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There's so much about your post which is incorrect that I don't have time to debunk it all. So let me just hit the biggest error, so that others don't have to w

There's so much about your post which is incorrect that I don't have time to debunk it all. So let me just hit the biggest error, so that others don't have to waste their time: It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.

jpatokal 12y ago
It's "literally impossible" only in a very literal sense of the word. In other words, yes, Japan can indeed get out of a debt of 17 gazillion yen simply by printing 17 gazillion yen, but I'm not sure flooding the money supply like this would cause much less damage than an actual default (=the Japanese government telling its bondholders that it's not going to repay them).
- xorcist 12y ago
  You're not sure financial institutions would prefer being paid something rather than nothing. Could you please elaborate?
  - deciplex 12y ago
    I'd imagine, it's that the damage caused by massive inflation does not start and stop at what financial institutions would prefer. (For that matter, financial institutions would probably prefer a haircut on their Japanese bond holdings, over the 3rd largest economy going up in smoke.)
  - nandemo 12y ago
    At a high enough rate (e.g. war time Germany, 1980s Brazil, Zimbabwe), hyperinflation will turn your nominal returns into next-to-zero real returns. Conversely, default doesn't have to be "we won't pay nothing". A country can partially default.
- AmirS2 12y ago
  >It's "literally impossible" only in a very literal sense of the word. The literal sense of the word "literally"? Yes, I think that's exactly what was meant! Has the word "literal" been so badly abused across the internet (true) that you thought a correct use of the word needed clarification? Or is contemplating the fact that Japan's govt. debts are entirely in its own currency, which can be issued at will with no constraint from the financial markets, so shocking and nonsensical to orthodox thinking that you thought that the original statement couldn't possibly have meant what it said?
- nhaehnle 12y ago
  Japanese government creditors as a whole will never want to get rid of Japanese bonds in the kind of mass-selloff that you're implying unless the Japanese government does tell its bondholders that they're not going to be repaid. The reason is simple: individual holders of Japanese government bond may want to get out of Japanese government debt. These individuals then hold Yen in a bank account (if they're regular individuals or institution) or in a central bank account (if they're banks). What happens with those Yen? Maybe they'll buy some other bonds, or sell those Yen for another currency, or something else entirely. But no matter what they do, those Yen will still be around. It is impossible for them to disappear, unless somebody buys Japanese government bonds. So those Yen might circle around a bit in the financial system, but at some point, they will end up with somebody who sold some asset and does not want to buy anything else. This somebody now has a choice of keeping Yen (which guarantee no loss of principal but have zero nominal return) or of buying government bonds (which also guarantee no loss of principal and which have a - however small - positive nominal return). At this point, buying the government bonds is clearly the superior option. This hot potato effect of money is why there will never be the need to print gazillions of Yen to get rid of the debt. I would point out that one might say that your statement is based on a fundamental misunderstanding anyway: Whether you hold Japanese government bonds or Yen, both are forms of government debt! The only difference between them is in maturity and interest rates.
ekianjo 12y ago
> It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency. Banks are not going to be super happy when the government tells them that their bonds are worth nothing through giga-inflationist measures. Or are they ? Default is better than nothing, at least you can pick up the pieces, while inflation is literally destroying your economy for any foreseeable future.
- quanticle 12y ago
  >inflation is literally destroying your economy for any foreseeable future. Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default. They're both very painful, but it's not clear to me that one is especially worse than the other.
  - ekianjo 12y ago
    Have you heard of Argentina, or Germany in the 30s ? Both of them did not like Inflation too much.
    - jernfrost 12y ago
      What I've read is that inflation in Germany in the 1930s was actually very usefull. They had an enormous amount of debt they were incapable of servicing. The huge inflation cut the debt to pieces very efficiently. The inflation was not the cause of German problems, it was a symptom of problem of having a too large debt. It is sort of like blaming the flu on the fever. The fever might feel bad but it is actually your body's way of fighting the flu.
      - ekianjo 12y ago
        Probably you should read another version of how inflation "helped" Germany. When you have hyper inflation like that it may be good for paying back your debts, but your creditors soon realize that their payments are worth nothing (because you just print paper, you don't create value like that), and you disintegrate all private investment in your country. Why do you think the Third Reich nationalized every industry out there?
dimitar 12y ago
This a really strong statement and is either a misunderstanding or exaggeration. The received wisdom is either that a country issuing debt in its own currency cannot be forced to default or that it is not as vulnerable to sudden stops of confidence in its debt. There are various levels of conviction in these statements. This definitely doesn't mean that it is impossible; at a minimum, a country might choose to do it. In fact as others have pointed out, default is sometimes preferable to hyperinflation and extreme devaluation. After all, all countries, Japan included, rely on imports to get at least some essential goods (think about food, fuel, medicine and tools); autarky is possible, but very inefficient and painful.
- hudibras 12y ago
  A country defaults when it can no longer service the interest on its debt. Japan's interest on the public debt is around $250B/year, or around 5% of GDP. 5% is a higher percentage than most countries (U.S. is around 2.5%) but less than, say, Greece at the height of their crisis. And Greece ended up not defaulting and not devaluing their currency (obviously, being in the Eurozone). $250B is around 25% of the annual government budget for Japan. Again, this is higher than most countries but manageable. Additionally, 92% of Japan's sovereign debt is held domestically. This means that the interest paid on those bonds don't go to Wall Street or Beijing but rather to Japan's own banks and pensioners. As a comparison, 47% of the U.S. debt is held by foreigners. In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
  - adventured 12y ago
    A country defaults when it either can no longer make the payments, or when it can't pay back the real value rather than just the nominal value. eg If I devalue my currency by 99%, and then attempt to pay off debts in that currency, that is a default, regardless of if a country were to try to pretend otherwise. The alternative to that context, would be that any nation can just freely debase their currency, pay back debts in worthless paper, and nobody cares because it's not a default - that's false. Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
nandemo 12y ago
> It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency. False. Many countries have defaulted on debt denominated in local currency. E.g. Brazil in 1990 and Russia in '98. In Brazil's case, part of the debt was indexed to inflation, so inflating away the debt wasn't easy. AFAIK most of Japan's debt isn't inflation-linked. Still, a high enough rate of inflation isn't substantially different from partial default. PS: See the table on page 30. http://www.cass.city.ac.uk/__data/assets/pdf_file/0009/219978/120.-Jeanneret-v2.pdf http://www.cass.city.ac.uk/__data/assets/pdf_file/0009/21997...
- hnnewguy 12y ago
  >False. I think you're both right. When you can print your own currency it is literally impossible to default on your debts, unless you choose to. Often times defaulting has benefits to the debtor, like the Russians escaping from ridiculous fixed exchange rates in 1998.
  - Tyr42 12y ago
    I'd take another look, didn't he say that there exists inflation adjusted debt, which I don't think you can print money to get out of debt.
    - hnnewguy 12y ago
      >there exists inflation adjusted debt Because they decided to issue it, mainly to instill confidence in a currency with a history of big inflation. But this isn't the norm. It doesn't change the argument that it is impossible to be unable to "pay back" something that you have an infinite supply of.

