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Last week I posted a short piece titled “A silver price-suppression theory gets debunked“, the main purpose of which was to direct readers to a Keith Weiner article disproving that the silver price had been dominated by the “naked” short-selling of futures. My brief post rattled the cage of GATA’s Chris Powell, who made an attempt at a rebuttal early this week and in doing so proved that 1) he doesn’t understand what arbitrage is and how it affects prices, and 2) he doesn’t understand what fundamental and technical analysis are (he seems to believe that any analysis that uses charts to display data is the ‘technical’ variety).

My approach to the gold market involves fundamentals, sentiment and technicals in that order, except when sentiment is extreme in which case it takes priority. To give non-TSI subscribers an idea of what I do, here’s a brief excerpt from the TSI commentary that was published on 8th October:

“Last week, two of the seven components of our Gold True Fundamentals Model (GTFM) flipped from bullish to bearish. We are referring to the bond/dollar ratio, which broke below its moving demarcation level, and the real interest rate (the 10-year TIPS yield), which broke above its moving demarcation level. As a result, five of the seven components are now bearish and the GTFM is well into bearish territory. Here’s the updated chart:

The gold market responds more immediately, directly and accurately to changes in the fundamental backdrop than any other major financial market. This means that there is often an easy-to-identify fundamental reason for any sizable multi-week move in the gold price, but it also means that changes in the fundamental backdrop often say more about the past than the future. For example, the fact that the fundamental backdrop was gold-bearish at the end of last week doesn’t imply that there will be additional short-term weakness in the gold price. Instead, it explains the weakness that has already happened.

That being said, an understanding of the true fundamental drivers of the gold price can be used to assess the future prospects for the gold price. For example, five of the seven components of the GTFM are either directly or indirectly influenced by the bond market, with T-Bond strength generally acting to shift these components in the gold-bullish direction and T-Bond weakness generally acting to shift these components in the gold-bearish direction. Therefore, a strong expectation regarding the future direction of the T-Bond price can feed into an assessment of gold’s risk/reward.

For example, it was partly the expectation of T-Bond weakness, potentially exacerbated by the Fed taking its first genuine step along the monetary tightening path, that three weeks ago caused us to become sufficiently concerned about gold’s short-term risk/reward to suggest buying some put-option insurance. This was despite the GTFM being well into gold-bullish territory at the time.

It is now the expectation of a T-Bond rebound that causes us to view gold’s short-term risk/reward as being skewed towards reward, despite the GTFM being well into gold-bearish territory.“

This post has nothing to do with the US Second Amendment or my opinion on whether gun ownership should be legal. It’s about the presentation of gun-related death statistics in a way that supports a political position rather than provides relevant information.

The following chart from a recent post at ritholtz.com compares the number of gun-related deaths to the number of guns per 100 people across many countries. It naturally shows that the country with by far the highest rate of gun ownership (the US) has by far the highest rate of gun-related deaths.

The above chart would be presented for only one reason: to persuade people that the US needs stricter gun control. However, the chart does not make the case for stricter gun control in even a small way. This is because the charted comparison is meaningless.

Obviously, the greater the availability of guns the higher the proportion of gun-related deaths. A country with zero guns will have zero gun-related deaths and a country in which everyone owns a gun will have a significant number of gun-related deaths. This is not evidence that the first country is safer than the second country.

Also, not all gun-related deaths are equal. There is, for example, a huge difference between someone using a gun to take his own life and someone using a gun to take someone else’s life. Lumping all gun-related deaths together is therefore disingenuous. It is part of a deliberate effort to mislead.

The relevant comparison isn’t the gun ownership rate and the gun-related death rate, it’s the gun ownership rate and the total homicide rate or the violent crime rate. Evidence that a higher rate of gun ownership led to a higher rate of homicide and/or a higher rate of violent crime would not prove that stricter gun control was desirable, but at least it would be relevant to the debate.

The following charts from a 2014 article at crimeresearch.org contain relevant information. These charts compare homicide rates and gun ownership rates across countries. They show that the US has a much higher gun ownership rate than average and a slightly higher homicide rate than comparable countries. The slightly higher homicide rate could be due to the higher rate of gun ownership, but it could also be due to other factors.

