The potentially ugly 'end game' for Japan's debt spiral

[Ad Orientem]

Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned.

Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory.

Read the rest here...
http://www.telegraph.co.uk/business/201 ... bt-spiral/

Blanchard is a heavy weight in the field of economics.

[clacy]

I feel like we'll be reading articles like this 20 years from now too.  It's hard to say how long the can be kicked down the road.

[barrett]

I feel like we'll be reading articles like this 20 years from now too.  It's hard to say how long the can be kicked down the road.

Yeah, I agree with this. On the other hand, with more and more countries running up their debt to GDP ratios, the chances on ONE of them imploding becomes greater. There's also always the question of whether or not just servicing the debt (as opposed to paying it down) is sufficient. But I am oozing into an area that I don't know enough about.

[dualstow]

I read an interesting piece in 'Foreign Affairs' this morning which may well have been called, "What Japan Syndrome?" You need a subscription so maybe don't bother with the link, but here's the gist:

A) GDP is the wrong way to measure things these days, partly because inflation is low.
B) the cost of food, housing and energy has gone way down for the most part. And the cost of things like electronic goods has plummeted even faster.
C) Japan is now infamous for its stagnation, but it's a stable, functional society & economy. The author suggests that the country is in de-growth or post-growth mode, and that it's not so bad.

I think I agree.

[Pointedstick]

Yeah, I think the challenge of the next century is going to be adapting to low or no growth economics without blowing everything up. Or figuring out how to measure growth in a way that doesn't depend on increased population or resource consumption. People keep pointing out how lovely of a place Japan is despite looking like a basketcase on paper.

[clacy]

Yeah, I think the challenge of the next century is going to be adapting to low or no growth economics without blowing everything up. Or figuring out how to measure growth a way that doesn't depend on increased population or resource consumption. People keep pointing out how lovely of a place Japan is despite looking like a basketcase on paper.

Yep, relative to most of the world, would you rather live in a first world "financial basket case" or a 3rd world "high growth" country?  Most would chose the modern basket case.

[MachineGhost]

Blanchard is a heavy weight in the field of economics.

Doesn't mean he knows shit.  General rule of thumb is people with PhD's are the most clueless idiots about actual reality, especially those that win Nobel Prizes or could have.  Ivory Tower.

Prof Blanchard has been one of the world’s top theoretical economists over the last quarter century and might have won the Nobel Prize by now if he had not been cajoled into IMF service by his fellow Frenchman, Dominique Strauss-Kahn.

He transformed the IMF into a brain-trust of progressive ‘Keynesian’ thinking - or strictly speaking the MIT school of  New Keynesian and Neoclassical Synthesis - much to the fury of Berlin. A leaked document from the German finance ministry said the institution should be renamed the ‘Inflation Maximizing Fund’.

Well, at least they're evolving even if they're still a ways off from operational reality.  It's about time someone jettisoned the gold bug doom porn "sound finance" neo-classical crap at the IMF.  One thing you can count on is there are always new and upcoming aspiring PhDers willing to exploit a failed prevailing orthodoxy.  Just give it time.

[MachineGhost]

I feel like we'll be reading articles like this 20 years from now too.  It's hard to say how long the can be kicked down the road.

Japan can't default and they can emit unlimited bills of credit, so unless the Japanese economy makes a miraculous, high growth recovery against negative demographic trends that makes all the local's savings parked in government debt a hot potato, I fail to see what will be the straw the breaks the camel's back.  The Japanese are a very hompgenous society.  It would take a gigantic Black Swan event to really get them to stop saving locally (and what do people do in a panic, flee to goverment debt!)  I'd say only war or threat of Communist takeover can accomplish that.  Maybe that idiot dipshit in North Korea will decide to invade Japan?

[MachineGhost]

Yeah, I agree with this. On the other hand, with more and more countries running up their debt to GDP ratios, the chances on ONE of them imploding becomes greater. There's also always the question of whether or not just servicing the debt (as opposed to paying it down) is sufficient. But I am oozing into an area that I don't know enough about.

Servicing debt is a cash flow issue, not a level.  You can just use taxes and/or emit more bills of credit to get the funds needed to pay the interest on the previous bills of credit you already emitted.  And if there's no willing private market buyers, the central bank becomes your best friend.  This can go on indefinitely to no ill effect because the debt provides savings vehicles and income to the private sector as well as the central bank who returns all its profits back to the Treasury.  It's almost like a perpetual motion machine!  What makes it all work is taxing productivity.

The PP relies on this concept to work.

[MachineGhost]

I read an interesting piece in 'Foreign Affairs' this morning which may well have been called, "What Japan Syndrome?" You need a subscription so maybe don't bother with the link, but here's the gist:

A) GDP is the wrong way to measure things these days, partly because inflation is low.
B) the cost of food, housing and energy has gone way down for the most part. And the cost of things like electronic goods has plummeted even faster.
C) Japan is now infamous for its stagnation, but it's a stable, functional society & economy. The author suggests that the country is in de-growth or post-growth mode, and that it's not so bad.

I think I agree.

Did the article mention the damaging effect it has on the male, bread-winner psyche?  There's a reason the men throw themselves in front of their trains all the time.  Not having increasing nominal inflation is very bad for society.  We all want to be on a hedonic treadmill so we can feel better instead of depressed.

Japan only survives due to the competitive grace of foreigners not present; they export their way into relevance.  People are too wowed by the superficial, materialistic appearance of high tech, modern Japan and ignore the dark undercurrents.  It is a dystopia.

[dualstow]

Well, I think that was far beyond the scope of the article, MG. It was a to an economics-based counterpoint to an essay by Lawrence Summers on stagnation.

I don't disagree that there are strange psychological issues and that Japan has, in many ways, a repressed society, as well as a misogynistic one. But, a dystopia it ain't.