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 Weimar 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
31 thoughts on “–The Japanese crisis. What is it and could it happen here?”
It’s extremely irritating to be told constantly that ‘what sets Japan apart’ is that it borrows almost exclusively from at home, while at the same time ‘what sets the United States apart’ is that it has ‘reserve currency status’ i.e. it borrows so much from foreigners who have accumulated enormous amounts of US currency. These things are exact opposites but they are always said to be the reasons why both countries are managing to avoid being like Greece and have such low interest rates on their government debts.
First; GRR888TE piece.Even the format where you explicitly address each part seperately.
“Finance Ministry . . . simulations show adding 1 percentage point to borrowing costs “……This statement gets me going. HELP, Help,!
This perhaps is equal by my standard as saying “Are you sure Japan is
MS ????. Please explain , why does Japan have borrowing costs ?
Is it the reason Japan has a problem, They also have the stupid practice of paying interest (“powerful weapon”) on their own money ?
If a nation allows any entity other then itself to print (put in circulation) its currency and or is allowed to charge interest on it,it is “de facto” a non-moneytary sovereignty !!!!!
Correct. There is no need for a Monetarily Sovereign government ever to borrow. However, despite Einstein’s little joke about compound interest, paying any amount of interest is no problem for a Monetarily Sovereign government, and it does have the advantage of adding money to the economy.
That doesn’t make America a de facto monetarily non-sovereign nation. What does make us monetarily non-sovereign is the debt ceiling and insistence on balanced budgets.
Rodger Malcolm Mitchell
>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.
That may very well be, but don’t you think there would be severe socio-economic and thus political consequences if Japan’s currency “tanked”? As far as I know, Japan buys large amounts of energy resources, food and probably all kinds of cheap manufactured products (as opposed to valuable manufactured products, which it is famous for exporting) from the international market, and if its currency “tanked”, all of those imports would be greatly more expensive, wouldn’t they? Wouldn’t that have a severe effect on Japan’s population’s lives?
Jorma, you’re talking about inflation. You neglected to read farther down the post where it says:
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.
In the U.S., there has been zero relationship between federal deficits and inflation. I suspect the same is true of most other countries. Of course, I recognize this is counter to popular wisdom.
In the part that I quoted, I thought you were saying that their currency “tanking” would be no problem. But I guess you’re saying now that it wouldn’t “tank” in the first place anyway.
>So all that money “printing” to pay all that debt has not caused inflation?
This part makes me wonder why Japan has so much debt if they have been money “printing” a lot to pay it. Maybe I’m not understanding something…
What you’re not understanding is why I write this blog in the first place. Monetarily Sovereign nations like Japan (and the U.S.) no longer need to borrow. That became true on August 15, 1971.
However, they still live in the gold standard days, when borrowing was necessary.
If economists understood how economics has changed, I could go back to painting.
>Monetarily Sovereign nations like Japan (and the U.S.) no longer need to borrow. That became true on August 15, 1971.
So in your opinion it has been over 40 years while they have borrowed even though they don’t “need” to… Sounds pretty dubious. I think people usually don’t tend to do things if they don’t need to do them, especially for decades.
Also, I wonder what the money that governments currently borrow would do, where it would be redirected, if governments stopped borrowing it and “printed” their spending money instead.
Perhaps you should redo this piece with one on Canada.As in ,
Oh Canada! Imposing Austerity on the World’s Most Resource-rich Country
Posted on April 1, 2012 by Ellen Brown
Sad, isn’t it.
Although, in truth, resources have nothing to do with it. If Canada had zero resources, it still is a Monetarily Sovereign nation, and therefore can pay all its bills — without taxing or borrowing.
>resources have nothing to do with it.
Except that the usefulness of money comes from the fact that you can exchange it for resources. Isn’t that true?
World resources, not just your own resources.
No, your own resources. You can only exchange it for world resources because the recipient can redeem it for your resources.
Wrong. Visualize this. The nation of Cheapoland has zero natural resources, but it has people who work cheapo. So people send it car parts, where the people assemble cars and ship them out, again — for a profit.
Take it a step further. The nation of Thinkingland have the world’s best computers. People send it problems to solve. Still no natural resources, but lots of profits.
Jorma, you may be dubious, but that is the fact. As I said, if economists understood Monetary Sovereignty, people like Warren Mosler, Randy Wray, Billy Mitchell, Marshall Auerback and I wouldn’t need to write blogs.
As for federal borrowing, this is not the same as when you and I borrow. There is no increase in the money supply, nor the government’s access to money, when the federal government borrows. They merely move dollars from the “lender’s” checking account to the “lender’s” T-security account.
That’s why borrowing is meaningless for a Monetarily Sovereign nation.
Once again, that is the difference between Monetary Sovereignty and monetary non-sovereignty.
>There is no increase in the money supply, nor the government’s access to money, when the federal government borrows.
As long as the government in question can’t “print” money at will (be it for political, technical, cultural or whatever reasons), surely there is an increase in the government’s access to money when it borrows. As for the money supply, I guess your idea about it may be correct.
>They merely move dollars from the “lender’s” checking account to the “lender’s” T-security account.
Wouldn’t the dollars in the “lender’s” checking account tend to seek some other opportunities if the government didn’t move them to the “lender’s” T-security account but instead just “printed” the money it wanted to spend? I would think that they would and that that should have economic consequences.
The borrowing by a Monetarily Sovereign nation is different from your and my borrowing. Two facts you should understand about government borrowing:
1. The dollars already exist. So-called borrowing doesn’t create any dollars.
2. The government never receives the dollars it “borrows.” The dollars remain with the lender, and just are debited from one of the lender’s accounts to another of the lender’s accounts.
