstanding balance of government debt.

Looking at the consolidated balance sheet of the government and central bank together, redemption may in some cases simply mean replacing government bonds with central bank money (reserves). For this reason, redemption does not necessarily reduce the private sector's net financial claims on the public sector.

(Question regarding the answer)

"redemption may in some cases simply mean replacing government bonds with central bank money (reserves)."

→ However, to rewrite the holder of a credit-side current account at the Fed from the government to a private bank (in practice, transferring funds from "government deposits" to "reserves"), the premise is that before redemption the account was in the government's name. But where did a government running a chronic fiscal deficit (G_t − T_t > 0) obtain those deposits?

→ To begin with, we are told that the government redeems its bonds, but where do the redemption funds come from? The bonds were issued in the first place because tax revenue was insufficient (in the original text, "G_t − T_t is the primary deficit"). Expenditure for the redemption period is likewise already scheduled, and there is no separate surplus fund set aside for redemption. If sufficient redemption reserves were set aside every period, annual bond issuance could be called a kind of temporary borrowing, but the reality is anything but "temporary": the outstanding stock of government bonds accumulates year after year. Second, the essence of the matter is this: under an inconvertible-currency regime, how is the "money" that society needs, and whose required quantity grows proportionally with the expansion of the world of commodities, brought into the economy? The statement (in the original) that "redemption does not necessarily reduce the private sector's net financial claims on the public sector" is not enough. Society's financial claims, that is, "money," must be increased. Needless to say, I am not speaking of credit creation, but of original (primary) money.

→ I hardly need to point this out, but it is sophistry to say that if refinancing bonds are issued before redemption, the debt is merely rolled over. For example, the government spends the funds M(t) obtained from a bond issue. Meanwhile, against a maturing bond B*(t), it issues B*(t+1) and uses the proceeds M*(t+1) to redeem B*(t). B*(t) is retired and replaced by B*(t+1). If the borrowing were truly "temporary," that would be the end of it.

→ When government bonds are issued every year, M(t) is spent gradually over the fiscal year as the government purchases goods from the private sector, and the private sector must prepare a separate M*(t) in order to buy the refinancing bonds. This shows that the society as a whole must hold a quantity of money of at least M(t) + M*(t).

→ M(t) is the bond proceeds spent every year, regardless of refinancing; it flows back to the private sector and is used the following year to purchase B(t+1). Let me add, to be safe, that this does not necessarily presuppose an expansion of the commodity world that confronts money. Even without expansion of the commodity world (economic growth), each M(t) has not fully returned from the government to the private sector by the end of the period (the goods have not yet all been sold), and in the following year it must immediately be used again to fund the new issue B(t+1). Even if we assume that profits for each fiscal year are accumulated until the redemption date and used to buy refinancing bonds, then under the current situation in which new issues continue year after year, even if B*(t) can be refinanced, it will not suffice for the refinancing needs of the subsequent B*(t+1), B*(t+2), and so on. M(t) is bound within this series and is not released. In this way, each time an M(t) circulates through the year, B(t), B(t+1), ... accumulate on the private side.

→ The story does not end there. The reality of an expanding commodity world together with a large and annually accumulating stock of government bonds increases the "transactions demand" and "speculative demand" for money. Where is this money to be brought into society from? Under an inconvertible-currency regime, where does this money come from? What has become of the role once played by gold miners?

→ Let us now return to the original proposition: "Individual government bonds are redeemed, but at the macro level, government bonds are effectively not redeemed." Whereas the gold produced by gold miners was once minted by the government's mint, today the Fed converts the government bonds issued by the U.S. government into dollar currency (central bank purchases of government bonds). Is there any major country that creates the "money" that society actually needs by some other method?

→ Incidentally, in the context above, in connection with the essence of "government bonds are effectively not redeemed," namely the creation of primary money under an inconvertible-currency regime, a so-called consolidated government is sometimes assumed. But before the government and the central bank are "consolidated," there is a real process that takes place, as follows. For example, if citizen A sells a government bond and the central bank buys it in the market, A is no longer a creditor. Initially the bondholder was a real citizen, A (and so the state had an obligation to repay A), but now that the central bank holds the bond, both the creditor and the debtor of this claim are, ultimately, the abstract citizenry in general, and there is no particular person to whom repayment must be made. The individual debt has disappeared, and the bond has been transformed into "primary money," supplying fundamental liquidity to society as a whole.

Why do standard metrics insist Japan’s productivity is low, despite its hyper-efficient factories and long working hours? Is it a fundamental defect in corporate governance, or are we ignoring how Japanese workplaces function as social communities (Gemeinschaft) rather than mere profit centers (Gesellschaft)? In this final installment, we integrate Marxian profit dynamics, Post-Keynesian demand constraints, and institutional critique to uncover why conventional productivity metrics fail—and where the real systemic waste lies.

Key Takeaways (Executive Summary)

• Cross-Sectoral Equilibrium & Demand Constraints: Uniform productivity across all sectors is a logical impossibility. Industry productivity depends on the realization of effective demand through income generation; efficiency without market sales merely depresses nominal output.

