Saturday, October 4, 2014

Noah says Japan Will Monetize Debt

Noah Smith wrote Japan's Debt Trap where he concludes that Japan will monetize their debt.   On this point I believe he is correct, Japan will monetize their debt.  However, he says a few other things I do not agree with.

Noah:
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.


Noah:
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.

Noah:
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.


10 comments:

  1. I commented over at: http://delong.typepad.com/sdj/2014/10/inflation-hawks-unrepentant-and-zombified-watch-early-friday-focus-for-october-3-2014.html#comment-6a00e551f08003883401b7c6ed5309970b

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    1. My first comment was deleted so I put in a second one:
      http://delong.typepad.com/sdj/2014/10/inflation-hawks-unrepentant-and-zombified-watch-early-friday-focus-for-october-3-2014.html#comment-6a00e551f08003883401b7c6ed57e5970b

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  2. I asked a question about Japan on your behalf here Vincent (although I didn't mention you):

    http://jpkoning.blogspot.com/2014/09/the-law-of-reflux.html?showComment=1412630016719#c9975850485364256

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    1. Thanks! I am far more optimistic about using his theory to predict inflation than he is. I think his theory works great for Japan. They are buying up long term bonds, which is against his theory, and they will suffer.

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  3. Vincent, what do you think about the recent rise of the yen vs the dollar? The short yen ETF looks like it likes to build large triangle formations on its way up.

    I've drawn a chart on my blog:

    http://itradebubbles.blogspot.se/2014/10/is-yen-coning-again.html

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    1. I certainly think the value of the yen will go down further. It seems to me that the drops in the equity markets have made the yen more valuable for the moment. If the equity markets crash it may be yet even more valuable for a time. But eventually I do think the yen will go down in value.

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    2. Interesting, does that mean you think the equity market is leading the yen and why would that be? Why aren't the equity markets preparing for an even weaker yen instead? (Sorry for throwing hard questions at you that might not be possible for anyone to answer. At least I know you're interested in the subject!)

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    3. If the equities are cheaper it might make more demand for the Yen as more people would want to buy them. You could also think of it as two currencies that trade against each other. If more people want to move out of equities into yen than want to go from yen into japanese equities then their relative value could change. I am not sure, but it seems they usually go the opposite way recently.

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  4. eToro is the ultimate forex trading platform for novice and pro traders.

    ReplyDelete

Looking for polite debate on ideas. Never attack a person. Be nice.