Here is the common ground and controversy between most economists on the situation, I think it is interesting how much common ground there is:
The common ground:
* The government of Japan faces budget constraints; it cannot tax more than a certain amount and that includes seigniorage (taxing using inflation).
* Right now Japan doesn't seem to be immediately close to those constraints since interest rates and inflation are low.
* Lowering taxes, spending more and depreciating the currency will expand the economy, but rates will increase and so will inflation (among with wages).
* Inflation expectations can create actual inflation. It can be generalized that different people will demand higher prices in advance if they can, since they know their costs will rise. The same applies to interest rate and there is a link between them (investors demand higher yields if inflation is expected).
* Default and excessive inflation can be a result of too much expansionary policy (eventually, what is too much is up for debate), but they can destroy the gains and make the economy worse off.
The disagreement (you can see that its actually a spectrum of opinion and there are differences between the details of the policies, but for clarity I've divided them neatly into two camps):
* School A believes expansionary policy will make Japan default because the government will have lost control, since expectations can make interest rates and inflation jump rapidly. They site that the level of Debt to GDP is over 200% as evidence. They say the government should not lose credibility or else.
* School B believes that the expansionary policy is so hard to actually pull off that some expectations of inflation and higher rates are desirable. Since rates stay low and deflation is always around the corner it seems that the government can easily reverse too much expansionary policy, far before a default appears to be likely. Additionally Increased GDP will bring more revenue, decreasing the need to rely on inflation after a certain point. They joke that the "government should credibly promise to be irresponsible" to get out of the bad equilibrium that is the lost decades.
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A political compromise appears to have been made by mixing expansionary policy with the decision to increase the sales tax. Since this caused a recession school B feels vindicated - getting to a default and inflation path is really hard. Interest rates and inflation refuse to bulge.
However the lack of progress will add even more to the debt to GDP, perversely aiding school A (even thought some of them might agree that B were right in the previous period). So the end result has been 20 years of the government oscillating between those two positions, without reaching a point where either side can victory (default or significant GDP growth).
* If creditors see that you are trying to monetize debt too quickly, they will demand higher rates.
* At some level of inflation, seigniorage revenue will fail to increase.
* If the government borrows money in a foreign currency to spend too much, depreciation makes loans harder to repay and there is no seigniorage.
* If a government refuses to loose monetary policy while spending too much, it will not be aided by monetizing debt, which makes default even quicker, since interest rates will rise regardless. Expectations of default can lead to capital flight, which if money is tight will wreck even more damage to revenue.
Creditors can't raise rates on bonds. When you issue a bond, you get paid then, and the creditor gets paid later. They can raise rates on new issuance, but the inflation rate is determined by monetary policy, not so much fiscal policy.
Nation-states are constantly refinancing or issuing new debt, sometimes daily. The pool of potential creditors for this sort of debt is very limited, and will react pretty quickly to changes in almost any area of public policy by shunning your debt if rates are not to their liking. Also, some of this debt is auctioned, with results indicating what the market thinks of proposed rates.
Oh wow, it is certainly a challenge to find a public intellectual to admit something like that, especially considering that not everyone can be neatly placed in one of the two camps. But you can get close to that by reading between the lines, by the viewing the context.
A close reading will show him admitting, quite begrudgingly :
* we aren't that close to a "sudden stop" after all.
* homework shows that rates do seem to stay low, when having high debt. It is "sobering".
* more inflation is desirable (to be fair, this was always his position)
* balancing the budget "tomorrow" is "facile"
But if you look at my post carefully, the case for him looks stronger:
* Cumulative costs - more debt, more problems. Now its worse.
* there are other factors beside monetary and fiscal policy (this is definitely true, but a distraction, no reason why B shouldn't agree)
* no admission that inflation is hard to do
So here you go, Rogoff admits he was wrong, but finds his case only strengthened. Since he was wrong the other side was right, correct? Not exactly, since he invents a straw-man (simplistic Keynesian) to deny how much common ground there actually is. There might be a better admission somewhere, maybe in private or after a bit more time, but this is pretty close.
It is more about currency deflation rather than price deflation. Without currency inflation the current system collapses.
Price inflation is from currency inflation - ie: more $ around today chasing approximately the same number of goods than yesterday. Agreed?
When currency deflates, there are less dollars chasing those goods so dollars are harder to come by and prices necessarily decrease to allow the remaining dollars to cover the goods being exchanged. Yes goods 'get cheaper' in dollars. That's just a side show and not the problem.