As mentioned at the start, this post has nothing to do with my opinion on whether the US should have stricter gun control laws. It’s about how statistics are abused to influence opinions and promote agendas.

Embracing the belief that a bank or a cartel of banks has suppressed the prices of gold and silver for decades via the short-selling of futures contracts is like adopting a child. It’s a lifetime commitment through thick and thin, meaning that once this belief takes hold there is no amount of evidence or logic that can dislodge it.

Entering a debate with someone who is incapable of being swayed by evidence that invalidates their position is a waste of time and energy, so these days I devote no TSI commentary space and minimal blog space to debunking the manipulation-centric gold and silver articles that regularly appear. However, Keith Weiner has taken on the challenge in a recent post.

Keith’s article is brilliant. In essence, it proves that the silver market has NOT been dominated by the “naked” short-selling of futures. His arguments might not be as interesting as many of the manipulation stories, but they have the advantage of being based on facts and logic.

Don’t get me wrong; for as long as I can remember it has been apparent to me that gold, silver and all the other important financial markets are manipulated. However, it is also apparent to me that the price manipulation happens in both directions and never overrides the fundamentals for long. Of course, to see that this is the case you first have to know what the true fundamentals are.

The logic underlying the Laffer Curve is that the greater the tax on production, the lesser the amount of production. As a broad-brushed economics principle this is reasonable, but the Laffer Curve itself is bogus. Unfortunately, this bogus curve is being used to justify bad government policy.

Before I get into why it is bogus and how it is being used to justify bad policy, here is a representation of the Laffer Curve from an Investopedia article:

And here is how the Laffer Curve is described in the above-linked article:

“The Laffer Curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100%, shown as the far right on his curve, all people would choose not to work because everything they earned would go to the government. Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.”

One of the problems with the Laffer Curve is that the relationship between tax rates and tax revenue cannot be expressed as a simple curve. In fact, it can’t be expressed by any curve. This is because tax revenue is affected by a myriad of variables, not just the average tax rate. However, there are much bigger problems.

A second problem is that the Laffer Curve puts the focus on maximising government revenue when the focus of economists should be on maximising living standards. A related problem is that by putting the focus on tax rates the Laffer Curve takes the focus away from what really matters, which is the total amount spent by the government. All else remaining the same, higher government spending combined with a lower average tax rate is worse for the economy than lower government spending combined with a higher average tax rate. The reason is that if the government is running a deficit, then reducing the tax rate and simultaneously increasing government spending will quicken the pace at which private-sector savings are siphoned to the government. This happens because a government deficit can only be funded by private-sector savings.

Another problem is that there is often a big difference between the official tax rate and the effective tax rate. For example, the US corporate tax rate is presently 35%, but the average rate of corporate tax actually paid in the US is only 22%. For the purpose of this discussion let’s assume, however, that a change in the tax rate would initially lead to a proportional change in the amount of tax being paid. That is, let’s assume for the sake of argument that a 5% reduction in the US corporate tax rate would initially lead to an average reduction of 5% in the corporate tax burden. Having made this assumption we get to an additional problem.

The additional problem is that the Laffer Curve implies a potential outcome that is, as far as I can tell, impossible. If the Laffer Curve is right, then the government taking less money from the private sector potentially would result in both the government and the private sector ending up with more money. Unless I am missing something this could only be possible if the money supply were to increase, meaning that at its core the Laffer Curve relies on a form of monetary illusion.

The biggest problem of all, though, is that the Laffer Curve is downright dangerous to the extent that it seemingly removes the need to implement cuts in government spending to fund cuts in taxes. Thanks to the support provided by this bogus curve, unscrupulous and/or ignorant politicians can promote tax-cutting plans that have no offsetting spending cuts based on the idea that lower tax rates will eventually bring about a counter-balancing increase in tax revenue. The potential result is a tax-cutting plan that quickens the pace at which private-sector savings are siphoned to the government, that is, a tax-cutting plan that leads to slower economic progress.

Janet Yellen has quipped that the Fed’s balance-sheet reduction program, which will start at $10B/month in October-2017 and steadily ramp up to $50B/month over the ensuing 12 months, will be as boring as watching paint dry. However, like many financial-market pundits she is underestimating the effects of the Fed’s new monetary plan.