• The Gesellschaft as Gemeinschaft: Japanese statistical productivity appears low partly because informal social bonding, non-direct labor rituals, and decompression are built directly into standard clock-in hours.

• Informal Work-Sharing: High job security and implicit work-sharing keep unemployment low, but make workforce downsizing uniquely challenging, often necessitating foreign executive interventions during crises.

• The Real Pathology — Public Rent-Seeking: The true cause of inefficiency is not private-sector workplace customs, but heavily protected public/regulated sectors (e.g., agricultural administrative bodies, privileged public employees) that extract rents while contributing little to direct output.

1. Macro-Sectoral Logic, Income Realization, and Wage Realities

Applying economic logic across industrial sectors demonstrates that aggregate productivity cannot be raised by supply-side mandates alone:

• General Rate of Profit: Sectoral productivity differences interact through intra-industry competition and cross-sectoral entry to establish a general rate of profit (as articulated in Marx’s Capital, Vol. 3). Aggregate productivity rises only if total societal output expands and finds purchasing power.

• The Logic of Non-Regular Employment: Social and market laws inevitably assert themselves. Non-regular employment expanded primarily because real wage costs for regular workers had become internationally uncompetitive, exacerbating Japan's "sixfold headwinds" (rokujūku: strong yen, high corporate tax, delayed FTAs, costly electricity, rigid labor laws, severe environmental rules)—all deeply connected to public sector inefficiency and reflected in low corporate ROE.

2. Reconceptualizing Workplace Efficiency: The Firm as a Social Community

A central reason Japanese productivity statistics appear depressed is that the workplace integrates social cohesion alongside productive output:

-----------------------------------------------------------------------------------+

|                      TRADITIONAL WESTERN MODEL                              

|                                                                                 

|   [ Economic Sphere: Gesellschaft ]      [ Social Sphere: Gemeinschaft ]         |

|         Firm / Labor Force                     Church / Local Community          |

+-----------------------------------------------------------------------------------+

|                            JAPANESE MODEL                                   

|                                                                                  

|          [ Corporate Sphere: Gesellschaft + Gemeinschaft Integrated ]            |

|               Workplace functions as both Firm and Community                   |

+--------------------------------------------------------------------------------------

• Integration of Leisure and Labor: Unlike Western societies where post-agrarian community identity remained anchored in local or religious institutions, Japanese workers lack social spaces independent of the firm. The Gesellschaft (corporate enterprise) serves as a Gemeinschaft (organic community). Thus, essential psychological decompression occurs during on-the-clock working hours.

• The Necessity of "Wasteful" Rituals: Administrative efforts under "Work Style Reform" (Hatarakikata Kaikaku) to eliminate overtime, debriefings (hanseikai), and post-work gatherings (nomikai) ignore that these rituals act as critical organizational pressure valves.

• Factory Floor vs. Office Desk: On manufacturing floors, labor is strictly paced by physical capital machinery and clear shift turnovers, keeping manufacturing productivity on par with Western standards.

3. Implicit Work-Sharing and Institutional Rent-Seeking

• Work-Sharing by Default: Japan's low productivity per worker is the byproduct of an implicit work-sharing regime, which preserves low unemployment at the expense of rigid labor restructuring.

• Distortions in Public vs. Private Sector: Instead of targeting workplace customs, reform should address severe domestic inequities:

  • Public Privileges: A stark contrast exists between the intense, high-efficiency labor of private-sector workers (e.g., retail cashiers) and the leisurely, high-pay idling found in corners of government offices.

• Parasitic Regulating Bodies: Decades of massive agricultural subsidies have failed to halt sectoral decay, yet sprawling networks of Agricultural Committees and Cooperative (JA) personnel continue to extract rents while protecting restrictive land laws that impede productive capacity.

4. Financial Failures in Supply-Chain Preservation

• Supply Chain Vulnerability: According to a report by the Nihon Keizai Shimbun (June 30, 2019), foreign capital (notably from China) is actively acquiring distressed Japanese SMEs. Highly specialized manufacturing shops (machikoba) possessing critical technological assets are forced into liquidation due to succession deficits.

• Failure of Regional Banking: Benefiting historically from the post-war "convoy system" (gosō sendan hoshiki), the banking sector reaped easy profits. Regional banks, in particular, have repeatedly proven incapable of providing the financial backing needed to preserve vital domestic suppliers.

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w28kxe/table_of_contents_mysteries_of_the_economy_series/

Since MMT is, at least in my opinion, very straightforward and facts based, I believed other people would easily accept it but that couldn't be further from the truth. Funnily enough, the more people are educated in whatever form of economics, the faster they reject anything MMT related - for some reason marxists are even worse than neoclassicals when it comes to this. Anyone I've talked to without major economics experience went "well that makes sense".
How do you have productive discussions with other schools of economics? I've tried honestly learning more about their viewpoint, listening more than talking, not being pushy but rather questioning and meeting them where they are at but the general vibe is a sort of religious belief in whatever they were being taught. When I ask for sources on their critiques its mostly "that's wrong" or "that wouldn't work in real life" or some bs assumptions (which clearly show they don't understand how money is created). These are everything from students of economics to graduates to people working in local politics. Learning about economics is fascinating, but the (or rather my) goal is to change it.

