Japan Isn’t Bankrupt

I’ll keep this short and sweet.  I’m not a big fan of the Japanese economy at present or what the policymakers are doing to drive the economy/markets higher.  I think they’ve made a mockery of their stock market and that this “wealth effect” is a misguided approach to fixing their woes.  But I am equally critical of those who think Japan is on the brink of bankruptcy.  Japan’s got big problems – being able to meet its obligations is NOT one of them.

First of all, Japan has basically copied the US monetary design.  And anyone who understands the US monetary system knows that the USA can’t just “run out of money”.  Even the most simplistic (erroneous) thinking that the US government “prints” money should lead one to understand that a nation with a printing press can’t default on debts denominated in its own currency. I mean, if you had a printing press in your basement would you worry about your credit card bills?   This should just be obvious.  As Warren Buffett once said:

“The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.”

Japan is in the same boat.  Their debt is denominated in a currency they can always create.  So what’s the persistent fuss from the likes of Kyle Bass and some others who keep claiming Japan is on the brink of insolvency?  Even an Austrian economist who criticizes the US government for “printing money” should understand that a nation with a printing press and debt denominated in its own currency isn’t going to go bankrupt.  So why does this myth persist?

Japan’s got big problems and I wouldn’t go near their economy or their markets with a twenty foot pole, but that doesn’t mean they’re on the brink of insolvency.  Saying something that silly might make people think you don’t even understand the most basic institutional structures of the way their monetary system is designed.  As for the USA, it’s the same story, but that doesn’t stop the mainstream media and politicians from constantly talking about how we’ve “run out of money”.  It’s absurd.  And this conversation about whether we “have the money” should just stop.  It’s time to get past the basics and move on to the real discussion – the quality and efficiency of spending, how it’s impacting living standards and is it causing inflation?

Updated with horrifying 30 year JGB interest rates surging as default approaches:



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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    • Damn, that was 6 minutes of my life I won’t get back.
      Why can’t smart talented people who can make these videos actually do a bit more leg work and get it right.
      That guy would be a great MR spokesman if he was willing to educate himself.

      • Cowpoke, the music and presentation was so poor, I click the ad to the left (Hot Russian girls with high debt and QEs in their eyes)

      • Cowpoke, I watched it once. I too liked the way it was put together. I’m naturally suspicious since it appears on the “Bear Porn” site zerohedge. I need to watch it again to see the logic of the magic 4% they talk about.

        Just off hand, where, specifically, in your opinion does that video go off the rails? I’d be hard pressed to answer that myself after one viewing, but I think perhaps the magic 4% they talk about might be the crux. I’ll watch it again and see if I have a problem w/ their logic there.

        BTW, for anybody who’s ever made an unsuccessful attempt to fully decipher one of those dense Tyler Durden ZH articles, packed to the gills with mysterious sounding arguments, I found this made me feel a lot better:


        Better men than I have tried to fight their way through the logic of some of those articles apparently! Reading pragcap is a breath of clear and de-mystifying fresh air in comparison!

        • “Just off hand, where, specifically, in your opinion does that video go off the rails?”
          Tom My Monetary brother..LMAO… The first 2 seconds.

          “Japan’s Debt Problem” I’m ad libbing (music)dum dum dummmmm (Lady Screaming) Eeeeekkk (puts hands to face)

          Wait, I thought Japan issued it’s own currency?

          Oh they must borrow from China like we do.. har har har.. What’s the modern computer symbol for harpo honking his horn?

          • “Bear Porn” for ZH? Damn Funny Thomas that right there was..
            I do like them for their snarky political comments though. They do have some great headline leaders.

  1. Cullen:
    I haven’t commented on your blog for some time now because I realize the ignorance I have of economics.
    That being said, I read the same things over and over: the US can’t run out of money (that’s a gimme); we cannot keep spending and spending (because that would cause inflation – but there presently is no sign of this occuring). So why is it that I keep getting this feeling that something is fundemantally wrong with our present situation? Could it be that somethng is worth what people THINK it’s worth, not WHAT it’s worth. If our economy – or dollar – loses the faith (what people THINK it’s worth) of the vast majority of the people because they start realizing WHAT it’s worth (because we just keep on printing and spending) then it will be realized to be worth damn little.
    The continuation of huge deficits, while not directly impacting WHAT it’s worth, will eventually cause a lack of faith on part of the people. Large economical facilities can only control the peoples’ minds for so long. This worries me greatly. Continued cheap money worries me greatly. I feel like I’m at the end of a whip and have no control over the snap, only the dreaded knowledge that eventually it’s going to happen.

