Saturday, September 22, 2012

Time to Japanic?


The Atlantic has a big story on the impending Japanese crash; one of the authors is the brilliant Simon Johnson. Excerpts:

About half of the Japanese government’s annual budget now goes to pensions and interest payments. As the government has spent more and more to support its growing elderly population, Japanese savers have willingly financed ever-increasing public-sector debts... 
Elderly people hold their savings in the form of cash and bank deposits. The banks, in turn, hold a great deal of government debt. The Bank of Japan (the country’s central bank) also buys government bonds—this is how it provides liquid reserves to commercial banks and cash to households. Similarly, Japan’s private pension plans—many promising a defined benefit—own a great deal of government bonds, to back their future payments. Few foreigners hold Japanese government debt—95 percent of it is in the hands of locals... 
With projected annual budget deficits between 7 and 10 percent of GDP, Japanese savers are essentially tendering their savings in return for newly issued government debt, which is not backed by hard assets. It is backed only by an aging, shrinking population of taxpayers... 
Japan’s taxpayers are already rebelling against small tax increases needed to limit escalating deficits. This leaves little room for hope that future taxpayers will accept the larger tax increases needed to repay debts... 
The economy, roughly speaking, is as healthy as it is likely to become. Yet the government seems incapable of steering away from the cliff... 
A crisis in Japan would most likely manifest as a collapse of confidence in the yen: At some point, Japanese citizens will decide that saving in any yen-­denominated asset is not worth the risk. Then interest rates will rise; the capital position of banks, insurance companies, and pension funds will worsen (because they all hold long-maturing bonds, which fall in value when rates rise); and fears of insolvency will surface... 
The fact that government debt is held mostly by Japanese citizens is not sufficiently reassuring. The same was true in Germany during the 1920s and Russia during the 1990s, yet in both cases the elderly lost their savings to high inflation. Today, Italian and other European savers who hold their own government’s debt are already nervously edging toward the exits...

This prophecy is hardly unique; I have beaten this drum myself. If Japan doesn't change course, it will have a major crisis within the next decade.

If. But what people need to understand is, the Japanese government does have the power to avert a crisis. It is not inevitable.

There is one way that the crisis can definitely be averted: Raise taxes. Japan's fiscal woes can be boiled down to one sentence: Japan has European levels social spending and European levels of aging with American levels of taxation. But this could change; if Japan raised taxes to European levels, crisis would be instantly averted. According to analyses I've seen, this would require raising Japan's taxes from their current level of 32.5% of GDP to somewhere between 40% and 50% of GDP. That's comparable to France or Sweden. Painful, but not impossible.

Now for the rumor (rumor always being a large component in Western analyses of Japan). My sources at the Bank of Japan and Ministry of Finance tell me that domestic Japanese investors are betting that, after all the grumbling and fighting and ending of political careers, Japan's government will suck it up and raise taxes. This, my shadowy sources say, is why pension funds are still willing to put the Japanese people's money into JGBs.

But this story is not really outlandish. It's similar to what we're observing in America right now. U.S. borrowing is at all-time highs, but demand for Treasuries shows no sign of flagging, and most of that demand - more than in the past - is from domestic U.S. investors. Yes, we have shown a reluctance to raise taxes - witness the apocalyptic debt ceiling fight from last year. But if the public really thought the U.S. government was willing to default, domestic Treasury buyers would be heading for the exits. That they are not heading for the exits probably indicates that they believe that when push comes to shove, the U.S. government will suck it up and raise taxes. There are signs that the Republicans are quietly recognizing the necessity of this. At this point, it's just a fight between Democrats and Republicans to see who takes the fall for raising taxes - that's what the "fiscal cliff" is really all about.

Japan seems to be in a similar situation. It is not really unusual or outlandish at all. Everyone in the country still seems to believe that the government will continue to function. The day that that belief falters - or is proven wrong by main force, when interest payments swamp the primary budget - is the day that Japan collapses (the same goes for the U.S.). But if Japan's government is less dysfunctional than the often skittish Western press believes, that day will never come.

(Anyway...oh yeah, I did mention that there might be two ways out of Japan's fiscal trap, didn't I? The other way is to use monetary policy to create negative real interest rates for a very long period of time. If that can be done in a stable way (without accelerating inflation) and if stable growth persists, then Japan can use an "inflation tax" to erode the value of its government debt instead of an actual tax. Econ bloggers (and commenters), who tend to believe that central banks can hit any NGDP target they want, will probably advocate this "solution"...)

89 comments:

  1. BT London2:18 PM

    I think Noah means negative *real* interest rates are the solution.

    As long as nominal GDP grows faster than the nominal interest rate on JGBs, there will be no 'crisis'.

    As long as the BoJ can buy JGBs to keep their interest rates low, there will be no 'crisis'.

    The only 'risk' is moderately high inflation - something that economists from Krugman to Rogoff agree is actually a *good* thing when you are sufferring from a lost decade/liquidity trap/private sector deleveraging/contraction/depression.

    Noah's first solution - raising taxes - is a perfect one for a Japan whose private sector is booming. But fiscal contraction is probably not helpful in the current environment.

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    1. Bob_in_MA9:04 AM

      "As long as nominal GDP grows faster than the nominal interest rate on JGBs, there will be no 'crisis'."

      That's assuming debt rises no faster than GDP, in fact it's rising at a rate of 10% of GDP.

      And for nominal interest to stay this low, you also have to assume assume all the debt rolls over. So current workers would need to increase savings just as they're absorbing a big increase in taxes.


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    2. Not only is Japan Monetarily Sovereign, meaning it has the unlimited ability to create yen, but it also has the unlimited ability to control interest rates, just as the U.S. has for dollars.

      So there is no need to worry about the government running short of yen or of uncontrolled interest rates. The biggest worry: Someone convincing the Japanese to raise taxes, which absolutely, positively will send them into a recession if they are lucky or a depression if they are not.

      Rather than cut the yen supply (thereby cutting GDP), by raising taxes, the Japanese easily can counter inflation by raising interest rates (making the yen more valuable).

      Those who do not understand Monetary Sovereignty, do not understand economics.

      Rodger Malcolm Mitchell

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    3. Rather than cut the yen supply (thereby cutting GDP), by raising taxes, the Japanese easily can counter inflation by raising interest rates (making the yen more valuable).

      Uh, that's the same thing...

      Those who do not understand Monetary Sovereignty, do not understand economics.

      How about who do not understand that raising interest rates is the same thing as shrinking the money supply?

