But if inflation strikes, it could rise high enough to hurt growth, and therefore tax revenue, severely. That would mean game over -- Japan’s government would be forced to default (or to hyperinflate, which amounts to a messier version of the same thing).Defaulting would not really help because much of the debt is owed to their retired voters. The government would still end up having to take care of these people, so it would not save that much. After defaulting the government would still be spending nearly twice what they get in taxes but now the central bank would be the only bond buyer for sure. With the central bank clearly monetizing their deficit, they would get hyperinflation even after defaulting. Default in Japan would not avoid hyperinflation. Yes, hyperinflation amounts to a messier version of default.
But I’m not worried. In the end, a sovereign default is just an accounting exercise -- marking down the assets of some Japanese people and marking up the assets of others.
He should be worried. Hyperinflation destroys an economy. It is not just an accounting exercise. I suspect he need to read my CMMT article.
The fact is, no one really knows what causes high-inflation episodes to begin.I really think I understand and can explain how high inflation episodes work. In fact, I have a model with which I can simulate how high inflation quickly begins. It is true that predicting the exact start time of a positive feedback phenomenon is not really possible. However, we can tell Japan has a high risk of a hyperinflation chain reaction at any time now.