Sunday, June 6, 2021

What about Japan?

What about Japan? It's a question I often hear from advocates of fiscal expansion. Japan has huge debts and no crisis or inflation (so far). Doesn't that prove the US can borrow a ton more money painlessly? 

I offer two new points today: 1) Not every high debt country is so happy. 2) Just what did Japan get for all its fiscal stimulus? Indeed, I will start asking "What about Japan?" Japan seems a tough case for those who advocate that fiscal stimulus will save us from secular stagnation, or that huge spending programs bring prosperity in other dimensions.   

1. Picking and choosing

Here, fresh from the April IMF Fiscal Monitor  is the list of top 30 countries sorted by debt to GDP ratios. I boldfaced larger countries. 


Yes, Japan is up there at 256% of GDP. The champion is Venezuela however. Sudan and Eritrea are not particularly known for economic prosperity. Greece and Italy are not held up as examples to follow either. Serial defaulter Argentina is behind the US already. 

If Japan is sustainable, that doesn't mean all large debts are sustainable. It means there's something different about Japan than the other countries on the list -- or ones now lower down on the list because they already defaulted or had crises. 

2. So what did Japan get for all that debt anyway? 


It was not always thus. Japan started borrowing heavily in the 1990s from a debt/GDP ratio of 63%. (For some reason the IMF does not have US data before 2002.) 



Those debts come from deficits, of 5-10% of GDP every year. Since 2006, the US has been behaving a lot like Japan, or more so. We only have less debt because the US ran surpluses through the 1990s. 

Japan has had perpetually low GDP growth, low inflation and zero interest rates since the 1990s. I view it as low "supply" growth, but it ought to be the poster child for "secular stagnation" fans. 

So I turn the question around: If massive deficits, including lots of "infrastructure"  are going to boost the US economy, why did they not do so for Japan? 

Update

In response to tweets about why is Japan different from the US,  

I did not want to repeat old points. Japan's debt is long-term, held by domestic people, pensions and central bank. US debt is short-term, held by foreign central banks and financial institutions. Our debt is much more prone to run, and a rise in interest rates will feed quickly into the budget. Japan also has accumulated assets from trade surpluses; we have the opposite. Japan's debt is held by old people and subject to estate tax. A lot of Japanese hold bank accounts, as mutual funds and similar investment vehicles familiar in the US are less prevalent. Bank accounts flow in to reserves, backed by Treasury debt. 

More importantly, Japan  does not have looming unfunded Social Security and Medicare, underfunded pensions, contingent liabilities (Fannie and Freddy guarantee most home mortgages, who is going to pay student loans?) bailout guarantees and more.

 Sustainability is about debt vs. ability to repay; about future deficits;  not debt alone.

Japan's slow growth for three decades comes from microeconomics, taxes, regulations, demographics, slow productivity, not money, stimulus, "aggregate demand." 

71 comments:

  1. John,

    You might add that despite having a large internal debt, Japan as a country is a net creditor.

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  3. Perhaps better if you show net debt / gdp as then japan's ratio is not that high? Plus we also should look at NIIP right?

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  4. GDP isn't a good marker for Japan. If you look at GDP per capita or GDP per hour worked, Japan doesn't look so bad!

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    1. I don't know what to say. The Grump has a real blind spot when it comes to sovereign debt. He's measuring the wrong things. A few FACTS are in order:
      1) The US or Japanese government is unlike a:
      a. state,
      b. municipality,
      c. business, or
      d. household,
      in that it can issue its own currency.

      2) A sovereign (Treasury combined with the Federal Reserve Bank), like the US (OR JAPAN), that:
      a. issues,
      b. borrows in, and
      c. floats
      its own currency, and can export enough to feed itself, can NEVER run out of cash, or be vulnerable to hyperinflation.

      3) The sovereign, like the US (OR JAPAN), can:
      a. issue currency to spend and buy anything the economy produces,
      b. up to the productive capacity of the economy (adjusted for turnover/velocity),
      c. without creating inflation.

