This video is a follow on from the other three videos I’ve done on the Central Bank currency creation operation. If you haven’t seen those videos, I would recommend you doing so before watching this one.
Let’s pick up where we left off …
Point number 3
The previous point I made, in the previous video, concerned the power of the voting public to make Governments more fiscally prudent. There is another way in which this alternative system I have proposed encourages Governments to be more fiscally prudent and that is by means of the Bondholders or Investors. They also have the power to make Governments more accountable for their actions.
If Bonds are bought on the open market – assuming of course that the markets are free, and that they’re not manipulated, or rigged - then market forces will determine the price of Bonds.
This means that the market will determine whether or not the Government is acting in an appropriate manner.
If the market determines that the Government is being fiscally irresponsible by excessive Deficit Spending, then investors won’t be so interested in buying Bonds. Demand for Bonds will drop, prices will fall and yields will rise. This will in turn make debt more expensive to service and this should also alert the populace, prompting them think that something is somewhat amiss with he system.
Let’s turn our attentions to Argentina as a real world example.
The Argentinian Government is not regarded as being the most financially prudent in the world because the Argentinian Economy has a habit of failing every once in a while.
Argentinian Bonds are therefore considered rather risky.
So, when Investors carry out a risk / return assessment on Argentinian Bonds, they deem them to be relatively risky investments.
And the longer the term of the Bond, the riskier they are.
A 30 year Bond is risky because it’s possible that the Argentinian Economy might well fail sometime in that 30 year time period.
Higher risks, demand higher yields. Why? Well, the yields have to be high to overcome any objections investors might have about investing. Investors will be prepared to take the risk in investing so long as they are able to get a very good rate of return on their investment.
So, yields for Argentinian Bonds, especially 30 year Bonds, have to be high.
What is more, if investors deem the Government too risky, they won’t invest at all. This will put the Government in a predicament. It will then struggle to raise funding to finance its commitments for the fiscal year. This will become all too apparent to people living in the country. Maybe services provided by the Government will suffer.
So, this state of affairs should discourage excessive Deficit Spending and should make the Governments that bit more accountable. Ergo, Investors can make Governments more fiscally prudent.
Under the present system, demand for Bonds are artificially heightened because the Big Banks know that they have a guaranteed buyer they can offload the Bo