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  2. I see your point when it comes to the U.S., but Japan is in a tough spot. What mechanism would force the Japanese government to raise taxes? Most likely an upward climb in interest rates, or a crash. If it is the latter, then all bets are off - who knows what would happen. If it is the former, then it would put a damper on an already depressed economy. Tax increases that reach percentage points of GDP could worsen the macro situation in the short term, which could also be destabilizing. Or is there something I'm missing?

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    1. Like the U.S., Japan has absolute control over its sovereign currency, including interest rates.

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  3. I think Noah means negative *real* interest rates are the solution.

    Yes. I should add this. Done!

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  4. "Time to Japanic?"

    The country's Japanemic growth needs to be Japanimated to avoid an economic Japaneurysm.

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  5. Anonymous2:52 PM

    Sorry, but the idea that a collapse in the Yen would be a "crisis" is surely laughable.

    A collapse in the Yen would be the most wonderful thing to happen to Japan.

    Exports would soar. There would be a massive investment boom as exporters try to keep up with demand for their goods.

    Import prices would soar - which would be profoundly inflationary for the domestic economy.

    All of the above mean that tax revenues would also soar and spending (NGDP) finally took off after 30 years of stagnation.

    And yes, the BoJ would have to raise interest rates.

    We don't call that a "crisis" - we call it "success".

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    1. Ah, we have another pro-default person! Well I agree with you actually, but we are unlikely to persuade Japanese people to join our radical faction...

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  6. The Republican Party is going to have to wash its hands of Grover Norquist before it can raise taxes. In fact it is going to have to purge itself of the Tea Party and most of its current leadership. None of that is not going to happen until there is a full on crisis.

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  7. I agree with Noah's negative interest rate solution.
    We are advocating it for many years but the Bank of Japan does not believe its power to remedy the deflation resume. As Mr. anonymous wrote a collapse in the Yen could be the most wonderful thing to happen to Japan. But Japanese export sector could have been long dead before it happens. We have to set a clear inflation or nominal GDP target to remedy the deflation mentality. Remember Japan's nominal GDP has not grown at all for 20 years because of its ridiculously poor monetary policy.

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  8. Anonymous5:38 PM

    Japan like the USA is a Soveriegn currency ISSUER. So technically it is not "borrowing" its own currency from anyone (domestic or foreign ). What's happening is Japanese people are moving their currency from their current account (non interest paying liquid currency) to a savings account (interest paying term locked account) and the bank of Japan is aiding them. Why are they doing this? The Japanese don't see an avenue to spend their savings. Aside for them huge loss of lives due to the tsunami, that was/ is a big avenue for unlocking these savings and spending it to stimulate the economy.
    Now by increasing the taxes their govt is again applying the breaks on economic growth that's begun.
    In today's world of non-convertible flexible rate fiat currencies, it is important for the people running the country to understand its dynamics. By assuming that we are still living in a fixed rate commodity backed hard currency and acing accordingly is a big disservice to its citizens and humankind in general.
    But them the rich bankers wanted it this way so that hey can continue to rob the productivity of the people.

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  9. "Anyway...oh yeah, I did mention that there might be two ways out of Japan's fiscal trap, didn't I? The other way is to use monetary policy to create negative interest rates. If that can be done in a stable way (without accelerating inflation) and if stable growth persists, then Japan can use an "inflation tax" to erode the value of its government debt instead of an actual tax. Econ bloggers (and commenters), who tend to believe that central banks can hit any NGDP target they want, will probably advocate this "solution"..."

    Well, Japan ought to know. Expansionary monetary policy successfully stabilized its gross government debt before.

    In Japan during 1993-2002 real GDP growth averaged 0.9%, unemployment rose almost consistently every year from 2.2% in 1992 to 5.4% in 2002. CPI fell from 2.5% in 1992 to (-0.7%) in 2002. The Japanese announced their plan of ryōteki kin’yū kanwa (QE) on March 19, 2001 and maintained it through March 9, 2006. Real GDP growth averaged 2.1% during 2003-2007. Unemployment fell every year until it reached 3.9% in 2007. Deflation slowed down to -0.4% by 2007.

    Japan's gross government debt grew from 66.5% of GDP in 1991 to 153.6% of GDP by 2001. After QE the rate of growth of gross government debt slowed down dramatically and it peaked at 186.4% of GDP in 2005. Gross government debt as a percent of GDP then fell for the first time in 15 years:

    https://research.stlouisfed.org/fred2/graph/?graph_id=89146&category_id=0

    So, oh yeah, it just might be, you know, a "solution."

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    1. Here's a graph of Japan's inflation rate;
      http://www.forexblog.org/wp-content/uploads/2010/10/Japan-inflation-rate-chart-1970-2010.jpg

      Japan's QE program in the mid-2000s might have helped boost the economy, but at most it generated 1 year of 2% inflation - that wasn't even above the interest rate on 10-year Japanese government bonds.

      In other words, maybe a far more vast and comprehensive program of QE, forward guidance, NGDP targeting, etc. might raise inflation enough to erode the Japanese government debt, but only if A) demand for JGBs is stable so that real interest rates go negative, B) the debt increases more slowly than the sum of growth and inflation. If Japanese investors jump ship, or if the government doesn't curb its borrowing, even a prolonged period of moderate inflation will not make a dent in the debt...

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    2. Although I mentioned the CPI rate above the more relevant rate is the GDP implicit price deflator. And though I'm no fan of deflation Japan actually managed to shrink its debt ratio in 2006 and 2007 despite deflation:

      http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?sy=2001&ey=2007&scsm=1&ssd=1&sort=country&ds=.&br=1&c=158&s=NGDP%2CNGDP_D%2CLUR%2CGGR_NGDP%2CGGX_NGDP%2CGGXCNL_NGDP%2CGGXWDG_NGDP&grp=0&a=&pr.x=20&pr.y=5

      The key factors in stabilizing the debt ratio were reducing the primary deficit by reducing the output gap, lowering the nominal interest rate and raising the rate of NGDP growth.

      For interest payments as a percent of GDP see page 4:

      http://www.imf.org/external/np/seminars/eng/2012/imbalances/pdf/japan.pdf

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    3. And though I'm no fan of deflation Japan actually managed to shrink its debt ratio in 2006 and 2007 despite deflation

      Yes, because of a spurt of faster growth combined with a massive reduction in construction spending. I'll agree that QE contributed to the growth, but the spending reduction was also necessary to bring down that ratio.

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  10. Johnson: "At some point, Japanese citizens will decide that saving in any yen-­denominated asset is not worth the risk."

    I don't know Japan at all, but I've been reading what foreign residents say, and it seems there is much truth in the stereotype of insularity.

    I get the impression that Johnson's epiphany will happen right after Japan removes the glass ceiling for women in the workforce, overhauls its service sector, and starts encouraging mass immigration.

