Will Japan destroy the world economy? Top Economist Reacts

Will Japan destroy the world economy? Top Economist Reacts

so what if I told you that Japan a country with just 2% of the world’s population could disrupt the entire world that sounds pretty serious doesn’t it let’s look at his example as to why Japan is bringing down the global economy because their trust is fading japan’s debt to GDP again is 250% and for years the only reason that didn’t cause a crisis was because the Bank of Japan could print money to buy up those bonds that works until it doesn’t and now that the Bank of Japan is backing off the market is testing what their bonds are really worth organically without that artificial government demand and what the whole world just saw are failed bond auctions failed municipal bond auctions what he’s doing here is conflating bond auctions by the government with bond sales by a municipality and as usual this ends making up a huge accounting mistake and creates a panic where none is justified so to see this you’ve got to be able to look at how money is actually created how the banking system actually operates and the only program that enables you to do that is my software ravel so what I’ve done here very very briefly and very simply is show what happens from the point of view of a municipality running a deficit and then comparing it to the government so municipalities like households and like firms have their bank accounts at private banks and if they spend more than they get back in revenue as a municipality they reduce the amount of money in their deposit account and that increases the amount of money in the non-municipal private bank accounts your personal accounts business accounts and so on now if it runs that deficit then it has to get some money back so what it does is it sells bonds and that then transfers money from the deposit accounts of non-municipalities into the accounts of municipalities and of course since you’ve issued bonds you’re required to pay interest so that goes back again now what you’ve got in each of those three operations is shuffling existing money in the first case money in the municipality accounts goes into non-municipal accounts in the second it has you have a transfer of money back to buy the bonds and then you’ve got to pay interest on the bonds so money down here up there money down here up there money down here up there there’s no change in the total amount of money now it’s quite possible when you’re looking at the municipality and seeing that it’s perennially running a deficit spending more than it gets back in revenue then it’s going to run out of money it can’t pay you you won’t be willing to take the bonds on no sales occur and then you’re in a crisis for the municipality now what about when a government issues bonds well in that case when a government spends more than it takes back in taxation we call that a deficit now if it is spending more on private individuals than it’s taxing private individuals then it’s increasing the amount of money in those accounts exactly the same way up here that the municipality spending more than it gets back in revenue increases the amount of in those accounts but this is not balanced by something else happening on the liability side of the banking sector’s ledger in fact the increase in the deficit here is matched by an increase in reserves so when the government spends more than it gets back in taxation what it does is it tells the private banks to put money in particular accounts millions of accounts for any standard large economy of course and each of those is earmarked and they come in through the reserves so the reserves go up earmarked to be given to a particular person whether that’s buying goods and services off a corporation or paying a welfare check whatever else and so on so when the deficit increases the amount of money in people’s deposit accounts the offsetting entry is an increase in the reserves that banks have into bank settlements but it’s an asset of the banking sector that goes up matching an increase in a liability now that makes all the difference in the world because these operations simply shuffle around existing money this one creates additional money and creates additional reserves at the same time that’s how it’s balanced so this operation actually creates money now what about the reserves that the banks get well the banks are quite restricted in what they can do with reserves they can lend reserves to each other if they have to need withdrawal requests by customers and so on but they can’t trade them they can’t sell the reserves nor do they make any interest on them until after the global financial crisis now that that was something the mainstream did not see coming i did but I’ll just go back to the normal situation before that crisis came along the reserves earned no interest now what that means is the deficit spending by the government has created money on one side of the banking systems ledger it’s created an asset on the other side but that asset is pretty useless asset the banks they can’t trade it they don’t make any interest income out of it then the government says we’re going to sell bonds and those bonds are obviously tradable and they also earn interest would you like to swap your non-interest earning non-tradable reserves for tradable interest earning bonds the standard answer for banks is yes please okay it’s converting a lame asset into a worthwhile one so that’s why you don’t have the dilemma of lenders not to lend to the government because all they’re doing is swapping a lousy asset for what was normally a good one now there’s been some damage done under that i’ll get into that in a moment so once the banks have these bonds they then trade them with each other they also sell them to the non-bank public if there’s a shortage of reserves in the system the central bank does the standard operations not quantitative easing which is a operation they undertook in a crisis but the ordinary what they call open market operations that the central bank does with the