In the old days, hiking the Fed Funds rate (FFR) involved reducing the quantity of bank reserves and the money supply, but that is no longer the case. Hiking the FFR is now achieved by raising the interest rate that the Fed pays to banks on reserves held at the Fed, which means that hiking the FFR now leads to the Fed injecting reserves into the banking system. This was explained in previous blog posts, including “Tightening without tightening (or why the Fed pays interest on bank reserves)“, “New tools for manipulating interest rates“, and “Loosening is the new tightening“.

In other words, under the new way of operating that was implemented in the wake of the Global Financial Crisis, hiking the FFR does not tighten monetary conditions. In fact, given that hikes in the FFR now result in more money being pumped INTO the banking system, an argument could be made that a hike in the FFR is now more of a monetary loosening than a monetary tightening. It is therefore not surprising that the rate hikes implemented by the Fed over the past two years had no noticeable effect on anything.

I mentioned in a blog post a few weeks ago that there has been a significant tightening of US monetary conditions since late last year, but this has not been due to the actions of the Fed. Rather, the rate of US monetary inflation has dropped substantially over the past 10 months due to a decline in the pace of commercial-bank credit expansion. As an aside, the substantial drop in the US monetary inflation rate would have affected the stock market in a bearish way by now if not for the offsetting effect of rapid euro-zone monetary inflation.

The Fed’s first genuine step along the monetary tightening path will happen within the next few weeks when it begins to shrink its balance sheet*. When this happens it will mark a momentous change in the monetary backdrop, and given that it will happen after the US monetary inflation rate has already tumbled it is likely to have financial-market consequences that are far more exciting than watching paint dry.

*The fact that the balance-sheet reduction will take place via the non-reinvestment of proceeds received from maturing securities rather than the selling of securities is neither here nor there. An X$/month balance-sheet reduction is an X$/month balance-sheet reduction, regardless of how it occurs.

In a 2015 blog post titled “Unintended Consequences” I explained that policies implemented by the Clinton and Bush administrations to boost the rate of home ownership not only had unintended consequences, but the opposite of the intended consequence. This post is a brief update on the US home ownership situation.

As evidenced by the following chart, the government was initially successful in its endeavours. The home-ownership rate sky-rocketed during the second half of the 1990s and the first half of the 2000s as it became possible for almost anyone to borrow money to buy a house. As also evidenced by the following chart, the home-ownership rate subsequently collapsed. The collapse was an inevitable consequence of people throughout the economy first responding to the Fed’s and the government’s incentives to take on excessive debt and then finding themselves in drastically-weakened financial situations.

The home ownership rate ended up bottoming in Q2-2016 at a 50-year low.

No one in the government or at the Fed has ever admitted culpability for the mortgage-related debt binge that led to the spectacular rise and equally-spectacular fall in the US home-ownership rate. Apparently, it was a market failure.

[This blog post is an excerpt from a TSI commentary published about two weeks ago.]

The Australian Dollar (A$) and the Canadian Dollar (C$) are called “commodity currencies” for a reason. The reason is that regardless of what’s happening in their associated local economies, on a multi-year basis they will usually trend in the same direction as broad-based commodity indices.

Since 2001 there have been three major rallies in the A$, each lasting about 2.5 years. These 2.5-year rallies are indicated by vertical red lines and notes on the following chart. Our assumption, which is also indicated on the following chart, is that the fourth 2.5-year A$ rally began in early-2016. In other words, we are guessing that the A$ upward trend that began in early-2016 will continue until around mid-2018. As well as being based on the lengths of previous major upward trends, this guess is based on what we expect from commodity prices.

Speaking of commodity prices, in addition to the A$ the chart shows the GSCI Spot Commodity Index (GNX). Unsurprisingly, each of the 2.5-year A$ rallies indicated on the chart coincided with an upward-trending GNX. In terms of price direction, the main difference between the post-2001 performance of the A$ and the post-2001 performance of GNX is that GNX trended upward from the beginning of 2002 until its blow-off top in mid-2008 whereas the A$ experienced a flat 2-year correction during 2004-2005.

