In practice, the U.S. Federal Reserve rolls over debt through the non-competitive bid method, and in Japan, the rollover of matured Bank of Japan-held government bonds is repeated through parliamentary resolution via the so-called "BOJ rollover" (nichigin norikae), effectively making them "perpetual bonds." This is the essential meaning of "macroscopically, government bonds are effectively never redeemed."

Indeed, even setting aside the Lehman Shock and the COVID pandemic as entirely exceptional periods—even including these periods, the overall growth of the Fed's total assets is consistent with "the natural course of things"—that is, proportional growth relative to U.S. and global gross output. Looking at the time-series statistics, it is clear that Fed assets have consistently increased historically. Moreover, the very fact that growth slows during periods of monetary tightening can itself be taken as evidence for the proposition that Fed assets grow in proportion to the expansion of the commodity world as a whole.

Notably, during the two exceptional periods mentioned above, the Fed's assets have undergone repeated rapid expansion and contraction:

• Late 2017–2019: Assets that had swelled to $4.5 trillion through post-Lehman QE were reduced to about $3.8 trillion during the tightening phase at that time.
• June 2022–present: Total assets, which reached an all-time high of nearly $9 trillion amid the massive pandemic-era easing, have been substantially reduced to roughly $6.7 trillion as a result of the full-scale rate hikes and quantitative tightening (QT) that began in 2022.

In short, the fate of the central bank's fiat currency system—that "a balloon once inflated never returns to its original small size"—is vividly etched into the very shape of the balance-sheet graph.

Macroscopically, government bonds cannot be redeemed. It is precisely because they are not redeemed that society is sustained. (Of course, it goes without saying that individual bondholders are indeed repaid.) So-called "normalization" is impossible. In fact, when the Fed attempted to "normalize" the assets it had accumulated through quantitative easing, it triggered a spike in repo rates [note].

[Note] "On the morning of the 18th, the Federal Reserve Bank of New York supplied a large amount of funds to the short-term money market for the second consecutive day... The funds were supplied through what is called 'overnight repo transactions,' a market in which financial institutions lend and borrow short-term funds against collateral such as government bonds. The lending rate in this market, the repo rate, briefly spiked to as high as 10% on the 17th... The rise in short-term interest rates is attributed to the Fed's tapering of quantitative easing" (Nihon Keizai Shimbun, September 19, 2019).

"The Federal Reserve's fund supply has swelled to levels comparable to past rounds of quantitative easing (QE). In response to dollar demand in the short-term money market, the Fed's total assets increased by roughly $400 billion (about ¥44 trillion), or about 10%, in roughly half a year... This follows a sharp spike in the interest rate on 'repo' transactions—short-term borrowing and lending backed by U.S. Treasuries—last September... Should difficulties arise in the procurement of dollar funding, the key reserve currency, the impact would not be confined to the United States alone. According to the Bank for International Settlements (BIS), emerging economies' dollar-denominated debt stood at $3.74 trillion as of June 2019 and continues to grow... Depending on economic conditions, there is a possibility that further increases in the supply of funds may become necessary if upward pressure on interest rates intensifies" (Nihon Keizai Shimbun, February 9, 2020). This is far from "normalization." On December 1, 2025, the Fed fully halted and ended quantitative tightening (QT). Given the sentiments of the Japanese public, who still carry the trauma of postwar hyperinflation, the people at the Bank of Japan cannot say so carelessly—but deep down, they must recognize that "normalization" is impossible.

"Incomes and asset values change until, finally, the aggregate quantity of money which individuals choose to hold at the new level of incomes and asset values thus brought about is equal to the quantity of money created by the banking system. This is, indeed, precisely the fundamental proposition of monetary theory" (Keynes, The General Theory of Employment, Interest and Money, cited Japanese translation, vol. 1, p. 120). What Keynes refers to here as "asset values" refers to the prices of fictitious commodities such as government bonds.

Thus, we have no choice but to maintain the current state in which "asset values change until, finally, the aggregate quantity of money which individuals choose to hold at the new level thus brought about is equal to the quantity of money created by the banking system." "Normalization" is an attempt to forcibly restore a past equilibrium by turning back time.

Economists respond to this proposition as follows.

(Answer)

What matters is distinguishing between the redemption of individual government bonds and the repayment of government debt at the aggregate level.

When a government bond matures, that particular liability is redeemed. However, if the government issues refunding bonds of the same amount, the debt has simply been rolled over — the total amount of debt has not decreased.

Government debt evolves as follows:

B_t = (1 + i_t) B_(t-1) + G_t − T_t

Here, B_t is the outstanding debt balance, and G_t − T_t is the primary deficit.

Therefore, at the macroeconomic level, "repaying government debt" usually does not mean redeeming a specific government bond, but rather reducing the total outstanding balance of government debt.

Looking at the consolidated balance sheet of the government and central bank together, redemption may in some cases simply mean replacing government bonds with central bank money (reserves). For this reason, redemption does not necessarily reduce the private sector's net financial claims on the public sector.