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    1. The glass ceiling is now slowly but steadily vanishing, though it has a long way to go...mass immigration won't happen. Service sector reform (and manufacturing sector reform too; much of it sucks) is the big problem, zombie firms really, and I feel like it might take a giant crisis for that to happen. So I am almost cheering for default...

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  11. Again why would they default? The Japanese are the sole Soveriegn currency ISSUER. They can issue as much as needed at whatever interest rate they chose to. Haven't they done that for the last two decades? They will continue doing that unless some nut head from our Republican Party convince them otherwise. :)

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    1. The Japanese are the sole Soveriegn currency ISSUER. They can issue as much as needed at whatever interest rate they chose to.

      When you say that currency is issued at an "interest rate", are you referring to inflation as the (negative) real interest rate on money?

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    2. What I meant was JCB can issue as much currency as needed and then buy them back to issue bonds at whatever interest rate they chose.

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    3. Anonymous7:56 AM

      The myth of the Japanese collapse is still going strong...meanwhile the line of burned short JGBs keeps getting longer. 22 years and counting.

      A bit of MMT education should do the quantum leap and keep those kind of predictions in perspective.

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    4. What I meant was JCB can issue as much currency as needed and then buy them back to issue bonds at whatever interest rate they chose.

      The JCB - By which I assume you mean the BOJ, or Bank of Japan, i.e. Japan's central bank - doesn't issue bonds. Although I suppose it could. But usually central banks don't do that. So I still don't understand what you're saying.

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    5. A bit of MMT education should do the quantum leap and keep those kind of predictions in perspective.

      As far as I can tell, none of the people who come into the comment sections of blogs and cite "MMT" as a reason that "deficits don't matter" have the foggiest notion of how "MMT" arrives at this result.

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    6. Anonymous10:42 AM

      Actually I might be able to.

      But the point is that it offers a different view on how the collapse of the Yen has never arrived, in again 20 years (an eternity when you think of it for financial markets...)

      You do not come up with an explanation and the solutions to fix the supposedly big problem are rather debatable.
      Raising tax would politically be a tremendous challenge and we are still waiting for the inflation tax to materialize....

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    7. Well then by all means please do, because so far, 100% of the content of all the comments talking about MMT has consisted of:

      1. the acronym "MMT" repeated over and over,

      2. the claim that deficits don't matter if a country borrows money in its own currency, repeated over and over, and

      3. links to MMT blogs (but not to specific posts).

      If anyone knows what the heck "MMT" is, let him speak now...

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    8. Noah,

      MMT would say that since both dollars (or yen) and treasuries are liabilities of the government, and are held as functionally equivalent risk-free assets by private sector actors, there is very little functional difference between the two save the interest payments. They would say that the CB could buy all treasury debt tomorrow and there would be little inflationary impact - perhaps even a net deflationary impact as the interest income channels were removed from banks, pension funds, etc.

      Once the CB has all the debt on its own balance sheet, it could simply cancel them tomorrow with no functional impact on the rest of the economy.

      The claim that govt's can print its own currency is important to understand the function of bonds - MMTers claim that it is functionally a reserve drain operation that allows the CB to meet its target interest rate. In a world with payments of interest on excess reserves, this coordinated Treasury-Bank-CB dance - 1. issuing debt, 2. selling the debt to bank for bank deposits, 3. transferring treasury's deposits to CB, and 4. the bank restoring its previous reserve balance through selling the bond on the interbank market or to the CB - is unnecessary and merely confuses people about whether governments need to borrow in order to spend (not to mention providing banks interest welfare for being a completely superfluous middleman between the CB and Treasury).

      With regards to Japan's huge debt, they would say - this is a reflection of national net savings desires, which is an endogenous variable that needs to supported in order to prevent a crash in AD. They would say your long-term concern may be true in terms of aging population, but that the answer is to 1. stimulate through govt investment now in productive enterprise to ward off stagnation, and 2. be prepared to raise taxes in the future if a mass releveraging/departure from the Yen starts to cause the price level to rise.

      But in a world of depressed AD, sluggish growth and -most importantly - low inflation, they would say that raising taxes is completely unnecessary and the spectre of "high debt" is illusory.

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    9. As an aside, Noah, it's a bit weak that you're willing to take the time to learn about voodoo Austrian economics, debate people like Cochrane, etc., and still not take the time to read even a basic intro article on MMT from one of its founders.

      These are the guys who regularly collaborate with Jamie Galbraith, who worked with Minsky for the last 20 years of his life (Randy Wray was his top dissertation student), who collaborated with Nobel Laureate Bill Vickrey on policies for Beveridge-style true full employment, who are held up by LSE monetary legend Charles Goodhart as the group of scholars who best understand the historical origins and nature of money, and are one of the very few groups who use a stock-flow consistent macro-model derived from the insights of Cambridge Prof. Wynne Godley (one of the earliest predictors of the Euro crisis). They are cited by the WSJ, Economist, New Yorker, WaPo, CNBC, FT etc. and have gained recognition and popularity in recent years at a pace only matched by the Market Monetarists, whom you are apparently quite comfortable in learning about.

      Here are a bunch of journalist articles written about them (some are more accurate than others, but at least it paints a picture of their public presence):

      http://www.modernmoneyandpublicpurpose.com/blog.html

      I'd recommend these in particular:

      http://johnsville.blogspot.com/2011/06/modern-monetary-theory-mmt-in-nutshell.html

      http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory

      http://ftalphaville.ft.com/blog/2012/02/22/890211/yes-virginia-there-really-is-modern-monetary-theory/

      http://ftalphaville.ft.com/blog/2012/02/22/892201/why-mmt-is-like-an-autostereogram/

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    10. As an aside, Noah, it's a bit weak that you're willing to take the time to learn about voodoo Austrian economics, debate people like Cochrane, etc., and still not take the time to read even a basic intro article on MMT from one of its founders.

      Well, I only have a finite amount of time to devote to blogging (actually to devote to anything)...there are lots of "heterodox" people out there...Austrians, Post-Keynesians, Market Monetarists, etc...I will get to each in its turn. ;)

      Anyway thanks so much for writing this, I really appreciate it. I'll read up and get back to you.

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    11. BTW, what you're describing is not too outlandish-seeming at all. Basically, the only danger from seigniorage is hyperinflation, and you can beat hyperinflation by balancing the budget. Since the amount of seigniorage you can do without triggering hyperinflation is not known in advance and may be large, simply do it until inflation starts to spike, and then stop doing it, and you get a free lunch.

      I am predisposed to agree with this, with the caveat that once hyperinflation starts it might take some time to stop, in which case you'd get the opposite of a free lunch. But I see no reason why limited seigniorage can't, in theory, provide a free lunch...