So what happens to debtors in a currency deflation? Dollars are harder to come by, debts cannot be repaid and debts default. Debt default is the destruction of currency. More deflation. Positive feedback.
Savers today save in dollar accounts which rely on debtors to pay back their debts. With debt collapse, so goes bank assets (debt) and now their liabilities (savings accounts) outweigh their assets which makes them insolvement.
If today's savers didn't save in bank accounts for the promise of more dollars tomorrow then we wouldn't have this problem. Save in fine art and collectibles, save the world.
When people know there's deflation they hoard money rather than spending - which can then push into further deflation. Currency ceases to be liquid because no one wants to sell - you're making a free profit by just holding onto your cash. In a world with only one currency you end up with the rentier class that has money capturing all economic productivity. Given that the Japanese have other options... I don't know. Interesting times to be sure.
It's a myth propagated by certain economists who believe there is an optimum inflation rate and that this optimumum is around 2%. They also predict a great calamity if inflation falls below zero. In practice, experimental evidence tells us that this theory is complete rubbish.
>In practice, experimental evidence tells us that this theory is complete rubbish.
Please, provide us with examples of a sustained deflation that didn't harm the economy.
The supply of money has to grow at the same rate as the real economy, otherwise you can end up with "problems" associated with having "too few dollars". In other words, we need to keep increasing the supply of dollars to buy the growing output of goods we produce. This is common sense. Because it's impossible to hit that growth target exactly, we err on the side of caution and produce some inflation, which has the side benefit of preventing the hording of currency, as it naturally diminishes in value over time. For whatever reason most governments have decided on ~2% to be a safe, stable target.
One of the common misconceptions of deflation is that the lower prices should be good for consumers. Which is true, if terms of consumer goods. But keep in mind that wages and debt are also affected, which is where the real pain from deflation for the average person stems from.
Currencies are government made artificial stores of value.
If money doesn't lose value fast enough, people, companies and banks invest in government sponsored fiat instead of the real economy. This distorts the markets.
Money should be there to allow transactions and contracts without having to do barter. It has no choice being a store of value to do so, but it should not artificially keep value at a rate that makes it desirable enough so that it replaces private markets for investments. To do so is a subsidy to economic idleness and a promotion of investment in fiat instead of the real economy.
Money doesn't have intrinsic value. It should not artificially be made to seem like it keeps so much value by governments. It should be made stably declining and just valuable enough to allow for low friction transactions and contracts. More than that and you are throwing a wrench in the gears of private markets.
I think because while average prices for individual devices go down, you make up for that with volume in an expanding market. Once you saturate the market, then you have to diversify, create new markets or consolidate (buy more market share).
A computer manufacturer doesn't need to increase their market share to keep the same profit when a process technology matures and therefore gets cheaper.
It is trivially possible to keep making money selling computers even if the total market share doesn't expand.
As an entity, yes, but overall as an economy this does not work. How will you be able to afford giving employees raises? Cut the workforce, and then what happens when everyone 'cuts the workforce'? what happens to total buying power?
Price-inflation means our purchasing power decreases. We're all better off if we get moar stuff for our money instead of less, but governments would like us to believe the opposite.
We ordinary people clearly don't benefit from inflation, but who does? -Might it be the same people who are telling us inflation is good?
Even if wages do fall, as long as your purchasing power increases more than your wage drops, you're just fine.
People take on massive loans exactly because prices have been inflated. That certainly doesn't mean deflation is bad.
Even if you're paying off a loan, price deflation is not a problem because though the loan is becoming more "onerous", you'll have more money left over for paying the loan after you've bought everything else you need.
> Additionally Increased GDP will bring more revenue
The thing is with the current policy you won't get much increased GDP. Prices are going up in Japan now, which will lead to decreased consumption, decreased savings (or maybe actually an increase in savings vs spending if Japanese feel the worst is yet to come) and negatively impact GDP.
This is incorrect. GDP growth in Japan jumped when it became clear Abenomics was going forward, and un-jumped when the recent tax increase went in.
The annualized growth[1] in between these two periods has been greater than 2%, with falling unemployment, despite a declining workforce. The growth right before Abenomics was negative and falling.
[1] For this comparison, make sure to use annualized QoQ figures. Data-illiterate people have been using YoY figures to argue Abenomics doesn't work, but these are distorted by the pre-Abenomics recessionary plunge in 2012.
Or rather, instead of putting more money into their economy by printing it, which was working extraordinarily well, they instead decided to pull money back out with a huge rise in a regressive tax.