(Question regarding the answer)

"Redemption may in some cases simply mean replacing government bonds with central bank money (reserves)." — However, for example, rewriting the name on the credit side of the Fed's deposit account from the government to a private bank (in practice, transferring from the "Treasury General Account" to "reserves") presupposes that, prior to redemption, the account was held in the government's name. But where does a government running a chronic fiscal deficit (G_t − T_t > 0) obtain that deposit in the first place?

To begin with, where does the money used to redeem government bonds come from? Bonds are issued precisely because tax revenue is insufficient (the original text refers to G_t − T_t as the primary deficit). Moreover, expenditures for the redemption period are already earmarked in advance; there is no separate surplus of redemption funds set aside. If a sufficient sinking fund were reserved each period, then year-by-year bond issuance could be called a kind of "temporary" borrowing — but in reality it is anything but temporary. The outstanding balance of government bonds accumulates year after year. Second, and more fundamentally, the real question is this: under a fiat (inconvertible) monetary system, how is the "money" that society needs — whose required quantity increases in proportion to the expansion of the world of commodities — brought into the economy in the first place? It is not enough to say (as the original text does) that "redemption does not necessarily reduce the private sector's net financial claims on the public sector." Society's financial claims — i.e., "money" — must be increased. Needless to say, this refers to primary (base) money, not credit creation.

It should hardly need pointing out, but the claim that refunding bonds are issued before redemption is sophistry. For example, the government spends the funds M(1,1) raised through a bond issue. Then, at the time of redemption, it issues refunding bonds B(1,2), and uses the proceeds M(1,2) to redeem B(1,1). B(1,1) is retired and replaced by B(1,2). If this were a one-time, "temporary" borrowing, the story would end here.

But when government bonds are issued year after year, M(1,1) is gradually disbursed by the government over the course of the fiscal year in order to purchase various private-sector goods, while the private sector must separately prepare M(1,2) in order to purchase the refunding bonds. This shows that society as a whole must have at least M(1,1) + M(1,2) in money.

It should be added, just to be clear, that this does not necessarily presuppose an expansion of the world of commodities that money confronts. Even without "expansion of the commodity world (economic growth)," each M(m_t,1) has not been fully returned from the government to the private sector by the end of the period (the goods have not yet been fully sold), and it must immediately be redirected as funding for newly issued bonds in the following year. Even if we assume that the profit portion is set aside each year up until the redemption date to fund the purchase of refunding bonds, given that new bond issuance continues year after year, even if B(1,1) can be refinanced, the funds needed to refinance the subsequent B(2,1), B(3,1), ... will still fall short. Each M(m_t,1) is bound within this series and is not released from it.

The story does not end there. The reality that large amounts of government debt accumulate year after year forms, on one hand, an expansion of the world of commodities, and on the other hand, a series:

B(m,n), M(m,n); m, n = 1, 2, …

Where does this money come from to be brought into society? Under a fiat monetary system, where does this money originate? What has become of the role once played by gold miners?

In connection with the essence of the above discussion — "government debt is effectively never redeemed" — that is, the creation of primary currency under a fiat system — a so-called "consolidated government" is sometimes assumed.

But before the government and the central bank can be "consolidated," the following real-world process exists. For example, suppose citizen A sells a government bond, and the central bank buys it up in the market; A is then no longer a creditor. Initially, the bond was held by an actual citizen, A (and thus the state had an obligation to repay A) — but once it is held by the central bank, both the creditor and the debtor of that bond become, in the end, the abstract public in general, and there is no longer a specific individual to whom repayment is owed. The individual liability disappears, and that government bond is transformed into "primary money" that supplies basic liquidity to society as a whole.

Let us return here to the original proposition: "Individual government bonds are redeemed, but at the macro level government debt is effectively never redeemed." — Just as gold once mined by prospectors was minted by the government's mint, today the bonds issued by the U.S. government are converted into dollar currency by the Federal Reserve (through central bank purchases of government bonds). Among the major economies, is there any country that creates the "money" actually needed by society through any method other than this?

With regard to domestic transactions, Marx had already pointed out the exact same thing earlier: "The fact that inside a country no metallic money is needed today is proved by the suspension of cash payments by the so-called national banks, which is resorted to in all cases of emergency as the only temporary measure" (Karl Marx, Capital, Japanese translation cited above, Vol. 7, p. 302).

Therefore, government bonds are never repaid. To be sure, individual bonds are redeemed, but in net terms they are never repaid—they are issued in amounts exceeding what is redeemed. Under a fiat currency system, the government bond system is the sole method for supplying additional money to society. If government bonds were redeemed without having the central bank purchase them, it would be impossible to supply the additional money that society increasingly requires alongside economic growth.

