There’s been a lot of chatter in recent days about Japan and their debt issue.  John Carney and Joe Weisenthal both wrote good pieces on their sites and then today Bloomberg reported the Fitch downgrade of Japanese debt citing:

“A lack of new fiscal policy measures aimed at stabilising public finances amid continued rises in government debt ratios could lead to a further downgrade. A shock to Japan’s sovereign funding conditions such as a steep and sustained rise in yields would be strongly negative for the ratings, although Fitch does not consider this likely.”

I would say that I do not consider this “likely” either.  Now, I don’t know if I’d go as far as Joe goes in saying that Japan won’t ever default.  They could very well choose to default much like Russia did in the 90’s.  And I certainly wouldn’t make big bets on the political intelligence of Japanese officials (in either direction).  After all, there are a lot of politicians in this world who simply don’t know how the monetary system works and they might even conclude that a default would be good.  Who knows?  The Euro crisis that never ends hasn’t yet convinced some people that austerity is crushing these economies, but sometimes evidence in front of your face just isn’t enough.

But the more important point is that Japan is like the USA in being an autonomous currency issuer.  In essence, the US Treasury would never run into trouble procuring funds to pay bondholders because of its unique relationship with the Federal Reserve.  Bondholders know this so US bonds are seen as a save haven.  As an act of Congress and the lender of last resort the Fed can always be counted on to supply fund to the US government so bond holders can be paid and remain whole.  In this regard, the US government is a currency issuer because of its explicit political unity between its central bank and treasury (the exact thing missing in Europe).  The same relationship exists in Japan.  So, unless you think central bankers are bad at “printing money” for their governments then it’s rather silly to assume that Japan or the USA can’t obtain the funds to remain “solvent”.   Of course, Japan could suffer hyperinflation at some point, but as I’ve previously explained, this is quite a different phenomenon than “running out of money”.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • marketcycles79

    Ah yes hyperinflation………deflation has killed this country. Real estate and risk assets are on par with with prices well back into the 80s

  • LVG

    Cullen, off topic, but I’d like to know what MMR says about this article on MMT. http://neweconomicperspectives.org/2012/05/the-semantic-problem-with-mmt-an-exercise-in-framing.html

  • http://www.pragcap.com Cullen Roche

    I’ll have to get back to you later, but my discomfort with many MMT concepts is increasing. MMT is like the movie Inception. The deeper the levels you get into the crazier the dream appears…..I got to the money monopolist level and recognized a catatrophic error. Now I’m awake….

  • whatisgoingon

    There was no Q&A this weekend but a few questions regarding central banking.

    The Fed (as I understand from college economics) can conduct open market operations (OMO) to increase or decrease the money supply to alter interest rates. That is, I was taught like I’m certain many others that the Fed lowers rate by simply printing dollars and increasing the money supply. And they use these printed dollars to buy bonds and lower the rates. And vice versa if they want to raise rates. What makes this more confusing is that base money increases to give the appearance of “money printing” because reserves are included in this definition but these reserves are not “spendable”.

    However, as I understand the Fed does not impact interest rates by altering the money supply in this way (perhaps they did under the gold standard). They impact rates via the FFR by adding or removing reserves through the buying and selling of treasuries.

    1. Are there any legal restrictions that prevents the Fed from undertaking OMO by “money printing” as is taught in traditional economics?
    2. When was the last time the Fed printed dollars to buy treasuries in this manner? And how would we know if they did this?

  • Lance

    Rock and a hard place for Japan, I reckon. They’d actually *welcome* a little bit of inflation over here, but of course they don’t want the higher debt service load that would likely come along with it. And if they try to do too much QE to weaken the currency, rates might climb anyway, which of course would be *positive* for the currency, unless the CB was viewed as veering on out of control. Japan isn’t really kicking the can down the “road”. It’s kicking it down the edge of a knife.

  • Ben Dover

    An autonomous currency issuer can always make its bondholders whole in nominal terms. But those bondholders can still suffer huge losses in purchasing power if the currency issuer is forced to engage in heavy currency printing. As Fed chairman Alan Greenspan once remarked: “We can’t print purchasing power.”

    Bonds denominated in the currency of a heavily indebted government (currency issuer or not) are NOT safe and in fact are one of the most dangerous investments around. Add to that that US and Japanese bonds pay very little interest and you have to wonder what kind of mass insanity is causing people to buy these so called “investments”.

