2️⃣ How 'Monetization' Really Works Jesus Felipe, Scott Fullwiler…
👉 A “heated” debate emerged in China in Spring 2020 regarding whether or not the People’s Bank of China (PBoC) should “monetize” the national government’s deficits… Wu Xiaoling (она почти Maxim Oreshkin из Китая😉), former deputy governor of PBoC…, argued that “currently, the Chinese [government bond] market has plenty of room for government bonds”. “If there is a problem with market liquidity, the central bank will buy and sell government bonds in the secondary market to provide liquidity. The biggest advantage of PBoC buying and selling government bonds from the secondary market is that it can form the yield curve of government bonds and provide a risk-pricing benchmark for the financial market”.
👉 Returning to the “monetization” debate in China, the analysis here suggests flaws in the arguments both for and against “monetization.” It is not “direct printing of money”—it is an exchange of an interest-earning government liability for an interest-earning central bank liability. While the size of a deficit could surely be too large with respect to a given inflation target, whose interest-earning liability accompanies it is not a difference of macroeconomic significance, much less the knife-edge point between price stability and hyperinflation. On the other hand, PBoC indirectly supports China’s government bond market already. “Crowding out” does not apply here—from the simple accounting in Table 1, a government deficit adds private saving rather than withdrawing it, while a bond market backstopped by PBoC even indirectly means interest rates on government debt are driven by monetary policy strategy, not savers and borrowers of “loanable funds.”...