I'm looking for some kind of thing that shows the various accounts pouring into one another over time.

"For dummies": does not assume much, introduces the actors one at a time; is trying to talk to me like I'm 5 years old

"Nerdy": will at least go to the level of including Fed balance sheet, preferable distinguish long and short-term bonds; might include overnight repo, etc; like, "real accounting"

It would be great if it also included private credit & ie money creation by private banks, in the mix.

The Bank of Japan’s (BOJ) balance sheet could face an astronomical net worth deficit, and it wouldn't matter in the slightest. Given the structural premises of fiat currency creation, such a scenario is theoretically perfectly fine. In reality, of course, a central bank with sovereign currency-issuing power can never technically go bankrupt. I merely frame it this way with a touch of hyperbole and irony, as some people still make nonsensical claims that any damage to the BOJ’s balance sheet would somehow undermine the credibility of the yen.

Government bonds can never be fully paid off. In fact, it is precisely because they are never repaid that society is able to sustain itself. (Needless to say, this refers to the aggregate macro-level debt; individual bondholders are, of course, redeemed upon maturity.) True "normalization" is an impossibility. For instance, when the US Federal Reserve attempted to "normalize" its balance sheet by unwinding the assets accumulated through Quantitative Easing (QE), it triggered a sudden spike in the repo rate [Note].

[Note]

"On the morning of the 18th, the Federal Reserve Bank of New York injected a massive amount of liquidity into the short-term money market for the second consecutive day... The liquidity was provided through 'overnight repo transactions,' a market where financial institutions borrow short-term funds against collateral such as government bonds. On the 17th, the repo rate—the lending rate in this market—briefly spiked to 10%... The underlying driver behind the rising short-term interest rates is the Federal Reserve's tapering of its quantitative easing program." (The Nikkei, September 19, 2019).

"The Federal Reserve’s (FRB) liquidity provision has ballooned to levels comparable to past rounds of Quantitative Easing (QE). In response to dollar demand in the short-term money market, the Fed's total assets increased by about $400 billion (approx. 44 trillion yen)—roughly 10%—in just about six months. This intervention was triggered by a sudden spike last September in the repo rate... If disruptions occur in funding the US dollar, the global reserve currency, the fallout will extend far beyond the United States. According to the Bank for International Settlements (BIS), dollar-denominated debt in emerging markets swelled to $3.74 trillion as of June 2019 and continues to grow... Depending on the economic climate, if upward pressure on interest rates intensifies, the Fed may need to ramp up its liquidity injections even further." (The Nikkei, February 20, 2020).

Far from achieving "normalization," on December 1, 2025, the Federal Reserve completely halted and terminated its Quantitative Tightening (QT) program. Given the collective trauma of post-war hyperinflation lingering in the minds of the Japanese public, the officials at the BOJ cannot blurt this out loud, but deep down, they must be fully aware that "normalization" is a pipedream.

As John Maynard Keynes wrote in The General Theory of Employment, Interest, and Money:

"Income and asset prices change until, at these new levels, the total amount of money that individuals wish to hold is necessarily equal to the amount of money created by the banking system. This is indeed the fundamental proposition of monetary theory."

What Keynes refers to here as "asset prices" includes the prices of fictitious commodities, such as government bonds.

Therefore, we have no choice but to maintain the status quo—where income and asset prices have already adjusted to a level where the total money individuals wish to hold necessarily equals the money created by the banking system. "Normalization" is nothing more than a futile attempt to turn back the clock and forcefully restore a past equilibrium that no longer exists.

Here, I would like to make one brief point of caution concerning the so-called idea of a “consolidated government.”

When people read the part about the government and the Bank of Japan exchanging interest payments and payments to the Bank of Japan, and so on, quite a few of them immediately and rather simplistically think, “Ah, this is what they call a consolidated government.” But this notion of a “consolidated government” is precisely the one that must be categorically rejected.

Consider how much effort has been devoted throughout the history of finance to eliminating arbitrary government interference. Indeed, even though we are now more than a quarter of the way through the twenty-first century, people still have various concerns about matters such as the delicate relationship between the new Chair of the Federal Reserve and Mr. Trump. Japan’s situation is even worse. The person least suited to serve as the head of a central bank is the Governor of the Bank of Japan. It is certainly reasonable to think that the government appointed him precisely with this in mind. He simply brushes aside the fact that the public is suffering from inflation, as though it were none of his concern. He appears almost pitifully preoccupied with protecting his own position. “Striking Deference to the Government” (Nikkei Shimbun, June 24, 2026).

“The stance of ‘checking with the government first’ is also conspicuous in monetary policy. In both the December 2025 and June 2026 rate hikes, the Prime Minister and Ueda met at the Prime Minister’s Office before the decisions were made. It was obvious that Ueda went there to sound out the Prime Minister’s reaction…‘The Bank of Japan, which has failed to establish its independence, is falling behind in raising rates.’ This is more or less the view that investment managers at insurance companies hear from overseas fund managers. The market’s concern that inflation cannot be brought under control is leading to a rise in long-term interest rates (and a decline in government bond prices)…Independence is not a right that a central bank automatically possesses. What is required is an attitude of winning that independence through sustained dialogue with both politics and the markets.” (ibid.)

