Tuesday, May 28, 2013
The Mother of All Painted-In Corners
I highly recommend the paper, The Mother of All Painted-In Corners by John Mauldin. It talks about how Japan has gotten themselves into a situation where there is no good way out.
Let me give my own highlevel overview of Japan's predicament. Japan spends about twice what they get in taxes and has debt approaching 250% of GNP. If they let interest rates go up just 2% then interest on the debt would use up nearly all their tax money. If that happened then nobody would loan the government money and they would have to print for all their expenses and get hyperinflation. However, if they hold interest rates down then people will keep getting out of bonds till they have printed for all the bonds and they will get hyperinflation. Either way, they get hyperinflation.
To avoid hyperinflation they could cut the government budget in half and default on all the debt; however, that is just not going to happen. On any given day or week it seems like printing money is the easier answer. So they will keep on printing money, week after week. This will go on till it is too late to avoid hyperinflation, if it is not already too late.
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Default is very problematic simply for the reason that govt bonds are 900% of their bank's capital. Basically all the banks in Japan will go bankrupt on the day of default.
ReplyDelete-Alexey.E. "Technologov"
This is a good point. And probably the government would be on the hook for deposits, so defaulting might not even save anything.
DeleteI know this isn't the right post to say so (although it is related) but I want to express my appreciation for the magnificent article you published at:
ReplyDeletehttp://pair.offshore.ai/38yearcycle/#hyperinflationstages
I reads like a complete education on hyperinflation. Thank you.
Thanks!
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