For the first time probably in history, the debt stricken Greek government is being paid by ‘the market’ to borrow from them.
Two year bond yields have fallen into negative territory at -0.02. For six months, yields are at -0.11. While for three years, they stand at -0.05.
In an astonishing twist in just eight years, the Greek government has gone from paying 35% in interest for long term loans of 10 years, to being paid 0.05% to take out loans for a period of three years.
This is due to Christine Lagarde, the ECB chief, implementing the Modern Monetary Theory which in practice goes like this.
Gov goes to commercial banks to borrow. Those commercial banks package this borrowing into bonds, which they sell onto the market. Except, it is only a small portion of ‘the market’ that buys these bonds. The vast majority of them are bought by Lagarde by straight out printing this money.
So we kind of have double printing. First the commercial banks print it by lending it to the government as every money lent is printed money from nothing according to the Bank of England.
Then, the central bank prints it to buy these ‘securities,’ these bonds. Because there is so much money in offer to the government due to the central bank mass buying such debts, there is simply far more supply to lend than to borrow when it comes even to governments like Greece which are very deep into debt at 175% of their GDP.
In effect, the monetary system as we knew it has collapsed. Now there’s a new system of unfettered money printing and unchecked government borrowing which has led to an erasure of interest rates for the government and giant corporations.
That’s a good thing on the surface because why should the government pay interest on money printed from nothing, but there’s a very big catch.
What is currently going on, believe it or not, is actually monetary contraction, not expansion.
Money is being taken out of circulation, not entering circulation, that is why we have deflation, not inflation.
Money is interest payments. The interest you pay on your loan or credit card becomes central bank money, or reserve money, which is what commercial banks use to transact with each other, and which is what puts a lid on how much they can ‘print.’
The capital on a loan is temporary money, and for banks, risky money. Once you pay it back, the capital disappears, it’s erased from the spreadsheet, is no longer money. If you don’t pay it back, the bank has to from its reserve money.
As most loans are repaid, banks make money from this interest becoming reserves. However, if no interest is being charged, the capital is being erased, and no new money is being created through interest, meaning there is an ongoing monetary contraction.
That is why it is quite difficult to borrow unless you earn $100,000 a year. That is why new start-ups and company formations are down, because money is not flowing into the market, it is actually being taken out. That is why house prices are skyrocketing, because new money is not being advanced to build houses, and it is not being advanced because banks take too much risk for almost zero interest rewards to lend to even slightly risky activities. While for ‘safe’ activities, there is boundless money, but at almost zero interest rates.
In effect, the European Central Bank and the Federal Reserve is unleashing deflation even while we all think they are print baby print, which they are but with no interest, making it temporary print.
This also potentially explains the very low growth in Europe in particular which is mainly due to the simple fact that banks are just not funding economic activity while lending to safe borrowers like govs, giant corps, or the rich, all at almost no interest.
This is probably their response to the criticism that gov shouldn’t pay interest in what is printed money. The solution however is for Congress to mint actual money itself as the Constitution demands, instead of borrowing it from banks without interest which translates to a monetary contraction for the masses due to how this bank based lending system works.
But Congress minting is not something on offer anytime soon. So until then, there’s bitcoin where debt monetization is not as easy as entering numbers on excel.