Mainly for interest’s sake (pun intended), the chart also shows the yield on the 10-year T-Note. The 10-year interest rate had a downward bias during two of the A$’s 2.5-year rallies and an upward bias during the third rally. We expect that it will have an upward bias over the course of the current (fourth) rally.

The next chart shows the relationship between the C$ and commodity prices as represented by GNX. If anything, with one notable 6-month exception the positive correlation between the C$ and GNX has been even stronger than the positive correlation between the A$ and GNX. The notable exception occurred during the first half of 2008, when a speculative blow-off move to the upside in the commodity markets was accompanied by a decline in the C$. This divergence was a warning that the commodity-price gains would prove to be temporary.

We are expecting the upward trends in the commodity indices and the commodity currencies to extend well into next year, although it’s likely that short-term corrections will begin soon.

In a blog post in February of last year I explained that an inversion of the US yield curve has never been a recession signal. Instead, the genuine recession signal has always been the reversal in the curve from ‘flattening’ (short-term interest rates rising relative to long-term interest rates) to ‘steepening’ (short-term interest rates falling relative to long-term interest rates) after an extreme is reached. It just so happens that under normal monetary conditions an extreme usually isn’t reached and the reversal therefore doesn’t occur until after the yield curve becomes inverted.

The fact is that it doesn’t matter how ‘flat’ or inverted the yield curve becomes, there’s a good chance that the monetary-inflation-fueled economic boom will be intact as long as short-term interest rates are rising relative to long-term interest rates. The reason, in a nutshell, is that the boom periods are dominated by borrowing short to lend or invest long, a process that puts upward pressure on short-term interest rates relative to long-term interest rates. It’s when short-term interest rates begin trending downward relative to long-term interest rates that we know the boom is in trouble.

The following chart shows that the spread between the 10-year T-Note yield and the 2-year T-Note yield is much narrower now than it was a few years ago. This means that there has been a substantial flattening of the US yield curve. Also, the chart shows no evidence of a trend reversal. This implies that the inflation-fueled boom is still intact.

The long-term economic oscillations between boom and bust are caused by changes in the money-supply growth rate. It can therefore make sense to monitor such changes, but doing so requires knowing how to calculate the money supply. Unfortunately, most of the popular monetary aggregates are not useful in this regard because they either include quantities that aren’t money or omit quantities that are money.

What “Austrian” economists refer to as TMS (True Money Supply) is the most accurate monetary aggregate. Whereas popular measures such as M2, M3 and MZM contain credit instruments, TMS only contains money. Specifically, TMS comprises currency (notes and coins), checkable deposits and savings deposits.

The following chart shows the year-over-year TMS growth rate (the monetary inflation rate) in the US. It has fallen sharply over the past 8 months — from around 11% to around 5% — and is now at its lowest level since 2008.

The chart displayed above suggests that the US economic boom* is on its last legs. It may well be, but the 2002-2006/7 boom continued for almost 2 years after the US monetary inflation rate fell to near its current level in early-2005.

The reason for the long delay during 2005-2007 between the decline in the US TMS growth rate to a level that ordinarily would have ended the boom in less than 12 months and the actual ending of the boom was the offsetting effect of rapid monetary inflation in the euro-zone. This prompted me to develop a monetary aggregate that I call “G2 TMS”, which combines the US and euro-zone money supplies. Here is a monthly chart showing the growth rate of G2 TMS.

The rate of change in the G2 TMS growth rate has been the most useful leading indicator of the global boom-bust cycle over the past two decades. Of particular significance, a decline in the G2 TMS growth rate from well above 6% to below 6% warns of a shift from boom to bust within 12 months.

At the end of July the G2 TMS growth rate was slightly above the boom-bust transition level.

*An economic boom is defined as a multi-year period during which the creation of a lot of money out of nothing causes an unsustainable increase in economic activity.

Everyone is familiar with the term “interest rate”, but most people don’t understand what the term means. Unless you understand what the term means, you won’t fully understand why the central bank’s ‘management’ of interest rates damages the economy.