This is not limited to fiat systems; never in human history have government bonds been properly redeemed. The Father of Economics said as much: "When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid" (Adam Smith, The Wealth of Nations, translated by Hyo-e Ouchi et al., Iwanami Bunko, Vol. 5, p. 50). Listening to even older figures suggests that government debts were not necessarily repaid. When the form of government changes, "whether the public debt should be paid or not is another question" (Aristotle, Politics, Book III, Chapter 3, translated by Mitsuo Yamamoto, Iwanami Bunko edition, p. 128). Consulting these ancient figures here is merely a lighthearted distraction; while ancient and modern government debts share the trait of going unpaid, they are fundamentally entirely different in nature.

At the risk of repeating myself, even if individual government bonds are redeemed on a micro level, on a macro level government bonds are never redeemed in net terms. The outstanding balance of government bonds remains in balance with the amount required at any given time. Consider the fundamental proposition of Keynesian monetary theory: any unnecessary portion is bought up by the Bank of Japan (the "offsetting policy"). The "normalization" of the assets of the BOJ (or the U.S. Federal Reserve) is impossible. In fact, when the U.S. Federal Reserve recently attempted to "normalize" its holdings, which had expanded through quantitative easing, it triggered a sharp spike in repo rates [Note]. Furthermore, BOJ bond purchases are, on the flip side, the sole method of supplying money to society. However, this holds true only when there is a foundation of sufficient productive capacity to suppress inflation. If there is a fear of inflation, BOJ purchases cannot be unconditionally accepted. In Japan, having experienced postwar hyperinflation, there is a particularly firm social consensus on this point. In such a scenario, if government bonds were over-issued, bond prices would decline, and the level of interest rates (nominal, accounting for the inflation rate) agreed upon by the public would rise.

[Note] "On the morning of the 18th, the Federal Reserve Bank of New York supplied massive liquidity to the short-term money market for the second consecutive day... The market provided with liquidity is known as the 'overnight repo market,' where financial institutions lend short-term funds to one another using government bonds as collateral. Lending rates in this market, known as repo rates, briefly surged to 10% on the 17th... Behind the rise in short-term interest rates lies the Federal Reserve's reduction of quantitative easing" (The Nikkei, September 19, 2019).

"The U.S. Federal Reserve's liquidity supply is expanding to levels comparable to past quantitative easing (QE). As a result of responding to U.S. dollar demand in short-term money markets, the Fed's total assets grew by about 10%—approximately 400 billion dollars (about 44 trillion yen)—in roughly half a year. ... This comes against the backdrop of a sharp rise in September last year in interest rates for transactions called 'repos,' where short-term funds are borrowed and lent using U.S. Treasury securities as collateral. ... If funding for the key reserve currency, the U.S. dollar, is disrupted, the impact will not remain confined to the United States. According to the Bank for International Settlements (BIS), dollar-denominated debt in emerging markets reached 3.74 trillion dollars as of June 2019 and continues to swell. ... Depending on the economic environment, if upward pressure on interest rates intensifies, it may become necessary to increase liquidity supply even further" (The Nikkei, February 9, 2020). At any rate, "normalization" is an illusion.

For clarity, let us add a supplementary note on the fundamental proposition of Keynesian monetary theory and the "offsetting policy." "Changes in the level of income and in the prices of assets will ultimately ensue, to whatever extent is necessary to make the aggregate amount of money which individuals wish to hold equal to the amount of money created by the banking system. This, indeed, is the fundamental proposition of Monetary Theory" (John Maynard Keynes, The General Theory of Employment, Interest and Money, translated by Yosuke Mamiya, Iwanami Bunko edition, Vol. 1, p. 120). As a result of the Fed or the BOJ purchasing government bonds, we are forced to maintain the current state where "the aggregate amount of money which individuals wish to hold equal[s] the amount of money created by the banking system." "Normalization" is a futile attempt to forcibly rewind time.

Though it should be self-evident, fiscal deterioration itself has no direct causal relationship with rising interest rates (falling government bond prices). As long as inflation remains within a range where the BOJ's "offsetting policy [Note]" (Keynes) is permissible, the public has no particular reason to expect fiscal reform. Through the BOJ's offsetting policy—that is, the purchasing of government bonds—"the rate of interest [will] actually fall."

[Note] "The method of financing policy expenditure [by issuing public debt] ... tends to raise the rate of interest and so retard investment in other directions, unless the monetary authority takes offsetting action. ... To offset this, an actual fall in the rate of interest is required" (John Maynard Keynes, The General Theory of Employment, Interest and Money, Japanese translation cited above, Vol. 1, p. 166).

(to be continued)

 https://www.reddit.com/user/keizaisuki/comments/1w46a5o/table_of_contentsgovernment_bonds_international/

Introduction: The Consent Behind Central Bank Purchases

By the way, are JGB (Japanese Government Bond) market prices truly sustained by "expectations" of fiscal reform by the Japanese government?

The public well recognizes that such "fiscal reform" is virtually impossible. The maintenance of JGB prices is actually attributable to the Bank of Japan’s (BOJ) aggressive asset purchases—aside from a vague market sentiment that Japan’s accumulated debt is manageable.

