Japan Debt Trap Situation

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exp
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8:48a, 10/31/22
AG


Interesting read on BoJ debt monetization. I don't understand how the world is fine parking 400 trillion of value in government debt that has no tie to physical reality. Proof of work is completely absent from government asset allocation.
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Sims
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10:15a, 10/31/22
AG
The Japanese monetary system has been a bug in search of a windshield for a while.

As the world tightens, they're doing fiscal stimulus to help ease the burden of inflation. If anything, they're just ahead of the curve.

The world has a bad debt problem, probably better described as a fake wealth problem. We're starting to find out the value of things is not what we thought it was. The more we discover how much of the wealth is fake, we're in for a great big deflationary surprise.
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Win At Life
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12:36p, 10/31/22
AG
It's not accurate to say fiat money and government debt has no tie to physical reality. If I cut lumber and stone and build one house, I've created wealth. There may have been no money or gold involved in doing that. But you can strike that wealth against anything of value such as food, gold, barrels of oil or a money that can't be easily counterfeited. If I invent a saw and nail gun and can now build two houses tomorrow in the time it used to take me to build one, I've increased the wealth of the nation substantially. Why does it make sense that I must also go mine enough gold to equal the increase in housing production (i.e. the gold standard)? The production itself is wealth. Fiat currencies are backed by the production of the economy it's tied to.

That's why debt/GDP is such a valuable measure of a fiat currency. It's similar to you taking on a debt larger than your annual salary to buy a house. How can you do that? Well, if financed over time and, the finance cost isn't too high compared to your salary, then it's pretty manageable. But what if your salary drops? Yeah, that can be a problem. But what if you're successful and your salary increases 10 fold? That house is now cheap and you go out an finance a multi-million dollar mansion. But due to your increase in revenue, the debt of that is still manageable. Government debt works in a very similar way.

But fiat currencies can be printed to infinity and become worthless? Yes. They can. But if they don't, a good measure of their fiscal responsibility is to watch the debt/GDP. What debt to GDP is considered okay? Historically, 100% debt/GDP is considered approaching danger zone. The US approached that at the end of WWII. And didn't hit that again until very recently. Now we're at about 130% debt/GDP IIRC. The highest we've ever been. So that should receive some scrutiny

Is 130% debt/GDP a big deal? Is 200% debt/GDP a big deal? Historically, yes. But Japan is the only economy in the modern world to buck that trend. They been at 200% debt/GDP for decades. Some say it's hurt their economy, but Japan is still a very functional place to live. There's not starvation, riots, bank runs, hyperinflation, or any of the other doomsday stuff going on that people predict. How did they do that? That's a bit uncertain. And the OP's article may be digging into that.

Japan is the big testing ground the world is watching to say more debt/GDP is okay. But they might not be a valid case to apply to the rest of the world. Peter Zeihan mentions their inverted population growth which is worse than, and in front of many other countries. Why hasn't that caused their GDP to collapse? Mostly through automation. Fewer worker produce more GDP. Can the rest of the world repeat that? Maybe. The US has corrected it's similar population inversion through immigration. And it's not all poor people from the south. I've worked my whole career with highly educated, successful and upper-middle class workers from all over the world. We have more of those than any other country in the world. Will that solve our debt/GDP problems? That's and experiment that has yet to come to a conclusion.
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Sims
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In reply to Win At Life • 1:32p, 10/31/22
AG
Good points.

With respect to debt/gdp, would it be fair to say that an increasing debt/gdp over time is enough of an answer to say you're doing the wrong thing? I would almost think it's the vector of the measurement (magnitude/direction) more than it is the position ($debt/$gdp)

Here's what I mean, if you are incurring debt in order to fund productive uses of capital, at some point in the future, you should see the offsetting increase in GDP.

If you are always issuing unproductive debt ( $1 debt = less than $1 gain to gdp), the measure trends up over time and at an increasing pace.

I think you could say at some point in time someone, some entity or some government with enough clout has to say the position of debt to gdp is enough. I think regardless of whether or not we ever get to that point in time, the trend of debt to gdp ever increasing and at a faster pace has to be indicative of the fact we are not adding debt for good, productive reasons.

