Right or wrong, it is apparent that our current administration would agree with you – we can spend/credit/print our way back to prosperity! Just like Argentina.

Right or wrong, it is apparent that our current administration would agree with you – we can spend/credit/print our way back to prosperity! Just like Argentina.

In response to the first line of your article, the major problem with saving in Japan is houses, not taxes. Houses in Japan are depreciating assets which typically are torn down and replaced after their 30 year life span runs out. Instead of being able to invest and build equity in a house, the Japanese know that if they are told to relocate by their employer they will not be able to sell the house for what they paid. As a result, they need cash available to pay off the difference between the current value of the property and the loan, as well as a down payment for another property.

In a message dated 04/11/2009 Mountain Standard Time, writes:
fuguez wrote, in response to mauerback:

Marshall I cannot. I also did not mean to say/imply that it would default.

I am simply saying that one end to an increasing debt and tax revenues unable to reduce the burden in an increasing interest rate environment is hyper-inflation – i.e. the collapse of the currency system. No default, but hyperinflation.

I am convinced that there is a combination of Debt, Tax Revenue & Expenditure and Interest Rates where this becomes self-reinforcing and unpreventable.

I remember on another blog a mention to the 1998 Rouble Crisis, but am not sure of the history behind that.

I will investigate that and the 'fiscale channle'.

Thanks

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I am simply saying that one end to an increasing debt and tax revenues unable to reduce the burden in an increasing interest rate environment is hyper-inflation – i.e. the collapse of the currency system. No default, but hyperinflation.
I am convinced that there is a combination of Debt, Tax Revenue & Expenditure and Interest Rates where this becomes self-reinforcing and unpreventable.

I remember on another blog a mention to the 1998 Rouble Crisis, but am not sure of the history behind that.
I will investigate that and the 'fiscale channle'.

Thanks

You can't use emerging markets as examples, because they generally had high foreign debt components, or pegged rate or currency board systems. There is no solvency issue in the kind of circumstance I am discussing.

I've heard the “Ponzi” scheme analogy endlessly. Remember, a government creating its own currency doesn't have the constraint that a Ponzi scheme has. Additionally, that interest being paid out is going into debt holders' pockets. It actually operates in a manner akin to a “fiscal channle” (Bernanke wrote about this in 2004). You can't focus solely on the liabilities of the government, but the assets of the private households on the other side of that integrated balance sheet.

Best,

Marshall Auerback

The Japanese population is getting smaller every year, and there will be NEGATIVE GDP growth in the long-term. How can a smaller tax base support interest payments and repayments for a government debt that is the largest by far in the world, and is forecast to keep on growing??

Of course, the government could print money pay off the debt, but there is very little PRODUCTIVE spending that they can embark on. Japan is already a very wealthy developed nation with world-class human and physical infrastructure. And since the population is DECREASING and AGEING, most of that spending would actually be WASTED, and would not contribute to any long-term growth.

Mynsjy's Hedge, Speculative, & Ponzi Finance regimes can be applied to Sovereign Debt, but the end result is Inflation/HyperInflation and not Deflation.

If the Private Sector has estimated that it would be unable to produce the economic output to re-pay the debt via pre-tax revenues and looks to deflation and default; I do not understand what concern it is of The Government to take these very obligations on board and attempt to solve the problem via its tax revenues.

Our fiat currencies are backed by the future taxation of our productive enterprises – this has an NPV limit as much as a store full of gold and silver. This limit may be harder to calculate but when the financing flows cannot be maintained to service the assumptions that these can be repaid we go 'open-loop'. Instability will occur at this point.

Surely the ability of The Government to pay-off/reduce its (JPY) debt is limited to:
i) The Amount of Tax Revenue that the Government can obtain from the citizens
ii) The Amount of debt that the Government can 'print' – which is in its own currency.

There is a maximising (and presently unknown) Tax Rate above which The Government will not be able to gain more money. A self-reinforcing point could be reached where Tax Income is insufficient to reduce Total Sovereign Debt and The Government is forced to finance itself by Ponzi-Financing in an increasing interest environment. Public Spending will have to be slashed, but this may not be sufficient.

In the West, The Private Sector was able to perform Ponzi-Finance in a declining interest rate environment – thanks to the Fed. With Interest Rates ,especially now, at zero there is a Debt Limit for Sovereign Debt above which this self-reinforcing Ponzi-Finance will be reached – i.e. where Tax Income (Revenue Less Expenditure) is insufficient to reduce Outstanding Debt in a rising interest-rate environment.

With countries like Zimbabwe – which do not have effective Taxation regimes or sufficiant revenue flows – this problem simply occurs earlier.