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Japan, Italy, and Greece are in the same category of heavily indebted countries as a percentage of their GDP. But, you’re absolutely correct that a key differen

Japan, Italy, and Greece are in the same category of heavily indebted countries as a percentage of their GDP. But, you’re absolutely correct that a key difference between these countries is that Japan controls its own currency (unlike Italy and Greece). Having a central bank by bonds directly from the treasury is the very definition of monetization. It would add a substantial amount of currency to the economy and is very different from what is happening with QE. As for how Japan has been able to build up debt to their levels without seeing bond yields rise and sparking a crisis - it’s because the Bank Of Japan has used just about every outstanding government bond for QE. But they Japanese in particular are reaching the limit of QE. I go more into this argument here: https://www.cassandracapital.net/post/quantitative-easing-has-prevented-a-debt-crisis-but-we-re-reaching-the-physical-limits-of-qe https://www.cassandracapital.net/post/quantitative-easing-ha...

RobertoG 7y ago
If I understand you correctly, your argument is that QE is not inflationary because the banks don't have bonds in their balance that previously they had, instead they have reserves. First, reserves are not inflationary (1). The quantity of reserves in the system is not important if that money is keep in the Central Bank and it's not spent. As the current QE exercise has show, adding reserves to the system don't make firms and households ask for more credit. If the real economy don't want to spend, you can add all the reserves that you want and nothing will happen (except lowering the interest rate that it's already at minumum). Now, fiscal policy, it's the right tool if you want to stimulate the economy, but, for political reasons, it's not done. Second, please, explain through what mechanism banks don't owning a quantity of bonds equivalent to the reserves in the system will create inflation. All the point of selling bonds (by the central bank to the banks) is to retire reserves from the system. Monetization of the debt don't cause inflation. What causes inflation is spending in the economy. That it's precisely what the politics in, for instance, the Euro-area refuse to do. (1) - http://bilbo.economicoutlook.net/blog/?p=6624 http://bilbo.economicoutlook.net/blog/?p=6624
- joshuafkon 7y ago
  I think we agree that QE is not inflationary (and obviously despite years of QE inflation is low) However, monetization if the debt (which is very different from QE) is definitely inflationary. Would you suggest that every country could simply print fresh currency and pay off the national debt without causing inflation?
  - RobertoG 7y ago
    Please, note that I'm not saying that QE it's not inflationary (it's not), I'm making a more general statement: adding reserves to the bank system it's not inflationary. You probably agree with me that what create inflation is the spending in the economy. One thing is the public deficit and another is the public debt. The deficit happens when the government spend in the economy. If the government (or the private sector) spend too much in the economy inflation will happen. The other way inflation can happen is by some kind of supply shock. The public debt is just the accumulated of the money that has been already spent in the economy. So, the public debt can't be inflationary. That money is already in the economy! Paying the public debt it's just not emitting new debt and waiting until all the debt mature. Could that be done (if we forget for a moment the rules currently in place)? Yes, the government just could spend what they need without emitting bonds. The real restrictions in the government spending would be the same: don't spend more than the economy can provide or you will get inflation. The public debt number is basically irrelevant. This is true for countries with its own currency and the debt denominated in its own currency, otherwise the issue it's very different. We are not going to see a crisis created by a public debt problem of countries that have their own currency, but the public debt, of the countries in the Euro, is a good candidate for the source of the next crisis.

RobertoG 7y ago

If I understand you correctly, your argument is that QE is not inflationary because the banks don't have bonds in their balance that previously they had, instead they have reserves. First, reserves are not inflationary (1). The quantity of reserves in the system is not important if that money is keep in the Central Bank and it's not spent. As the current QE exercise has show, adding reserves to the system don't make firms and households ask for more credit. If the real economy don't want to spend, you can add all the reserves that you want and nothing will happen (except lowering the interest rate that it's already at minumum). Now, fiscal policy, it's the right tool if you want to stimulate the economy, but, for political reasons, it's not done. Second, please, explain through what mechanism banks don't owning a quantity of bonds equivalent to the reserves in the system will create inflation. All the point of selling bonds (by the central bank to the banks) is to retire reserves from the system. Monetization of the debt don't cause inflation. What causes inflation is spending in the economy. That it's precisely what the politics in, for instance, the Euro-area refuse to do. (1) - http://bilbo.economicoutlook.net/blog/?p=6624 http://bilbo.economicoutlook.net/blog/?p=6624

joshuafkon 7y ago
I think we agree that QE is not inflationary (and obviously despite years of QE inflation is low) However, monetization if the debt (which is very different from QE) is definitely inflationary. Would you suggest that every country could simply print fresh currency and pay off the national debt without causing inflation?
- RobertoG 7y ago
  Please, note that I'm not saying that QE it's not inflationary (it's not), I'm making a more general statement: adding reserves to the bank system it's not inflationary. You probably agree with me that what create inflation is the spending in the economy. One thing is the public deficit and another is the public debt. The deficit happens when the government spend in the economy. If the government (or the private sector) spend too much in the economy inflation will happen. The other way inflation can happen is by some kind of supply shock. The public debt is just the accumulated of the money that has been already spent in the economy. So, the public debt can't be inflationary. That money is already in the economy! Paying the public debt it's just not emitting new debt and waiting until all the debt mature. Could that be done (if we forget for a moment the rules currently in place)? Yes, the government just could spend what they need without emitting bonds. The real restrictions in the government spending would be the same: don't spend more than the economy can provide or you will get inflation. The public debt number is basically irrelevant. This is true for countries with its own currency and the debt denominated in its own currency, otherwise the issue it's very different. We are not going to see a crisis created by a public debt problem of countries that have their own currency, but the public debt, of the countries in the Euro, is a good candidate for the source of the next crisis.