    Furthermore, the inflation that results when governments print lots of money is politically very unpopular. Dissatisfaction over high inflation is one of the major reasons that Ford and Carter were one term presidents. So governments will only print as a last resort. But if debt grows faster than GDP for too long, they will eventually have no other choice.

  • MGK


    I must admit, I’m always perplexed by this type of response. The idea of being an “autonomous currency issuer” hardly seems comforting because this is less about “paying the bills” and more about maintaining a currency that actually displays some credibility in international markets. Obviously with increasing issuance, the currency will be debased, but at what point does hyperinflation officialy set in and foreigners refuse to accept payment regardless of continued printing? If this were never a problem, then why didn’t the German Weimar republic just continue printing? Are you suggesting that hyperinflation is never an issue, just because you can print.

    The real issue to me is that this situation reflects either a lack of fundamental economic and fiduciary responsibility and/or political will to deal with an evolving or rather devolving problem. From the ratings’ agencies standpoint, it would seem that the likelihood of a stable solution is diminishing with either a dramatic turn of events (from a bold, strong willed leader actually addressing the underlying problem) or the gradual evaporation of a globally significant participant.

    Given, the current financial state of affairs (with more than 50% of expenditures coming from deficit spending), an aging population with an ever growing need of social and health services, a declining overall population especially the youth, an increasing reliance on imported energy, a declining industrial base, and a xenophobic aversion to any type of immigration, what can reasonably happen other than complete default?

    Do you honestly expect that they can print their way along for the next several decades with a growing debt and a declining population and GDP?

  • http://netnet.cnbc.com John Carney

    Thanks Cullen.

    I raised the Russia point to Joe over IM. He agreed that it’s possible that Japan could chose to default as a matter of policy. Or some political impasse could trigger a default. But he also points out that Japan is a much more stable place than Russia was in the 1990s–or is today. It’s hard to see how they’d do anything as dumb as default.

    Then again, Japan has gone politically insane in the past. Could happen again.

  • Lilly


    I’ll tell you why I would get angry like the wife in the article. Money represents her hard work. She has to send a certain amount to the government in taxes. She is sending a portion of the fruit of her labor. The government may trash the dollars, but her contribution to the economic success of this country is still there in the form of her work.

    When the government sends money to someone on SS or an other government program, they are sending them the ability to buy somebody’s labor with those dollars and those dollars represent the work of someone else. When the government prints money, they are devaluing the representation of labor a person has saved in the form of dollars.

    So while economic theorists tell us all how the economy must work, and why they must take our dollars and spend them on nonsense, the individual still sees they are taking something from him that he worked many hours to get.

    What I would like to see more of from this economic theory is an explanation of how the work of the citizens of this country contribute to the value of each dollar. I know the government can print dollars, but it can’t make them worth anything.

  • http://www.pragcap.com Cullen Roche

    The Fed is not constrained in creating reserves to achieve monetary policy. But remember that they set the overnight rate now by essentially setting the interest on reserves. So there’s no need to remove reserves to set rates like there was pre-crisis. Also important to note that these operations change the composition of pvt sector financial assets, but don’t necessarily add to the money supply.

  • http://www.pragcap.com Cullen Roche

    Correct at least in part! Inflation is the bogey to watch out for. Not “running out of money”. The thing about Japan is, there is and has been zero inflation for decades so bond prices have soared.

  • http://www.pragcap.com Cullen Roche

    Weimar had foreign denominated debts which forced them to print. When their manufacturing base collapsed after the war this situation was highly unstable. So Weimar was a case of foreign debt that the country could not handle and printed to try to meet. This cratered the exchange rate.

    I am not necessarily saying Japan is okay. But they aren’t going to “run out of” Yen unless their politicians decide that they want to.

  • http://www.pragcap.com Cullen Roche

    Hey John. I didn’t mean to imply that Joe didn’t know what he was talking about. It was probably just the headline that jumped out, but we know BI can be a bit “catchy” with their headlines at times. Nothing wrong with that when you’re in the business of catching eye balls. :-)

    And I agree with Joe 100% that Japan is much more stable than Russia was.

  • LVG

    Cullen, I can’t tell you how exciting it is that MMR is developing such a detailed approach to all of this. It sounds like you guys are really trying to get the operational realities correct. MMT messes this stuff up all the time and it drives me up the wall.