      Anyway I'll read up on MMT. Thanks again.

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    12. By the way, Ron Paul seems to be an advocate of MMT: http://money.cnn.com/2011/06/28/news/economy/ron_paul_bankruptcy/index.htm

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    13. Noah - Fair enough - i guess now you've worked through Austrians and MMs, the Post-Keynesians/MMTers should be next on your list ;-)

      I agree - they are not that outlandish at all - in fact, as a law student, they are the only group of economists i've come across who consistently ground their economic approach in existing institutions and what warren samuels called the "legal-economic nexus", rather than a priori beliefs about human nature and abstract mathematical principles.

      The point about free lunch is exactly right - and the "limit" may be a lot higher than we know, such as in WWII when we had something like 12% real growth.

      MMTers would advocate you use seignorage money to eliminate full employment through a public Job Guarantee with a fixed-minimum wage (tied to democratically determined basic living standards). Anyone could turn up and get a job, either through public works projects (i.e. WPA/CCC), or through subsidized employment partnerships with Non-profits that meet certain public-interest criteria. They use the analogy of a commodity buffer-stock program, and suggest that by replacing our current unemployment buffer stock with an employment buffer stock, you can eliminate ALL unemployment while maintaining price stability (essentially around a "labor standard" where the value of the dollar with a $x/hr Job Guarantee would settle at the average productivity of 1/x of an hour of unskilled labor). There is a great discussion on how this could work, particularly in combination with a basic income grant, at Heteconomist (http://heteconomist.com/?p=3789).

      They would suggest that this buffer stock program would be the way to prevent hyperinflation before you start. You could basically have all the traditional tax/spend debates within the context of the regular budget debates (with taxes serving an aggregate demand regulator not revenue-generator function), and leave the automatic stabilizers (JG, UI, etc) outside of them to mop up the slack until we reach true full employment of 1-1.5% (i.e. everyone that wants a job has one minus frictional).


      Thanks for the response, and for the record, I do appreciate your blogging a lot. Keep it up, and i'm really looking forward to your thoughts after some more reading on MMT.

      P.s. I think Miles Kimball would also find this interesting - adding MMT's fiscal ideas to his revolving lines of credit proposal could be very powerful in creating a stronger new toolbox for AD stabilization.

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    14. Hoah,

      Hyperinflation is not triggered by excessive money creation. It's the other way round - excessive money creation is the inevitable response of a distressed sovereign to exogenous forces that cause debt buildup and currency collapse. See Cullen Roche's paper on this:

      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

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    15. P.s. I think Miles Kimball would also find this interesting - adding MMT's fiscal ideas to his revolving lines of credit proposal could be very powerful in creating a stronger new toolbox for AD stabilization.

      Miles is a great guy, and will surely respond at length if you present some of these ideas to him. He answers his email and would be happy to blog about this...

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    16. "If anyone knows what the heck "MMT" is, let him speak now..."

      If you have two hours and are more inclined to an A/V approach, this co-presentation from Randall Wray and Michael Hudson at Columbia is fairly informative. Wray specifically covers many of the supposed solvency constraints of 'sovereign governments.'

      https://www.youtube.com/watch?v=0zEbo8PIPSc&list=FL0HKEYJqRTCGZpOP9R4DkeA&index=1&feature=plpp_video

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    17. As one of the organizers of the Columbia seminar, I also recommend tuning into the livestream for the next one this Tuesday, Sept 25th, at 6.15EST. It is called "Governments are not Households: Implications of Monetary Sovereignty and Stock-Flow Consistent Accounting," so is pretty on point.

      We will be taking questions from people in attendance and online - the aim is to allay any concerns or curiosities about the ideas from the founders themselves (including follow up questions where necessary) so that communicative confusion is minimized.

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    18. You wouldn't be able to tell me who is speaking, woud you? It sounds like a discussion of Godley & Lavoie with some of the additional recent scholarship from the folks at UMKC and Levy.

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    19. Stephanie Kelton and Warren Mosler - It's all on the website: www.modernmoneyandpublicpurpose.com.

      It's Godley/Lavoie + Neo-Chartalism.

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    20. Thank you for the link, I missed it in your earlier post. That's a very impressive lineup you all have managed to put together. The only name that stands out that's missing from the list of speakers is Galbraith. Really excellent panels, I'm looking forward to viewing them all. Thanks again.

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    21. Yes, Galbraith was unfortunately not available - he is speaking at Columbia on Nov. 1 on Inequality though:

      http://heymancenter.org/events/global-inequality/

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  12. As a Guamanian, I'm sure I speak for many on our island when I say the method we'd prefer probably wouldn't be one that leads to a big currency depreciation vs. the dollar. Earlier this year, we had the lowest employment-population ratio in the history of our unemployment reports.

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  13. Let's see if I can get this straight.

    So, Japan faced a lack of aggregate demand. Which they attempted to boot through infrastructure investment. There isn't a ditch in the country without its own culvert and bullet train station.

    The effect of which has been that the country has huge borrowings and will go bust unless it raises taxes to European levels. Not to provide European style social services, but just to pay the interest for those culverts and train stations.

    At which point infrastructure investment is the solution to US woes is it? I have to admit I don't really quite get that last logical leap.

    I think I'd prefer to go back to Good Krugman. Who pointed out that Japan's economic growth hadn't really been fuelled by tfp improvements but by increasing resource inputs. Something that obviously has its limits. And what the country really needed was a supply side revolution (no, not the Americanism of lower marginal tax rates, but proper reform of the supply side).

    Which is, amazingly, what I'd say the US and UK (and even more the EU) economies need.

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    1. So, Japan faced a lack of aggregate demand. Which they attempted to boot through infrastructure investment. There isn't a ditch in the country without its own culvert and bullet train station.

      The effect of which has been that the country has huge borrowings and will go bust unless it raises taxes to European levels. Not to provide European style social services, but just to pay the interest for those culverts and train stations.


      This is partly right. Much of Japan's current debt is a legacy of that wasted spending. But most of Japan's current deficit - i.e., the new debt they are adding - is not to pay interest on the old debt, but to fund new spending. The new spending is mostly health care spending on the national health system, increases in government pension payments, and Japan's version of the EITC. The reason most of it is not going to pay interest on the old debt is that interest rates have fallen.

      At which point infrastructure investment is the solution to US woes is it? I have to admit I don't really quite get that last logical leap.

      A starving man needs to eat more; a fat man needs to eat less.

      And what the country really needed was a supply side revolution (no, not the Americanism of lower marginal tax rates, but proper reform of the supply side).

