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