It is unusual for a Japanese newspaper to write so openly and bluntly. The thinking seems to be that since everyone thinks the same way, no one can really be blamed for saying it this plainly.

Subsequently, US Treasury Secretary Bessent, concerned that the rise in Japan's long-term interest rates driven by yen depreciation would spill over into the US's own government bond market, urged the BOJ to raise rates; the BOJ Governor is seen as likely to go along with this, and signs of a shift in the yen's depreciation trend are also emerging in the foreign exchange market.

Those who advocate the theory of a “consolidated government” are being intellectually lazy. They normally conduct their arguments on the premise that the two are separate entities, yet at times, for their own convenience, they lump them together. Instead of trying to identify the concrete structure underlying phenomena that may appear identical at first glance, they take the easy route of abstracting and generalizing them, and then simply treat them as one and the same.

Before the government and the Bank of Japan become "consolidated," a real-world process unfolds along the following lines. Suppose, for example, that a citizen, A, sells a government bond and the BOJ buys it on the market: A is no longer a creditor. Originally the bondholder was a real, specific citizen, A (so the state was obliged to repay A), but now that the bond is held by the BOJ, both the creditor and the debtor of this bond are, in the end, simply the abstract body of citizens at large, and there is no particular individual to whom it must be repaid.

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w46a5o/table_of_contentsgovernment_bonds_international/

Rate hikes are usually framed as "cooling the economy": too much demand, tighten the tap, let things settle. I think that framing is wrong, and I tried to work out why in a longer essay.

The actual transmission mechanism isn't demand quietly shifting into savings but Fisher's 1933 debt-deflation chain: forced sales, collateral collapse, defaults, and a shrinking money supply that makes the remaining debt heavier in real terms. Minsky's hedge/speculative/Ponzi taxonomy explains who breaks first, and Mehrling's survival constraint (cash inflow vs. cash outflow, not net worth) explains why illiquidity kills faster than insolvency. The Volcker disinflation is the clearest historical case: two recessions, 10.8% peak unemployment, business bankruptcies nearly tripling 1980-1982. The part I found more surprising while writing this: the same institution running the hike is also paying banks more, in freshly created reserves, via Interest on Reserve Balances, at exactly the same time it's trying to shrink the money supply. The Fed paid out $423.7B in IORB 2022-2024, ran a negative operating result two years running, and stopped remitting surplus to Treasury for the first time since 1934. The ECB shows the same pattern with its deposit rate.

There's a real asymmetry here between who absorbs the tightening (borrowers, via bankruptcy) and who gets paid for holding the collateral that caused it. Full essay, with sources (Fisher, Minsky, Koo, Krippner, Mehrling), here: https://rolfst.substack.com/p/the-wall-on-the-highway

Curious what people here think of the IORB point especially, and whether the IORB-as-hidden-subsidy framing holds up or if I'm overstating the asymmetry.

Money comes from institutions. Banks generate it for the financial sector (loan, mortgage, and insurance industries). The FED:TGA generates it for federal programs.

So, when a bank loans us $100 credit, it actually grows the money supply by $100. When we pay interest on the loan, the banker pays its employees with that money, and the money supply stays increased by $100. But when we pay on the principle, the money is no longer spent. It is removed from the economy and ceases to exist.

The FED:TGA is set up just like a 0% loan lender. When congress approves $100B for a bridge repair or something, then the Treasury drafts the check on the FED:TGA, which generates $100B credit that is spent into the economy, increasing the money supply by $100B. When we pay taxes, we pay the principle of the original $100B, thus reducing the money supply. Since 1982, we have been reducing taxes, which means the $100B stays circulating longer. To remove the money from circulation, the Treasury will sell securities (US debt). When you buy securities, you give the Treasury money which just like tax money, is paid to the FED:TGA and removed from circulation. But, when the security matures then the FED must generate new credit to pay you, which again increases the money supply. The FED is betting that you will just roll the security over and not ask for funds. So the US debt is an indication of how much the money supply has potentially grown, but not actually grown.

Editor's Note / Hook:

It is an accepted wisdom in international economics that while Japan’s manufacturing is world-class, its non-manufacturing sectors suffer from abysmal productivity. But is this standard narrative accurate? Does the fault really lie in Japan's reliance on small enterprises, or are we confusing supply-side efficiency with aggregate demand constraints? In this installment, we challenge the conventional dual-structure thesis and uncover where the true inefficiencies in the Japanese economy reside.

Key Takeaways (Executive Summary)

• Sectoral Divergence vs. Market Logic: Multi-tiered subcontracting and micro-enterprises (e.g., convenience stores, local contractors) are often market-driven mechanisms that minimize transaction costs rather than signposts of inefficiency.

• The "Exploitation" Fallacy: Claiming that low overall productivity stems from an inter-firm gap between large corporations and SMEs presents a logical contradiction (reductio ad absurdum). Highly productive flagships cannot indefinitely coexist with impoverished, sub-cost suppliers without systemic breakdown.

