by Derryl Hermanutz
In a recent article, Michael Pettis is missing the point of arguments that claim the Chinese money system is different. The point is that the Chinese government effectively owns and operates the Chinese money system, so as long as all the credits and debts are in Chinese money, the government can add or subtract money out of its money system at any time and in any amounts it chooses. That’s the primary power that is exercised by a government that issues its own money to serve the interests of its national economy.
Pettis cites Greece and Italy as nations comparable to China, but Greece and Italy use a foreign currency, the euro, that the Greek and Italian central banks are not able to print at will. The PBoC prints yuan, and as long as the government owns its own central bank, the government is monetarily free of the tyranny of arithmetic that afflicts nations who don’t issue their own money. Those nations have to make their economies serve the arithmetic of money, rather than using money issuance to serve the interests of their economy.
Benjamin Franklin understood this difference very clearly, and used his understanding of government money issuance to foster a flourishing of Pennsylvania’s colonial economy. Pettis is assuming that money somehow comes from economic production, so that unless some economic goods are produced, no “money” can be produced. This is the old classical economics error of treating money as if it is “value”. Money is apples and value is oranges. They grow on different trees. Money can grow while no value grows (money inflation) and value can grow while no money grows (price deflation, depression, financial-cum-economic collapse).
The only real concern of a money-issuing government is excessive money inflation which can lead to a reduced foreign exchange value of the national currency, which makes imports expensive, but makes your exports cheap. This makes your nation’s exporters rich at the expense of your nation’s consumers.
Government debt, in the case of a government who “issues” the money in which the debt is denominated, is an absurd contradiction in terms, even if the government accounts its money issued to itself as “loans” to itself. If the IOUs that you write against yourself happen to function as “the national currency”, then your “debts” to yourself “are” your nation’s “money”. China is that kind of nation. Greece and Italy are not.
Pettis says all debts must be repaid. In China’s case, if the central bank adds a trillion yuan credit to the government’s deposit balance, and adds a trillion yuan debt to the government’s loan account, and the government spends that new money into the Chinese economy, the government never “has to” repay that money. The “money issuing branch” of the government can “issue” money to the fiscal branch of the government. The central bank balance sheet can grow to Jupiter and orbit around Saturn until our Sun expires. The balance sheet never “has to” be unwound.
Even though the Fed is not a branch of the US government in the same way the PBoC is a branch of the Chinese government, the Fed never “has to” unwind its balance sheet either. That’s the whole point of a central bank. It is the national institution that “issues” the national currency. As a “bank”, a central bank “issues” money by “purchasing” government securities. The government writes a bond, which is a “debt”, and the central bank purchases that debt security by adding a deposit into the government’s checking account at the central bank. The government then spends the money into the economy, and now the economy has money to use.
The central bank didn’t “get” the new deposit from anywhere. It “issued” the new money.
Money that is issued is newly created. It is not “borrowed” from anybody, so issued money is different than debt money. Government issued money is different than a commercial bank creating new deposits to purchase private debt. Commercial banks can issue bank deposits, but banks have to buy “money” (cash or reserves) from their central bank. Commercial banks can run out of money, because commercial banks are not allowed to “issue” money. Only central banks are allowed to issue money.
Banks create new bank deposits every time a bank makes a loan or purchases a government security. The bank deposits are issued as repayable loans, which are “debts” to the borrowers. If commercial banks fail to collect repayment of the loans, the commercial bank can run out of money and fail as a private business.
But when government owned central banks purchase their own government’s securities, those “debts”, which are mere accounting formalities between the government’s money-issuing left hand and its money-spending right hand, never have to be paid back.
As long as China’s government understands the power it possesses as a sovereign issuer of its own money, then China need not suffer the stupid self-inflicted miseries of nations who have allowed private banks to gain ownership of the nation’s money issuing power.