jpatokal 12y ago

It's "literally impossible" only in a very literal sense of the word. In other words, yes, Japan can indeed get out of a debt of 17 gazillion yen simply by printing 17 gazillion yen, but I'm not sure flooding the money supply like this would cause much less damage than an actual default (=the Japanese government telling its bondholders that it's not going to repay them).

xorcist 12y ago
You're not sure financial institutions would prefer being paid something rather than nothing. Could you please elaborate?
- deciplex 12y ago
  I'd imagine, it's that the damage caused by massive inflation does not start and stop at what financial institutions would prefer. (For that matter, financial institutions would probably prefer a haircut on their Japanese bond holdings, over the 3rd largest economy going up in smoke.)
- nandemo 12y ago
  At a high enough rate (e.g. war time Germany, 1980s Brazil, Zimbabwe), hyperinflation will turn your nominal returns into next-to-zero real returns. Conversely, default doesn't have to be "we won't pay nothing". A country can partially default.
AmirS2 12y ago
>It's "literally impossible" only in a very literal sense of the word. The literal sense of the word "literally"? Yes, I think that's exactly what was meant! Has the word "literal" been so badly abused across the internet (true) that you thought a correct use of the word needed clarification? Or is contemplating the fact that Japan's govt. debts are entirely in its own currency, which can be issued at will with no constraint from the financial markets, so shocking and nonsensical to orthodox thinking that you thought that the original statement couldn't possibly have meant what it said?
nhaehnle 12y ago
Japanese government creditors as a whole will never want to get rid of Japanese bonds in the kind of mass-selloff that you're implying unless the Japanese government does tell its bondholders that they're not going to be repaid. The reason is simple: individual holders of Japanese government bond may want to get out of Japanese government debt. These individuals then hold Yen in a bank account (if they're regular individuals or institution) or in a central bank account (if they're banks). What happens with those Yen? Maybe they'll buy some other bonds, or sell those Yen for another currency, or something else entirely. But no matter what they do, those Yen will still be around. It is impossible for them to disappear, unless somebody buys Japanese government bonds. So those Yen might circle around a bit in the financial system, but at some point, they will end up with somebody who sold some asset and does not want to buy anything else. This somebody now has a choice of keeping Yen (which guarantee no loss of principal but have zero nominal return) or of buying government bonds (which also guarantee no loss of principal and which have a - however small - positive nominal return). At this point, buying the government bonds is clearly the superior option. This hot potato effect of money is why there will never be the need to print gazillions of Yen to get rid of the debt. I would point out that one might say that your statement is based on a fundamental misunderstanding anyway: Whether you hold Japanese government bonds or Yen, both are forms of government debt! The only difference between them is in maturity and interest rates.