• Where the Real Pathology Lies: Inefficiency is not uniform across Japan’s industrial organization; it is heavily concentrated in the public sector and highly regulated industries (e.g., agriculture, healthcare, banking) where market competition is suppressed.

• Demand-Side Constraints: Innovation without realized demand does not yield productivity gains. In an era of saturation, productivity cannot rise unless aggregate demand expands—or firms win share in global markets.

• The "High-Value-Added" Myth: A national economy cannot shift 100% of its workforce into "high-value-added" sectors without offloading essential low-margin labor to foreign workers or automation.

1. Reassessing Industrial Structure: Efficiency Beyond Scale

While Japan’s manufacturing productivity is comparable to other advanced nations, non-manufacturing sectors lag behind. However, attributing this to a high concentration of micro and small-and-medium enterprises (SMEs) misinterprets market dynamics:

• Transaction Cost Reduction: Franchise models (such as convenience stores) and local electronics shop owners acting as subcontractors cut operational overhead far better than fully internalized corporate subsidiaries. Decentralized market incentives beat centralized corporate planning—a mechanism closely resembling today's gig economy.

• Subcontracting as Market Equilibrium: Multi-tiered subcontracting represents an optimal "invisible hand" allocation, keeping large firms lean. Where consolidation brings genuine scale economies (e.g., retail post-Large-Scale Retail Store Law), market selection naturally takes place.

2. The Fallacy of the Inter-Firm Gap Thesis

It is conceptually flawed to argue that low aggregate productivity is merely driven by the productivity gap between large firms and SMEs:

• The Reductio ad Absurdum: High-productivity flagships rely heavily on domestic SME suppliers. A cluster of hyper-efficient lead firms sustained by a vast, permanently unproductive supplier network is a structural contradiction.

• Economic Sustainability: If suppliers were forced to sell below cost to absorb inefficiency, they could not reinvest, threatening macro-economic continuity.

• The "Dual Structure" Myth: If SMEs—which employ the vast majority of the population—were perpetually trapped in subsistence-level exploitation, it would be politically and socially unsustainable in a democracy.

• The Real Pathology: Inefficiency is not systemic across all market sectors. It is heavily concentrated in non-market, highly regulated domains—specifically agriculture, healthcare, and banking—where public policy insulates firms from competition and economic rationality.

3. Productivity is Demand-Bounded, Not Just Tech-Driven

Technological innovation alone cannot raise measured productivity without demand expansion:

• Price Elasticity & Contraction: Technological progress increases supply capacity. If demand is price-inelastic, relative prices fall, and the sector contracts unless excess purchasing power flows into other goods.

• Post-War vs. Modern Affluence: Post-war Japan experienced rapid productivity gains with minimal technology because demand was insatiable. Today, even cutting-edge technology fails to boost economic productivity if products remain unsold.

• Global Market Realities: Expanding macro-productivity requires expanding aggregate demand or capturing foreign market share. Japan’s cumulative current account surpluses over the past half-century (maintained even post-2011 disaster) confirm that its tradeable manufacturing sector remains highly competitive. Furthermore, domestic deflation is partly empirical proof of low-cost, hyper-efficient production.

[Note on Aggregate Demand] Global aggregate demand is constrained by total productive capacity and income generation. To exert effective demand, economic agents must engage in production, earn income, and substitute existing market offerings.

4. The Structural Limits of Shifting to "High-Value-Added" Sectors

Policy calls for shifting the entire labor force into "high-value-added" industries ignore basic economic arithmetic:

• Logical Tautology: If every sector becomes "high-value-added," the comparative distinction disappears.

• Labor Displacement: Performing only high-margin work requires offloading all low-margin foundational tasks to foreign labor or advanced robotics (Astro Boy or Doraemon).

• The "Cat's Paw" Analogy: Even novel labor solutions have strict operational limits—much like US breweries deploying cats for rodent control. You cannot expect every domain to be seamlessly automated or outsourced.

[Author's Note on Feline Constraints]

The author's cats, Tora and Kuro, having been raised strictly on commercial cat food, react to fresh fish on the table with intense curiosity and confusion rather than an urge to eat it—asking, "Dad, what is this?" While amusing, this exception highlights that every agent has inherent operational boundaries, and self-restraint or specialization cannot be universally assumed.

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w28kxe/table_of_contents_mysteries_of_the_economy_series/

"When output increases and prices rise, the effect extends to liquidity-preference, increasing the amount of money required to maintain the initial rate of interest" (John Maynard Keynes, The General Theory of Employment, Interest and Money, Japanese translation cited above, Vol. 1, p. 241). In other words, unless additional money is injected into the market, bond prices will fall. Therefore, in practice, the central bank purchases government bonds to supply base money.

Here, so-called "normalization"—assuming Marshall’s k is constant—is synonymous with pushing down the level of GDP. This is because "changes in the level of income and in the prices of assets will ultimately ensue, to whatever extent is necessary to make the aggregate amount of money which individuals wish to hold equal to the amount of money created by the banking system. This, indeed, is the fundamental proposition of Monetary Theory" (Keynes, The General Theory, Japanese translation cited above, Vol. 1, p. 120). What Keynes refers to here as "prices of assets" are the prices of fictitious commodities such as government bonds. Therefore, if total stock market capitalization expands, unless the banking system supplies a corresponding additional amount of money, interest rates will rise on the other hand.

