Monday, 8 March 2010
Monetary base part of the national debt? You’ve got to be joking.
The monetary base is normally counted as part of the national debt. It is supposedly a liability of the central bank: indeed the monetary base appears on the liability side of central bank’s balance sheets.
But wait a moment. Those who hold monetary base have absolutely no right to be repaid their “debt” by the central bank. For example cash ($20 bills or £10 notes) are monetary base. But try going along to your friendly central bank with some of these notes or bills and demand that their “debt” to you is repaid. They’ll tell you to go away.
Not only that, but as a holder of national debt you don’t get to see any of the interest paid of this tranche of the national so called debt. For technical reasons that have to do with the complex way in which governments print money, interest IS PAID on this tranche of the national debt. But it’s paid by the Treasury to the central bank which in turn remits its profits back to the Treasury at the end of the year. YOU don’t get to see any of it.
And third, government has the right to confiscate any monetary base that you hold, and confiscate it at will. Governments do this via an amazing wheeze called “tax”.
To summarise, it’s a very strange sort of “debt” where,1, the “debtor” has the right to extinguish the debt at will, 2, the creditor gets no interest, and 3, there is no way the creditor can be repaid by the debtor.
To count the monetary base as part of the national debt is a bit saying chalk is a type of cheese.
Or as Willem Buiter put it, “These monetary base ‘liabilities’ of the central bank are not in any meaningful sense liabilities, because they are irredeemable."
But if you’re still convinced that monetary base is a debt owed by the central bank to hose holding this debt, I’m prepared to let you in on the deal of a lifetime.
You send me £X. By the way I have a perfect credit record and have ample net assets. I will then immediately undertake to be in “debt” to you to the tune of £2X: that’s an instant 100% profit for you. But there are just a couple of conditions. First you have no right to repayment. And second, I have the right to extinguish the debt at will (that's the whole £2X debt).
How can you lose?