Monday, March 14, 2011

Japan -- from the ashes?

A massive earthquake, a huge tsunami, and now the possibility of a nuclear meltdown. Things are looking grim for poor Japan.

Japan has enormous real problems, having suffered a massive real negative shock. Their ability to "finance" their reconstruction is (thankfully) not a real problem at all. This tragedy makes it very clear: there is a huge amount of real (sweat & atoms) work to be done, and there is a huge amount of real (swat & atoms) labor and capital ready and willing to do it. The Japanese Government can print as many Yen as it needs to to mobilize its available resources and get the country to work. Maybe now, finally, Japan will fund its demand for net private savings (equity) and escape the balance sheet recession it's been mired in for a generation.


Anonymous Anonymous said...


How does the abiity to print yen enable the Japanese government to replace the real output it borrows from the rest of the economy?

8:43 AM  
Blogger winterspeak said...


Japan's problem has been that its capital has been underutilized, and its economy has been running below full output capacity.

In the past, the value of the ends the Japanese Government has put the private output it's bought has been unclear ("bridges to nowhere"). But there is very obvious, valuable work to be done now and the Government can get the private sector at full output doing that good work.

9:28 AM  
Anonymous Anonymous said...

The issue as I see it is that MMT bloggers think that because the Japanese govt is unconstrained in its ability to print currency, it must therefore also be unconstrained in its ability to consume real resources, which is not true.

Now, if the government does not aquire resources by taxing them, it must be the case that it borrowed them. If it borrowed them, this implies that it must return them in the future (with interest). If it has to return them in the future with interest, this implies that tax receipts will have to grow, or spending will have to come down, or both. But their ability to "finance" the reconstruction is very much a real problem, unless you are suggesting that the government defaults on its debt.

9:40 AM  
Blogger Neil Wilson said...

I would have thought the rest of the economy cannot be said to be deprived of anything until you see some evidence of demand pull inflation in some resource segments.

Until then surely you are using up the slack and/or the economy is upping output quantity in response to the demand.

If the Japanese do managed to generate some demand pull inflation (and they've struggled to do that for years), then the government will either have to slow down or tax out some extra space.

The key piece of data here though is how much real productive capacity has been destroyed by the disaster. I've not seen any estimates of that yet. No doubt it is too early to tell.

9:51 AM  
Blogger winterspeak said...


Not sure I follow. Of course the Government, like us all, is constrained in our ability to consume real resources. But I'm not sure that the only options are to buy or borrow real resources, you can also rent them.

The real resource I have in mind is labor. The Government can rent labor just like anyone, and Japan has a labor surplus. The government also now has very clear, valuable projects that it can have that surplus labor work on, and no longer be idle.

NEIL: The core, real productive capacity of Japan are the Japanese themselves. It will be difficult, but I'm optimistic they will succeed ultimately.

9:54 AM  
Anonymous Anonymous said...


I don't understand how the distinction is significant WRT to the ability of the Japanese government to fund its activities. Ruling out slavery, no one "buys" labour--they buy labour services.

11:19 AM  
Blogger winterspeak said...


And Japan has had idle labor services for a long time now. The labor service is idle because the private sector has insufficient net financial assets.

The Government may now finally generate sufficient NFAs so the idle labor is put to you replacing lost real stock.

12:17 PM  
Blogger The Arthurian said...

Vimothy, I don't think this is correct: "Now, if the government does not acquire resources by taxing them, it must be the case that it borrowed them. If it borrowed them, this implies that it must return them in the future (with interest)."

The fact that government borrows does not imply that it will pay back its debt. Interest, yes. Principal, no.

11:02 PM  
Anonymous Anonymous said...

The Arthurian,

Can you explain that statement in a bit more detail? ta.

7:10 AM  
Blogger The Arthurian said...

This comment has been removed by the author.

5:17 PM  
Blogger The Arthurian said...

A bit more detail, Vimothy? Sure!

Apart from the four years 1998-2001, the U.S. federal budget has not been balanced since 1970. That's four years out of forty. One out of ten.

Ten percent of those budgets were balanced. How much was the debt reduced? From 3772.3 billion (in 1997) to 3319.6 (in 2001). So the federal debt fell 12% from its 1997 value. But, by 2007 that number was one-third higher again than its 1997 value. While I'm sure this comes as no surprise to you, it does stand as evidence that governments do not pay back debt. They just roll it over.

The graph of public debt in the United Kingdom looks like a mountain, as Christopher Chantrill shows. From almost nothing in 1692 it rose to more than 2½ times GDP around 1820, then fell again to nearly nothing by 1914.

But Chantrill's graph shows debt relative to GDP. Raw numbers from Robert Barro ( page 342 if available) show that while the sharp increase of public debt did end around 1820, debt did not decrease thereafter. Total public debt in the UK increased gradually from 1820 to the end of the century.

Taken together, the two sources suggest that what appears to be a decline of debt on Chantrill's graph is really a sudden, sharp increase in real GDP. Measuringworth confirms this analysis.

One could argue that a century of U.K. public debt growth paved the way for the GDP growth of the following century, and that we see in these developments the birth of modern capitalism.

But one can not claim that U.K. public debt was paid back or paid down or reduced.

Some governments have gone so far as to issue "perpetuals" -- bonds that never come due, so that there is always interest to be paid, but never principal. I think I have that right.

Without addressing the question of whether this policy helps or hurts the economy, I think it is realistic to say that, for many governments, one cannot assume that an act of borrowing implies that repayment of that debt will follow.

5:25 PM  

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