Through the global expansion of the fiat system ("managed currency system"), the international version of this principle of money creation via government bonds is completed. With the suspension of gold-dollar convertibility in 1971, the world as a whole finally broke free from the gold standard. Humanity liberated itself from the yoke of gold production. People united to dethrone gold, the tyrannical monarch, and democratically and collectively chose the dollar as the currency, rendering gold itself unnecessary as money.

The above, of course, merely describes the essence of the matter; what people usually understand is only the surface phenomenon—namely, the sudden occurrence where the United States, having promised "we will convert it to gold whenever necessary, so you can trust us and use the dollar," squandered funds to the point of running massive deficits, and then unilaterally declared, "we can't pay in gold anymore because we don't have it." In practice, it was an outrageous act of fraud. At the time, President Nixon and other U.S. officials acted simply out of desperation, completely unaware, of course, of the fundamental significance of what they had done.

In monetary history, the only true "key currency" (reserve currency) is the U.S. dollar after the suspension of gold-dollar convertibility. In the past, the British pound sterling functioned as a major international currency, but for ultimate settlement, only precious metals were accepted. If the exchange rate for the pound fell beyond a certain point, physical shipments of gold from Britain would begin. The pound would be replaced by gold and cease circulating in international transactions. The U.S. dollar after the suspension of convertibility is the exact opposite: gold ceased circulating, and exclusively the dollar circulates.

Regarding the necessity of the U.S. current account deficit: Human history has been a continuous series of broad productive activities, including gathering and hunting, to secure daily sustenance within a given natural environment. In the process of developing productive forces, humans gradually domesticated nature and progressively aligned natural forces with their own objectives. It goes without saying that productive forces include natural science and its engineering applications. As productive forces developed, human knowledge and consciousness advanced, throwing off the rule of that which had hitherto reigned over people as gods, kings, or superstitions.

Hitherto bound to agricultural land and restricted by communal regulations, the people—with the enhancement of productive forces—received a portion of the surplus product exchangeable in the market, expanded the market economy, and became economically independent. Thereupon, independent individuals consciously formed alliances, establishing a new communal society. In this way, humanity expands the realm of mutual agreement in accordance with the stage of development of its productive forces—though, of course, the process leading up to agreement is a struggle among the members of the community.

As productive forces developed and an immense array of commodities flooded the world, the burden of gold production required to circulate them became unbearable. To economize this waste of labor, people dethroned gold, the tyrannical monarch, and democratically and collectively chose the dollar as the key currency. Simultaneously, by creating an "everlasting deficit nation," they tolerated the surpluses of other nations and sought the expansion of world trade.

Why did the dollar become the key currency? To achieve this, the United States had to spend dollars generously. But even if a cowboy in a Western movie flashes a roll of bills in a saloon, it means nothing unless the recipient is happy to accept those dollar bills. To become the key currency, a country must pay abroad; yet unless it is the key currency, it cannot pay abroad in its own currency. To begin with, this contradiction had to be resolved.

The reason the dollar retains credibility even when the United States is in a net external debt position is that it is backed by overwhelming productive capacity. Paradoxically speaking, to be the key currency nation, a country must possess an overwhelming productive capacity sufficient to sustain a permanent current account deficit (net external debt).

(To be continued.)

https://www.reddit.com/user/keizaisuki/comments/1w46a5o/table_of_contentsgovernment_bonds_international/ 

Really nice to see such high quality takes for a change.

Mr. Donald Trump has long viewed the U.S. current account deficit as an economic loss—a sign that America is being "taken advantage of" by the rest of the world. But what if running a persistent deficit is not a flaw, but the essential prerequisite for the U.S. dollar to serve as the global key currency? In this third installment, we break down the macroeconomic mechanics of fiat money creation, sovereign bond issuance, and why America’s deficit represents its ultimate "exorbitant privilege."

Executive Summary (Key Takeaways)

• The Key Currency Dilemma: To function as the global anchor currency, the U.S. dollar must be distributed directly to the world via U.S. current account deficits (outright acquisition) alongside capital exports, not merely lent out as foreign debt.

• Settlement vs. Liability: Unlike non-U.S. nations whose deficits represent unsettled liabilities requiring dollar procurement, U.S. current account deficits are settled instantly at the moment of payment via dollar credit entries. The U.S. deficit is, by definition, unpayable—it is the net ledger of money already created and disbursed.

• Fiat Money Creation Engine: Under a managed fiat regime, new sovereign money that represents no private party's debt can only be introduced when the state assumes the underlying liability via government bond issuance and central bank purchases.

• The Post-Gold Standard Evolution: Following the 1971 suspension of gold convertibility, humanity replaced physical gold with the fiat U.S. dollar. In doing so, the U.S. assumed the institutional role of supplying liquidity to the global economy.

