China is Sovereign in their Currency

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.

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12 replies on “China is Sovereign in their Currency”

  1. This writer thinks USA current fiat money game and National Ponzi can last he is wrong.
     
    Says “Benjamin Franklin understood this difference very clearly, and used his understanding of government money issuance to foster a flourishing of Pennsylvania’s colonial economy.”  Yes his fiat Pennsylvania Pound arguement failure in London caused the Anglo/American War losses and failing Democracy they have today after his replacement ‘American Pound’ and today’s snowballing worthless fiat USD.
     
    Writer then says “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).” As USD Fiat cash today, but since PRC has already destroyed half the Petrodollar swindle, and US Government gives the rest to enrich the richer. It’s US today that’s falling off that tree and rotting. 
     
    And what nonsense that Money was not invented as a barter value facilitator.
     
    “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.” Well they and their bankers have admitted rigging exchange values that are already too high, imports are surely replacing US products both at home and abroad, USA has no chance of equaling competition cheaper WTO and TPP imports and reducing exports further. USA is just buggered and they did it themselves or are their super rich not quickly moving their hoard offshore? and are USA manufacturers replacing man with machine to eat fuel and rise fuel costs above consumer incomes and polluting citizens and environment health for no gains? And is outsourcing not rife? Imjports substituting affordability to replace domestic products? and and and.

  2. @FrankLi1 Frank are you trying satire as a more subtle sarcastic barb here or do you see something in his tripe don’t and aren’t USA being even worse with their  Sovereign Fiat Currency. Isn’t this all opposite of your book “Solving America Chinese Style”  the only similarity I see is his view with yours that PRC is doing things better than USA stuffup Krugmanist styles?

  3. @robcartervn the only similarity I see is his view with yours that PRC is doing things better than USA stuffup Krugmanist styles?
    Yes, that was my point! Everybody can print money. When you print money with real growth, it helps (as in the case of China).. When you print only without growth, you will die (as in the case of the US).
    Now, since you seem to be well versed with my book 1, would you please write a review at Amazon.com? You can then move on to my book 2, which will drive the sales of my book 1!!!

  4. @FrankLi1  Well Frank I followed your lead into the brainwashing thing, much to read on but I agree the first part and as such see your meaning. So perhaps stop calling it Communism and Capitalism. PRC, SRV, Singapore all still Communist in fact and the Capitalist similarities are are fast emerging ~ Bribed leaders, lobby force of rich/powerful, damaging Capitalism by causing a Fascist class. If you talk of Cuba and North Korea meanings better use the word Marxism so the slower learners like me can follow meanings better.

  5. Yes Frank I did say Singapore ~ PAP is still “Peoples Action Party” and yes they are communist/Capitalism at it’s best democracy, of for and by the people’s best Interests. Democracy mustn’t be allowed to the extent that NSA can be called of, by and for the people when only the Powerful/rich get that “for the people” benefit. That’s what’s hurting USA democracy part today as those bloated capitalists gain the necessary recognition and even Companies by ‘Citizens United’ become people. 
     
    PAP under LKY guidance kept the respect for the people faithfully deciding only method and quantum control necessity. iN TIME the People of Singapore as with PRC are seeing the benefits of such control and wanting to keep it, whereas the boater USA Democratic forces have so warped the meanings that the people don’t want it and your book plan rises to the cause more.

  6. @robcartervn Singapore is too small to be relevant to any big boys! Singapore is a city/country. Singapore is a de factor monarchy. LKY was a good king, with a son succeeding him, albeit with a gap of a few years. For more on Singapore, read my book #2! I dedicated 2 chapters to it!

  7. @FrankLi1 Yes Frank I owe you that but I am not finished with Book 1 yet and am yet to buy book 2. But I am making a note now to hurry me reading book 1 to end and recommend on Amazon. I am still a sick man, limited time, lots to do and read ~ Lazy at times and just finished 4 Philosophy and religion DVD’s some 88 lectures in my evenings. 
     
    Some of your early first impression remarks often send me in shock, even wind me up. so I re-read with a view to your multicultural American Bias/tilt or brainwashed handicaps and my totally alien Australian/Italian now 25 years in SRV equally warped views and when I reargue with me Frank Li shins better for me. Ha Ha!

  8. @FrankLi1
     Where you mess my comprehension first read is a fault of my colloquial adjectives to your formal writing styles. VIZ 4,2 your book you say :US sacrifices Capitalism for democracy too much, I say not enough as in representing the people it claims too work for, and too much Capitalism for that 1% and next 5% influence of election funding & power mongering?
     
    Sure they need “better democracy” but Obama loking GOP out by pandering to the Capitalist and forgetting the left they claim to foster is a negative?

  9. @FrankLi1 Small is no measure USA is too big for it’s boots also. Anyhow you prove my point constitutional Monarchy still works better than Vote/fund bribed republic presidents are the messiest as their ideology gives way to their bank demands.
    EG: 
     Asian Field of Study
     <http://leminhkhai.wordpress.com/2013/11/21/flying-heads-third-gender-spirit-mediums-and-southeast-asia-as-a-southeast-asian-field-of-study/#comment-6671&gt;
    Posted Comment:
    ??? It wasn’t Wolters purpose to impose his ideas on people in Southeast Asia, but be felt that he could “stimulate self-awareness”???
    I think the way to “stimulate self-awareness” is to encourage people to not pay any attention to the politicized rubbish that academics in America sometimes produce, and to encourage people to just think critically about the world they live in. Rob Carter totally agrees, Yankee baby’s talk rubbish has no place here in ancient granny lands where culture & religion Buddha peace & Islam aggression are passively agreed for the better of their lower educated average masses with 1000 times more ancestral wisdom and need quiet progress. Ignore the overly automated USA need for your import of their junk to cover their domestic lack of employment disposable incomes to sap their own greedy over-producing economic woes.
    However, I would be willing to guess that as more countries in Southeast Asia teach about the region in an effort to promote ASEAN integration, they will teach about the “unique” Southeast Asian attribute of wanting to be “up-to-date” and that they will cite the “authoritative knowledge” of “the West” in doing so. Rob Carter yes expose USA excesses, greed, New World American Dominance Order of baby head too big for it’s hat.

  10. @Robert Cole stop invading GEI for your unpaid advertising virus. You merely assure we will never resort to your crooked business practices for our printing needs.

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