"Real GDP" is some kind of economic truther term. If you can sell debt at a low interest rate, whatever paper you've generated is "real" because the market is still buying it.
To be fair, "real GDP" has a somewhat precise economic meaning as measuring GDP while taking inflation into account; i.e., take nominal GDP and divide it by some measure of inflation (it is only somewhat precise because one can quibble about which inflation measure should be used).
In general though, you are right that especially "real growth", as the antonym of "fake growth", is often used in a way that has economic truther feel to it.
I'm not talking about short-term changes in GDP. I'm talking about longer term ones, obviously. Nothing in Economics is worth measuring on a 6 month scale. Political decisions on the Economical climate take dozens of years to take their toll and have marking impact.
Monetary policy is considered neutral in the long run. The real economy is definitely not. Monetary shocks are a passing phenomenon. Loss of GDP hurts for a very long time.
There's so much about your post which is incorrect that I don't have time to debunk it all. So let me just hit the biggest error, so that others don't have to waste their time:
It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.
This a really strong statement and is either a misunderstanding or exaggeration. The received wisdom is either that a country issuing debt in its own currency cannot be forced to default or that it is not as vulnerable to sudden stops of confidence in its debt. There are various levels of conviction in these statements.
This definitely doesn't mean that it is impossible; at a minimum, a country might choose to do it. In fact as others have pointed out, default is sometimes preferable to hyperinflation and extreme devaluation. After all, all countries, Japan included, rely on imports to get at least some essential goods (think about food, fuel, medicine and tools); autarky is possible, but very inefficient and painful.
A country defaults when it can no longer service the interest on its debt.
Japan's interest on the public debt is around $250B/year, or around 5% of GDP.
5% is a higher percentage than most countries (U.S. is around 2.5%) but less than, say, Greece at the height of their crisis. And Greece ended up not defaulting and not devaluing their currency (obviously, being in the Eurozone).
$250B is around 25% of the annual government budget for Japan. Again, this is higher than most countries but manageable.
Additionally, 92% of Japan's sovereign debt is held domestically. This means that the interest paid on those bonds don't go to Wall Street or Beijing but rather to Japan's own banks and pensioners. As a comparison, 47% of the U.S. debt is held by foreigners.
In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
That statement is far more reasonable than 'It's literally impossible for Japan to default on their debts', which is false. Japan could default on debts if it chose to (many countries have in the past).
>That statement is far more reasonable than 'It's literally impossible for Japan to default on their debts', which is false.
This is slightly pedantic. The argument was about whether incurring ever-greater amounts of debt would result in the default of Japan, a country with a sovereign currency. It's a fallacy that is often repeated. As long as the debts are denominated in said currency, the answer is: no. A country with its own currency will always be able print more money to fulfill these obligations, making default practically (not literally, I guess) impossible.
The fact that they can choose to default, or that we may run out of trees, or ink, or whatever, is a bit outside of the scope of the argument.
A country defaults when it either can no longer make the payments, or when it can't pay back the real value rather than just the nominal value.
eg If I devalue my currency by 99%, and then attempt to pay off debts in that currency, that is a default, regardless of if a country were to try to pretend otherwise. The alternative to that context, would be that any nation can just freely debase their currency, pay back debts in worthless paper, and nobody cares because it's not a default - that's false.
Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
> Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
Back in the real world: When I said earlier that Japan has to pay $250B this year to service their debt, that means there is an actual no-kidding line item in their fiscal year 2015 budget for the Ministry of Finance to pay that money to bondholders. They've budgeted the money already and it will be paid out starting in April just like it was in 2014, 2013, 2012, and so on.
Japan can only fund their government through debasing the Yen, because 50% of tax revenues are being consumed by interest payments, and that's rising by the year. That's a death spiral that is only going to get worse.
The government of Japan is plainly bankrupt. People that own Japanese government debt are already being paid back in devalued Yen. The only options left for Japan are to either openly default, or dramatically increase the debasement of the Yen - the last option is exactly what they will choose. So rather than an open default, they will default by destroying their currency.
Abenomics will be followed by a call for Abenomics 2, and a more dramatic destruction of the Yen. Japan has been living on borrowed time for 15+ years, maintaining a fake standard of living that was dependent on perpetually greater amounts of debt; the bill has come due. The exact same process is occurring in several of the biggest economies of Europe.
Please find me a single CDS contract that allows that definition of "default"? Or a law or a solvency judge who would agree? If your contract stated that you are to pay back 100 USD or JPY or whatever, on a certain date, and you pay exactly as stated, then that cannot be a default, regardless of the prevailing FX or inflation rate at the time. You should have FX or inflation hedged if you were worried about those risks...