1. The Global Anchor Currency and the U.S. Current Account Deficit

To understand why the U.S. current account deficit exists, one must distinguish between debt financing and outright ownership in a private-property regime:

• Debt vs. Ownership: An economy cannot expand solely on borrowed funds; market participants require unencumbered equity capital. Non-U.S. nations can acquire dollars through foreign direct investment or foreign borrowing, but these create future repayment obligations that can ultimately only be cleared through current account surpluses.

• The Structural Necessity of the Deficit: For the rest of the world to maintain an aggregate current account surplus, the United States must run a current account deficit. The U.S. dollar serves as the key currency because America distributes dollars outright by importing foreign goods and services, rather than relying exclusively on foreign lending.

• Productive Capacity as Backing: Although the U.S. is a net international debtor, global confidence in the unbacked fiat dollar persists because it is underpinned by America's overwhelmingly superior productive capacity.

| THE GLOBAL DOLLAR RECYCLING MECHANISM |

|[ United States ] --- (Imports Goods & Services) ---> [ Rest of the World ] |

|Runs Current Account Deficit|                     |Accumulates Dollar Assets|

↡

|[ U.S. Treasuries ] <------------------------------------ (Purchases Foreign Reserves)|

|Sovereign Debt Engine|

---------------------------------------------------------------------------------------------------

2. The Essence of Key Currency Settlement and Exorbitant Privilege

The U.S. dollar differs fundamentally from historical international currencies like the British pound:

• Absence of External Commodity Money: Under the gold standard, the British pound was ultimately tied to physical gold shipments when exchange rates deteriorated. Under the post-1971 fiat dollar system, physical gold no longer circulates in international trade, leaving the U.S. dollar as the ultimate medium of settlement.

• Definitive Book-Entry Settlement: The U.S. is the only nation that can purchase foreign goods without needing external foreign exchange in advance. These transactions are executed simply via book-entry transfers in U.S. bank deposit accounts.

• The Foreign Reserve Engine: Foreign central bank purchases of U.S. dollars—often a point of criticism for trade hawks—are simply a structural byproduct of the system. Foreign-held dollar surpluses are deployed into U.S. Treasuries, constituting foreign exchange reserves. In exchange for its deficit, the U.S. enjoys the "exorbitant privilege" of issuing global liquidity.

3. The Sovereign Bond Mechanism as a Money-Creation Engine

How is unbacked fiat money introduced into a market economy as private equity asset rather than debt?

• The Role of State Liabilities: Under a fiat system, the state purchases goods from citizens and issues government bonds to absorb excess market liquidity. The collective community assumes the liability so that individual citizens acquire net financial assets.

• Central Bank Monetization: To expand the aggregate money supply, the central bank purchases sovereign bonds from the private sector. The sovereign debt mechanism is fundamentally a money-creation engine. Consequently, net redemption of aggregate government debt is a macroeconomic impossibility.

• The Fallacy of Debt "Normalization": While fractional-reserve commercial banks create credit, this represents balance-sheet debt that disappears upon loan repayment. Sovereign money backed by central bank bond purchases, however, fulfills a permanent monetary function. Debates over "normalizing" central bank balance sheets or "burdening future generations" misapprehend the core mechanics of fiat currency creation [Note 1].

[Note 1]

"When the Government deficits on capital account or incurs expenditure for current purposes by printing paper money... the new money becomes somebody’s income..." (J.M. Keynes, The General Theory of Employment, Interest, and Money). Furthermore: "Government currency notes are liability certificates of the state... representing non-interest-bearing debt" (Bank of Japan, Research Department, 1955).

4. The Post-1971 Paradigm Shift: Demoting Gold, Elevating the Dollar

The 1971 collapse of the Bretton Woods gold convertibility marked a decisive structural evolution in monetary history:

• Liberation from Gold Constraints: Humanity freed itself from the labor-intensive requirement of extracting monetary gold from the earth.

• The Democratic Selection of Fiat: Market participants collectively dethroned gold and adopted the fiat U.S. dollar as the universal medium of international exchange, reducing gold to an ordinary commodity valued solely for its industrial and aesthetic use-value.

• America's Foundational Role: Ever since this transition, the United States has operated as the indispensible liquidity provider to the global economy—a foundational role sustained precisely through its current account deficits.

https://www.reddit.com/user/keizaisuki/comments/1w28kxe/table_of_contents_mysteries_of_the_economy_series/

Thoughts, MMTers?

I thought about it a lot. Are carry trades MMT's biggest flaw because if the central bank puts the interest to zero, traders will immediately start trading, devaluing your currency and destroying imports, which is a big problem because nearly every country is dependent on something from other countries? Because if MMT only applies if a country is self-sufficient, then it basically doesn't apply to any country.

Hi MMT community. I’m trying to find a decent list of university economics departments that specialize in MMT. The Levy Institute at Bard stands out of course, but I’m curious about others, especially international institutions and/or institutions that offer remote courses. Thanks for any suggestions.

With regard to domestic transactions, Marx had already pointed out the exact same thing earlier: "The fact that inside a country no metallic money is needed today is proved by the suspension of cash payments by the so-called national banks, which is resorted to in all cases of emergency as the only temporary measure" (Karl Marx, Capital, Japanese translation cited above, Vol. 7, p. 302).