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exp
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In reply to Win At Life • 2:10p, 10/31/22
AG
When I say fiat money has no tie to reality I'm speaking about the creation of new monetary units. You're 100% right in your explanation of how value is actually created by the economy. You and I do physical work to order the world and unlock energy. To the extent we create more energy reserves than we need at that moment, we trade that product or service for energy receipts, i.e. money. The money is optionality on future energy reserves produced by others.

If anyone has the ability to create more of these energy receipts without actually doing work, they have a very perverse incentive to debase the money which is stealing energy from the actual producers.

If YOU have a money printer, what would you do? Exactly.

Bitcoin aims to remove the incentives for government to print energy receipts out of thin air by fixing the money. You can't fake Bitcoin. You have to do productive work. It's the first discovery by mankind that can bridge real world physical energy with digital scarcity.
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Win At Life
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In reply to Sims • 5:21p, 10/31/22
AG
Sims said:
Good points.

With respect to debt/gdp, would it be fair to say that an increasing debt/gdp over time is enough of an answer to say you're doing the wrong thing? I would almost think it's the vector of the measurement (magnitude/direction) more than it is the position ($debt/$gdp)

Here's what I mean, if you are incurring debt in order to fund productive uses of capital, at some point in the future, you should see the offsetting increase in GDP.

If you are always issuing unproductive debt ( $1 debt = less than $1 gain to gdp), the measure trends up over time and at an increasing pace.

I think you could say at some point in time someone, some entity or some government with enough clout has to say the position of debt to gdp is enough. I think regardless of whether or not we ever get to that point in time, the trend of debt to gdp ever increasing and at a faster pace has to be indicative of the fact we are not adding debt for good, productive reasons.

Well, yeah, generally high debt to GDP causes harm and most would say the government is doing harm at some point. Where is that point? Nobody really knows for sure. But debt to GDP does not always trend up and has not always trended up. It went back down after WWII. But as the GDP has ever-increased, so the government has chosen to increase the debt along with it (more or less) at about 50% - 100% of the latest GDP. But that is a choice and it's a choice that can get more reckless just as exp says.

Now, the efficacy of the incurred debt is a whole other matter. Sure, you can incur debt that improves GDP and incur debt that doesn't. Presumably the government would do more of the former and less of the latter. But that's why governments need to be monitored and the people need to have levers to hold them accountable. How good the levers are in the US, I'm not entirely sure.
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one MEEN Ag
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In reply to Win At Life • 8:49a, 11/1/22
AG
Great points. Debt does the same thing to everyone, it limits your options and creates ties that are very hard to break.

Japan is going to have to wrestle with their debt over the next generation. They aren't going to get to just shrug their shoulders and keep stagnating forward. They'll have hard decisions about their work culture, productivity, and declining population. Their outlier view on property is also going to bite them.
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Sims
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In reply to Win At Life • 11:46a, 11/1/22
AG
Win At Life said:


Now, the efficacy of the incurred debt is a whole other matter. Sure, you can incur debt that improves GDP and incur debt that doesn't. Presumably the government would do more of the former and less of the latter. But that's why governments need to be monitored and the people need to have levers to hold them accountable. How good the levers are in the US, I'm not entirely sure.
For me this goes a key difference between fiscal and monetary policy. If printing is forced by horrible fiscal policy (like helicopter money or the inflation reduction act) then it's an issue with the fiscal policy. Fiscal policy is the biggest threat in my opinion.

The stock market, at the end of the day, should be a capital allocation tool. That's what has allowed the US to reach as far as it has with wealth generation, productivity, inventiveness etc. I think the monetary policy mistake was to keep the cost of capital so low that companies were able to go public without a viable path to profitability (see peleton, uber, rivian). It also create huge asset bubbles. I think the extreme low cost of capital has also contributed to wealth inequality in a negative way. I certainly don't say that with a socialist bent. I think if the market is properly allocating capital to productive ventures, then society generally benefits. The benefit could be wealth or it could be skills and experience.

As to what the proper debt/gdp limit is, maybe it's a function of the central bank credibility as it pertains to being able to pull the levers timely and effectively and keep investors' confidence.

(I'm thankful this thread is on B&I and not politics and appreciate the discussion!)
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