Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Just to show that ignorance of Monetary Sovereignty is not restricted to Americans and the European Union, here comes Japan:
Insight: Japan slowly wakes up to doomsday debt risk
By Tetsushi Kajimoto, Leika Kihara and Tomasz Janowski
TOKYO (Reuters) – Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks — that is what Japan may have to contend with if it fails to tackle its snowballing debt.
Not long ago such doomsday scenarios would be dismissed in Tokyo as fantasies of ill-informed foreigners sitting on loss-making bets “shorting Japan.” Today this is what is on bureaucrats’ minds in Japan’s centre of political and economic power.
Japan is Monetarily Sovereign, so even if borrowing costs “soared,” and currency “tanked,” the central bank would have no difficulty whatsoever pumping vast amounts of cash into local banks or anywhere else.
“Shorting Japan” is a fools play — unless they do something stupid, like raising taxes.
“It’s scary when you think what could happen if there’s triple-selling of bonds, stocks and the yen. The chance of this happening is bigger than markets think,” says a senior official.
These officials would be the ones pulling the levers in the command center if Japan were to be hit by a debt crisis.
Japan cannot have a “debt crisis.” Remember, it’s Monetarily Sovereign.
The government borrows more than it raises in taxes, and its debt pile amounts to two years’ worth of Japan’s economic output, the highest debt-to-GDP ratio in the world. It costs Japan half of the country’s tax income just to service its debt.
Being Monetarily Sovereign, Japan does not need or use taxes to pay its debts. It merely creates yen.
Technocrats who might have once dismissed worst-case scenarios are now beginning to take them seriously as doubts grow over whether Japan is ready to act and as Greece’s budget meltdown stokes the euro zone’s debt crisis.
Greece is monetarily non-sovereign. No comparison with Japan.
Conventional wisdom is that Japan is safe as long as it keeps covering about 95 percent of its borrowing needs at home.
As usual, conventional wisdom about Monetarily Sovereign governments is wrong.
But to some economists who have followed Japan for years, the frustration is that the country has yet to solve its underlying problems of slow economic growth and stubborn deflation.
So all that money “printing” to pay all that debt has not caused inflation?? It must make debt-hawks crazy not to be able to use their Wiemar Republic scare example.
As long as those conditions persist, it will be difficult to crawl out from under the debt burden.
Why would slow growth and deflation make it difficult for a Monetarily Sovereign nation to pay its bills?
“If you wind the clock back five or 10 years, they’d have been saying all the same things and probably with a very similar time horizon of three to five years,” said Richard Jerram, chief economist at Bank of Singapore.
Yes, the same as in the U.S. Since 1940 or earlier, our debt-hawks have been saying our federal debt is unsustainable. Failure to be right never deters them.
While officials stress it is too early for a definite contingency plan, there seems to be an agreement that financial institutions will be the hardest hit because of their big government bond holdings, and that the Bank of Japan will play a key role in shoring up the sector.
Why hit at all? Japan will continue to service its bonds, just as always.
In an event of a surge in yields, the Bank of Japan could flood money markets with cash the way it did after the March 11 earthquake and act as a market-maker for the bond market, matching bids and offers if they fail to meet, officials say.
The finance ministry could also be forced to redeem bonds ahead of maturity to calm investors, says Yoichi Miyazawa, former vice finance minister and upper house lawmaker for the opposition Liberal Democratic Party.
Right. No problem. Easily done. That’s the beauty of Monetary Sovereignty (Hello Greece, are you listening?)
Miyazawa, who led work on the party’s crisis plan, says the worst case scenario could involve bank bailouts and Greek-style austerity if debt servicing costs soared, threatening to eat up a big portions of revenues. “The government should show a concrete roadmap for rebuilding public finances, including the kind of reforms adopted by Greece, which involve painful belt-tightening, slashing welfare spending and boosting sales and other tax rates,” he said.
He’s nuts. It’s guys like him who would doom Japan.
Finance Ministry . . . simulations show adding 1 percentage point to borrowing costs would add 1 trillion yen to about 22 trillion in borrowing costs over the course of one year, rather than double them as some commentators warn, because the spike would only affect newly issued and rolled over debt.
Yawn. Another 1 trillion yen would be needed. So? That would require one push of a computer key.
What sets Japan apart from Europe’s crisis-hit nations is that it borrows almost exclusively at home and with domestic savings of some 1,500 trillion yen ($19 trillion) it can do it paying less than 1 percent for 10-year bonds.
And herein lies the ignorance. What sets Japan apart is that it is Monetarily Sovereign, while the euro nations are monetarily non-sovereign. Those who do not understand the difference, do not understand economics.
Deflation and the yen’s long bull run foster a “patriotic” home bias among households and institutions, turning private savings into quasi public money, always there and easily accessible. That explains how a nation with one of the lowest tax burdens in the OECD and a stagnant economy never seemed to have trouble rolling out hefty stimulus packages or subsidizing social security.
Gee, what a mystery. A Monetarily Sovereign nation has low taxes, high debt, and never has trouble spending money. And no inflation! Debt-hawks, how could this be?
It’s sad to see Japan undergoing the same death-by-ignorance that the U.S. suffers at the hands of the economically unknowing. Here is a perfect example for Americans — a nation with twice the debt/GDP ratio as ours, yet having no difficulty paying its bills and no inflation. Yet our leaders do not learn from what is right in front of their eyes.
I hope Japan doesn’t panic and begin needlessly to raise taxes, as our Congress and President wish to do. That would make them as foolish as we are.
Regarding the headline of this post, the Japanese “crisis” is economic ignorance, and yes, it already has happened here.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports