Obama Debt in 45 days 294,000,000,000$-2017 set to be 2.45 trillion- Over 106% of GDP

a reply to: fractal5

In simple terms Zimbabwe experienced hyperinflation largely due to incrediblely badly structured land reforms driven by political pressures. Germany experienced hyperinflation due to collapse of its productive capacity and huge debts denoted in a foreign currency (a crucial difference).

Japan issues it's own debt, in its own currency at an interest rate of its own choosing. I am also not clear if you understand that even if the interest rate was higher then this only effects new debt not existing bonds. It would probably also interest you to check who the largest holder of Japanese government debt is. (Hint it's the same people who issue it).

Comparisons to Greece are meaningless as Greece effectively uses a foreign currency.

There are two key problems with assuming that a increase in government deficit spending results in an increase in inflation.

The first is your assumption that there is such a thing as normal velocity of money. If demand is too low as in Japan (and by extension velocity low) then there is nothing inherently going to increase it to a 'normal' level.

The second is that government issued money (base/outside/high powered whatever your preferred terminology) only makes up a small part of the overall money supply. The majority is bank lending which again is driven by demand.

Basically the Quantity Theory of Money assumes that governments control the money supply, velocity of money is constant and the economy is constantly at maximum production. As none of these things are true it isn't particularly useful in real world analysis.

The ongoing problem with the Japanese economy is lack of domestic demand to fuel growth. Japan is traditionally a nation of savers and the domestic private held bonds are higher than most comparable countries. While inflation may be a long-term issue as it may be for any country it is not likely to be one in the near future (again barring a major supply side shock) and if it does become a problemJapan has all the economic tools it would need to deal with this at the time regardless of current borrowing.

originally posted by: ScepticScot
a reply to: fractal5

In simple terms Zimbabwe experienced hyperinflation largely due to incrediblely badly structured land reforms driven by political pressures. Germany experienced hyperinflation due to collapse of its productive capacity and huge debts denoted in a foreign currency (a crucial difference).

Japan issues it's own debt, in its own currency at an interest rate of its own choosing. I am also not clear if you understand that even if the interest rate was higher then this only effects new debt not existing bonds. It would probably also interest you to check who the largest holder of Japanese government debt is. (Hint it's the same people who issue it).

Comparisons to Greece are meaningless as Greece effectively uses a foreign currency.

There are two key problems with assuming that a increase in government deficit spending results in an increase in inflation.

The first is your assumption that there is such a thing as normal velocity of money. If demand is too low as in Japan (and by extension velocity low) then there is nothing inherently going to increase it to a 'normal' level.

The second is that government issued money (base/outside/high powered whatever your preferred terminology) only makes up a small part of the overall money supply. The majority is bank lending which again is driven by demand.

Basically the Quantity Theory of Money assumes that governments control the money supply, velocity of money is constant and the economy is constantly at maximum production. As none of these things are true it isn't particularly useful in real world analysis.

The ongoing problem with the Japanese economy is lack of domestic demand to fuel growth. Japan is traditionally a nation of savers and the domestic private held bonds are higher than most comparable countries. While inflation may be a long-term issue as it may be for any country it is not likely to be one in the near future (again barring a major supply side shock) and if it does become a problemJapan has all the economic tools it would need to deal with this at the time regardless of current borrowing.

A quick web search reveals unsurprisingly the Zimbabwe hyperinflation has been studied by economists, and the first and only study I looked at beyond any surprise completely affirms both points:

hyperinflation in Zimbabwe is explained by the use of money printing as one of the major source for financing government deficits, especially since the beginning of the new millennium. Thus to break this vicious circle, as suggested by the sensitivity test as well as other countries’ successful hyperinflation stabilization programs, Zimbabwe need[s] to seriously reduce its money supply

Source: www.universityofpretoria.co.za...

So yes printing lots of money leads to a similarly rationed amount of inflation, though not exactly as you point out because of many other factors that also influence inflation. So, while as you point out is not an exact predictor, it does predict the general future direction of inflation. While money velocity does not have as you define "normal" to have a normal value, it does have an average value over its history of measurement, and like any financial metric it will tend to revert to the mean at some future date. Would you argue that money velocity does not revert to the mean over the long term? A study by Mauldin Economics is evidence that it does.
Source: www.mauldineconomics.com...

Notice that study shows the long-term money velocity average based on M2 money supply data to be 1.67 from 1900 to 2007. After the 90's boom ended at a peak of 2.2 velocity has dropped to 1.44 in Q3 2016 according to:
fred.stlouisfed.org... That 1.44 is below average while still higher than two previous low points of 1.17 at the trigger level of the great depression and also lower than the World War II low of 1.15. And looking at the data I can see that low money velocity is correlated with economic hardship. Both the Great Depression and World War II were times of economic hardship.

The study also notes a correlation with a high debt load but not a major causation of the Zimbabwe hyperinflation. But it does cite the main cause as deficit spending which is by definition correlated with a high debt load. Either print the money now or print the money later. In both cases you will have inflation because as you point out nations don't actually default on their debt but instead they print money to pay for the debt. But in fact that is even worse because it causes hyperinflation. A debt default would be be a financially prudent move for both Japan and the USA when the day of reckoning comes.

a reply to: fractal5

Thank you for a detailed reply, while I disagree with you I appreciate the time you gave put in. Also apologies if my reply not quite as well structured as yours Laptop has died and on phone.

First of all on velocity. Something having a mean doesn't mean that it has a normal value. Yesterday I drank 10 coffees today I will drink zero. Does not mean I normally drink 5 coffees. Perhaps my choice of normal was a poor one and it is better to say that velocity does not have a equilibrium value. Your link is an opinion piece that doesn't offer any evidence that it will automatically revert back to a normal level.

In terms of Zimbabwe you have quoted one part of the conclusion that actually be points to a number of causes of hyperinflation.

Importantly the paper also points out that the relationship between printing money and inflation is not a simple one. Countries with high inflation have to increase the money supply, this does not mean that increasing the money supply is the driver of inflation.

The Zimbabwean government did not one day decide to mass print money and devalue the currency. The economicnecessaity of printing money was there because of massive economic and political problems that existed. The economic inflation in Zimbabwe stemmed from problems in the real economy, not the monetary one.

There is simply no comparison between Zimbabwe and Japan. Zimbabwe was a highly agriculture economy with political instability high unemployment and ill enforced property rights. It ran a current account deficit with a fixed rate exchange rate and foreign denoted debts making its import position dangerously unstable.

Japan has a fiat currency with debts in its own currency, floating exchange rate, current account surplus and large foreign reserves of its own.

Running a deficit is no more or less automatically desirable than running a surplus. It depends entirely on the economic circumstances. At the moment Japan seems to be struggling with lack of inflation, not too much.

A deficit can be inflationary however the debt is a deficit already spent, there is no additional inflationary pressure from the debt (of the type Japan owes).

There are no circumstances when Japan can be forced to default. There could be circumstances where it becomes better for Japan or the US to default. However the scenario for this is so unlikely and alternative options are almost always better.

Again thanks for an interesting conversation (even if I suspect we are the only ones left on this thread).