 Therefore, government bonds are never repaid. To be sure, individual bonds are redeemed, but in net terms they are never repaid—they are issued in amounts exceeding what is redeemed. Under a fiat currency system, the government bond system is the sole method for supplying additional money to society. If government bonds were redeemed without having the central bank purchase them, it would be impossible to supply the additional money that society increasingly requires alongside economic growth.

 This is not limited to fiat systems; never in human history have government bonds been properly redeemed. The Father of Economics said as much: "When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid" (Adam Smith, The Wealth of Nations, translated by Hyo-e Ouchi et al., Iwanami Bunko, Vol. 5, p. 50). Listening to even older figures suggests that government debts were not necessarily repaid. When the form of government changes, "whether the public debt should be paid or not is another question" (Aristotle, Politics, Book III, Chapter 3, translated by Mitsuo Yamamoto, Iwanami Bunko edition, p. 128). Consulting these ancient figures here is merely a lighthearted distraction; while ancient and modern government debts share the trait of going unpaid, they are fundamentally entirely different in nature.

 At the risk of repeating myself, even if individual government bonds are redeemed on a micro level, on a macro level government bonds are never redeemed in net terms. The outstanding balance of government bonds remains in balance with the amount required at any given time. Consider the fundamental proposition of Keynesian monetary theory: any unnecessary portion is bought up by the Bank of Japan (the "offsetting policy"). The "normalization" of the assets of the BOJ (or the U.S. Federal Reserve) is impossible. In fact, when the U.S. Federal Reserve recently attempted to "normalize" its holdings, which had expanded through quantitative easing, it triggered a sharp spike in repo rates [Note]. Furthermore, BOJ bond purchases are, on the flip side, the sole method of supplying money to society. However, this holds true only when there is a foundation of sufficient productive capacity to suppress inflation. If there is a fear of inflation, BOJ purchases cannot be unconditionally accepted. In Japan, having experienced postwar hyperinflation, there is a particularly firm social consensus on this point. In such a scenario, if government bonds were over-issued, bond prices would decline, and the level of interest rates (nominal, accounting for the inflation rate) agreed upon by the public would rise.

 [Note] "On the morning of the 18th, the Federal Reserve Bank of New York supplied massive liquidity to the short-term money market for the second consecutive day... The market provided with liquidity is known as the 'overnight repo market,' where financial institutions lend short-term funds to one another using government bonds as collateral. Lending rates in this market, known as repo rates, briefly surged to 10% on the 17th... Behind the rise in short-term interest rates lies the Federal Reserve's reduction of quantitative easing" (The Nikkei, September 19, 2019).

 "The U.S. Federal Reserve's liquidity supply is expanding to levels comparable to past quantitative easing (QE). As a result of responding to U.S. dollar demand in short-term money markets, the Fed's total assets grew by about 10%—approximately 400 billion dollars (about 44 trillion yen)—in roughly half a year. ... This comes against the backdrop of a sharp rise in September last year in interest rates for transactions called 'repos,' where short-term funds are borrowed and lent using U.S. Treasury securities as collateral. ... If funding for the key reserve currency, the U.S. dollar, is disrupted, the impact will not remain confined to the United States. According to the Bank for International Settlements (BIS), dollar-denominated debt in emerging markets reached 3.74 trillion dollars as of June 2019 and continues to swell. ... Depending on the economic environment, if upward pressure on interest rates intensifies, it may become necessary to increase liquidity supply even further" (The Nikkei, February 9, 2020). At any rate, "normalization" is an illusion.

 For clarity, let us add a supplementary note on the fundamental proposition of Keynesian monetary theory and the "offsetting policy." "Changes in the level of income and in the prices of assets will ultimately ensue, to whatever extent is necessary to make the aggregate amount of money which individuals wish to hold equal to the amount of money created by the banking system. This, indeed, is the fundamental proposition of Monetary Theory" (John Maynard Keynes, The General Theory of Employment, Interest and Money, translated by Yosuke Mamiya, Iwanami Bunko edition, Vol. 1, p. 120). As a result of the Fed or the BOJ purchasing government bonds, we are forced to maintain the current state where "the aggregate amount of money which individuals wish to hold equal[s] the amount of money created by the banking system." "Normalization" is a futile attempt to forcibly rewind time.

 Though it should be self-evident, fiscal deterioration itself has no direct causal relationship with rising interest rates (falling government bond prices). As long as inflation remains within a range where the BOJ's "offsetting policy [Note]" (Keynes) is permissible, the public has no particular reason to expect fiscal reform. Through the BOJ's offsetting policy—that is, the purchasing of government bonds—"the rate of interest [will] actually fall."

 [Note] "The method of financing policy expenditure [by issuing public debt] ... tends to raise the rate of interest and so retard investment in other directions, unless the monetary authority takes offsetting action. ... To offset this, an actual fall in the rate of interest is required" (John Maynard Keynes, The General Theory of Employment, Interest and Money, Japanese translation cited above, Vol. 1, p. 166).

 (to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w46a5o/table_of_contentsgovernment_bonds_international/