Economist Sheard explains how some government debt doesn’t have to be repaid

Tuesday, September 19, 2023

Paul Sheard

PanOrient News

TOKYO: “Government debt doesn’t have to be repaid per se,” economist Paul Sheard said in a press conference in Tokyo on Tuesday September 19.

The former Vice Chairman of S&P Global was talking about Japan’s debt to itself. While the Japanese government has an enormous debt of around $10 trillion, around half of that is to itself. Sheard used the example of a husband and wife in the same household. One or the other could borrow and pay the bills, but it’s all the same source.

“A big stock of government debt is essentially likely to be associated with big government and big government means perhaps less of a role for the market economy, so there might be very good economic, political, ideological reasons for people to oppose a lot of government debt because that's a sign of a big government sector and maybe you don't like that,” Sheard said, explaining that the Japanese government was in a position where it could actually buy all its debt, which are mainly in the form of government bonds.

Sheard said more important was how much money actually makes it into the economy: “Economists try to define or measure the various kinds of money sitting in bank accounts, on term deposit or in mutual funds, etc,, but there are lots of debates about which part of the money supply should be in what category.”

Sheard said that banks actually create money by making loans and that is the most important way that money makes its way into the economy. While loans have to be repaid, the rate at which loans are created usually is bigger than the rate at which old loans are being retired.

“Bank government debt in and of itself in principle does not have to be repaid and actually ‘debt’ is a misnomer,” Sheard said. “Debt means you have to repay. It's better to think about government debt or Japanese JGBs or treasuries in the US as being a form of money created by the government.”

Sheard said you can have too much money in an economy: “If that purchasing power is being released into the economy, it can overwhelm the ability of the economy to produce goods and services. Guess what you will get: inflation and we just saw that worldwide. After COVID a lot of money was created through governments running budget deficits and damage was done to the real economy, particularly to the labor markets. There was not as much labor supply available as compared to pre-COVID and suddenly this purchasing power, this money overwhelmed the capacity of the economy to produce the necessary goods and services. And then we got high inflation in the US.”

Sheard also said that Japan had been the forerunner in utilizing quantitative easing: “Typically, when the government runs a budget deficit, it's creating more money than it's taking out, and it changes that money into government bonds. QE just reverses it. It takes it back to a more primitive state. Quantitative easing doesn't create any more purchasing power. You take government bonds out of the system and you put yen deposits or reserves back in.”

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