    Thanks for your blog.

    • Troll, I think you are falling into the “Micro Trap” when it comes to “Macro Monetary” concepts.
      People are bantering on about the US or JAPAN, however, people are NOT rushing to hide their money in China or Russia.

      Think of Money more in terms of TRUST IN NATION or BELIEF IN IDEOLOGY

      That is really what makes money a store of value, The VALUE of the society.. NOT just ones and zeros.

      • Cowpoke:
        Agreed. Our American ideology founded on the NDAA, Patriot Act, Monsonto Protection shall certainly give the public full faith in the privately owned unconstitutional debt based reserve note.

        • Joe T, it is what it is my brother.
          Think about it. At least with the Monsanto Corn, You could “possibly” live another day. However. If you just had to rely on another Oprah OR Ellen Degenerate TV show for your substanance you would not be doing so well.

          If I may put Words In A Profit of Gods mouth…
          “Man does Not Live BY The Words Of Cheesy Actors Alone.”

            • I spose a slam, It just “rubs my fur” wrong when the Hollyweird folks and other people in the public eye use their platform for their own personal agendas.
              Next Up, The Rainbow football players.

              This is why I have really enjoyed the pragcap over the years. The facts are out there for all to dissect and debate.
              This is SO refreshing. However, with all the gay this and that in the lame stream media, you would think that every other person is homosexual. However the facts are very different.
              Same for Gun Homicides, Chances of being Kid napped ect OR My OTHER favorite Stadiums For Billionaires owners and wealthy athletes. WOW what a scam that one has been.
              It’s nice to have a place on the web where monetary policy can be openly discussed and debated all in the name of truth in fact instead of agenda driven.
              I wish more politicians would swing by and learn something.

      • oh, people do not hide money in the US, they hide it in various offshore outlets. Do they really “TRUST IN NATION” when they hide money in Cayman Islands?

        And regarding China – people hide huge sums of money in HK and Singapore. What do you think would happen to this trend after Cyprus “levy”?

    • Troll, your intuition is correct. The current argument goes that while we are printing money, the price of goods (CPI) has not increased, so there has been no inflation. The problem is that CPI doesn’t account for inflation if the savings rate changes. So if you print $85 billion a month, and banks and individuals simply save it because they realize they have no savings for retirement, your inflation will still be low until they start to unwind this position and live off of their savings. Once the population starts to liquidate its savings to live off of, inflation with rise as the cheap money finally hits the market. This is the issue facing baby boom countries like Japan, the USA, and China although they are in a better financial position in terms of savings. As the Japanese population ages and hits retirement, they will start to liquidate their savings, and inflation will rise. That is true to both the Yen, and savings Japan has in US Dollars (several trillion in T-bills). As those assets get liquidated inflation will spread to the dollar, which could be managed if the US wasn’t also facing a similar crisis of a retiring baby boom generation that has virtually no savings. Now the US baby boomers liquidate their savings to live off of in retirement, and all those $85 billion a month comes poring back into the market. I’m not sure how this gets avoided, even if the next generation were willing to take responsibility for the debt, there simply isn’t enough working age people to support the aging population anywhere near the current standard of living.

      • You write “individuals simply save it because they realize they have no savings for retirement, your inflation will still be low until they start to unwind this position and live off of their savings. ”

        But which is it? Individuals “have no savings” or they have such a tremendous amount of savings that they’re going to cause inflation once they retire and start to live off of it? I don’t see how you have it both ways.

        One thing you’re not taking into account is that the Fed has a tremendous ability to suck money back out of the economy by selling the assets its been buying. Part of its charter is to control inflation, so if inflation starts becoming a problem, I think you might start to see some asset sales. Taxes can also be used to help control inflation.

    • Read Cullen’s piece on hyperinflation and what characterizes it. It might help put your mind at ease, especially with regard to “loss of faith.” I think that’s a very unlikely scenario for us given where we are now.

