The Money-Debt Paradox



Dear Martin,

if bonds are beginning to crash in 2015.75 , is there anything that prevents central banks from printing even more money and buying bonds as many as governments needs?  Can’t they basically print unlimited amounts of money, thus preventing the crash?

Best regards from Germany,

ANSWER: You are making the logical assumption here. Your problem is government reasoning. To them, they will go shopping with your credit card and hand you a bill for €10,000. You say, “What the hell?” They explain that they just saved you €15,000 because they saw something they wanted that was €25,000, so they only spent €10,000 and therefore saved you €15,000. This is government logic. When they claim they have reduced spending, it only a reduction in future expectations.

The central bank of Japan owns 70% of the national debt of Japan. So why borrow if you are borrowing from yourself? Go ahead, write yourself a check for $1 billion, and place it in your left pocket and the checkbook in your right. You can now claim that you are a billionaire, for you have $1 billion in assets (accounts receivable). As long as you do not try to cash the check, you are a billionaire. This is government logic.


This is the paradox of government. There is no one in charge with a rational thought. This is why it does not make sense to borrow anymore. This is a game of musical chairs. When the fat lady stops singing, that is when reality comes in. They can monetize all they want. However, they are simultaneously raising taxes and regulations to hunt money. The money they create is not going back into the system to stimulate anything, as they are simultaneously extracting as much as they can from everyone (deflation). This is why a correlation of money supply and inflation fails to work. It is only one side of the coin. If I hand you a €100 and then demand back a tax of €110, the increase in the money supply is offset by the contraction simultaneously. It is the NET residual amount of an increase in the money supply within a domestic economy that would be any measure of inflation.

When the bulk of the “money” bring created is debt paying interest, that will not stimulate the economy if it flows externally. The Fed increased the money supply by purchasing in 30-year bonds assuming from a domestic view that would create a shortage in 30-year paper domestically and hence stimulate the real estate market. That failed because China said thank you, sold their long-term and moved short-term leaving the Fed holding 30-year bonds they cannot now resell. This is why the long-term bonds should have peaked ahead of the short-term going into 2015.75. It is the shift in the yield-curve.

The increase in the money supply will only create inflation when the people start to flee government and buy private assets domestically. That will cause those assets to rise and such a bull market is typically driven by capital inflows. We are witnessing that in real estate, arts, and coins. The smart money has begun to move. This is reflected in the share market as well. When it hits Main street, the music stops. That is Phase II.