      In other words the US OR JAPANSES government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled.

      For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
      a) Income Taxes,
      b) Sales/VAT Taxes
      c) Asset Value (or Wealth) Taxes
      That'll cool things off pronto.

      On a PER CAPITA basis, Japan is doing fine. They're just better with contraceptives then we are.

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    2. Alas, not true. Abysmal, actually. See here

      https://ourworldindata.org/grapher/labor-productivity-per-hour-pennworldtable?time=1950..2017&country=BEL~CHN~DEU~GBR~USA~CHE~CAN~FRA~DNK~NLD~SWE~JPN

      The duration of the Japanese stagnation suggests it's indeed a supply side phenomenon. People thought it was a demand side phenomenon; hence the high debt-to-GDP ratio.

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    3. @dodeals

      Considering that people make economic decisions at least somewhat related to expectations, how exactly do you think instituting inflation triggering income, sales, and wealth taxes will impact expectations, especially for savings, spending, and investment?

      Inflation historically seems to come unexpectedly, so you're basically saying my taxes might go up at random at any point in time so I should plan accordingly. How would you choose to invest and spend in this world?

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    4. Isn't this just modern monetary theory? When the economy is cool government spends a ton of money to rev it up; when the economy is hot, the government raises taxes to cool it off. Whatever your problem is, the solution is ever larger and more intrusive government, with big jobs for the economists who promote it. No thanks.

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    5. @Frank: How has productivity impacted Japanese workers? Not much. Who cares. Since 1979, productivity is US has been very strong. But income has been going to the top 1%. Workers' pay has been flat. They might be tempted to say: "take your productivity and shove it!"

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    6. @jamescarlyle: Not instituting inflation. A Job Gty will increase labor utilization and prompt the production of MORE GODS AND SERVICES, offsetting any added spending so inflation is not a foregone conclusion. Inflation is not unexpected unless you don't know what you're looking at. Choose to invest in productive enterprises. Folks overstate the effect of taxes on investment decisions. (I wonder if Zuckerberg was noodling with proforma tax liability when he was designing Facebook.)

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    7. @Michael. It generally is an examination of how the the fiscal/monetary system works. Govt doesn't have to be ever larger. Fiscal policy can be focused on taxes. But the Job Guarantee is the solution to most of our economic and social issues - full stop. Unfettered free markets don't work so well for labor. (see: last 50 years) The Job Gty works at the lower margin and gets every body working (the lazy asses).

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    8. @dodeals.

      A jobs guarantee guarantees production? Why wasn't the USSR phenomenally rich then? They had close to zero unemployment forever.

      Also historically it has not been easy to forecast inflation. I would go further and say no one can predict insolvency with any degree of precision.

      I also think your Zuckerberg example misses a lot. Maybe he nor Edison or Einstein thought much about the rate of return for their innovations, but in zuckerberg's case he certainly needed venture funding to get his idea off the ground. Just how much venture funding will be out there if such risky assets can have their returns cut in half or more. Maybe it's enough to keep Facebook alive but can you say the same for a lot of other companies?

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    9. @JamesCarlyle We're talking about a Job Gty in a capitalist economy. There were alot of other things going on in the USSR unrelated to their "Job Gty".

      As outlined in my blurb above, you can institute automatic tax increases that kick in when inflation hits certain targets. No need to forecast.

      Yes.

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    10. @dodeals

      Even in this automatic tax increase regime, firms, investors, and consumers have to make decisions. Tax raise automatically from higher inflation. But is higher inflation known ex ante? Consider right now. Will there be inflation in 6 months? It's not known for certain but suddenly I have to make decisions with tax implications based on uncertainty in this regime. Does that seem healthy to you? Would you make risky investments with the threat of high taxes looming that in retrospect never come?