      For a little perspective: What are there, about $65 trillion out there now? The public debt is about $16 or $17T, and about 10% to 12% of that is owned by the Fed? Only that part (of the public debt) which is owned by the Fed can be said to be backing “government debt created money.” The rest of the public debt is in bank created money. By far the vast majority of money that’s in play in the economy was created by private banks through private debts (bank loans). Only a small fraction was created by government debt (~2.5%).

  2. You would think the founder of a financial services firm would be more astute than the article implies, but i guess its all about sales after all.

      • i checked on finra and now i understand…i guess i am amazed at how a guy with 1.5 years experience at Merrill passes himself off as an financial expert. i guess this is the power of social media nowadays. japan’s issues are well documented. good luck with your website.

        • I am not in the business of defending,but listen anyway. In half a century in the business trenches I’ve met allsorts of people. Some have been in thir business of choice for 30 maybe 40 years,called expert and paid accordingly, and yet frankly they appear to have stopped learning anything much after perhaps the first few years.They are where they are because of the system they are in and perhaps the people they know,not indeed their expertise. Others appear relatively inexperienced and yet when you get down to the face to face stuff they appear to be on a different level to their wouldbe experience and indeed most of their peers.
          Now in my own way I am trying to tell you that time in the job isn’t really worth that much as a generic method of ascertaining expertise unless you’re just impressed by that stuff. I’m old enough not to be and to keep the mind open to proof. CR has offered more than enough of the latter for me to forget age etc and just concentrate on the quality of the arguments.
          Talking about arguments it is relevant that yours was extremely weak. Perhaps you have more to offer,but if you have not then in your own interests go away and learn until you have.

        • I have no idea what being a Merrill Lynch employee almost 10 years ago has to do with anything. I think people should judge me based on the reasoning and accuracy of my arguments and not the firms I’ve worked for in the past.

          But that’s up to you.

          PS – Thanks for following your insult up with another insult. :-)

        • I’ve been reading Cullen for 3 or 4 years now and I can honestly say that I can’t think of anyone with a macro focus who has been more accurate, instructive and informative about the state of the global economy. It’s not even the fact that he’s been right about so much that keeps me coming back. It’s the fact that he’s incredibly humble about understanding very complex things and has an obvious desire to help others understand. I think it’s a real shame when people come here and attack him.

          • That’s far too kind. I think what I do here is rather simple. I have a real desire to understand our money system in its entirety. And I enjoy disseminating my ideas about the system because it provides feedback from an incredibly intelligent group of readers and gives me the ability to provide some real value in what I believe is a world full of monetary mythology. I certainly don’t know everything and I don’t pretend to have all the answers, but I try my best to provide honest, objective and unbiased opinions about what is happening. That’s about it. If people don’t like the message they should contribute to why it might be wrong rather than just lashing out with petty personal insults. That doesn’t help anybody.

  3. Nippon, has the largest governmental debt burden in the world…

    Its export arm is growing weak, the nations’ greatest resource…

    It is sitting in the shadows of Red China, with an aging population and a dysfunctional political system…Surely, the Yen shall follow the nation declining demographics..

  4. We will see in due course how this monetary experiment works out. Indeed the very night that the BoJ launched its new money printing program, the JGB 10 year spiked to a 35 bps yield than reversed down to 65 bps, reversed again to recover to 45, and ended up around 55. That is a lot of daily volatility for a vehicle that yields around 50 bps per year. I think a new and very different risk-reward Keynesian end game regime is at hand. Fiscally Japan already spends a third of its tax revenues on interest payments, so I will ask you what happens should this spike even moderately, say to one percent?

    This is bound to attract the interests of speculative pools, who I think will facilitate an attack on the both the currency, but especially the JGB. Japanese institutions and individuals can then do the absurd exercise of determining if their exposure loaning at near zero rates is really worth the risk. I am betting with Kyle Bass that an asymmetric trade will work here.