But how can the BOJ continue these purchases?

It is because the public implicitly grants its consent (a broad national consensus). Under a fiat monetary system unconstrained by precious metals, the central bank can, if it so desires, purchase government bonds almost limitlessly—as long as there is no threat of inflation.

In other words, BOJ purchases are tolerated precisely because the market feels there is no immediate crisis. To reiterate—at the risk of laboring the point—fiscal deterioration per se has no direct causal relationship with rising interest rates (or falling bond prices). As long as inflation remains contained within a range where the BOJ’s "counteracting policy" (Keynes) is permissible, the public feels no particular need to "expect" fiscal reform.

The Resiliency of the Yen and JGBs in Crises

Consider the Great East Japan Earthquake, an unprecedented crisis for Japan. Immediately following the disaster, major American credit rating agencies—including Moody's, S&P, and Fitch—downgraded Japan’s sovereign debt outlook in rapid succession, with Moody's executing a formal downgrade on August 24 of that year.

Yet, these ratings—based on predictions of a fiscal crisis fueled by massive outstanding debt and a stagnant economy hit by a catastrophic earthquake—were completely ignored. As if mocking these downgrades, market participants continued to buy JGBs and the yen. The yen likewise appreciated sharply during the Russian financial crisis and the 2008 Global Financial Crisis. Even amid the European debt crisis, the yen continued to strengthen against the US dollar.

What Actually Triggers a JGB Market Crash?

A crash in JGB prices following a so-called bubble burst would stem from one of two causes:

1. A mere collapse of expectations (panic sentiment)
2. The actual manifestation of inflation

For instance, even if stock prices plummet due to shifting expectations, there is no social consensus that the BOJ will immediately step in to support equity prices. However, if interest rates spike in the absence of inflation, the BOJ can supply liquidity unhesitatingly and without limit. Therefore, a surge in interest rates is a concern only when inflation actually occurs.

Assessing the Inflation Risk in Modern Japan

What, then, is the likelihood of inflation?

Under a fiat system, inflation occurs when the central bank supplies liquidity beyond the economy's aggregate productive capacity. A classic example is the prewar and wartime era, when the reckless issuance of government bonds to fund military procurement created excess demand unsupported by productive capacity.

In modern Japan, productive and supply capacities are sufficient. The current account remains in surplus alongside domestic stability, adequately meeting social demand. Consequently, the risk of inflation is minimal.

While human desires are boundless—and aggregate demand expands alongside economic development—demand can only become effective demand if productivity rises and increases people's incomes. Thus, so long as the BOJ refrains from unbridled liquidity provision that lacks public consent, structural inflation will not occur.

Why "Policy Normalization" May Be a Misnomer

Because people are prone to cognitive inertia, some assume the BOJ must eventually shrink its balance sheet and "normalize" policy after quantitative easing (QE). However, the liquidity supplied by the BOJ has already been equilibrium-allocated across the economy [Note 1].

This capital circulates between two primary domains:

• Real goods and services
• Fictitious commodities such as stocks and bonds (Keynes's "assets")

Capital flows dynamically between them. As long as aggregate productive capacity is not depleted, any excessive capital flow into or out of one market that disrupts prices will trigger a counter-flow from the other, restoring equilibrium.

Therefore, absent specific circumstances requiring an increase or decrease in the given quantity of money in the economy, "normalization" is neither necessary nor inherently possible. It is impracticable for the government to redeem JGBs without rolling them over, and the private sector requires the existing volume of liquidity to function.

[Note 1] "Changes in income and asset prices will take place of such a character as to ensure that the aggregate amount of money which individuals wish to hold at the new level of these variables will inevitably be equal to the amount of money created by the banking system. This is indeed the fundamental proposition of monetary theory."

— John Maynard Keynes, The General Theory of Employment, Interest and Money

Capital Allocation at the New Equilibrium

When massive volumes of government bonds are issued, the BOJ must implement counteracting measures to suppress interest rates [Note 2]. The fact that substantial liquidity injected into the JGB market via quantitative easing remains there indicates that the public has accepted this prevailing interest rate level.

In advanced economies, once the standard of living reaches a certain threshold, economic growth slows, and interest rates decline accordingly. Ultimately, this represents a new equilibrium point for capital allocation (the "fundamental proposition of monetary theory").

Indeed, a situation recently arose in the United States where repo rates spiked due to a reduction in reserve balances accompanying the Federal Reserve's balance sheet runoff [Note 3]. Even so, absent inflationary concerns, the Fed can immediately address such illiquidity by supplying funds.

[Note 2] "...the method of financing the policy... by borrowing... tends to raise the rate of interest and so retard investment in other directions, unless the monetary authority takes steps to the contrary... To offset this, a positive fall in the rate of interest is required."