      No argument here.

      Which is, amazingly, what I'd say the US and UK (and even more the EU) economies need.

      What supply-side reforms would you recommend for the U.S.?

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    2. "What supply-side reforms would you recommend for the U.S.?"

      Kill the licensure economy for a start. 30% of all workers need a license to do their jobs? This is worse than the medieval guilds! Which is the sort of corporatism that Adam Smith railed against so effectively.

      Would be quite simple to do as well. Congress has the Commerce Clause to hand, simply declare any one State license valid in any and every other State. We could depend upon at least one State deciding to capture the issuance of licenses dollars through demanding a three sentence application and a $50 a year fee. Instead of all the ghastly nonsense about 300 days training for hair braiding etc.

      That's the first one off the top of my head.

      I'd reform the patent system too. Get back to their only being for non-obvious items (Apple, seriously? Rectangle with rounded corners?) and abolish them on software. That's copyright, not patent.

      The most important underlying problem as I see it (and I emphasise that I'm not an economist, just a scribbler who often writes about it) is that we're making the destruction part of creative destruction much too hard. My pet current example being the horrible problems Uber is having from the incumbent taxi industry.

      This will sound strange but the US is currently, in my perception, much worse at this than several places I know in Europe.

      Full blown "Worstallism" would require a thorough overhaul of the tax system. Abolish corporate taxation entirely: they don't bear the incidence so why pretend? Then you can equalise dividend and income taxation. Capital gains at the same rate as well as long as you've an inflation adjustment mechanism. A good solid carbon tax (would be around $1 a gallon on gas and on all sources of CO2-e.). A VAT would be a great idea along with halving or even quartering the income tax rates.

      Wouldn't be averse to higher welfare spending. Falling off the edge is easier in the US than the EU. I would propose a citizen's basic income. Around the $10k a year mark. Hey, you're a citizen, there's your monthly dole. Then abolish the rest of the welfare system in its entirety.

      And in my dreams I would try to entirely gut the Federal Government. Defense and a couple of other things belong there. But not the vast majority of what it does. Compare the US system to the Danish system for example.

      Danish national income tax is 3.76%, topping out at 15% (only two rates). The 25-30% tax rate is set by, goes to and is spent by the commune, a unit as small as 10,000 souls.

      The EU tax system, if it were like the US, would have 20% of GDP being sent to Brussels (instead of about 1.5%) to then be parcelled out to whoever can lobby best among the political class. An insane way to run a continent.

      Which is why I think that running the US in that manner, with 20% (spending at least, even if not tax receipts) of GDP being handed out by 535 crooks in DC is insane. And I've really never understood why American liberalism loves this system so much. The way to get people to happily hand over more cash to the "state" for public services is to have local taxation for local public services.

      Finally, how in buggery have you ended up with the new healthcare system? The one one conceivable that is even worse than single payer? Why didn't it go Singapore stylee? individual health care accounts with government provided catastrophic insurance? As per, for example, Brad Delong?

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    3. Wow, that was huge!

      I like a lot of your ideas. The cross-state licensing thing is brilliant. Patent reform is a must. Corporate taxation is pointless except as a means of gathering data and offering subsidies for research. And I also like Singapore's health care system.

      However, "gut the federal government" sounds more than a bit silly to me. No successful country has operated in the modern age with a gutted federal government. I'd say that one needs some honest rethinking.

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    4. Anonymous3:10 PM

      Yeah that cross-state licensing idea sounds really good, and this is the first I've ever heard of it. I would enjoy reading a blog post about that, some time.

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    5. It is one of my very few original ideas. I think I came up with it when I was desperate for something to write about at Forbes.

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  14. I don't have the technical competence to say if the MMT'ers are right, and the deficit is irrelevant to a country with its own currency, but I'm pretty sure major tax rises now would be catastrophic for Japan - the domestic economy is too delicate, it would create an immediate recession which would make reducing the deficit impossible.

    The one window of opportunity may be that if someone like Michael Pettis is correct, then we are looking at a major commodity crash, then this could allow a devaluation of the Yen without the consequent impact on making imports of raw materials (which of course japan is very dependent upon) much more expensive.

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    1. I'm pretty sure major tax rises now would be catastrophic for Japan - the domestic economy is too delicate, it would create an immediate recession which would make reducing the deficit impossible.

      Well, I am not a big believer in these large supply-side effects that my advisor Miles believes in. I mean, look at the U.S....the Bush tax cuts did nothing to help the economy, and the Clinton tax hikes don't seem to have harmed it...Color me skeptical here.

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    2. I take the point that there is contradictory evidence on the impact of tax rises, but the most recent, and maybe (considering the current state of the economy) most relevant example would be the VAT rise in early 2011 in the UK, which many have blamed as a primary cause of the double-dip they are currently going through. That rise was fairly modest compared to those proposed for Japan.

      Oops, and I just realised I used 'MMT' without reading your comment above (I'm no supporter or expert on MMT, but I do know that they are the leading lights of the 'deficits don't matter' brigade).

      http://www.guardian.co.uk/politics/2011/jan/04/george-osborne-vat-rise-least-damaging

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    3. Ben Johannson3:40 PM

      @Noah Smith

      The Clinton tax hikes and ensuing surpluses drained income from the private sector, forcing it to take on debt. The Bush tax cuts, being primarily aimed at upper earners who save most of their incomes, did little to support aggregate demand. The last time Japan raised taxes to decrease budget deficits resulted in a renewed recession as households reduced spending in response to the higher sales tax. This lowered incomes, generated additional unemployment and increased deficits as automatic stabilizers increased spending in response.

      Japan has had twenty years now of large deficits with effectively no inflation and flatlined interest rates. Post-Keynesians and MMTer's have been right all along that the loanable funds framework is junk and spending drives rates down rather than up, it's just that no one listened to them until now.

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  15. Noah,

    In what way would the deflationary effect of increasing taxation in some way (since negative real interest rates are effectively a tax) improve the situation, given that Japan's economy has been bumping along the bottom for the last 20 years despite the amount of monetary and fiscal stimulus it has received?

    I'm with Tim on the need for supply-side reform. Though while Japanese savers are happy to buy whatever debt the Japanese government chooses to issue, there is zero incentive to reform anything.

    Please explain why an ageing nation would suddenly reject the main medium in which its savings are held - and by extension, reject its government and its currency? Johnson's argument that savers lost everything in Weimar and Russia is true, but he ignores the fact that both those nations were economically distressed due to losing a war and paying reparations (Weimar)and regime collapse (Russia). Unless Japan has a revolution, or loses a war (maybe with China?), the situation isn't remotely similar.