  • hangemhi

    Lilly – you’re bashing SS? “when the gov sends money to someone on SS”???? You know, that program that we all pay into during our working years… you’re upset about that? Money for the elderly no less????

    Are you also upset with the money spent on wars, on bank bailouts, on tax breaks for the rich, on prisons and prisoners?

    When it is spending on the poor… keep in mind they’re still poor, so the money isn’t making them rich… it is ending up somewhere else. Where is that somewhere else????? It is with whoever is being productive. Food stamp money ends up putting the Grocer, the farmer and all the workers in btwn to work – I’ve heard it also puts JP Morgan to work since they spit out the food stamp cards.

    So sure, be pissed about Gov spending, but stop listening to idealogues running for office, or trying to make a buck supporting an idea that may not have any truth to it, and starting thinking logically about what Gov spending can do for an economy. Food stamps feed kids (is there abuse, sure, but nothing compared to wars or bank bailouts), and if kids are fed they are less likely to clog up ER’s and enter a life of crime and fill up prisons. Of course we need education too…. but we’re cutting back on schools and teachers… all to save money (or because teachers don’t have lobbies) and that “savings” is likely, in the future, to go to prisons and welfare. Yes, we need to fix Gov spending… but as long as we’re fighting imaginary battles, we’ll never discuss the real issues.

  • Andrew P

    There IS a very good reason to downgrade Japan.

    They permanently shut down all their nuclear reactors after the Fukushima disaster. Japan has no native fuel resources. The long term prospects are not good here.

  • Lilly


    I think you read way more into my post than I wrote. My point was that the tax dollars someone must pay have value because of the work it took to earn the money. Because of that it’s an insult to tell someone their tax dollars don’t fund anything, which was the subject of the article.

    I also think that because the money spent by the government represents someone’s work, it should be respected in the way it’s spent.

    This is the sentence I wrote that you took out of context: “When the government sends money to someone on SS or an other government program, they are sending them the ability to buy somebody’s labor with those dollars and those dollars represent the work of someone else.”

    You interpreted that as me “bashing SS” and being “upset about sending money to the elderly.” You are wrong. I’m doing neither.

  • Johnny Evers

    Just because Japan *can* print money doesn’t mean it should. Just because the theory states that governments can’t run out of money doesn’t mean the answer to everything is: Just print more money.
    And what level does MMT theory believe government debt becomes a problem?

  • InvestorX

    At the point inflation starts to rise I guess, which would lead to higher rates, which would consume the whole govt revenue for just paying interest. Then some people can get uncomfortable,. Then the flight can become non-linear

  • http://www.pragcap.com Cullen Roche

    I don’t do MMT. We changed the whole thinking to MMR because we found that MMT was “inherently progressive” and largely based on a world they WANT rather than the world we HAVE. Which is fine, but I’m not so worried about solving the problems of the monetary system as I am about understanding the monetary system.

    So you’ll have to ask an MMTer that question for their answer. I certainly don’t speak for them. For MMR, it’s about understanding that debt is not the true constraint. It’s inflation. And there are lots of ways to understand when that’s a problem.

  • Johnny Evers

    1. Social security recipients aren’t getting back what they put in. The program doesn’t work that way. Yours and my tax dollars are going to the recipeients.
    2. It’s not a ‘stimulant’ the economy. Putting it crudely, if the government takes a dollar from me and gives it to a Social Security recipient who turns around and gives me back the dollar in exchange for a service, I have not benefitted at all. In fact, I am out the labor and time it took me to first earn the dollar and then to perform the service for the recipient.

  • Johnny Evers

    So when do MMR proponents believe government debt becomes a problem?
    Do you see government debt continueing to grow, based on demographics and the current trajectory of spending? At some point does that lead to inflation? Or some other negative consequence?
    Second, if inflation becomes a problem, and if we have the tools to address that problem, what are those tools? And wouldn’t the use of those tools (higher interest rates? Reducing the Fed’s balance sheet?) create other problems?

