Bond market jitters may be a global problem. But what might be happening here is fundamental.
A modern monetary theorist will tell you that a state who can print its own money can never go 'bankrupt'. Even more so if the state's debts are denominated in their own currency (as they are in the US or the UK). And actually, I agree with them up to this point. A state can keep on printing money to pay interest on its debts, ad infinitum. All good so far.
But where MMT and reality part company is in MMT's failure to consider the second and third order consequences of creating vast amounts of new money in order to service existing debts. Modern money is effectively CREDIT; credit means trust, and most especially, trust that you'll be paid back what you are owed (and that the money will be worth something when that happens).
Creating new money debases the currency by immediately reducing the value and purchasing power of all pre-existing money in the system.
Secondly, the creation of new money causes price inflation as a larger amount of currency is able to chase the same amount of goods and services (there always being a lag before the supply can catch up with new demand).
Thirdly, the distribution of new currency is not equal. In the modern economy, the majority of new money is created by banks making loans, and the new money accrues to those in a position to borrow, or to those who are connected with the banks themselves. This is the Cantillon Effect in action.
So what is the conclusion to all this, and what is likely to happen? A few guesses:
- > No nation state is remotely capable of paying down the unimaginable sums below. The principal amounts here will only ever be refinanced, never repaid.
- > Government is an inherently unproductive enterprise. Governments obtain funds from their productive population, or from borrowing. If markets lose confidence in their ability to repay (or, importantly, in the ongoing value of their currencies), they will tax their populations harder. They could cut government spending, but they tend not to like doing that....
- > servicing these giant debt burdens will lead, inevitably, to currency debasement.
So what can you do, as an individual caught up in the middle of this mess that is not of your making?
If you're one of the lucky ones who has any savings at all, recognise that leaving these savings in the currency of a government that wilfully debases them is, perhaps, not a good idea.
If you don't have any savings, and if you live paycheck to paycheck, then I'm really not sure what the solution is. I'm afraid that these people vastly outnumber the lucky ones, and I hope we collectively manage to stop this monetary madness before something breaks. But it may already be too late for that.
