Three nations with sovereign currencies walk into a bar during a depression
The USA is very concerned about how their government deficit will affect interest rates and spark inflation—so concerned that their liberal president has even paid lip service to demonstrably false right-wing ideas on the topic. Fortunately it has just been lip service and the republican lunatics only pretend to care about the deficit but are opposed to raising any revenue, so the deficit is way up for as far as the eye can see and the US Fed chief has maintained incredibly loose money policies throughout the current down-turn.
The UK is super-duper concerned about how their government deficit is sure to lead to higher interest rates and has cut government spending during depression, contrary to all legitimate economics and all common sense. But this is, they say, necessary to keeping interest rates down.
Japan has the most mind-boggling national debt on the planet. Her depression started 10-15 years before everyone else's and she has been doubling and tripling her money supply and keeping central bank rates at zero for decades in hopes of creating some inflation... but cannot. She was promised by all the "serious" economists that her huge deficits were sure to create Wiemar-style inflation but they can barely even move her much off the deflationary point-of-no-return.
Different politics, different geography, different demographics, different prospects, different currencies, different philosophies about how to keep interest rates down... but the ten-year treasury bonds of all three countries are currently yielding a little over 1.8%.
What a mystery!!! What could possibly account for this?
Conventional economics, that's all. Just stop listening to RW liars, fantasists and agenda-mongers and it all makes sense.
1) A bond from a large, established economic power with its own currency is very, very secure. You are guaranteed to be repaid X amount of dollars or pounds or yen. If worst comes to worst such a nation could just print up a box of dollars or yen or pound notes to pay you with. This would devalue the currency, but not by much. What it takes to service the national debt is a small fraction of the entire money supply so even though devalued, you would be getting 90%, 95% of the promised value. And that's the worst case. Compare that to Greece, which cannot print up some devalued Euros to cover her debts. With Greek bonds you might lose 100%.
2) A national deficit is only relevant to a bond-holder insofar as it affects 1) ability to service the debt, and 2) the value of the currency the debt is paid in. The US and UK and Japan can all service their debt just fine without devaluing their currency so they are all pretty much equally safe bets over the next ten years.
3) Buying a bond is not an expressive act about making a personal statement in support of some wing-nut bullshit. It is an investment. Bonds are priced competitively in the world markets so a bond is worth what it is worth to serious money people, regardless of whether Glen Beck fantasizes that the US cannot pay back its debts. And since the real risk of the three nation's bonds are about the same they yield the same. Safe 10-year paper is worth a yield of about 1.85%. Period. Austerity in the UK is not lowering interest rates... nobody gives a flying fuck about the deficit unless it is so large that it materially affects the odds of your being repaid at good value. Secure 10-year paper is worth 1.85%, austerity or no austerity.
4) The idea that bond markets will punish nations with large deficits who have their own currency makes no sense in a global depression, unless those deficits are so large that they can create inflation. And it is almost impossible to create inflation under these conditions. Ask Japan, who has been trying for ages.
Consider this hypothetical: Say the total amount borrowed in the USA is 500 dollar units. Of this, 75 units is federal borrowing and 425 units of private borrowing. Now the economy falls apart. Private borrowing drops to 325 units. So the government doubles the deficit to 150 units. All "serious" (i.e. right-wing) economists say that doubling the deficit will increase interest rates. But the total demand for borrowing in the US just went from 500 units to 475 units. Demand for borrowing is down. Why would interest rates go up when demand for credit goes down? Why would inflation go up when demand for credit goes down?
And this is the real point... all this right-wing bullshit about government deficits treats government borrowing as a special case of evil borrowing that has special terrible effects because, it is assumed, government spending cannot be a productive part of the economy.
Which is incorrect.
(And, as always... these comments refer to the world of today. There are no universal economic right answers. It aways depends on the real environment. Huge deficits in a depression are a good thing. Huge deficits in an economic boom are a bad thing.)
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