  • http://www.pragcap.com Cullen Roche

    I am saying that government debt is the wrong thing to focus on. It’s all about inflation for an autonomous currency issuer. The govt can print money til the cows come home. There’s nothing stopping the US govt from printing wads and wads of money except the currency user’s demand for that currency. There’s no constraint in the US government’s ability to procure funds except the willingness of the currency users to continue using that currency. So it’s pointless to focus on default and debt ratios or things like that. The thing that matters is inflation and productive capacity. When does inflation become a problem? When we print in excess of our productive capacity. There are lots of indicators that we can use to verify when this is occurring. Capacity utilization, employment, various inflation gauges, etc.

  • Johnny Evers

    Sorry, but that doesn’t begin to answer the questions.
    Yes, we know the government can print endlessly. And yes, the public’s demand for money is equally infinite, although usual tempered by such factors as credit standing or the ability to earn money.
    When does printing become a problem? You say it’s inflation. OK, so if we have inflation — let’s say it’s 70s style inflation, when we had inflation despite high employment and low capacity, how do we stop that?
    Or what happens if the key currency users — the Chinese or other international parties — find another currency. Don’t tell us that’s impossible.
    You are suggesting a path of action but not making any suggestions for what might happen if there are obstacles on the path or if we build up so much debt that we get stuck on that path with no solutions.

  • http://www.pragcap.com Cullen Roche

    The 70’s price shock was primarily due to the oil shock. We can’t control what goes on in foreign markets regarding oil supply. We can control domestic oil policy, but you know that (lack of a) plan.

    I am not sure what you mean by China “finding another currency”. If you mean they will stop exporting goods to America in exchange for domestic jobs and investment then sure. That could happen. But why would China stop importing dollars so they can employ millions of people and reap the many rewards of this relationship? China doesn’t import dollars because they like owning pieces of paper with dead white guys painted on them. They import dollars because it results in many real benefits like jobs, investment, etc.

  • Johnny Evers

    If we’re debating the causes of inflation or what China does with its dollars, I am not as knowledgable or conversant as you, so I won’t go down that road.
    But I am asking you to share what you think will happen in these worst case scenarios. For example, inflation clearly is possible.
    What happens if we have a huge debt load and interest rates skyrocket?
    Telling me that inflation isn’t a problem doesn’t address the question.
    To use an analogy, let’s say I had a healthy, 30-year old man with a job making a million dollars a year and I ask him, ‘What happens if you lose your income,’ it’s not fair for him to say, ‘Why would I lose my income. I’m healthy, I’m smart, that’s not possible.’
    Address the worst case: you lose control of interest rates and you have a huge debt. Or … people lose confidence in your dollar because they don’t trust your stewardship.

  • http://www.pragcap.com Cullen Roche

    The Fed doesn’t and can’t “lose control” of interest rates. They can set the rate of long bonds at whatever they want. They do this with short rates already. If they wanted to set the long rate they’d name the price and use their infinite reserve ammo to pin the price down. Don’t fight the Fed is appropriate here. No one can fight the Fed on interest rates. Now, the Fed sets rates based on their expectations of future inflation and demand for credit. The market tries to front run them (that’s what markets do), but make no mistake. The market is like a dog on a leash in this regard.

    In running through an exercise like this we have to consider why inflation might rise. If an oil price shock occurs then it’s out of the govt’s hands. Cost push inflation ensues, our standards of living go down and it is what it is. Tough luck basically. The more likely scenario for rising inflation is a stronger economy. Think Chinese style inflation. It’s only bad if we aren’t being productive in a manner that results in a real increase in living standards. Inflation isn’t always bad. We’ve had inflation as long as we’ve had a fiat money system. Since 1913 the value of the USD has dropped 95% and yet living standards have surged. So you have to understand the difference between inflation and a decline in living standards.

    The bigger scare in the USA is a decline in our competitiveness and a decline in our real production. That could create a bad kind of inflation where living standards are declining and inflation is still positive. We’ve experienced that to some degree over the last 10 years, but it’s impossible to say if this is permanent. It’s certainly not causing a collapse in the currency though so that’s one good sign. Hyperinflation is the worst form of inflation. That’s essentially a collapse in the currency. Not gonna happen here when we’re as productive as we are.

  • Mr. Market

    Have the folks at Fitch been asleep at the wheel when it comes to Japan’s credit rating. Why did they wait this long ?

    I think Fitch was alarmed by the fact that Japan has started to run (yes, here we go again) Current Account Deficits. As a result of that Japan has started to rely on the “”kindness of strangers”” to fund their budget deficits. To buy their JGBs. When (not if) foreigners pull the plug on Japan then Japan is going to experience higher interest rates.