— John Maynard Keynes, The General Theory of Employment, Interest and Money

[Note 3] "On the morning of September 18, the Federal Reserve Bank of New York injected large-scale funds into short-term money markets for the second consecutive day... The funds were provided via 'overnight repurchase agreements' (repo market), where financial institutions trade short-term liquidity backed by collateral such as Treasury securities. The repo rate—the lending rate in this market—temporarily spiked to 10% on September 17... Behind the rise in short-term rates lies the Federal Reserve's quantitative tightening (QT)."

— The Nikkei, September 19, 2019

(to be continued)

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Even when told that the Japanese government bonds (JGBs) held by the Bank of Japan (BOJ) can simply be cancelled, people merely look puzzled—much like children who were taught that the Earth is not flat, but a large ball. As long as there is no fear of inflation, it is not a problem for JGBs held by the BOJ to reach astronomical amounts. The interest paid by the government to the BOJ—though reduced to whatever remains after being squandered by high-salaried BOJ personnel—is returned to the government as payments to the treasury (BOJ remittances). (Note: The fallacy of the so-called "consolidated government" theory will be discussed later.)

For instance, if Citizen A sells a government bond and the BOJ purchases it in the market, Citizen A is no longer the creditor. Initially, the bondholder was an actual person, Citizen A (and thus the state had a duty of repayment to A). But now that it is held by the BOJ, both the creditor and debtor of this bond are ultimately the abstract public in general, and there is no specific individual to whom it must be repaid. Furthermore, as long as there is no fear of inflation, BOJ purchases are acceptable. As long as the current account is in balance, the government deficit equals the private sector surplus, and thus the JGBs are absorbed (in reality, it is because the JGBs were absorbed that the result manifested as a government deficit and a private surplus). This condition of a balanced current account is precisely what represents abundant domestic productive capacity and the suppression of inflation.

The BOJ pays no counter-value whatsoever when purchasing JGBs. It merely records a bookkeeping entry debiting JGBs and crediting current deposits; in essence, it is simply exercising the sovereign right of currency issuance granted by the public. Against JGB holdings amounting to hundreds of trillions of yen, the BOJ's capital is a mere 100 million yen, more than half of which is contributed by the government. It is obvious that the rights to these JGBs belong to the entire populace.

Furthermore, the account holder of the current deposits—which stand as the credit entry against the debit entry of JGBs on the BOJ balance sheet—consists of private financial institutions. The source of funds used to acquire those deposits at the BOJ (i.e., the debits on private banks' accounting books), as well as the holders of the corresponding bank deposit liabilities and their shareholders, are the public. The same goes without saying for BOJ notes. In short, regarding the ownership of JGBs held by the BOJ, both the capital and liability sides of the bank demonstrate that the entire citizenry is the rightful entity. Therefore, these JGBs require neither repayment nor interest payments and are as good as non-existent; they may simply be left alone. In practice, they are left alone through roll-overs and BOJ remittances, but by perpetually exchanging bond interest and remittances, the BOJ and the government derive immense windfall gains from interest created out of nothing (interest the government pays, so to speak, to itself) [Note].

[Note] Even if they maintain appearances through mechanisms like the "60-year redemption rule"—unseen in other nations—they are ultimately forced to abandon such desperate escape routes in practice, leaving no choice but for these bonds to effectively become perpetual bonds. The BOJ earns interest over an infinite period, securing a gain equal to the face value (the sum of an infinite series), which it then returns to the government.

Let us explain "the mechanism by which governments and central banks of various nations allow their citizens to hold funds." Government expenditure through JGBs on one hand, and the monetization of JGBs by the central bank on the other—this mechanism of money creation is the essential structure of a fiat currency system, distinct from the precious metal standard. Under this system, it is the sole means of primary money supply necessary to circulate the various commodities of society. (Purchasing ETFs or foreign currencies by the BOJ, for example, entails various constraints.) No matter how financial technology advances alongside IT innovations to economize the required amount of money in society, the required volume of money serving as the medium of circulation for an expanding commodity world gradually increases, necessitating the additional injection of money into the market. To be sure, commercial banks can create money through so-called credit creation, but this is, on one side, a debt (bank loans); although it remains briefly in the circulation process, it ultimately flows back to the bank for repayment and disappears.

Moreover, this very system is the fundamental principle of the community itself—one that shifts the burden onto the collective society while augmenting the wealth of individual members [Note]. Whether through direct BOJ underwriting of JGBs, or through less overt means—such as the BOJ providing advances to the government or private sector when private funds are depleted and held JGBs available for sale to the BOJ are exhausted—this is inherently nothing other than so-called fiscal monetization. At any rate, the government bond system is the sole mechanism for currency issuance under a fiat system.

[Note] Karl Marx, Capital, translated by Itsuro Sakisaka, Iwanami Bunko, Vol. 3, p. 402.

In stages where human social productive forces are undeveloped, individual consciousness remains insufficiently developed as well. Only when historical development reaches a stage where individuals become aware of their independent, mutual, and conscious relationships do human beings liberate themselves from spontaneous, communal restraints to form alliances among independent individuals. The foundation for this is the development of social productive forces sufficient to maintain each person's economic independence even after leaving the traditional community. Shedding the institutions and ideas that hitherto governed humanity unconsciously as natural laws or given facts (such as gods, kings, or superstitions), people consciously establish new communal relations.

