🚀 go-pugleaf

In article <1993Jan22.061857.22935@midway.uchicago.edu> thf2@midway.uchicago.edu writes:

>>>Are you including the $160 billion or so of debt that was monetized
>>>away due to inflation?  If not, you're double-counting.
>>
>>please explain what you mean by this.

>Say that there's a $1 trillion debt, $100 billion deficit, and 5% inflation...

>The "deficit" figure will include the interest for this inflation, but
>it's not a real expense.  Hence, deficit figures will always look larger
>than they really are.


This is certainly true, but it is not what is meant by "monetized" debt.

Monetized debt is debt that is held by the country's central bank.
Money borrowed by the goverment from the central bank is simply
created out of thin air.  Other things being equal, this will cause
inflation, with the effect that the goverment expenditures financed 
in this fashion are implicitly paid for by whoever was holding cash
when the currency was devalued by this money creation.  Since these
people cannot be identified, paying them back is impossible, as well
as not being legally required.  Paying back this debt to the central
bank would, indeed, result in the collapse of the financial system.

Accordingly, this debt cannot be regarded as real, and should not be
included in the figures on the cumulative debt (though it commonly is).
I believe, however, that the interest on this non-existent debt does
not distort the deficit figures, since it is cancelled out by the
central bank's profit on these loans, which gets credited as goverment
revenue. It does, however, distort the figures one sees on the percentage
of goverment revenue that goes to service the debt.

If I recall correctly, about 10% of goverment debt in countries such
as Canada and the US is owed to their central banks. I suspect that
in countries like Brazil the percentage is far higher (at least the
percentage of the debt in their own currency - Brazil's central bank
isn't allowed to create US dollars).

    Radford Neal