To understand what the interest rate is, it helps to understand what it isn’t. It isn’t the price of money. The price of money is what money buys, which can be different in every transaction. For example, if an apple is priced at $1, a new car is priced at $30,000 and a dental checkup is priced at $100, then the price of a dollar can be said to be 1 apple or 1/30000th of a car or 1/100th of a dental checkup.

The interest rate is the price paid by a borrower for a temporary increase in his purchasing power, or, looking at it from a different angle, the price received by a lender in consideration for temporarily giving up some of his purchasing power. This price will naturally take into account the risk that the borrower will be unable to make full repayment (credit risk) and the risk that money will be worth less in the future than it is at the time the loan is made (inflation risk). However, even if there were no credit or inflation risk to consider the interest rate would still be positive. The reason is that a unit of money in the hand today will always be worth more than a promise to pay a unit of the same money in the future.

This means that as well as being determined by the risk of default and the risk of inflation, the interest rate in any transaction will be determined by the time preferences of the borrower and lender. Someone with a strong desire to consume in the present has a high time preference. It’s likely that if this person has insufficient money to satisfy his immediate desire to consume then he will be willing to pay a high rate of interest to temporarily increase his purchasing power. Alternatively, it’s likely that someone whose desire to consume in the present is low relative to the amount of cash he has on hand will be willing to lend money to the right borrower at a relatively low rate of interest.

In any given transaction the credit risk component of the overall interest rate will end up being part of the lender’s real return if the borrower doesn’t default, but if credit risk is priced correctly then over a large number of transactions the amount received to compensate for this risk will be offset by actual borrower default. For example, if the risk of borrower default is correctly priced at 5%/year, then over a large number of transactions enough borrowers will default to impose a cost on the lender of 5%/year. Therefore, the time component of the interest rate is the same as the expected real return to the lender.

The implication is that on an economy-wide basis the real interest rate should be determined by the average of people’s time preferences.

To further explain, when the quantity of real savings is high relative to the general desire to consume in the present, the average time preference is low and the real interest rate SHOULD be low. Entrepreneurs and other businessmen will respond to this interest-rate signal by embarking on long-term projects that assume a future increase in consumer spending (high savings in the present implies higher consumer spending in the future). Capital equipment will be purchased, office buildings and shopping malls will be built, etc. When the quantity of real savings is low and people throughout the economy are consuming with abandon, the average time preference is high and the real interest rate SHOULD be high. Entrepreneurs and other businessmen will respond to this interest-rate signal by holding-off on new long-term projects. Although they won’t look at it in these terms, in effect they are being told, by the way the market is pricing time, that the future level of consumer spending will be insufficient to support certain investments.

The word “should” is capitalised in the previous paragraph because in the real world there exists a gremlin with the power to distort the interest rate. The gremlin is constantly tinkering with the interest rate, the result being that this vital price signal is always misleading to some degree. In fact, thanks to the mischievous acts of this gremlin the interest-rate signal is occasionally the opposite of what it should be.

Of particular relevance, due to the gremlin’s preference for distorting the interest rate in a downward direction the real interest rate is sometimes low during periods when the quantity of savings is low and the majority of people are spending like crazy, that is, when the average time preference is high. The result is that entrepreneurs and other businessmen throughout the economy embark on long-term projects that have no hope of being profitable. Individuals will naturally make mistakes, but for a large proportion of the population to make the same investing error the interest-rate signal must be wrong.

No prize for guessing the identity of the gremlin.

[This post is a slightly-modified excerpt from a recent TSI commentary]

The US economic boom that followed the bust of 2007-2009 is still in progress. It has been longer than average, but at the same time it has been unusually weak. The weakness is even obvious in the government’s own heavily-manipulated and positively-skewed data. For example, the following chart shows that during the current boom* the year-over-year growth rate of real GDP peaked at only 3.3% and has averaged only about 2.0%. Why has the latest boom been so weak and what does this say about the severity of the coming bust?

Before attempting to answer the above question it’s important to explain what is meant by the terms “boom” and “bust”.

An economy doesn’t naturally oscillate between boom and bust. The oscillations are related to fractional reserve banking and these days are driven primarily by central banks. When I use the term “boom” in relation to an economy I am therefore not referring to a period of strong and sustainable economic progress, I am referring to a period during which monetary inflation and interest-rate suppression bring about an unsustainable surge in economic activity.