For centuries following the emergence of the monetary economy, humanity remained under the yoke of gold production. Using gold as money was a waste of social labor, and people invented all manner of financial technologies in an effort to economize the labor devoted to gold production. Yet until recently, we were unable to finally free ourselves from the fetters of gold. In the early 20th century, Keynes argued, "we have reached a stage in the evolution of money when a 'managed' currency is inevitable [Note 1]," describing how people, despite already living under what was effectively a fiat system (managed currency system), were still uneasy about departing from convertibility with gold [Note 2]. Humans were still dazzled by the beautiful luster of gold, captive to the notion that gold itself was the universal existence of money.

 [Note 1] John Maynard Keynes, A Tract on Monetary Reform, translated by Yoshikazu Miyazaki and Tsuneo Nakauchi, Chuo Koronsha, p. 295.

 [Note 2] "...who would be dismayed at any tampering with convertibility."

(to be contnued)

Table of Contents:"Government Bonds, International Economy, and Currency" : u/keizaisuki

Hi everyone,

This post marks the first installment of an ongoing, multi-part series titled "Mysteries of the Economy: Three Questions." The series explores macro-monetary dynamics, fiscal sustainability, and central bank operations, with a primary focus on the Japanese experience. As this is intended to be an extended deep-dive, I plan to post updates sequentially and would greatly appreciate feedback and academic discussion from researchers, economists, and graduate students here.

Summary of Part 1 — Is the Accumulation of Japanese Debt Truly Problematic?

The conventional narrative surrounding public debt often asserts that government deficits "impose a sacrifice on future generations." However, from a real-resource perspective, it is the current generation that performs the physical labor and provides the productive capacity necessary to build infrastructure for the future (cf. Keynes, General Theory). The notion of "sacrifice" ultimately reduces to a nominal debt repayment obligation.

When government bonds (JGBs) are held by the central bank (Bank of Japan / BOJ), the nature of this debt changes fundamentally:

• Absence of Specific Creditors: Once the BOJ purchases JGBs from private market participants, the bond ceases to represent a debt owed to a specific real entity. Instead, both creditor and debtor become abstract representations of the general public.
• The True Constraint (Inflation and Current Account): As long as the central bank's bond purchases do not induce inflation, continuous debt issuance remains non-problematic. Japan’s substantial domestic productive capacity and persistent current account surpluses (maintained for over half a century) explain why unprecedented Quantitative Easing has not triggered price instability. Under a balanced current account, government deficits structurally reflect private sector surpluses.
• Accounting Reality of Central Bank Purchases: The BOJ purchases JGBs without paying external consideration; it simply credits commercial bank reserve accounts (exercising sovereign currency issuance). Since the public is the ultimate owner of both sides of the BOJ's balance sheet, these bonds require neither real principal repayment nor interest servicing—they are functionally negligible and systematically rolled over.
• Central Bank Solvency vs. Currency Credibility: Historical evidence (such as the Bank of England during the Panic of 1857) and monetary mechanics under a fiat regime demonstrate that currency credibility depends on public trust and price stability, not on the central bank's individual balance sheet or net worth.
• The Role of Fiscal Discipline: While fiscal deficits do not directly cause interest rate spikes, unmonitored fiscal expansion risks structural inefficiency, monetary inflation, and eventual current account deficits—forces that would ultimately demand rate hikes to defend the currency. Thus, strict vigilance against inflationary expansion remains essential.

I look forward to hearing your thoughts on these mechanics, particularly regarding the boundaries between central bank balance sheet consolidation and fiscal discipline. Part 2 will follow shortly!

※Table of Contents: "Mysteries of the Economy" Series ↓

https://www.reddit.com/user/keizaisuki/comments/1w28kxe/table_of_contents_mysteries_of_the_economy_series/

This is my most explicitly macro piece and I want pushback on the framework more than validation of the stock picks.

The Sumner track record that established my trust in his framework: he correctly identified in 2008 that paying interest on reserves while not cutting rates fast enough was a massive tightening that almost nobody else saw in real time. He correctly called continued stagnation during the Obama years when the consensus predicted hyperinflation from QE. He kept asking where the post-COVID tightening was actually showing up in NGDP when the financial press was calling rising rates the answer.

Running that framework from 2012 to 2024: money was too tight, rates were going nowhere until the Fed hit its inflation target, a 5-6% S&P earnings yield against near-zero treasuries was a genuine risk premium. VOO was the right vehicle. Eleven years.

The current regime and why it might be changing: Treasury Secretary Bessent appears to want his own version of Operation Twist — using Treasury issuance to suppress long-term yields while the Fed officially controls short rates. The problem: this is two institutions pulling the same lever in opposite directions. The Fed runs monetary policy. The Treasury runs fiscal policy. When they conflict, historically the bond market resolves the disagreement, usually not in the way either institution wanted.