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  5. The focus should be on net debt, not gross debt. Gross debt equals the summed financial liabilities arising from debt-related financial instruments issued by the general government—borrowing by the government. Net debt equals gross debt minus the summed value of debt-related financial instruments held as assets by the general government—lending by the government. In other words, net debt equals borrowing by the government minus lending by the government, that is, net borrowing by the government. Debt-related financial instruments include government bonds, loans, currency and bank deposits, trade credit, “deposits money” (which includes income tax withholding by the government), and various other accounts payable or receivable. Debt-related financial instruments do not include equities (shares of stock) nor financial derivatives.
    General government—as defined by the IMF—includes both the central government (but not the Bank of Japan or other government financial institutions) and local governments (prefectural governments and municipal governments of cities, towns and villages). General government also includes ‘social security funds’ which are government entities charged with managing social insurance, including social security pensions, government health insurance, workmen’s accident compensation insurance, unemployment insurance, and public assistance. In terms of assets, the largest of these social security funds by far is the Government Pension Investment Fund (GPIF) which is charged with managing the two largest social security pension programs in Japan—the Basic Pension system that is extended to virtually all residents of Japan and Employees’ Pension Insurance which is a supplemental pension system covering workers enrolled by their employers along with their dependent family members.
    Most of the gross debt comprises debt securities issued by the central government—Japanese government bonds outstanding—a liability equal to 187 percent of GDP in March 2019. Most of the lending by the Japanese government that partially offset this was embodied either in the outward investment in debt securities by the central government (in other words, holding of foreign government bonds and the like), or in the foreign and domestic debt security investments by the social security funds charged with managing the public pensions. The foreign debt securities held by the central government, 21.8 percent of GDP in March 2019, were in the Foreign Exchange Fund Special Account, mostly USA government bonds. The domestic and foreign debt securities in the social security fund, 10.7 percent and 16.6 percent of GDP in March 2019, were mostly in the vast portfolio of investment assets held by the GPIF. These financial assets could easily have been used to retire some portion of the outstanding Japanese government debt. That is why net government debt—equal to 152.3 percent of GDP in March 2019—is a better measure of the impending financial liability confronting Japanese taxpayers than gross debt—equal to 237.9 percent of GDP.
    Much of the outstanding Japanese government debt is now held by the Bank of Japan, which although not included in the general government as defined by the IMF, is certainly a government entity. BOJ holdings of Japanese government bonds had risen to 85 percent of GDP in March 2019, a reflection of the quantitative easing policy implemented in earnest by the Bank of Japan after 2013. Subtracting this from net debt leaves the Japanese government debt-to-GDP ratio at 73.5 percent as of March 2019.

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  6. Is Japan's debt really at 256% of GDP, if the Bank of Japan has purchased half of that debt back, as it has?

    How does a nation owe money to itself?

    Really, has not Japan effectively engaged in money-financed fiscal programs?

    Not much discussed, but after the Plaza Accords and the expensive Yen, Japan offshored much industry. Nations that offshore industry face consequences, including retarded incomes.(Not a polite topic of discussion.)

    But, as ever, no one is ever wrong in macroeconomic debates.

    One could say Japan would have fared far worse without the fiscal and monetary stimulus.

    One could posit Japan's fiscal and monetary stimulus has been ineffective.

    One thing is for sure, large amounts of fiscal and monetary stimulus have not led to inflation, even after decades.

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    1. Ben,

      "One thing is for sure, large amounts of fiscal and monetary stimulus have not led to inflation, even after decades."

      IN JAPAN. Did you not see the table above? Did large amounts of fiscal and monetary stimulus lead to inflation in Venezuela?

      It's called cherry picking your data to fit your conclusion.

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    2. No...I am not drawing a conclusion, as this is macroeconomics, and no one is ever wrong.

      Australia is another country with both fiscal and monetary stimulus and very low inflation forecasts.

      In the last several years the Swiss National Bank has printed up enough francs to equal the nation's GDP, but they do not have inflation (The SNB bought sovereign bonds of other nations).