Booms are always followed by and effectively give birth to busts, with each bust wiping out a good portion (sometimes 100%) of the gain achieved during the preceding boom. Putting it another way, once a boom has been set in motion by the central bank a bust becomes an inevitable consequence. The only unknowns are the timing of the bust and how much of the boom-time gain will be erased.

Returning to the question asked in the opening paragraph, the main reason for the unusual weakness of the latest boom is the unprecedented aggressiveness of the central bank’s response to the 2007-2009 bust. In broad terms, this response came in two parts. First, there was the initial knee-jerk reaction during 2008-2009 that involved massive bailouts for banks and bondholders. In particular, by various means the Fed channeled many hundreds of billions of dollars into financial institutions to keep these institutions in business and ensure that their largest creditors remained whole. Because the Fed cannot create new wealth, this effectively involved a huge transfer of wealth from the rest of the economy to financial institutions and the associated bondholders. Second, the Fed continued to ramp up the money supply and keep its targeted interest rates near zero for several years after a recovery had begun, that is, the Fed’s ‘crisis-fighting’ persisted for many years after the crisis was over. Ironically, this got in the way of the recovery.

A related point is that from a monetary perspective the biggest difference between the current boom and earlier booms is that a lot of the monetary fuel for the current boom was directly provided by the Fed, whereas almost all of the monetary fuel for earlier booms was loaned into existence by the commercial banks. When commercial banks lend money into existence the first receivers of the new money are individual and corporate customers of the banks, but when the Fed creates money via its QE programs the first receivers of the new money are Primary Dealers (PDs). The PDs invest the money in bonds, which means that the second receivers of the new money will be bond investors. These investors then use the money to buy other securities (bonds or stocks). The upshot is that when the Fed creates money the money gets shuffled around between the accounts of financial-market operators for an extended period, only leaking slowly into the real economy.

This explains why the economy has fared unusually poorly during the current boom while the stock and bond markets have fared unusually well. In effect, due to the way the new money was injected it had a much greater impact on financial asset prices than the real economy.

This could actually be a blessing in disguise. If the boom were to end within the coming 12 months, which it will if monetary conditions continue to tighten, then the ensuing recession may be far more severe in the financial markets (where the monetary inflation had its greatest impact) than in the real economy. In other words, the bust may look more like 2000-2002, when a short and mild economic recession was accompanied by a 50% decline in the stock market, than 2007-2009, when a devastating economic recession was accompanied by a similar decline in the stock market.

*The booms in the GDP growth chart included herewith are roughly equal the periods between the shaded areas, except that the official recessions (the shaded areas on the chart) typically didn’t begin until 6-12 months after the preceding boom ended. For example, whereas the most recent official recession began in December-2007, the bust probably began in late-2006 — when (mal) investments in sub-prime lending started ‘blowing up’.

According to the article linked HERE, if the US or the Australian or the UK government repaid all of its debt, the economy would tank. The article contains such a large number of factual errors and such a copious amount of nonsense that completely debunking it would take far more time than I’m prepared to spend, so in this post I’ll only deal with a few of the flaws.

To begin, the article points out that US government surpluses have, in the past, often been followed by depressions or recessions, the implication being that the government surplus caused the subsequent economic downturn. The two specific examples that are mentioned are the Great Depression of the 1930s, which apparently followed surpluses during the 1920s, and the recession of 2001, which followed the so-called Clinton surplus of 1999.

This is nothing more than confusing correlation with causation. The same logical fallacy could be used to show that a rising stock market causes a depression or recession, given that the stock market almost always rises during the years prior to the start of an economic contraction.

In an effort to show that there is, indeed, a causal relationship between a government surplus and a severe economic downturn, the article includes the following quote from an ‘economist’:

“…reducing or retiring the debt isn’t what caused the economic downturns. It was the surpluses that caused it. Simply put, you cannot operate an economy with no money in it.”

This brings me to the concept that runs through the article and is the logical basis for the assertion that government surpluses are very bad. It is that the running of a government surplus removes money from the economy and, therefore, that paying off most of the government’s debt would eliminate most of the economy’s money. That the author of the article found economists who genuinely believe this to be the case is extraordinary. It is akin to finding a physicist who genuinely believes that the Earth is flat.