    Hugh Hendry was right. The financial crisis has (finally) moved to Asia. It will be interesting to see how the japanese yen starts to behave in the next weeks/months.

  • Mr. Market

    I would consider Russia to be more stable than Japan. Russia defaulted on their debt in 1998. And that has cleared the decks for the russian financial system. Again, Japan has postponed a cleanup of their financial system for 22 years. Keyword: Current Account Surplusses. And now they’re about to completely collapse. Especially now Japan has started to run Current Account Deficits.

  • Roger Ingalls

    Why do you say the “permanently” shut down their nuclear reactors? Are they dismantling them?

    If oil goes to $200bbl, they’ll fire those puppies up in a heartbeat.

  • Lance

    The BoJ can do exactly what the Fed can do: fund Japanese budget deficits until the cows come home. This will remain true as long as there is a demand for Japanese currency. And since Japan is still an incredibly productive society, despite its obvious problems (anyone *not* have any thorny problems, especially these days?), hyperinflation is as unlikely in Japan as it would be in the US. Lastly, JGBs are overwhelmingly owned by Japanese, thus Japan is far, far, far from having to “rely on the kindness of strangers”, and foreigners are not really in any position to pull any hypothetical plug. If any plug gets pulled, it will be Japanese pulling it.

  • Colin, S.Toe

    Those who have followed this site for a while may wonder that you don’t tire of repeating yourself. But the continuing need to educate is clear.

    Thanks for your patience.

  • Johnny Evers

    Sorry, Colin, but repeating ‘the government can’t run out of money’ is not addressing the questions.
    I want to know what happens if we have inflation, as Cullen says the only restriction on printing money is the threat of inflation. He has not addressed that.
    He says that inflation will only happen if we have growth (which is not true) or that inflation will happen if there is some shock outside our control, or, if I’m reading him right, that inflation is fine if the standard of living continues to rise.
    The idea that we’ll inflate our way out of this is gaining traction, but it does have negative consequences for many people.

    Many people are saying that $15 trillion in federal debt is not a problem. But only MMR proponents are saying that $30 trillion in debt and zero percent interest rates are not a problem. Because that’s where we’re going and you keep saying that we can’t run out of money. But at $30 trillion in debt and zero percent interest rates, what does that world look like?

  • http://www.pragcap.com Cullen Roche

    No, I was very clear that we could have inflation or even hyperinflation if production collapses. Personally, I don’t think that is going to happen because the USA is a very productive nation. So the alternative is inflation due to money printing in excess of our productive capacity, not inflation due to collapsing production. If you can prove that production is collapsing in the USA then I’ll entertain the possibility of a Russian or Weimar like scenario. But the onus is on you to prove that’s going to happen. I’ve written thousands of words arguing why that won’t happen and I’ve been arguing that point for years and years now….

  • Johnny Evers

    Germany was the most productive nation in the world in the 1920s — a great culture, scientists, industry, agriculture. That productivity didn’t mean squat when the currency collapses.
    Let’s look into our future: $30 trillion in debt outstanding. Zero percent interest rates to keep the interest from taking over the federal budget. The realization among holders of the dollar that Uncle Sam is going to pay us back in printed money because of this new MMR theory that the new president is talking about.
    What happens in that situation?
    Many productive nations have seen their economies collapse when their currency became debased.

  • http://www.pragcap.com Cullen Roche

    Not really. Germany’s economy was decimated after the war and the war reparations eventually led to further productive decline when the French occupied the Ruhr.

    Also, how will the govt “pay back” its debt? Will it retire your Tsy bonds in exchange for cash? Do you actually want that? You want to exchange interest bearing bonds for cash? You know the Fed could achieve this tomorrow, right? They could QE all the bonds and essentially retire them to its balance sheet. Then you’d complain about the loss of savings AND you’d also cheer about how uncle sam has no more debt. Do you see the contradiction there?

  • rhp


    they are NOT permanently shut down at all. When they have gone offline for maintenance, they have simply not been brought back ON line. Japanese public is against nuclear right now, which is keeping them offline. When peak energy use hits this summer, there will probably be energy rationing and rolling blackouts. Whether nuclear ever comes back in Japan will depend on how people respond to increasing energy costs in their lives. This might lead to re-intro of nuclear……..OR…..to amazing advances in wind, tide, and solar, and…….. alternate energies…


  • rhp


    Stop thinking of the amount of $$ the USA has issued into circulation as “DEBT”. It is no more debt that MacDonald’s “over 10 billion sold” is debt to MacDonalds.