private banks and the non-bank public all the time to try to maintain its target interest rate and then interest is paid to banks on the bonds that they own and interest is paid to non-banks on the bonds that they own now those operations also create money this one reduces the amount of money because when the banks sell bonds to the non-bank public they reduce the deposit accounts of those agents at the banking sector and they also reduce their own assets so liabilities go down assets go down that destroys money but these operations open market operation with non-banks and interest payments to banks and interest payments to non-banks on the bonds they own they all create money so when you take a look at the overall economics and pardon an equation turning up here but I I want to show the overall logic there’s an increase in the money supply equal to the deficit plus open market operations with non-banks plus interest paid to non-banks minus the sale of bonds by banks to non-banks so the government’s operations actually create money that is why you’re not going to run out of money to borrow those bonds in the first place so there’s no worry about the capacity of the national government to sell bonds it’s completely different to a municipal system and this confusion is done all the time by commentators who don’t understand the monetary system and because conventional economists teach nonsense about how banks operate pretending that banks don’t create money this is a very widely held but extremely wrong view so Japan is not going to crash the global economy just because a municipal bond auction failed it’s the government auctions that continue operating and they will continue working because as I’ve said this trade this converts an asset which is not worth a lot to the banking sector to one that is worth a lot now the danger comes and there is a danger here this was a winning trade for banks in two ways for the last 40 years as we’ve been on a trajectory from going from high interest rates at the time of the bach recession down to very low interest rate before and during the and after the global financial crisis now the falling interest rates on bonds means the bonds rise in value so the banks win twice in a sense as the interest rate falls the bonds they’ve got are worth more and they’re getting this free money effectively from the government to enable them to buy bonds in the first place but when that goes into reverse and it has because central banks think they’re fighting inflation by putting up the interest rate as they put up the interest rate that reduces the value of outstanding long-term bonds in particular and that damages the equity side of the banking sector so the value of these bonds is affected by the interest rate now that we’ve got rising interest rates rather than falling interest rates those rising interest rates reduce the value of long-term bonds and potentially can drive banks into bankruptcy that’s what happened to Silicon Valley Bank so there is a danger with the current behavior of of central banks stupidly putting up interest rates to try to fight inflation because that’s what their neocclassical models tell them works it doesn’t work in the real world it just adds a larger burden on the non-bank private sector in repaying its debt so they’re crazy policies and that can actually lead to trouble but the fundamental operation of the government selling bonds to match its deficit works because the deficit itself not just only creates money which it does on the liability side of the banking sector it also creates assets on the asset side of the banking sector’s ledger and that’s what enables them to buy the bonds in the first place so no just because a municipal bond auction in Japan failed does not mean the Japanese economy is going to crash and bring down the global economy with it if you don’t understand the accounting you end up making stupid comments like that and you think you’re wise so if you really want to understand money the only way to do it is to get a copy of my Rattle software and be able to lay out the double entry bookkeeping as I’ve done here and see what the consequences are so I’m sorry if you listen to people like this who tell you that this is going to cause a crisis you’re being misled you’re like many other truth seekers and want to learn 50 years of real economics from me in only 7 weeks you’ll love my new 7we rebel economist challenge as well to apply go to steveken.com if you qualify you can attend my lectures ask me questions personally every week and make friends with a great group of like-minded people so again like many others go to stevekang.com to apply as well for the 7-week Rebel Economist Challenge good luck

👉 Learn 50+ Years of Economics in Only 17 Mins Here: https://www.youtube.com/watch?v=oO7iCv_NsPE

—

Who is Dr. Steve Keen?

Dr. Steve Keen is an influential economist who has dedicated over 50 years to challenging mainstream economic theories. Since his days as a university student, he has been engaged in a David vs. Goliath battle against conventional economic models.

Holding a Ph.D. in economics, Dr. Keen is well-known for his critical analysis and advocacy for more realistic economic approaches. His work emphasizes the importance of accounting for financial instability and incorporates elements of complex systems theory.

Engineers, finance professionals, and IT experts will appreciate his methodical breakdown of economic phenomena and his development of the Minsky software, which models financial crises.

Dr. Keen’s contributions are crucial for anyone seeking a deeper understanding of how economic systems can impact technological and financial environments. His teachings offer valuable insights into the economic forces shaping our world.

By following his analysis, professionals can gain a better grasp of economic dynamics that influence their fields.

—

👉 Again, If you enjoyed this video, you might also like my most popular video, “Don’t Study Economics, Study THIS Instead.” https://www.youtube.com/watch?v=oO7iCv_NsPE