official debt problem
  • There is a strong group here in Japan, with political clout and intellectual credentials, that says that both theoretically and practically there need be no official debt interest and repayment problem, that governments have the right themselves to create whatever funds they need for legitimate spending.

    It calls itself the Association for Japan Economic Recovery (AJER) headed by economist/ software company owner, Ono Seiji. Abe Shinzo is one of their members, at least on paper, and is supposed to head their large 100 member plus Diet support group. They claim credit for inspiring Abenomics.

    And since I am somewhat involved with the group maybe I can help outline their thinking.

    They began some years back with the arguments of Kansai economist Niwa Haruki pointing out that governments have the right to create money. It can do this in two ways - government issuing its own currency separate from that of the central banks, as Kennedy was setting out to do in 1963 before being assassinated. This is what they call positive money.

    Negative money is when governments require the central bank to provide whatever funds are needed and ignore the need for repayment. Interest charges can be imposed but they too are subsumed in the non-repayment funds. In short the central bank can simply expand ad infinitum the money supply needed for the economy to function at its full capacity, with government rather than private bank lending pumping the needed funds into the economy, and pulling back only when there are inflation fears.

    Here they point to the very important precedent set by 1930's finance minister, Takahashi Korekiyo, who used this policy to pull Japan out of Its Great Depression many years before Western governments relying on cautious fiscal spending (and the Second World War) could get themselves out of their GD mess. (He too was assassinated, by the military, when he tried to rein in later inflation by clamping down on military spending.)

    AJER realises these two approaches are too radical for a conservative Japanese public which assumes all debt is evil and must be repaid. Endless calls for fiscal discipline, with Nikkei and Keidanren troglodytes in the lead, have to date hobbled most attempts to rely even on fiscal policy since Bubble collapse (the brief Obuchi-Mori attempt to move to fiscal expansion was the exception). So AJER sugar-coat their calls for QE and fiscal expansion with claims that an expanded economy on a strong growth path will create the funds needed for repayment and interest costs caused by any expansion in official debt - claims that people like Ken Courtis are probably right to dismiss.

    AJER say that Abe, and those around him, are currently going along with this third approach, but have the second approach up their sleeves and may well use it to abandon the planned consumption tax increase. They claim to have inspired Abe via LDP conservatives such as Yamamoto Koji and former Upper House chairman, Nishioka. These people along with many other AJER supporters are worried by the need for massive government spending both to recover from the Tohoku nuclear disaster (which is far worse then most realise) and to expand both the military and economic clout needed to compete with China. For anti-China reasons they gain active support from the rightwing group round Ishihra, Hiranuma and Kase Hideaki.

    However, the approach has been criticised, possibly rightly, by people like former BOJ guiding committee member, Ueda Kasuo, who points to the inherent contradiction in saying you are going to rely mainly on QE to create a 2 percent inflation and yet keep interest rates subdued i.e. prevent a flight from the government debt market (one reason why Abe and Co. may soon to start to move away from open talk about the 2 percent target).

    (From the beginning they should have said simply they would do whatever it takes to defeat deflation. Or else they should have gone all out and embraced the negative money approach claiming there is now little fear of inflation - something I agree with since both as a researcher and owner of a small development company I can see close up the enormous increase in my productivity created simply by the information and distribution revolution, without any need for the new inventions demanded by Nikkei and some Western academics. Indeed, I suspect the productivity gains from this information revolution, not to mention the supply increases created by economies such as China, are a major reason for the deflationary pressures nagging more advanced economies, and serve as a more than adequate justification for positive or negative money approaches.)

    Needless to say both AJER and Abe bask in the economic revival to date (and as someone who sees close up the building boom not just in Tokyo but in the formerly depressed countywide round Tokyo I can vouch for the fact that the revival is not just the mere flash-in-the-pan 'sizzle' of Richard Katz imagination.) But to some extent it does rely on heightened expectations. Expectations can reverse easily in volatile Japan - a sharp stock exchange fall or yen appreciation can be enough. Strong fiscal follow up is needed, and as I wrote in an earlier post many of the Abenomics supporters such as Yamamoto shy away from such policies for fear of inflaming the Nikkei and other fiscal conservatives. Meanwhile the deregulations and the other reforms in Abe's third arrow will be far from adequate.

    Incidentally, I assume NBR followers are aware of the growing body of intellectual and other opinion in the West that goes along with positive/negative money approaches (references below). The AJER people are not fighting a solitary battle, just as in the past they were not alone in pushing fiscal or monetary expansion. For decades they sought to press the expansion case with support by Western economists such as Klein, Samuelson and Krugman, even if they got nowhere.

    The battle against Japan's, and other, close-minded economic conservatives has been, as the Chinese saying puts it, long and tortuous.

    References to relevant Western thinking on unlimited monetary expansion, sometimes called reliance on helicopter money include:
    http://blogs.reuters.com/anatole-kaletsky/2013/02/07/a-breakthrough-speech-on-monetary-policy/

    http://www.fsa.gov.uk/static/pubs/speeches/0206-at.pdf

    http://www.ft.com/intl/cms/s/0/9bcf0eea-6f98-11e2-b906-00144feab49a.html

    http://blogs.reuters.com/anatole-kaletsky/tag/adair-turner/

    Gregory Clark








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