    What matters is the amount of money circulating in ration to the productivity of the economy. If the USA was forced to service its economy on the original $300 million greenbacks issued during the Civil War, i don’t think you’d be seeing a productive country. The gov’t HAS to increase the money supply to keep the wheels of the economy lubricated.

    The gov’t DEBT is simply the sum total of $$$ issued over and above the amount they pull back out.

    The trouble comes when they issue too much money in relation to economic output. This can happen by issuing too much, or by a collapsing economy in the face of continued issuance of currency, resulting in too many $$ chasing too few goods and services.

    Cullen’s point (I think) is that you cannot simply ask the question “What if inflation occurs” without being much more specific about the WHY that has led to the occurrence. It is like saying “what if back pain occurs?” without diagnosing what the cause of the back pain is. It could be mechanical, or cancer or rupturing aneurysm or multiple myeloma, or spinal stenosis. Each of these requires a different approach.

    Similarly, the cause of inflation has to be considered for Cullen to provide an adequate answer to your question.

    Keep asking questions. It helps sharpen the responses!



  • http://www.pragcap.com Cullen Roche

    Right. It’s like asking a doctor “what if my kid gets brain damage”. Well, he’s screwed. But that’s the wrong question to ask. The right question to ask is “what could happen to lead to my child getting brain damage”. Then we can study possible causes of brain damage, assess whether the kid is at risk and possibly propose preventative measures. Inflatonists and hyperinflationists too often say “it’s coming” and then forget to connect the dots leading us there. It’s like the old “what if interest rates rise”? Well, WHY WILL RATES RISE?

  • Johnny Evers

    If I own Treasury bonds — and many retirees do, in the form of G funds and other investments — would I want my money back in retirement?
    Damn straight I will.
    And remember when money markets ‘broke the buck’ and the panic that caused. Wait ’til you see the panic when the public realizes it won’t get the full value of its money back, or when financial institutions see their hedging and leverage strategies blow up.

  • Johnny Evers

    Well, we know that printing money beyond your production causes inflation. Not productive ‘capacity’ by the way.
    There are other ways, of course, but I’m not hearing any answers for what to do when you have $30 trillion in debt and zero percent interest rates.
    Will that cause inflation? I think so.

  • http://www.pragcap.com Cullen Roche

    Not getting the full value of their money back would mean higher inflation. That’s my whole point!!!!

  • http://www.pragcap.com Cullen Roche

    You’re still not explaining the HOW….

  • rhp


    If you have a printing machine in the basement, will you have any trouble creating $30 trillion? If so, are you ever really in “debt”? If there is an ever increasing demand for dollars from the public for your creation in the basement, how much trouble are you going to be in if you crank out a bunch? How much trouble has McDonald’s gotten into by increasing the number of burgers it put out there? It expanded as its market expanded. Likewise, the money circulating will expand as the economy expands.

    If demand for burgers goes down, then Mickey D will have a trouble with excess burgers unless it cuts back. Likewise, if demand for dollars goes down, we’ll have a problem if we keep printing more.

    Let’s say that the US, without depleting its resources, doubles its population from today and has a booming economy. Will 30 trillion service that economy easily? Maybe. If so, there might be no inflation.

    Alternatively, as Cullen has pointed out…..tho’ the purchasing power of an individual dollar has decreased since 1900, our standard of living remains very high. Yes, the number of dollars needed to purchase a car has increased, but so has your paycheck. Do you care if you purchase a car for 20K with a 40K paycheck versus 2K with a 4K paycheck??

    The implication in your “inflation” is that things will be terrible (or maybe i read too much into your statement, but most people worried about inflation these days are concerned with decreased standard of living implied by that inflation). It is entirely possible that we can put 30 trillion into the private sector and be just fine. OR, we could be a wreck. As Cullen states….you’ve got to give the HOW this is going to happen to come up with a reasonable answer…..


  • Mr. Market

    No, that’s called DEFLATION. But that would INCREASE the value of cash. Another sign of deflation.