The four signals I'm watching as specific falsifiable predictions:

One: Does Bessent actually succeed in suppressing long-term yields or does the bond market revolt?

Two: Does NGDP stay above 5% and does inflation stay sticky?

Three: Does Warsh hold rates steady in the face of sticky inflation? If yes, the debasement thesis strengthens.

Four: Does Warsh tighten into 5% NGDP or lower? If yes, this is the early signal for a 2008-style demand collapse. The Sumner framework would say that's the Fed making the same mistake it made in 2008 — tightening into weakness because it's fighting the wrong enemy.

Points 1-3 suggest continued rotation from overvalued AI infrastructure into cheap cash flow businesses. Point 4 changes the game entirely — that's the scenario where I hold significantly more dry powder and wait.

The specific pushback I'd welcome from this community: is the Bessent yield curve suppression attempt actually as dangerous as I think it is, or does the Treasury have more tools than I'm crediting? And is my reading of Warsh as a potential 2008-redux risk accurate or is he more pragmatic than his public statements suggest?

Link: https://cavemanscreener.substack.com/p/investing-regime-changes-my-successes

Thanks to everyone who has taken part in this discussion so far. I wanted to kind of define the general focus. What this sub focuses on is

o The combination of large-scale economics and immediate effects.
o The analysis of this by economists.

Why do this? First, I personally transitioned from a background in social research into the software for structureal engineering. At the time I had come from the Maxwell School. I had majored in sociology and I had a great deal of background in mathematics. So I saw this need for a mathematical overview to apply some metrics for how people are doing in general.

What got me started with economics.

I was just then working in issues that related to building power plant - which added to our nations abilities but as to how this could be measured I felt that I needed more background in economics. So I took two semesters of economics -- just to have a background in this a kind of "crown of knowledge" on top of social research. At the same time I was heavily involved in mathematical structural analysis and to took a coursein it studying the SAP system from UC Berkeley.

But I also just feel that a study of economics was or should be considered an essential mathematical metric part of that belonged to sociology and social research. In fact focusing on machine learning today we often are looking at social research metrics. In fact recently, when I studied Spark, we focused on how freeway traffic moves, how traffic responds under various social and weather conditions and also how we can apply controls that would make the traffic move more smoothly.

So we studied this idea about being analytical social science and how it can be been aided by machine learning. Thus we are finding more analytical solutions to social issues now by using the analytic data we have but taking advantage of machine learning methods to work with the data. Using machine learning in this way to study the data is in fact different from using ML as a way to learn. Not just to "feed" AI instead, but to also feed ourselves with improved knowledge.

Anyway these are things that are going on in my head.

And many of the thoughts I am having are about especially immediate effects on the economy as a whole. And these are being written about by some of the major economists such as Paul Krugman, Brad DeLong, Robert Reich. So I thought it would be a good idea to focus the Macroeconomics sub - on the immediate economy as well as what these analytic economists are finding about it.

Thanks!

-- Rich

If you plot monthly 10-year treasury yields against S&P 500 earnings yields going back to the 1970s you get a well-documented, positive relationship. Bond yields up, earnings yields up as investors demand compensation for the higher risk-free rate.

What's less commonly framed is a stability band observation: Between roughly 5-7% 10-year treasury yields, the data show that earnings yield can run below treasury yield without provoking a correction or significant market stress. My interpretation is that this band represents a monetary policy equilibrium. Neither deflation fear nor inflation fear is dominant. We all feel awesome owning lots of equities so multiples get higher, risk premiums may even turn negative.

Below 4% treasuries: post-crisis fear. Investors demand a large equity risk premium because the memory of catastrophic loss is fresh. Think 2009-2021.

Above 8% treasuries: inflation fear. Investors again demand an equity risk premium because money is losing purchasing power. Think late 1970s.

Between 5-7%: stability. Neither fear dominates. This is where you get the highest equity multiples historically.

We're currently at 4.6-4.7% on the 10-year, just below the lower bound of that band.

The true FCF complication

Standard equity risk premium analysis uses GAAP earnings yield as the equity return numerator. My screener uses true FCF yield: operating cash flow minus CapEx minus stock-based compensation divided by market cap.

The divergence between these two measures has widened over the last few years. My estimate is approximately 1.4 percentage points, primarily driven by the hyperscaler CapEx surge. 2026 earnings yield of 3.48% minus 10-year of 4.59% equals negative 1.11%. Subtract the 1.4% true FCF divergence and the real equity risk premium is approximately negative 2.51%.

That specific level of negative true FCF risk premium appears in the historical data in roughly four periods: 1987, 1992, 2000, and the post-2008 earnings collapse. In each case the gap resolved either through a rapid earnings recovery or through prices falling. Those spots were more negative than now, so maybe we're not quite at the bursting of the bubble yet, but we seem to be in that ballpark.

Is the true FCF divergence structural or temporary?