      After 2008-9 and plenty of fiscal and monetary stimulus, the US had modest inflation.

      This time may be different. We are seeing supply shortages.
      But even yet, the shortages appear unrelated to fiscal-monetary policy. For example, there are shortages of semiconductor chips. OPEC has clamped down on production. There are housing shortages in the U.S. due to property zoning.

      Perhaps this will lead to a general rate of inflation higher than we have been used to in the last couple decades. Central bankers globally appear confident it will be a passing phase of 3%-4% inflation.

      Japan faces deflation.

      I guess the strongest thing I will say it is that it is not axiomatic that fiscal and monetary stimulus, even in large dollops, leads to inflation.

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  7. I think we have to compare apples to apples.

    From 2000 to 2020, US population increased 17% and US prices increased by 55%

    Population in Japan was flat (there may have been a decline in working age population) and prices increased only 3%.

    Real GDP per capita growth is not that much different between the two countries.

    Given the aging population, secular decline in prices, and not knowing the counterfactual you could even say that deficit spending has been a success

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  8. Is there any evidence on the counterfactual? Can we say that without an aggressive fiscal stimulus/expansion, Japan wouldn't have suffered a terrible economic growth (i.e. negative in real terms)? Any comments on this would be highly appreciated

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    1. The late Alberto alessina did some work on so called austerity and it's effects on growth, which turned out to be fairly soft on the economy. As always, this is a tricky thing to measure and has a lot of the usual caveats.

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  9. I got to wondering about the extent to which Japan's low growth is driven by demographics, and made up this chart, which I found surprising:

    https://fred.stlouisfed.org/graph/?g=ExFO

    Since Q1 1994, which is as far back as FRED has the relevant data for Japan, Japan's real GDP per working-age (16-64) resident has increased by 40%, compared to 50%. However, most of this gap is due to Japan's poor performance over the last few years; as recently as 2017, the gap was less than 2 percentage points.

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  10. John,

    "I did not want to repeat old points."

    No, you should keep repeating these points until you are blue in the face and then repeat them some more.

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  11. Needless to say, debt is only one part of a country's overall public balance sheet. If other assets and liabilities are accounted for Japan doesn't look too bad, see:

    https://gideonmagnus.medium.com/public-balance-sheets-of-g7-countries-7177629c9d3e

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    1. The Japanese government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Central Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

      Private Debt, by the way, can be a problem and is largely responsible for many recessions.

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    2. Yup, and the US can always sell the National Parks. :-)

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    3. "Private Debt, by the way, can be a problem and is largely responsible for many recessions."

      Are countries who make fiscal commitments in foreign currency too dumb to realize the benefits? After all, why not issue debt in your own currency if it's a win win?

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    4. THere are many reasons countries borrow in foreign currencies. Most of them are bad ideas. My private Debt comment above is a different issue. Private debt in your own currency can be an issue. Adds to economic fragility. (see Us)

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  12. John,

    "More importantly, Japan does not have looming unfunded Social Security and Medicare, underfunded pensions, contingent liabilities (Fannie and Freddy guarantee most home mortgages, who is going to pay student loans?) bailout guarantees and more."

    MOST importantly, changes in United States Social Security, Medicaire, underfunded pensions, contingent government liabilities, bailout guarantees, and other all require Legislative action.

    Reductions in the US federal debt DO NOT.

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  13. I am curious about two facts related to Japan

    1) if half the debt is being funded by the central bank, why is this not leading to inflation? Is everyone just taking the government payments and parking them as reserves/ more debt? Don't they want to spend some of it?

    2) if Japan does not have a huge unfunded liabilities problem, where is all the federal expenditures going? Ours and much of Europe are all tied by middle class transfers. How did Japan avoid this and whAt is it spending on instead?

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    1. James,

      One thing John doesn't discuss is total public + private debt in Japan.