  • InvestorX

    My salt to the inflation debate:

    There is productivity and production, but at least production is constantly stimulated by too easy monetary policy (and constant credit growth leading to exponential rise in private sector and probably total market debt). At some point debt (at least private sector) cannot rise more, which automatically causes a balance sheet recession or even a depression (like we had since 2008).

    If one looks at change of (private sector)credit/GDP growth it used to be 1:1; currently it reached something like 8:1, meaning $8 credit growth needed to generate a meagre $1 GDP growth. This growth in needed credit expansion vs. a unit of GDP growth is clearly not sustainable, so we are where we are in the Western world.

    Now you say Chinese inflation is fine, as long as it produces employment, rising living standards etc. But they also clearly suffer from the above’s problem – China is long past the level where their “inflation” (inflation stimulating production) produces REALLY productive GDP growth (we know that make work projects increase GDP, but not living standards). Many of Chinese waste of capital and resources are still well hidden and not yet recognized by the public (or admitted by their administration in transition), but I do not believe that they are fine with their inflation. It is now destructive, but hiddenly so.

    You also mentioned that in the USA, over the last 10years inflation was positive, butliving standards have declined (for the median). So you have the same problem.

    The solution for a taxi driver, who has not slept over 5 nights (and days) is not to exponentially increase his coke intake, but to finally have a good night’s sleep.

  • InvestorX

    rhp: “The gov’t HAS to increase the money supply to keep the wheels of the economy lubricated.”

    I think tihis is a fallacy.

    Real GDP growth depends on 2 things: population growth and productivity gowth.

    Now are you going to tell me that people will stop multiplicating or inventors will stop inventing if there is not inflation?

    Many of you guys say how you believe in human ingenuity. Now do you really believe in human ingenuity or do you believe in human ingenuity conditional on inflation? I believe in the former. We have had great technological progress (and GDP growth) in eras with flat price levels. The GDP growth rates of the industrial revolution may have been more volatile, but the average rate has been similar (or better) than today’s.

  • JH

    It works like this, anytime money is printed and spent without a measure of work to back it, it is values less by the recipient. When the government becomes a larger percentage of GDP much of that money is being wasted. This is inflationary.
    We are now seeing an environment where print and spend will implemented more and more in Europe and Asia due to increasing debt which will drive inflation and interest rates.
    Capital flows to where it is rewarded and so in order to compete, interest rates worldwide, even here in the US will have to rise in order to compete. The temporary reprieve we have enjoyed due to deleveraging is coming to an end as you are beginning to see money flowing back into real estate looking for a haven from inflation.
    Everything on earth bows to the laws of supply and demand. Anyone who denies that is a fool. Continually increasing supply has an opposite effect on demand. And once the expectation of inflation is built into the cake, it takes draconian interest rates to correct it. None of this bodes well for the future.

  • Johnny Evers

    The McDonald’s analogy is silly. It would only work if McDonald’s was giving away hamburgers and I promised to pay them later with money the Fed prints for me. How many burgers would they give away in those circumstanced?

    You ask if the U.S. population doubles and becomes more productive would they pay down $30 trillion in debt? Yes. But do you want future generations to pay for your spending? (In the form of a reduced cost of living.)

    Our standard of living is declining. By printing money you distort real interest rates and send those printed dollars into unproductive places.
    What happens if we have inflation? Do you print even more, or less? Do you take some other measures? Can you in fact control inflation if it happens.
    Cullen is dancing around the question. He keeps asking ‘how’ or ‘why’ inflation would occur. He says inflation would be an act of God (or the oil producing states). He also implies that inflation would be a good thing.

    At this point, all of the readers here understand that the Fed can print all the money it wants and that the government can’t run out of money.
    The only restriction on that is inflation.
    So the queston remains — if we have inflation, what happens then to your printing machine?

  • http://www.pragcap.com Cullen Roche

    It’s not that simple. The money could potentially capitalize someone else productive along the way. You can’t just say unemployment claims are unproductive because the guy who gets them is sitting on his couch. He could be consuming things that ultimately drive someone else to innovate and produce. But I generally agree with your idea. We shouldn’t promote this kind of “something for everyone” society.

  • Gerald P

    When money loses value, prices go up. I hear that is inflation.

  • Gerald P

    Again, Cullen said they don’t get money back as valuable as they put in, so it can’t buy as much.