The fact is that neither a government surplus nor a government deficit alters the economy-wide supply of money; all it does is change the distribution of the existing money supply. Here’s why.

First, when the government runs a deficit it is a net taker (borrower) of money from bond investors. It then spends the money. Money is therefore cycled from bond investors through the government to the individual or corporate recipients of government payments (including government employees). If this money had not been ‘invested’ in government bonds then it would have been invested elsewhere and subsequently spent in a different way.

Second, when the government runs a surplus it is a net provider of money to bond investors, with money being cycled from taxpayers through the government to the accounts of these investors. Collectively, the bond investors who receive these payments immediately turn around and reinvest them in corporate bonds or equity. Private corporations then spend the money on employee wages, employee healthcare, supplies, maintenance, plant, training, dividends, etc.

Either way, there is no change to the economy-wide money supply.

To further explain, in general terms there are only two ways that money can be added to the economy. The first involves deposit creation by commercial banks. For example, when Fred borrows $1M from his bank to buy a house, the bank adds 1M newly-created dollars to Fred’s demand account. That is, the money supply is boosted by $1M. The second involves asset monetisation by the central bank. In the US case, prior to 2008 almost all money was created by commercial banks, but from September-2008 through to the end of “QE” in October-2014 the Fed was the dominant creator of new money. Since November of 2014 the commercial-banking system has been the sole net-creator of new money.

In general terms there are also only two ways that money can be removed from the economy. The first involves the elimination of a deposit at a commercial bank when a loan is repaid (note that a loan default does not reduce the money supply). For example, if Fred were to pay-off his $1M home mortgage in one fell swoop then $1M would immediately be removed from the money supply. The second involves the sale of assets by the central bank — the opposite of the asset monetisation process.

Notice that the government was not mentioned in the above two paragraphs. Regardless of whether the government is running a budget deficit or a budget surplus, the banking system determines whether the supply of money rises or falls. I’m not saying that’s the way it should be, but that’s the way it is.

The next part of the article is a tribute to the old canard that the government’s debt doesn’t matter “because we owe it to ourselves”. In reality, there is no “we” and “ourselves”. The government’s debt comprises bonds that are owned by a few specific entities. It is to those entities, that in the US case includes foreign governments, to whom the debt is owed, with taxpayers technically being ‘on the hook’ for the future repayment. I say “technically” because what happens in practice is that the debt is never repaid; it just grows and grows until eventually the entire system collapses.

Related to the “government debt doesn’t matter because we owe it to ourselves” nonsense is the notion that the government’s debt is the private sector’s asset and, therefore, that more government deficit-spending leads to greater private-sector wealth. Ah, if only wealth creation were that easy! In the real world, government debt is not an additional asset for the private sector, it is a replacement asset. This is because when the government issues new debt it necessarily draws money away from other investments. Putting it another way, investing money in government bonds involves foregoing other investment opportunities. To argue that this would be a plus for the economy is to argue that the government usually allocates savings more productively than the private sector.

There are a lot more logical fallacies and factual errors in the article than I’ve dealt with above, but I’m going to leave it there. I just wanted to point out that much of what is observed about the relationship between government indebtedness and private-sector indebtedness can be explained by central bank manipulation of money and interest rates. When the central bank fosters an artificial boom via monetary inflation and the suppression of interest rates it prompts the private sector to go further into debt, which, by the way, is not an unintended effect.* At the same time, the rising asset prices and the temporary increase in economic activity that stem from the same monetary policy cause more money to flow into the government’s coffers, which could temporarily enable the government to report a surplus and should at least result in a slower pace of government debt accumulation. That is, it isn’t the reduced pace of government debt accumulation that causes the pace of private sector debt accumulation to accelerate; the driving force is the central bank’s misguided attempt to stimulate the economy.

I’ll end by stating that a government surplus is not inherently better or worse than a government deficit. What really matters is the total amount of government spending as a percentage of the overall economy. The higher this percentage, the worse it will be for the economy.

*Ben Bernanke made it very clear during 2009-2014 that the Fed’s actions were designed to boost the private sector’s borrowing and general risk-taking.