This is where Monetary Sovereignty is counter-intuitive. It is different from what people are accustomed to. You and I are monetarily non-sovereign. The is a huge difference between MS and mn-s.
That is your challenge: To understand that difference. It’s like the difference between the macro world and the quantum world. Huge difference.
You don’t seem to be answering my question about what the “lender’s” money would do/cause in the economy if the government didn’t “borrow” it but “printed” its spending money instead.
I’m no expert, so I just hope it’s not a stupid question.
Oh and about the relationship between money and resources, sure, the world’s recources are far greater than any single country’s, but they’re still finite. And of course, some resources only exist in some countries. Assuming no global empire which prevents them from having a say about the usage of their resources, those resources more or less may or may not be available to the whole world.
Agreed, all resources are finite. The ocean is finite as is the earth , as is the sun. But making the obvious statement that resources are finite does not mean the world is about to run out of the means to growth.
At some time in the future, the world will use up discoverable oil. No one knows when that might be, because we keep discovering new sites. But that reality doesn’t mean we will run out of energy, and that is the important point.
People who repeatedly predict the end of economic growth, also repeatedly make the same mistake. They don’t account for technology. In the 1800’s it was feared machines would take everyone’s jobs. The unions still fight that battle.
RE: finite resources.
What if we were to enable the use of “all the resourses of the universe,its stars and planets,etc.”,perhaps we may not have enough time to spend that amount of “wealth”?
>making the obvious statement that resources are finite does not mean the world is about to run out of the means to growth.
I don’t remember making such a claim, but I do admit that the effect of resource limitations on economy and its growth prospects worries me somewhat. But surely there will always be economic growth, at the very least locally even if not globally.
>At some time in the future, the world will use up discoverable oil. No one knows when that might be, because we keep discovering new sites.
The thing about oil seems to me to be less about using it up and more about the rates at which it can be produced.
>that reality doesn’t mean we will run out of energy, and that is the important point.
I’m not sure why that is supposed to be an important point. I don’t think anyone thinks that “we” (whoever that may be, exactly) will “run out of energy”.
>People who repeatedly predict the end of economic growth, also repeatedly make the same mistake. They don’t account for technology. In the 1800′s it was feared machines would take everyone’s jobs. The unions still fight that battle.
I, for one, have not made any such predictions here. I do agree that technological progress (and that can be thought to include even such things as societal organization) is a significant source of economic growth. As for your last two sentences, true or not, they seem pretty irrelevant.
Then what was your point about resources?
“Justaluckyfool”, asks,”Does a financial institution create currency when it
makes a loan using “Fractional Reserve Banking” ?
How does Bank of America have $80 trillion dollars of derivatives on its books, let alone US financial institutions have an estimated $235 trillion ?”
This is a fact as reported by the US Comptroller of the Currency. (occ.gov)
Isn’t the production from compound interest INFINITE ?
“You don’t seem to be answering my question about what the “lender’s” money would do/cause in the economy if the government didn’t “borrow” it but “printed” its spending money instead.”
I have no idea what this question means, but I’ll try to answer it anyway. The government neither receives nor uses “borrowed” dollars. When someone “lends” money to the government, they buy T-securities. Here’s how:
First, the “lenders” add dollars to their own checking accounts. Then, when they purchase the T-securities, their checking accounts are debited and their T-security accounts are credited. Now the dollars are in their T-securities account.
At no time does the government receive those dollars. It’s a simple transfer, similar to when you transfer from your checking account to your savings account.
That’s why federal borrowing is useless, obsolete and foolish.
Also, the government does not “print” dollars. Dollars have no physical existence, so how can they be printed? The government creates dollars by spending.
If you are a vendor to the government, you send them a bill. They send instructions to your bank, telling your bank to raise the numbers in your checking account. Your bank obeys, and at that instant, dollars are created.
If this doesn’t answer your question, feel free to clarify.
Rodger Malcolm Mitchell
>I have no idea what this question means
Well that would explain some things.
>If this doesn’t answer your question, feel free to clarify.
It doesn’t answer my question. My question was not about what the current situation IS (according to you, at least), but what the situation WOULD BE if your policy ideas would be followed.
In other words, what would the money that is currently debited from checking accounts and credited to T-security accounts do in the economy, if governments followed your advice and stopped doing that (but kept spending like usual and so on). I’m no expert, but I would think that the money owners would want to invest that money in something else if the goverment took away the T-security opportynity.
>Also, the government does not “print” dollars. Dollars have no physical existence, so how can they be printed? The government creates dollars by spending.
I did put the word “print” inside quotation marks for that kind of reasons.
Yup, if there were no T-securities, people would invest in other things.
Rodger Malcolm Mitchell says:
>what was your point about resources?
My point about resources was originally just a quip at your claim that “resources have nothing to do with it”. Being “monetarily sovereign” and so on surely does not remove the effect of resource availability on the economy.
Quips aside, being Monetarily Sovereign means a nation can be rich and can obtain all the resources they want, and have zero natural resources of their own. Switzerland and Japan come close to this extreme.
>being Monetarily Sovereign means a nation can be rich and can obtain all the resources they want,
I have to say that that sounds like a fantasy. After all, human wants are (at least potentially) far greater than the resources that exist on Earth.
>and have zero natural resources of their own. Switzerland and Japan come close to this extreme.
As far as I know, people in Japan and even in Switzerland consume significantly less natural resources per capita than people in USA and Canada. And even that level of consumption is said by many experts to be “unsustainable”, especially if all seven billion (and maybe nine billion in the future) humans were to consume natural resources at the same rate.
Of course, Switzerland and Japan don’t exactly have “zero natural resources”, either. Their population (in other words human capital) is a significant resource, as is their land. That’s why thay can afford to import lots of resources from outside their country, at least for now.
Ah, so population is a natural resource? You just solved your own problem.