      If the increase in public debt is offset by an equivalent decrease in private debt, then this would have very little effect on prices.

      https://economictimes.indiatimes.com/news/international/business/japans-debt-mountain-how-is-it-sustainable/articleshow/76298563.cms?from=mdr

      "In fact, 90 percent of the debt is held by Japanese investors."

      Not sure where you are getting your 50% of Japanese government debt is funded by the central bank information.

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    2. I actually got that figure from Ben on a similar one of John's posts on Japan.

      Whenever I see a government continually monetizing the debt, I start to wonder about the countries solvency. Sure it could raise the taxes to soak up all of the inflation but by that logic it can also borrow the funds and accomplish the same thing.

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    3. James,

      Unfortunately Ben doesn't like revealing the sources for his information. Why rely on authoritative information when you already have your mind made up?

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  14. Also, remember Japan is a island nation - they're also victims of their own success due to them being in the third phase of demographic transition for a while: low BR low DR = Higher Dependency Ratio which means less people have to be more productive than the larger labor force of days gone bye bye to finance Fiscal Policy Decisions. Net positive migration is low in Japan compared to the US. They're not apples and oranges in terms of comparison per se - they both need a money tree Arborist (arsonist works, too.)

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    1. What do you mean by "finance"? What do they not have enough of?

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    2. Finance = paying for stuff. Is there ever enough? Nope. Scarcity can make life difficult.

      Japan got itself into trouble by buying up real estate that was heavily leveraged. Blew up in their faces. They didn't invest business technology like Germany has done. Germany has the highest export per capita in the world, ahead of China. Why? Regional banks all over Germany that work with regional businesses to get them the capital they need to buy tech to stay competitive. Those banks aren't in the business of real estate finance and soeculation.

      So, what do they need more of? Productive debt. I know that sounds silly, but yeah...

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    3. Mykel,

      "Productive Government Debt" is an oxymoron.

      The government produces no good or service that is subject to market forces and owners of government debt are not incentivized to produce anything.

      A double whammy if ever there was one.

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  15. Whichever debt measure used, Japan has entered a debt trap, a trap that can now only get deeper, that remains contingent on ultra low or close to zero interest rates with debt and low rates feeding into a gradually decreasing productivity environment.
    What could go wrong?
    Apart from the benefits of extending and pretending, why would anyone follow this path?
    The debt trap, once entered into, is like Hotel California, a place which you can check out anytime you like but a place which you can never leave.

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    1. Walk us through it: How is high govt debt affecting production and consumption? Be specific.

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    2. Oh, first there's been a gradual increase in public debt to GDP (and total debt to GDP) associated with decreasing productivity and consumption financed by debt.
      To explain this, the debt intensity concept is useful. Gradually, more and more debt has been incurred and the associated outcome has been lesser overall growth (per unit of debt incurred). It's basically a common sense concept of diminishing marginal productivity on a factor (ie more debt will become progressively less useful).
      If you look at the aggregate numbers, investments in productive capacity have been decreasing, net national savings have been decreasing and the top 1% hold a huge chunk of the debt resulting from the dissaving incurred by the government and the bottom 90%.
      Let the good times roll but it's not sustainable.
      With present monetary and fiscal policies, it's not really a free market anymore.

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    3. Carl,

      "If you look at the aggregate numbers, investments in productive capacity have been decreasing..."

      That is because the financing means (debt) itself is the wrong way to ensure that capital is allocated to productive ends.

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    4. Ideally, for an individual or a company or a country, the most effective way to invest into productive capacity is to to reinvest retained earnings (it works like compound interest). However, debt can be a part of the financing as long as the debt is sustainable and funds are used to increase future purchasing power (productive).
      Take for example the example of the US in the late 1800s. The US sustained negative trade balance (and corresponding capital inflows) in order to build the necessary infrastructure to become a global manufacturing powerhouse (the rest is history until it is no more). For the last 20 to 30 years, the current account deficit has been matched by capital funds going back into the US to buy US government debt. Is that sustainable and productive for the future?

