And, unfortunately, they are acting accordingly, ensuring another lost decade and further destruction of their culture.
Azumi: Not Immune To Europe-Style Fiscal Crisis
By Kelly Olsen
Jan 18 (Dow Jones) — Finance Minister Jun Azumi said Wednesday that Japan is not immune to a euro-zone style fiscal crisis and that the government is “resolved” to raise the consumption tax to improve the nation’s finances.
Japan is “no exception,” Azumi said during a speech at the Foreign Correspondents’ Club of Japan, referring to the crisis in Europe in light of Japan’s own high debt levels.
Azumi said that although yields on Japanese government bonds are currently low, rates can quickly rise to “cause problems.”
“We cannot avert our eyes” from the problem of Japan’s outstanding debt, he said, which at around 200% of gross domestic product is the highest in the industrialized world.
Azumi said the government is resolved to raise the consumption tax rate to help bring the country’s finances under control, but acknowledged the difficulties in getting the legislation passed, saying it is “like climbing Mt. Everest.”
Prime Minister Yoshihiko Noda aims to submit legislation to double the tax to 10% by 2015 to a parliamentary session set to begin next week, though the unpopular move is opposed by opposition parties and has sparked defections from Noda’s ruling Democratic Party of Japan.
“rates can quickly rise to “cause problems.”” What problems?
If rates rise, the interest paid on existing debts remains unaltered, so no problem there. As to maturing debt and the “horrendous” rate of interest that “has” to be paid when rolling it over: don’t roll it over. Just print money and pay off creditors. And if that’s too inflationary, raise taxes so as to get a deflationary effect to counteract the above inflationary effect. Problem solved (Niall Ferguson and similar nit-wits please note.)
except paying off govt’s creditors has never been show to be ‘inflationary’ as both the debt and the funds paid are financial assets/govt liabilities so not enough changes to matter, seems
“Printing money” doesn’t reduce the debt, it just changes the average maturity from 5 years (or whatever) to 1 day. The debt is still there.
yes it does. Bonds are a promise to pay dollars. By printing the money and giving it to the creditor the debt is discharged. Their only obligation is to accept those dollars in payment of taxes.
If you consider dollars to be debt it’s maturity would be indefinitely, not one day!
Money pays interest daily (except for currency, which doesn’t pay interest), hence it’s like a 1-day bond. I take the view that the central bank is part of the government, so moving a debt from the treasury to the Fed doesn’t make it any less of a government debt.
what “money” pays interest daily?
I think the suggestion was to pay existing creditors with bank reserves not obtained by bond sales.
rather than using words like ‘money’ and ‘debt’ think reserve deposits and securities account deposits
Thanks Warren. I appreciate what you do here. It is invaluable!
So sad…it’s hard to understand how so many people can master really difficult subjects – in terms of intellectual effort and ability required – such as physics or mathematics, yet somehow we have so few people with the intellectual curiosity to put up the comparatively smaller effort needed to understand the workings of a basic technology (money) that conditions the functioning of the economy and ultimately our standards of living.
That thought has often struck me as well.
are you kidding? it’s mind blowing! how on god’s green earth can we produce 50 million or so beautifully engineered iphones at a couple hundred bucks a clip and we can’t even grasp the fundamental nature of money? sure our latest financial crisis was a misallocation of capital due to fraud, speculation, and corruption but our bigger problem is that the economic technocrats advising the management of the system don’t even realize that their basic understanding of our monetary system is completely flawed. our ignorance would be utterly hysterical if it weren’t causing so many people so much pain, stress, and anxiety.
I think there are several reasons. First, economics, as it is taught almost everywhere, is terribly boring and intellectually confused, not to say trivialized. Secondly, it requires a certain maturity of mind and experience that the technical subjects do not. One can be a math prodigy but hardly an economics one. Thirdly, and contrary to what our overly drunk-on-technology society believes, much technology spills down from military initiatives and funding. Fourthly, inventiveness is just part of intelligence, however dazzling to the crowd, but scarcely the most important compared to the much more subtle and profound capacities of intelligence, and which have a bearing on human nature, human purposes and values, and the like. Fifthly, “the nature of money” is not as simple a matter as one might initially think.
If the goal is full employment and price stability why do you say Japan had a “lost decade”?
high unemployment and near 0 real growth
Japan’s real PER CAPITA gdp growth since 1980 started and finished almost perfectly inline with the US. See graphs here:
In the late 1980s Japan got near full employment and thus GDP growth accelerated above “trend”, only to lose that advantage during the 1990s and revert back to the “trend” (even if the trend wasn’t full employment).
In the 2000s, Japan’s per capita growth was virtually indistinguishable from the US and many other developed nations. Not that the unemployment levels were anything to be proud of for any of these nations, of course.
most of what I read about their ‘true’ unemployment puts it around 10%
i’ve noticed a number of different perspectives on Japan’s lost decade lately. for example, “the myth of japan’s failure.” One of the statistics the author sites is unemployment at 4.2%.
Warren, I guess your saying if they weren’t deficit hawks, as opposed to deficit owls, they could of had more real growth and even lower unemployment.
most of what I’ve read puts their ‘true’ unemployment rate at around 10%
Not to worry, the Bank of Japan will offset the fiscal contraction somehow. Right? Riiiiiight.
By “money” pays interest daily, did you mean interest on reserves?
Yes. If the central bank wants a non-zero interest rate then it must pay interest on reserves, or alternatively issue bonds.
The Fed is currently paying interest (0.25%), by the way. Which oddly enough is HIGHER than the interest rate on short term treasuries! So what is the benefit in monetizing the debt? It doesn’t really do anything in substance, it just moves the debt from the treasury to the fed.
I disagree. Although the government is paying member banks interest, they do not owe anything. Nobody has borrowed anything. Were just talking about dollars sitting in bank accounts. The only conceivable difference I can think of is the effect it has on private sector borrowing costs and where interest income goes.
Instead of welfare for the securities holder it is welfare for the bank!
The point is, you owe the same interest regardless of whether the debt is in the form of money or (short term) bonds. Converting bonds to money doesn’t offer any relief from the burden of debt (if there is a burden to begin with).
Let the overnight rate fall to zero.