Barnaby Is Right

Submitted by reader JMD.

I will express a view here that is, as far as I can tell, being laid out by few others. I can’t claim the idea as my own, rather I have put this together based on the thoughts of Doug Noland, my favourite economic analyst by a country mile, who publishes the Credit Bubble Bulletin. I have taken the liberty of lifting quotes directly from his articles, they are in italics throughout my article, though I may have changed his wording just a little to fit in with the flow.

Readers of the Gold Standard Institute know that money is what extinguishes all debt, nevertheless, credit1 can be considered a monetary equivalent or ‘money good’, take for example, Real Bills that mature into gold. Inextinguishable debt, as in irredeemable dollars and dollar denominated debt, are not money since they are, well… inextinguishable debt. Despite this contemporary irredeemability, credit is still considered to be in a dynamic state of ‘moneyness’, driven by the marketplace’s perception of safety and liquidity, and any meaningful definition of contemporary ‘money’ must include government debt instruments.

The situation prevailing today is that key developed economies are locked into a perilous cycle of massive non-productive government debt expansion. Rather than the global money markets being composed of Real Bills, generated through the drawing of short term bills against consumer goods actually required by consumers, we have money markets where for nine quarters now, government finance has completely dominated system credit creation. These ‘marketable’ debt securities now absolutely dominate the world.

Just how massive has this increase in government debt issuance been? I draw your attention to the charts below.

As you can see, government debt issuance has reached levels never heretofore imagined. UST issuance reached almost $1.5 trillion in 2009. While the dollar amount of Australian government debt issuance is small in comparison to the US, the pattern of expansion is the same. I have included Australian government debt issuance back to 1985 to give some perspective of historical issuance. I don’t have figures pre 1996 for UST’s, nor 2010. Nevertheless, you get the picture.

Why the fuss? Because it is the ‘moneyness’ nature of government obligations that they enjoy special treatment in the marketplace. Readers of the Gold Standard Institute also know that when it comes to the ‘moneyness’ of credit it’s not just quantity but quality that counts. I think it safe to presume that government debt has not improved in quality since 2008, yet issuance has exploded with little perception that government debt is being mispriced, over-issued, and misdirected. There is an ever expanding gulf between market perceptions of ‘moneyness’ and the true underlying state of government credit. In simpler terms, government credit is a bubble, a precarious Credit Bubble at the heart of our monetary system. Just as the US financial system doubled total mortgage debt in just over six years during the mortgage/Wall Street finance bubble with little perception of the underlying quality of U.S. mortgage credit, the financial system is now on track to double federal debt in about four years. The situation is no different in Australia and I doubt it would be different in most other ‘developed’ countries.

There is only one true arbiter of the value of government debt, its only extinguisher… gold. Irredeemable dollars, being the obligation of the central bank – not money, cannot extinguish government debt. Is gold reflecting the expanding gulf between perceptions of moneyness and the true quality of government credit? Should holders be loaning their money – gold – for irredeemable government obligations, as if ‘buying’ mortgage credit at the height of the Wall Street bubble? Should the dollar price of gold be falling?

I think not. And we all know what happens to bubbles.

Note: 1. Remember, one person’s debt is another’s credit. I use the terms interchangeably.

Source - Australian Office of Financial Management (AOFM)

Source - Prudent Bear (prudentbear.com)

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Stay tuned for JMD’s follow up post, on the Reserve Bank of Australia’s sale of 2/3rd’s of Australia’s gold during the Asian Financial Crisis of the late nineties.

Tags: AOFM, credit expansion, doug noland, gold standard institute, government bonds, housing bubble, prudent bear, real bills