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    5. @Carl So if a sovereign owes money in its own currency and the currency price is not pegged to anything, how can the debt be a problem in any way shape or form. It can be paid off the next day and be replaced by deposits at the central bank. So how does this affect private/public or any other kind of investment?

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    6. @DoDeals,
      Please don't be offended by the following analogy.
      Yes, technically and theoretically, a money printing nation cannot default on its debt.
      https://www.youtube.com/watch?v=lK_rYS8L3kI
      The US has acquired over decades the status of the international reserve currency and is finding out how huge its potential taxing potential is (potential to issue debt without triggering bond vigilantes).
      Theoretical analogy
      Just because you can do something does not mean it should be done.
      Let's say the US people has the potential to develop diabetes (and related side effects) and various potent insulins have become marketable and can be used.
      Type 2 diabetes is a preventable disease and is deeply correlated to obesity, renal failure, vision loss etc etc. It's a slow process and a slippery slope because medications and insulins can do the job, sort of. If one forgets about fundamentals, antidiabetic medications use is on the rise and a significant portion of the population start the wear the stigmas of the disease. Oups it's not a theoretical analogy..

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  16. 1. Almost all of Japan's per capita growth over the last 10 to 15 years has been increased participation in the labor force by women. This has reached it's limit. There is no more growth to get by increasing this input.

    2. Japan's confiscatory tax rates on capital means that the expected after tax return on capital is negative on many types of investments (particularly for new business formation where pre-tax returns are very asymmetric.) So no more of this input either.

    3. So Japan now has no more real growth going forward. As the age of the population goes up, the number of producers drops. Remaining producers will need to reduce their consumption to support consumption by the increasing percentage of the elderly non-working population.

    4. So Japan's real problem is how do you manage this massive non-voluntary shift of consumption.

    5. Who owns the debt/assets is a trivial problem that can be solved with a stroke of a pen. Making changes in real economic activity and the allocation of resources is a very hard problem.

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    1. 1) Fine. Who cares?
      2) If the returns are negative, perhaps the businessfolk should increase their prices or operate more efficiently.
      3) They're fine. Producers just have to be more efficient. In reality, working class geezers don't really consume much. Mostly just watch cable TV and eat stuff that's soft and easy to chew.
      4) Manage. Nothing to manage. Let the free market take care of it. (Rally Dude? Can't produce enough to support the geezers? Preposterous.)
      5) Free market will take care of allocation of resources. (Why don't you have faith in the free market)

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    2. "Producers just have to be more efficient."

      By guaranteeing them a job irregardless of how efficient they are?

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    3. "Producers just have to be more efficient."

      By guaranteeing them a job irregardless of how efficient they are?

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    4. "Free market will take care of allocation of resources. (Why don't you have faith in the free market)"

      Why don't you have faith in the free market for the allocation of labor?

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    5. "Free market will take care of allocation of resources. (Why don't you have faith in the free market)"

      Why don't you have faith in the free market for the allocation of labor?

      Delete
    6. "Free market will take care of allocation of resources. (Why don't you have faith in the free market)"

      Why don't you have faith in the free market for the allocation of labor?

      Delete
    7. "Free market will take care of allocation of resources. (Why don't you have faith in the free market)"

      Why don't you have faith in the free market for the allocation of labor?

      Delete
    8. "Free market will take care of allocation of resources. (Why don't you have faith in the free market)"

      Why don't you have faith in the free market for the allocation of labor?

      Delete
    9. 1. Most people prefer to consume more, which requires more production.

      2. Can't raise prices when there's competition. More efficient operation mostly comes from investing in new more efficient capital, and people won't invest in capital if there is negative after tax return.

      3. Housing, food, medical care. It's a simple math problem, the more old people you have, the less the producers/workers get to keep.

      4. Great idea if there was a free market. The government is the one reallocating resources from people who work to people who don't work.