You may consider it a "moral" default if the debt is paid back in inflated currency, but it is in no way a technical default and you can't just redefine long standing meanings of the word "default" to suit the point you're trying to make.
I'm not saying that nobody cares if debt is paid back in debased currency, but if it's paid back according to the letter of the contract, then it's not a default.
It's "literally impossible" only in a very literal sense of the word. In other words, yes, Japan can indeed get out of a debt of 17 gazillion yen simply by printing 17 gazillion yen, but I'm not sure flooding the money supply like this would cause much less damage than an actual default (=the Japanese government telling its bondholders that it's not going to repay them).
Japanese government creditors as a whole will never want to get rid of Japanese bonds in the kind of mass-selloff that you're implying unless the Japanese government does tell its bondholders that they're not going to be repaid.
The reason is simple: individual holders of Japanese government bond may want to get out of Japanese government debt. These individuals then hold Yen in a bank account (if they're regular individuals or institution) or in a central bank account (if they're banks). What happens with those Yen?
Maybe they'll buy some other bonds, or sell those Yen for another currency, or something else entirely. But no matter what they do, those Yen will still be around. It is impossible for them to disappear, unless somebody buys Japanese government bonds.
So those Yen might circle around a bit in the financial system, but at some point, they will end up with somebody who sold some asset and does not want to buy anything else. This somebody now has a choice of keeping Yen (which guarantee no loss of principal but have zero nominal return) or of buying government bonds (which also guarantee no loss of principal and which have a - however small - positive nominal return).
At this point, buying the government bonds is clearly the superior option. This hot potato effect of money is why there will never be the need to print gazillions of Yen to get rid of the debt.
I would point out that one might say that your statement is based on a fundamental misunderstanding anyway: Whether you hold Japanese government bonds or Yen, both are forms of government debt! The only difference between them is in maturity and interest rates.
>It's "literally impossible" only in a very literal sense of the word.
The literal sense of the word "literally"?
Yes, I think that's exactly what was meant!
Has the word "literal" been so badly abused across the internet (true) that you thought a correct use of the word needed clarification?
Or is contemplating the fact that Japan's govt. debts are entirely in its own currency, which can be issued at will with no constraint from the financial markets, so shocking and nonsensical to orthodox thinking that you thought that the original statement couldn't possibly have meant what it said?
At a high enough rate (e.g. war time Germany, 1980s Brazil, Zimbabwe), hyperinflation will turn your nominal returns into next-to-zero real returns. Conversely, default doesn't have to be "we won't pay nothing". A country can partially default.
I'd imagine, it's that the damage caused by massive inflation does not start and stop at what financial institutions would prefer. (For that matter, financial institutions would probably prefer a haircut on their Japanese bond holdings, over the 3rd largest economy going up in smoke.)
> It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.
Banks are not going to be super happy when the government tells them that their bonds are worth nothing through giga-inflationist measures. Or are they ? Default is better than nothing, at least you can pick up the pieces, while inflation is literally destroying your economy for any foreseeable future.
>inflation is literally destroying your economy for any foreseeable future.
Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default. They're both very painful, but it's not clear to me that one is especially worse than the other.
> Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default.
I grew up in an Eastern-European post-communist country which was very badly affected by inflation in the '90s (it ran in the high double-digits for almost all the decade, and in one year it actually surpassed 100%). Let me tell you that to see your life-savings absolutely annihilated in a matter of 2-3 years it's much, much, much worse than deflation. Japan got into the current mess after 20 years and it still manages to build Maglev trains and to be an economic power, but in a country affected by very high inflation all that goes out of the window (see the Soviet Union implosion).
And anecdotal recollection, I remember when my parents had asked me to be the one in charge of answering the family's phone (I was 14 or 15), and to tell whomever was calling that they were not home (they had borrowed money from lots of their friends to buy food and to pay for basic apartment maintenance and there is no-way to pay it back). One day a lady judge called, asking my parents to pay back the money they owned her because she did not have money to buy bread. Now, you can imagine that in a country where even judges cannot afford to buy bread for their family things are worse than worse.
Your response completely misses quanticle's point. Quanticle was talking about the choice between inflation and default. (So, when it comes to your life-savings, both can be utterly destructive.)
Instead of actually addressing quanticle, you went into an irrelevant inflation/deflation rant. It would be nice if we could actually talk with each other rather than at each other in this kind of discussion.