  5. If money is considered as social way how to bridge time difference in production vs. Consumption of something of value and a mean to foster value exchange interactions across different forms (goods & svcs and yes taxes) then the question is what current monetary policies impact on value production and consumption will be? How various actors – consumers in u.s., japan, emgmkts world vs. Producers vs. Countries vs ccy blocs etc.will behave and what perceptions will influence their value metrics. There is much more here than rather mechanistics explanations of FED motives. I would really appreciate some insight in this area.

  6. Whether the Japanese succeed will depend up on execution. They need to find the structural handoff between generations. If they don’t and simply make a one pronged attack on their currency then when the sentiment momentum fades so will the bang for the buck they get from this monetary policy. Personally I prefer fiscal approaches to support monetary policy and I’m waiting to see what they have to offer.

  7. Cullen, all well and good that governments issuing debt in their own currency can never “run out of money”…but, please don’t stop there. Please explain how you see any natural limits to this issuance being applied.

    Zero interest rates haven’t stopped it, unlimited central bank buying of government bonds hasn’t stopped it, in fact, both encourage more of it.

    So, after the buyer of last resort buys all issuance, (which it seems to me is where we are heading), what then?

  8. Cullen, most of the time you make enlightening remarks or explain otherwise convoluted things in a simple way. However, when it comes to Japan, and its problems, you may have taken a short cut.

    Certainly needless to say Japan has a printing press so it has no insolvency issue. It is running higher and higher deficits and accumulating higher and higher debts. Yen is toast for sure. People holding Yen-denominated assets should consider and will consider selling off their assets – JGB included – for safer ones, for example, US government bonds. Inflation in Japan, once started, can run its course uncontrollably. Yields have to move higher, feeding more violent Japanese assets sell-off. Japan’s fiscal mess is ensured, though it theoretically can still pay its bills in its own currency. But few people will trust its currency by then. However, it(money printing) has to STOP/slow down dramatically some time in the future. What could happen then? Running monetary policy is never purely academical or numerical. It is subject to fiscal policy, and more broadly, national politics, and national strategy. Also the big fact or difference with Japan is, it is a country oriented towards exporting, which is not like USA. So, it is over simplistic for you to say that people like Kyle Bass is wrong. On the contrary, he has a very good point.

    Anyway, Japanese problem is too huge to be clarified in a few words.

  9. Kyle Bass was “wrong” on subprime for 2-3 years, and then he was right. Similarly he was “wrong” on Greece for a couple of years, and then he was right. Unfortunately being early is his curse, but it means he was buying CDS on both for less than 100bps.

    Cullen provides excellent arguments why Japan hasn’t had a problem YET, but japan’s debt is increasing way faster than productive assets, so a crisis is inevitable at some point. Maybe they will print yen to service their debts but that will just kill the currency, so is a default in real-terms.

    Either way, short yen is a great trade right now. And with 10yr JGBs at 0.7% i think that is a great short, provided you have the patience to be “wrong” for a couple of years.

    • And what Bass is doing is pretty slick. He’s buying CDS at bottom barrel costs. He’s basically buying super inexpensive options on a tail risk event. It costs him nothing, but the potential reward is huge.

      I haven’t seen his Japan Macro Fund holdings so I can’t speak to the validity of what’s going on there (though reports are that it’s been a nightmare), but I know his primary fund has performed fairly well despite the Japan thesis, but maybe he’s obviously not implementing the same trades in that portfolio.

      • Cullen, his macro fund has been decimated. How come no one calls him out for this? The fund has basically been imploded. I wonder how much he’s actually lost in there. It might not be his “primary fund”, but who cares? How many times does a Wall Street fund manager get to blow up funds before he loses all credibility?

        • Well, I don’t have data on his Japan Macro Fund so I can’t really talk about it. All I’ve seen is an old 2012 report and some speculation since then.

        • Kyle bass’ macro fund hasn’t been decimated, in fact it’s made excellent returns as he’s been long subprime for the last couple of years. His Japan fund (which is tiny relative to the macro fund) is down heavily, but of course it would be as he has to pay the theta on his JGB puts.

          Similarly his bets on subprime and Greece only showed losses for 2 yrs before those crises broke. These are trades where you have to be early in order to pickup the cheap out of the money options, as Cullen mentioned.

          Fact is that Bass can stay solvent a lot longer than Japan can, so lets wait and see. This trade isn’t over yet, he himself says it could take another 2yrs to payoff.