    MMT says that (assuming the external balance doesn't change) the deficit of the public sector is the savings of the private sector. Japan's households have been saving like crazy for the last twenty years and are still doing so. Their government's continuing deficit and increasing public debt accommodates this, as does loose monetary policy to some extent. If you take action to reduce deficit spending, you impede the private sector's propensity to save - which in an ageing population could well cause even more problems, since people may respond by saving even more.

    Fear of some possible future collapse really isn't sufficient justification for robbing the middle-aged of their savings, or for causing distress to the population by precipitating an entirely unnecessary recession.

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    1. Though while Japanese savers are happy to buy whatever debt the Japanese government chooses to issue, there is zero incentive to reform anything.

      This isn't quite right. Eventually Japan's savers won't be able to absorb any more government debt without substantial monetary easing from the Bank of Japan.

      Please explain why an ageing nation would suddenly reject the main medium in which its savings are held - and by extension, reject its government and its currency?

      Well, if people believe that the Japanese regime will collapse, they will try to park their assets overseas until after the collapse. Even if the regime doesn't collapse, this kind of fear could force a default.

      MMT says that (assuming the external balance doesn't change) the deficit of the public sector is the savings of the private sector.

      I doubt it says that, since that is obviously false. Proof: Imagine a guy on an island saving coconuts in the ground. No government, but savings > 0.

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    2. Noah,

      Yes, I agree at some point Japanese savers will reach saturation point. In fact at some point we are likely to see DIS-saving, I think. My point was that while that isn't the case, neither the savers nor the government have any incentive to change their ways, however much you and I might think they should.

      Why would people believe the Japanese regime will collapse? Unless they lose a war with China, of course!

      Regarding your man and his coconuts - with respect that's not a helpful example. MMT is a MONETARY theory. Your guy on the island doesn't have money, either. We can if you like argue about whether MMT is correct to assert that money is primarily a construct of government. L. Randall Wray is interesting on this:

      http://www.cfeps.org/pubs/wp-pdf/WP10-Wray.pdf

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    3. Noah, this point about deficits/savings is true as a matter of accounting. You assumed a 1-sector model, but a fiat currency system by definition has at least two sectors - the issuer and the user.

      So create a system with two guys on an island, and Guy 1 access to a printing press. Guy 1's deficits = Guy 2's savings.

      http://av.r.ftdata.co.uk/files/2012/02/Sector-Financial-balances.jpg

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    4. Ben Johannson4:41 PM

      Noah,

      The man on coconut island isn't living in a modern monetary system, where the state is the only source of the national currency. He's living in a subsistence/barter economy with no accepted medium of exchange. MMT is very up-front in stating that it applies to a fully fiat currency controlled by a sovereign government. In any economy where the state lacks monopoly power over the currency (Greece or Weimar Germany for example) you have a different monetary system.

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    5. Or and Ben: Nope. Suppose the two guys each have a tree - one guy has a coconut tree and the other guy has an orange tree. They agree to create a fiat currency, and they print, say, 100 tokens of it. Each guy saves by burying some fruit from his tree. Now let's assume they decide to keep the number of tokens fixed (who cares why, that's not the point of this example). The number of tokens is fixed at 100 but the number of saved fruits can change. Your conjecture is that the price (in tokens) of fruit must change so that 100 tokens can always be exchanged for all of the buried fruit on the island. Now suppose there is a sequence of bad harvests, in which neither tree bears fruit. One buried coconut is saved, and the orange guy has all 100 tokens. In the current round, each guy will die unless he consumes >50% of a coconut. Your conjecture is that the coconut guy will give his coconut to the orange guy for all 100 tokens. But he will not, because if he did this he would certainly die. Hence, the net assets of the private sector are not equal to the net liabilities of the public sector. QED

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    6. ....Real vs nominal?!?

      Why are you talking about savings in terms of coconuts and oranges rather than the tokens themselves? In your example, there is no new "savings" in terms of tokens. You're example refers to a relationships between real and nominal assets, but that's a separate question to whether people desire to accumulate financial assets in a regular world (i.e. M-C-M').

      In your situation, the catalyst for handing over the orange would be taxation - i.e. the orange guy would be the "public sector" with the power to declare a head tax of 1 coconut. Perhaps in your situation the coconut owner would prefer revolution since the tax would lead to certain death, but at that point your analogy is pretty divorced from reality and requires a complete breakdown of state power, which is pretty unlikely for a country like the US or Japan.


      But go back to the original claim, which was "that (assuming the external balance doesn't change) the deficit of the public sector is the savings of the private sector." In what macro context does anyone refer to "savings" in real rather than nominal assets?

      *nominal* govt deficits equal *nominal* non-govt surplus as a matter of accounting definition. The quality of real assets underlying those nominal assets is a question of what the state chooses to accept for new dollars to pay tax liabilities.

      As Warren Mosler says, the state is the monopoly supplier of state currency. As the price setter, it can choose what it wants to accept in exchange for currency, and consequently can use this pricing power to move real goods from private to public sphere as necessary.

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    7. Or, to paraphrase your earlier tweet in a (hopefully) more accurate fashion, Law > Voluntary Exchange.

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    8. *nominal* govt deficits equal *nominal* non-govt surplus as a matter of accounting definition.

      Does this hold for one nation in an open economy?

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    9. As Warren Mosler says, the state is the monopoly supplier of state currency. As the price setter, it can choose what it wants to accept in exchange for currency, and consequently can use this pricing power to move real goods from private to public sphere as necessary.

      Oh, but what if people set up a private currency? That's not illegal in the U.S., you know...universities and businesses do it all the time.

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    10. Noah,

      In your example both men are producers and both are saving some of their production - they have physical assets. But this is not the case with private sector savings and public deficits where the private sector savings are held in the form of fiat currency or government debt. Your orange man is not saving oranges, he has sold all his oranges to the coconut man in return for IOUs (tokens) issued by the coconut man against future production of coconuts. Both fiat currency and government debt are representations of future claims against the government. The coconut man owes the orange man coconuts that don't exist yet. Therefore the orange man's savings are the coconut man's deficit.

      Obviously, our orange man could save some of his oranges. If he did, then he would sell less to the coconut man. The coconut man would have less debt, so would in the future be able to keep more of his coconuts - but he would be hungry now. Our orange man's saved oranges are equal to the coconut man's shortage of oranges, and our coconut man's FUTURE unencumbered coconuts are equal to the orange man's FUTURE shortage of coconuts.