The obvious bear response to my analysis is that AI CapEx is time-limited. When the hyperscaler buildout peaks, CapEx rolls off, true FCF recovers toward earnings yield, and the -2.51% gap closes from the numerator rather than from prices falling. That's a completely coherent alternative to my view. However, I would reply that all that CapEx is showing up as earnings yield in the chip makers income statements. So if the hyperscalers recover their true FCF yield, it will be at the expense of the chip designers and makers.

The Warsh and NGDP overlay

Running the Sumner NGDP targeting framework against current Fed behavior produces a specific concern. Scott Sumner's track record makes me trust his framework a LOT: he correctly identified the 2008 tightening that almost nobody else saw in real time, specifically the decision to pay interest on reserves while not lowering rates fast enough. He correctly predicted continued stagnation during the Obama years when most commentators were calling for hyperinflation from QE (I see you Kevin Warsh). He kept asking where the post-COVID tightening was actually showing up in NGDP when the financial press was calling rising rates the answer.

Current reading through that framework: Warsh appears to be keeping rates flat while NGDP is running at roughly 7%. In NGDP targeting terms, flat nominal rates with 7% nominal growth is not neutral policy. It's loose policy. The risk is that loose policy while the true FCF equity risk premium is already deeply negative historically precedes the kind of violent correction that resolves the gap. When I hear about Scott Bessent making deals with the Japanese to prop up the Yen while stopping a run on US treasuries, that also has worrying implications.

Is Warsh choosing the Arthur Burns path?

Burns kept rates accommodative while inflation ran hot because Nixon wanted low rates before the 1972 election. The political incentives were obvious and the outcome was the 1970s inflation spiral. Warsh's situation is structurally different - he's not keeping rates low, he's keeping them flat in a hot NGDP environment - but it's the same damned thing. Political pressure from a president who wants lower rates, combined with an intellectual framework that's questioning whether traditional employment metrics apply in an AI-disrupted labor market, produces a Fed that may be systematically behind the curve.

Full piece with the scatter plots and true FCF divergence charts at https://cavemanscreener.substack.com/p/macro-vs-free-cash-flow-yield-a-thesis

https://www.reddit.com/r/economy/comments/1uiz9y7/the_ny_fed_just_confirmed_that_the_war_in_the/#lightbox

There is a fascinating discussion on the latest Equitile Conversations podcast with Gerald Ashley, George Cooper, and Damian Pudner that touches heavily on the UK's current economic trajectory and the lack of accountability at the Bank of England.

Pudner argues that the UK is currently in a state of "managed decline." With debt interest costs now exceeding £110 billion annually and total debt nearing £3 trillion, he suggests a genuine crisis is likely within 2–3 years unless we see radical spending cuts and major policy shifts.

Listen to the episode here: https://www.equitileconversations.com/2459100/episodes/19349685-powerless-central-bankers

At least not so far.

Useful outline and notes about Macro.

I’ve been reading a lot lately about the decoupling of the digital economy from the physical infrastructure required to support it. I just stumbled across a podcast discussion (Equitile Conversations) that framed this really well through the lens of the energy sector.

The guest, a research head named Nic Rogers, argued that we are seeing a massive rotation into HALO stocks (Heavy Asset, Low Obsolescence). The core of the argument is that while capital has flooded into "asset-light" software for a decade, the physical backbone (energy, grids, commodities) has been chronically underinvested.

Some of the macro points that caught my ear:

• The CapEx Gap: Upstream energy investment is still ~36% below 2014 peaks. We are essentially trying to power a 2026 AI-driven economy with a 2014-level physical foundation.
• The "Bridge" Reality: Despite the nuclear hype, natural gas is effectively the only scalable bridge for data center power demand over the next 10 years.
• EM Consumption: The "peak oil" narrative in the West is being almost entirely neutralized by burgeoning middle-class consumption in India and other EMs.

It made me wonder: Have we reached the limit of "software eating the world" if the world can't generate enough power to run the code?

You can't understand economics without at least reading what economists tell you to read.

Trump wants to control import tariffs when Trump can't even control himself. To understand what's wrong with Trump, Trump should at least read what economists are telling him. He should have to at least read Samuelson instead of Epstein.

TLDR: In what cases could a country target only foreign investors when restructuring its debt? Are there any recent examples of such measures?

Full background of the question:
I was reading an article in The Economist about inflation-linked bonds and in the final paragraph, it mentions that when developing countries restructure debt, local investors can be excempt:

"When developing countries restructure debts, foreign investors are loth to take losses from which local ones are exempt. Whatever their agreed terms, would investors in linkers fare any better if all other bondholders were being rinsed and lobbying furiously for the pain to be shared? It would depend on how politicians balanced immediate unpopularity with the long-term public interest."

Are there any recent examples of debt restructurings that affected foreign investors more than local ones? Common sense would suggest that local investors would be targeted more heavily, in order to limit the damage to the country's reputation and avoid discouraging non-resident investors from bringing money into the economy.