      5. I have total faith in the free market. Unfortunately, the free market is not the one doing the resource allocation.

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    10. Can somebody do something about Frisky? I think he's stuck in a loop. (Overexposure to Austrian maleducation will do that to your brain.)

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    11. No worse than the Job Guarantee nonsense you have been spouting over and over and over again.

      Again, why don't you have faith in the free market for the allocation of labor?

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    12. No worse than the Job Guarantee nonsense you have been spouting over and over and over again.

      Again, why don't you have faith in the free market for the allocation of labor?

      Delete
    13. @DanThomas
      1) Really? So the Japanese are suffering from low consumption and shortages of stuff? Really?
      2) So Japanese companies can't produce enough stuff for Japanese folks? Really? What kind of stuff are there acute shortages in Japan?
      3) So there aren't enough Doctors,food, and apartments in Japan for everyone? There aren't enough workers to produce them? Really? Not enough workers? (Preposterous)
      4)5) So there is no free market in Japan? So I guess the commies won. Who knew?

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    14. @Frisky The free market does a few things right but imperfect. The labor market is a major imperfection. The Job Gty is a very useful teak. (See: Pavlina R. Tcherneva "The Case for a Job Guarantee)

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    15. Your statement,

      "5) Free market will take care of allocation of resources. (Why don't you have faith in the free market)"

      Notice, your statement was not - Free market will take care of allocation of resources EXCEPT for labor, credit (why even have a central bank if the free market can effectively allocate credit), housing, and what ever else you believe is too much to handle for free markets.

      You are so full of it.

      Delete
  17. There's a simple reason Japan got less growth from its deficits and debts than some other countries: the Japanese are well known as "super savers". I.e. the average Jap household likes having a large pile of money in the bank or in the form of other paper assets. Thus the failure of Japan to get much growth from its debt does not prove much.

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    Replies
    1. "Thus the failure of Japan to get much growth from its debt does not prove much."

      Other than it didn't work?

      “The definition of insanity is doing the same thing over and over again, but expecting different results.” - Albert Einstein

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    2. And the reason that it didn't work is that incentives for government bond holders (more so than any other government entitlement program) suck.

      At least with Social Security in the United States (which John mentions), you need to work for a living to receive the benefits.

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    3. In the aggregate, savings will tend to channel into investments, ideally productive investments.
      In the 1980s, in fact, this even went too far as private savings (households and corporates) were very high and went into excessive production investments. Another era.
      For a while now, Japanese household savings have been on a down trend and it can be safely expected that there will be net dissaving in that segment soon because of the secular trend and population aging.
      In Japan, corporate savings has remained high and in fact have been on an upward trend for a few years in relation to improved (IMO false prosperity based on low interest rates and other factors) profitability. However, the excess cash is being funneled into financial assets overseas and especially into corporate share buyback activity.
      Japan, like most developed countries, is investing less and less overall into productive activity. On a net basis, its national capital stock is degrading.
      Central financial engineering can delay the day of reckoning but will not save the ending.
      The Japanese Central Bank is one of the clients of the Fed reverse repo program, driving it the record levels as we speak and the return on cash for those programs is 0% (with pressure for negative returns). Something does not add up. Too much cash in the system.

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    4. Ralph doesn't the high Japanese financial saving rate simply reflect the high deficits? As you know, the government's deficit (dissaving) equals the domestic private sector surplus - saving - (adjusted for the current account). Thanks.

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    5. These matching private-public savings swings only apply for a fixed level of investments.
      If for some reason, a country needs savings from all sources (private, public and current account) to invest more, it can be done.
      Investments have been going down in developed countries, so this is giving room for decreased savings (the national savings rate in the US is now negative).
      It's a consume some now vs consume more later type of decision and this applies to individuals as well as countries.
      Of course if the savings stay in money deposits, is used to buy public debt or end up in the Fed reverse repo facility, it's not productive but that's another story.

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  18. Can anyone please suggest some reading to dig deeper into the topic?

    ReplyDelete

Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.