      Your discussion of price is interesting but doesn't go far enough. If the owner of the coconut will not sell it at any price, then it is worth considerably more than 100 tokens, and what you actually have is hyperinflation - caused by a disastrous production collapse leading to scarcity of basic necessities, as in Zimbabwe. The fact that only 100 tokens exist is irrelevant, since an infinite number of tokens would be insufficient to make the coconut owner release his coconut. But if your saver has not a real coconut, but the PROMISE of a coconut in the future, then his savings are worthless. Both parties will starve, since there actually are no coconuts. This is how savings were wiped out in Weimar and Russia.

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    11. *nominal* govt deficits equal *nominal* non-govt surplus as a matter of accounting definition.

      Actually, thinking about it, this just seems flat-out false.

      Suppose all wealth in the economy is saved by investing in the stock of Acme Industries. Now suppose that the government's budget is balanced and the number of dollars in the economy is fixed. Now suppose that the price of Acme shares goes up. The nominal wealth of the private sector rises, but the nominal debt of the government does not change.

      Or am I interpreting your statement wrong?

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    12. *nominal* govt deficits equal *nominal* non-govt surplus as a matter of accounting definition.

      Does this hold for one nation in an open economy?

      - yes, but you now can disaggregate the non-govt sector into domestic and foreign, and in short-term govt can run balance/surplus w/o slowdown in growth provided current account surplus. (you could, for example, disaggregate further into household/non-financial corporate/financial corporate, depending on desired specificity). But govt still has key role because ext sector can't generate deficits endlessly - only one of three sectors (govt, dom private, ext private) has printing press.

      "Oh, but what if people set up a private currency? That's not illegal in the U.S., you know...universities and businesses do it all the time."

      - of course, people can and do - but the tax burden (and knowledge that others will have their own tax burden) is only satisfiable in Govt currency. If govt taxed everyone $1, then everyone could just work for $1 and then transact the rest of their economy in private currencies. But that would be govt deciding that it only wanted to move $1 x population number of real resources into public sector. If they raised the tax rate, more resources would have to be released from pvt currency mkts into fiat currency mkts.

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    13. Oh, and in reply to your question about one nation in an open economy - private sector savings can of course be held overseas. The balance still holds. Domestic private sector savings will vary with the external balance if government deficit is fixed. Equally, if the external balance is unchanged, domestic private sector savings will vary with change in government deficit. If you reduce the government deficit, then you need a bigger trade surplus (or smaller deficit) to avoid domestic sector savings falling (or discretionary spending reducing to maintain savings).

      On private currencies, MMT distinguishes between transactional currencies - you can have lots of these - and the sovereign currency or "high powered money", which is the only form of money in which taxes can be paid. Ultimately all other currencies have to be convertible to the sovereign currency in order for taxes to be paid.

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    14. "Suppose all wealth in the economy is saved by investing in the stock of Acme Industries. Now suppose that the government's budget is balanced and the number of dollars in the economy is fixed. Now suppose that the price of Acme shares goes up. The nominal wealth of the private sector rises, but the nominal debt of the government does not change."

      The price of those stocks are unrealised - without govt deficits, there is not enough money in circulation to actually buy those stocks at the new, higher price.

      All internal pvt sector liabilities and assets net to zero. You can split 0 into -1/+1 or -100000/+100000 and it can have an impact on growth (i.e. bank deposit-creation through lending/credit-extension), but there is no net increase in non-government sector financial assets (domestic and foreign) without a government deficit.

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    15. I'm hesitant to post this because it's easy to jump on it as an "a-ha" critique and stop engaging further with MMT's sectoral balances approach, but this post mirrors and elaborates your concern, i think:

      http://www.cnbc.com/id/46573742/MMT_Deficits_and_Savings_The_Babysitting_Model

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    16. Noah,

      Your Acme example is wrong from an accounting perspective. You can't mark Acme shares to market but leave govt bonds at book value. Either you are doing fair value accounting or you aren't.

      If all wealth were held in the form of Acme shares there would be no market for govt bonds. They would be worthless. But Acme shares would take their place as the key indicator of the net worth of the country. The currency would therefore appreciate as the price of Acme shares rose.

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    17. Sorry, just to expand that further.....the currency would appreciate, but as there would be no market for government debt the govt would be forced to monetize. The increase in currency in circulation would offset the appreciation due to Acme share price increase. Assuming that the rise in Acme share price was due to the vast increase in demand for those shares as a consequence of the total rejection of govt debt as a savings vehicle, it is possible that the effect on the currency would be neutral. But as it is highly unlikely that govt debt would be totally rejected as a savings vehicle unless the govt itself were also rejected, it is far more likely that the currency would collapse and there would be hyperinflation. This is the reason for the historic association of large-scale debt monetization with hyperinflation. Govts monetize debt when no-one else will buy it - in which case they are already in deep trouble anyway.

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    18. But Frances, in my example, there are no govt. bonds outstanding, since he govt. has never ever run a deficit (or surplus) in its history.

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    19. @Or:

      The price of those stocks are unrealised - without govt deficits, there is not enough money in circulation to actually buy those stocks at the new, higher price.

      Yes, the price of the stock is unrealized; yes, you'd need to print money to be able to sell all shares of stock at that price. NO, you would NOT need govt. deficits, only cash.

      And my point is precisely that the wealth gains are unrealized. Using mark-to-market accounting, unrealized wealth gains are included in wealth. But what kind of accounting can you use other than mark-to-market?

      All internal pvt sector liabilities and assets net to zero.

      Well, that depends on if you count equity as an asset. If you do, then assets + liabilities = equity > 0.

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    20. I'm confused here - the price of acme shares is going up, but there is only $100 in existence. How can they keep going up? What are people exchanging for shares? real goods? So you have $100 in existence, a million people, and a bunch of shares worth $400 billion? Why would people value the assets of ACME at $400 million when there is only $100 in existence?

      If the shares retain a fixed nominal price but represent more real assets, it sounds like you're just talking about massive deflation...or am i missing something?

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    21. Ah. "...the nominal wealth of the private sector rises, but the nominal debt of the government does not change". I assumed there was some government debt.

      If there is no govt debt as such, my original comment stands, namely that Acme shares would be the key indicator of country net worth and the value of the currency would appreciate in tandem with Acme's rising share price. If the government did not wish the currency to appreciate, it would have to issue more of it. As fiat currency is really another form of govt debt (callable zero-coupon perpetuals), the increase in value of private sector wealth is therefore (one way or another) still balanced by a bigger govt deficit - just in a different form.

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    22. I'm confused here - the price of acme shares is going up, but there is only $100 in existence. How can they keep going up? What are people exchanging for shares?

      Dollars. :)

      See, not ALL of the stock of outstanding shares is being traded. Only a few people are trading shared. Hence the mark-to-market value of shares outstanding can exceed the # of dollars in the entire economy. Truth!

