I've got no special reason to post this, but for some reason I was mulling over the question of Japan and its astronomical debt levels. In theory, this should cause an increase in inflation and a slowdown in growth, but that doesn't really seem to be the case. Inflation in Japan remains stubbornly low, and GDP growth is pretty good when you account for their aging population:
Up until 2016 the US and Japan were growing at about the same rate per working-age person. That's only changed recently, as the US recorded several years of strong growth while Japan stagnated. Is this because high debt levels have finally caught up to them? The next few years will tell us. For now, however, they really aren't much behind us.
why do you think high debt should in theory cause an increase in inflation?
Inflation occurs when demand exceeds supply. In the 70s, demand for oil exceeded the supply of oil and we had inflation until we adjusted demand downward and supply upward.
Increasing the amount of demand doesn't by itself cause inflation. Especially when you have a global economy and plenty of people around the globe that can enter the workforce.
Inflation occurs when too much money is created and chases limited supply. The 60's fit this example as the government printed money to reduce deficits for paying back wwii loans, Vietnam and domestic programs. The surge in the money supply was immense for the GDP level.
There are 2 somewhat contradictory views of inflation.
A. Monetary inflation - Prices go up systematically due to an increase in the money supply relative to GDP. In this view, if the money supply increases by say 2.5% then all prices should also go up 2.5% because there's more money chasing the same amount of goods (and the "rational consumer" still values all products relatively the same)
B. Price inflation - Inflation defined by how much prices of a basket of goods has increased over time. In this view it doesn't matter whether the price is going up do to money supply, or the Supply/Demand curve finding a new equilibrium.
Under the Monetary inflation model high debt increases the money supply (money is created by borrowing) therefore systemic inflation should go up, offset by any decrease in supply of goods. This is what Kevin is saying people expected to happen in Japan.
The 70s oil shock created the second type of inflation. Energy prices shot up due to a supply/demand imbalance, causing everything that was produced using energy (i.e. everything) to increase in price.
* due to
Good explanation. One thing I’d like to add is that what economists fear most is sustained inflation, which requires some sort of positive feedback. For example, as another commenter noted in an earlier thread, when the oil shock caused the prices of manufactured goods from the West to rise, OPEC raised its prices in response. But since energy is only one cost of production, price rises of other goods were less than the price rise of petroleum. Also, imports of Western goods were less than OPEC-member oil exports, so a smaller price rise was sufficient to cover them. So the feedback loop was decaying, and the 70’s inflation would have eventually subsided regardless of policy.
Thanks for the lesson, JimFive!
Of course excess demand, which means "excess" money in the hands of consumers, can cause inflation at full employment or if supply is limited for other reasons (according to standard economics). When the government spends a lot and runs deficits (i.e. no increased taxes) this puts money into the economy, and if the government spending is on war materials or infrastructure it does not directly increase supply of consumer goods. After the 1991 crash Japan sent enormous amounts on infrastructure.
This kind of spending should increase inflation if there is full employment, but according to standard Keynesian theory it should lead to increased growth if there is less than full employment. Japan actually got neither. The deficit spending also did not increase interest rates, falsifying another standard economic dogma. Japan since 1991 does not fit well with standard economic "theory". Kevin's version of this is confused, but standard economics doesn't explain what happened anyway.
To confuse things further, the Bank of Japan has been buying almost all the government bonds issued for the fast few years.
Central Banks don't create money.
Japan didn't spend large on infrastructure. Lazy post.
Deficit spending pushes economic activity and consumption beyond what they'd be absent the extra spending. In a time of depressed demand that's desirable. In a time of high economic activity/full-employment/strong demand, we're liable to experience inflation.
I'm personally not worried about excessive inflation in the near future, though I do think it's likely to approach 3-4% over the next 18 months. (I don't think of such a level as being "excessive;" also, federal borrowing will be declining again by next spring, so that factor plus higher borrowing costs are likely, in my view, to keep the lid on things moving forward).
Older folks (hello, Japan) just aren't as good consumers as young people. There's no surprise here.
For Japan to run down debt it needs to increase inheritance taxes. Most of the debt is owed to their pensioners.
Yeah, ex-pensioning debt shows Japan doesn't have that much debt and so it's money supply as you would expect isn't growing fast in a neutral population growth country.
Given the higher percentage elderly in Japan, that would suggest that net private debt may be low in world terms?
Chart legend. Please.
Ditto. Which line is which??
What about the weird captive Japanese post-office banking system that feeds govt designated industries...could that be controlling inflation by managing the money supply?
I get from the text that the orange line is the US and blue is Japan...but I shouldn't need to figure it out.
In infer from this the blue line is probably Japan? You really should include some labels.