ekianjo 12y ago

> It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency. Banks are not going to be super happy when the government tells them that their bonds are worth nothing through giga-inflationist measures. Or are they ? Default is better than nothing, at least you can pick up the pieces, while inflation is literally destroying your economy for any foreseeable future.

quanticle 12y ago
>inflation is literally destroying your economy for any foreseeable future. Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default. They're both very painful, but it's not clear to me that one is especially worse than the other.
- ekianjo 12y ago
  Have you heard of Argentina, or Germany in the 30s ? Both of them did not like Inflation too much.
  - jernfrost 12y ago
    What I've read is that inflation in Germany in the 1930s was actually very usefull. They had an enormous amount of debt they were incapable of servicing. The huge inflation cut the debt to pieces very efficiently. The inflation was not the cause of German problems, it was a symptom of problem of having a too large debt. It is sort of like blaming the flu on the fever. The fever might feel bad but it is actually your body's way of fighting the flu.
    - ekianjo 12y ago
      Probably you should read another version of how inflation "helped" Germany. When you have hyper inflation like that it may be good for paying back your debts, but your creditors soon realize that their payments are worth nothing (because you just print paper, you don't create value like that), and you disintegrate all private investment in your country. Why do you think the Third Reich nationalized every industry out there?

dimitar 12y ago

This a really strong statement and is either a misunderstanding or exaggeration. The received wisdom is either that a country issuing debt in its own currency cannot be forced to default or that it is not as vulnerable to sudden stops of confidence in its debt. There are various levels of conviction in these statements. This definitely doesn't mean that it is impossible; at a minimum, a country might choose to do it. In fact as others have pointed out, default is sometimes preferable to hyperinflation and extreme devaluation. After all, all countries, Japan included, rely on imports to get at least some essential goods (think about food, fuel, medicine and tools); autarky is possible, but very inefficient and painful.

hudibras 12y ago
A country defaults when it can no longer service the interest on its debt. Japan's interest on the public debt is around $250B/year, or around 5% of GDP. 5% is a higher percentage than most countries (U.S. is around 2.5%) but less than, say, Greece at the height of their crisis. And Greece ended up not defaulting and not devaluing their currency (obviously, being in the Eurozone). $250B is around 25% of the annual government budget for Japan. Again, this is higher than most countries but manageable. Additionally, 92% of Japan's sovereign debt is held domestically. This means that the interest paid on those bonds don't go to Wall Street or Beijing but rather to Japan's own banks and pensioners. As a comparison, 47% of the U.S. debt is held by foreigners. In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
- adventured 12y ago
  A country defaults when it either can no longer make the payments, or when it can't pay back the real value rather than just the nominal value. eg If I devalue my currency by 99%, and then attempt to pay off debts in that currency, that is a default, regardless of if a country were to try to pretend otherwise. The alternative to that context, would be that any nation can just freely debase their currency, pay back debts in worthless paper, and nobody cares because it's not a default - that's false. Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.

nandemo 12y ago

> It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency. False. Many countries have defaulted on debt denominated in local currency. E.g. Brazil in 1990 and Russia in '98. In Brazil's case, part of the debt was indexed to inflation, so inflating away the debt wasn't easy. AFAIK most of Japan's debt isn't inflation-linked. Still, a high enough rate of inflation isn't substantially different from partial default. PS: See the table on page 30. http://www.cass.city.ac.uk/__data/assets/pdf_file/0009/219978/120.-Jeanneret-v2.pdf http://www.cass.city.ac.uk/__data/assets/pdf_file/0009/21997...

hnnewguy 12y ago
>False. I think you're both right. When you can print your own currency it is literally impossible to default on your debts, unless you choose to. Often times defaulting has benefits to the debtor, like the Russians escaping from ridiculous fixed exchange rates in 1998.
- Tyr42 12y ago
  I'd take another look, didn't he say that there exists inflation adjusted debt, which I don't think you can print money to get out of debt.
  - hnnewguy 12y ago
    >there exists inflation adjusted debt Because they decided to issue it, mainly to instill confidence in a currency with a history of big inflation. But this isn't the norm. It doesn't change the argument that it is impossible to be unable to "pay back" something that you have an infinite supply of.