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    23. the value of the currency would appreciate in tandem with Acme's rising share price

      The "value of the currency" in terms of what?

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    24. Noah

      External value. MMT assumes freely floating currencies.

      The mark-to-market price of Acme shares can exceed the AMOUNT of currency in circulation, but it can't exceed its value. You are in effect assuming that the value of the currency is fixed, which is not true. If Acme share price rises but the amount of currency in circulation remains unchanged, the value of the currency must rise as well - which shows itself domestically as deflation, of course.

      Everything is relative. What you are trying to do is find fixed points, but in reality there aren't any.

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    25. External value. MMT assumes freely floating currencies.

      No, my example is a world with only one country, one government, and one currency.

      I ask again: the "value of the currency" in terms of what?

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    26. You're moving the goalposts! :)

      However, it doesn't matter. We can look at this from an exclusively domestic point of view. Think about the accounting implications for savings revalued to a value that exceeds the amount of money in circulation. The whole point of mark-to-market accounting is to value assets AS IF they were sold today. If they actually COULDN'T be realised at that price today because there physically isn't enough money in circulation, then that cannot possibly be the fair value of those securities. Fair value can only be established on the assumption that there is no restriction on the supply of money. If the supply of money is restricted then the securities' price must fall to the amount of money in circulation, no more - which is the same as saying the value of the currency must rise. Or, putting it another way, the purchasing power of the currency must increase - i.e. deflation.

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    27. You're moving the goalposts!

      Not in the slightest. I came up with the most simple example I could think of, and specified it fully and completely from the very beginning.

      The whole point of mark-to-market accounting is to value assets AS IF they were sold today. If they actually COULDN'T be realised at that price today because there physically isn't enough money in circulation, then that cannot possibly be the fair value of those securities.

      Au contraire. If only a small fraction of the securities trades, the mark-to-market value of the entire company can exceed the total money supply indefinitely. The value is "fair" by every standard of modern accounting.

      Fair value can only be established on the assumption that there is no restriction on the supply of money.

      Not according to any accounting law I've ever heard of!

      If the supply of money is restricted then the securities' price must fall to the amount of money in circulation, no more - which is the same as saying the value of the currency must rise.

      First of all, no, this is not the case. The price of the security is not restricted by the money supply, except that one share of the security cannot be priced at more than the total money supply. Below that limit, a share can trade for any price, because trade at any price is legally allowed.

      Second of all, since asset prices are not counted in the GDP deflator, the CPI, or any price index, falls in asset prices do not constitute deflation.

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    28. I may not have a PhD in economics but I do understand mark-to-market accounting. The reason that accounting laws don't limit fair value accounting by the available currency in circulation is that it has never occurred to anybody that governments might refuse to issue any additional currency required to settle trades. Mark-to-market accounting values securities as if they are sold today, implicitly assuming there would be sufficient currency in circulation to settle them. But more importantly, the market price implicitly assumes that there will always be means of settlement. If there were some limit on currency issuance which meant that there might not be the means of settling trades, what would the effect on market prices be?

      If all wealth were held as Acme shares, the rising price of those shares would indicate economic growth. So it is not the falling asset price itself that would constitute deflation. It's the general increase in purchasing power of the currency caused by restricting its issuance in a growing economy. In your closed economy that would show itself as falling consumer prices. Of course, we were originally talking about an open economy, which could increase exports, but after you redefined your example to mean "only one country" that became meaningless and the economy is closed by definition.

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    29. No disparagement to either party. The interchange is instructive. :)

      Frances Coppola: "As fiat currency is really another form of govt debt (callable zero-coupon perpetuals), the increase in value of private sector wealth is therefore (one way or another) still balanced by a bigger govt deficit - just in a different form."

      IOW, not G - T (gov't spending minus gov't revenues).

      Noah Smith (earlier): "Each guy saves by burying some fruit from his tree."

      Does that mean that S (saving) increases?

      Feeling better now about defining terms? :)

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  16. Why doesn't anyone here mention the real issue clouding demand, wages?

    All the pump and dump in the world won't do any good if young people are wondering how they are going to pay their bills.

    That is Japan (and the US's and Europe and ... ) problem in a nutshell, too many young workers with low paying unstable jobs

    This is bad enough that Japan is on an extinction trajectory, either they have far too few babies (with a 1.39 birth rate well below replacement) or they import foreigners (not easy, most Asian peoples have similar birth rates) who aren't Japanese.

    The US birth rate is a bit higher but too its has dropped well below replacement.

    Worse if we take the US strategy of allowing/tolerating mass immigration, we down-skill the populace (the most skilled people don't become immigrants for the most part ) create ethnic conflict and harm the existing wage structure (immigrants work harder for less ) especially for the poor . Than after a while the immigrants have less kids too It gives a short term bump with heavy costs.

    The only way to fix the issue is income stability. There are many ways to get there, make-work, labor sharing, social credit, social democracy, populism, choose one or several.

    If a state sovereign state choose that approach , the demand will reignite, private demand will grow (reducing public welfare costs ) and there will be economic improvement. The current choices simply exists to keep the existing rich, richer and the poor, poorer which is the whole point of course.

    No getting this is play is hard, it goes against a lot of very stupid economic and moral teachings and worse given how insanely status conscious the wealthy can be, well they will resists anything like that. While if there were such as case they'd still be rich in a material sense of others aren't suffering they won't be nearly as important and they just can't have that.

    Worse for the US we have millions of armed morons who think programs like that are a slippery slope to the Holocaust.

    So we'll just piddle till Rome (or D.C. or London or Tokyo or...) burns

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  17. Or maybe Japan could experience more real growth.

    I'd guess a little bit of each: more inflation, more real growth, and more taxes. Maybe a tad bit less spending.

    And the same goes for the U.S.

    This doesn't seem like a big problem and that's why markets yawn.

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  18. The research on "fiscal consolidation" is pretty clear that long-term deficit reduction based on tax increases is very ineffective. The research shows that cutting entitlements and spending on government employment is much more effective and has lower output costs than tax increases.

    Just Google "fiscal consolidation" and you will find plenty of studies that show these same findings. Few studies back up the idea that raising taxes would be effective.

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  19. Anonymous12:39 PM

    Given the extremely long bitter rivalry between Japan and China - going back thousands of years - then Japan is likely to turn its country around *only* when they come to a heated confrontation with China. Doesn't need to be a hot war. All this monetary gamesmanship is just moving around deck chairs for a people who've lost their direction.

    Doug8765

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  20. Question: Japanese saving by the private sector has plummeted in recent years, to around zero. Does that mean that they are definitely **not** in a balance sheet recession? Thanks. :)

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