Last year, one part of my series against Cassandras focused on the fear of excessive government debt in the US and other countries. I explained why current debt levels will not lead to a debt catastrophe or a financial crisis anytime soon and I emphasised that Japan manages to sustain much, much higher debt levels for decades without problems. Furthermore, I showed how central banks
"Austerity" measures have a lot of fans who view national accounts as one big overgrown household budget, but against the backdrop you describe, the risk of triggering a "balance sheet recession" is very real https://en.wikipedia.org/wiki/Balance_sheet_recession
"Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy (e.g., central banks lowering key interest rates) was ineffective because there was limited demand for funds while firms paid down their liabilities, even at near-zero interest rates. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy."
The US debt future is the same as Japan's debt history. I hope so. It's interesting to me that Japan has been able to do this while keeping inflation very low. I'm not sure the US will manage the same low inflation rate if it use yield control on rates.
Hello Joachim, many thanks for this very interesting post!
I'd have a question.
Frankly I do not understand the correlation between the low-yield environment and a self-perpetuating wealth effect:
"Second, the artificially low yields on long-term government bonds mean that there is a redistribution of wealth towards owners of assets with long duration. These tend to be older and wealthier households who own homes and have larger investment portfolios. Younger and poorer households, on the other hand often must borrow at high interest rates with short maturities or have no investment portfolios and thus only earn short-term interest rates on their bank accounts."
Isn't it always the case, whatever the yield environment, that wealthy households get better borrowing conditions (longer maturities, lower interest rates) than poorer, hence for the borrower riskier households?
I'd be interested to see an analysis which included Japan's trade surplus and government expenditure
"Austerity" measures have a lot of fans who view national accounts as one big overgrown household budget, but against the backdrop you describe, the risk of triggering a "balance sheet recession" is very real https://en.wikipedia.org/wiki/Balance_sheet_recession
"Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy (e.g., central banks lowering key interest rates) was ineffective because there was limited demand for funds while firms paid down their liabilities, even at near-zero interest rates. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy."
but so that there is no inflation, it only works in a balance sheet recession...then you expect a negative equity phase first? thanks
The US debt future is the same as Japan's debt history. I hope so. It's interesting to me that Japan has been able to do this while keeping inflation very low. I'm not sure the US will manage the same low inflation rate if it use yield control on rates.
Hello Joachim, many thanks for this very interesting post!
I'd have a question.
Frankly I do not understand the correlation between the low-yield environment and a self-perpetuating wealth effect:
"Second, the artificially low yields on long-term government bonds mean that there is a redistribution of wealth towards owners of assets with long duration. These tend to be older and wealthier households who own homes and have larger investment portfolios. Younger and poorer households, on the other hand often must borrow at high interest rates with short maturities or have no investment portfolios and thus only earn short-term interest rates on their bank accounts."
Isn't it always the case, whatever the yield environment, that wealthy households get better borrowing conditions (longer maturities, lower interest rates) than poorer, hence for the borrower riskier households?