Edit to point out once again: Default and deflation are not the same thing. By bringing up deflation in this particular sub-thread, you are further reducing the signal-to-noise ratio in a comment thread that is already of low average quality.
> (So, when it comes to your life-savings, both can be utterly destructive.)
As I was trying to say, after 20 years of a shitty deflationary economy the Japanese people still pretty much have their pensions more or less intact, while in a highly inflationary economy (like the one I experienced) the pensions become almost null in a matter of maximum 5 years. So your point, "So, when it comes to your life-savings, both can be utterly destructive" is actually demonstrably false, based on recent historic examples. I agree, we can start the discussion from here, i.e. from demonstrable economic facts.
Granted, English is my second to third language, so I try my best at holding a conversation.
Have you heard of Malaysia or Mexico in the '90s? They didn't like default too much either.
Germany in the '20s (not the '30s - hyperinflation was over by the '30s - just in time for Germany to be sucker-punched by the Great Depression) was a special case. They hyper-inflated in order to default. Namely, the Triple Entente had imposed massive war debts onto Germany at the end of World War 1, and Germany resorted to printing currency in order to pay off its war debts. When formal default justifies military invasion and the annexation of your territory (which was the French argument when the Weimar Republic talked about default), hyper-inflation begins to look awfully attractive.
While it's a trope to use the Weimar Republic as an cautionary tale about inflation, we can't really learn very many lessons from it, because of the relatively exceptional historical circumstances preceding the founding of the Weimar Republic.
(In the end, it was all moot, of course. Hitler unilaterally canceled Germany's debt payments, essentially calling the French on their bluff about invading the Rhineland. The French didn't invade, and Hitler was emboldened to pursue further expansionism.)
What I've read is that inflation in Germany in the 1930s was actually very usefull. They had an enormous amount of debt they were incapable of servicing. The huge inflation cut the debt to pieces very efficiently. The inflation was not the cause of German problems, it was a symptom of problem of having a too large debt. It is sort of like blaming the flu on the fever. The fever might feel bad but it is actually your body's way of fighting the flu.
Probably you should read another version of how inflation "helped" Germany. When you have hyper inflation like that it may be good for paying back your debts, but your creditors soon realize that their payments are worth nothing (because you just print paper, you don't create value like that), and you disintegrate all private investment in your country. Why do you think the Third Reich nationalized every industry out there?
My understanding is that German debt was not denominated in paper, but that they had to print money to buy gold at whatever rapidly falling rate people would give. Presuming my understanding is correct, the debt was certainly the root problem, but the inflation wasn't helping - it made it harder to buy the next payment's gold.
The common ground:
* The government of Japan faces budget constraints; it cannot tax more than a certain amount and that includes seigniorage (taxing using inflation).
* Right now Japan doesn't seem to be immediately close to those constraints since interest rates and inflation are low.
* Lowering taxes, spending more and depreciating the currency will expand the economy, but rates will increase and so will inflation (among with wages).
* Inflation expectations can create actual inflation. It can be generalized that different people will demand higher prices in advance if they can, since they know their costs will rise. The same applies to interest rate and there is a link between them (investors demand higher yields if inflation is expected).
* Default and excessive inflation can be a result of too much expansionary policy (eventually, what is too much is up for debate), but they can destroy the gains and make the economy worse off.
The disagreement (you can see that its actually a spectrum of opinion and there are differences between the details of the policies, but for clarity I've divided them neatly into two camps):
* School A believes expansionary policy will make Japan default because the government will have lost control, since expectations can make interest rates and inflation jump rapidly. They site that the level of Debt to GDP is over 200% as evidence. They say the government should not lose credibility or else.
* School B believes that the expansionary policy is so hard to actually pull off that some expectations of inflation and higher rates are desirable. Since rates stay low and deflation is always around the corner it seems that the government can easily reverse too much expansionary policy, far before a default appears to be likely. Additionally Increased GDP will bring more revenue, decreasing the need to rely on inflation after a certain point. They joke that the "government should credibly promise to be irresponsible" to get out of the bad equilibrium that is the lost decades.
-----
A political compromise appears to have been made by mixing expansionary policy with the decision to increase the sales tax. Since this caused a recession school B feels vindicated - getting to a default and inflation path is really hard. Interest rates and inflation refuse to bulge.
However the lack of progress will add even more to the debt to GDP, perversely aiding school A (even thought some of them might agree that B were right in the previous period). So the end result has been 20 years of the government oscillating between those two positions, without reaching a point where either side can victory (default or significant GDP growth).