DAVID JAMES. Japan could lead the way in forgiving debt

As the world economy groans under soaring levels of debt, the place to look is Japan, whose current government debt-to-GDP ratio is an eye watering 253 per cent. It is Japan, which led the developed world into its current mess, that is likely to lead the world out of it by cancelling debt. The consequences of such a move, if it happens, would be far reaching.

It has mostly faded from memory, but in the 1980s Japan had a debt bubble that makes what has been happening now in the West seem prudent. The Imperial Palace, which was admittedly never going to be on the market, was said to be worth close to all the real estate in California. The Ginza office district was worth about twice the real estate in California.

Japan, in other words, led the world into its current era of ridiculous debt accumulation. But almost on the tick of 1990 the Japanese asset bubbles collapsed, and for the subsequent 28 years the country has had zero, or even negative, interest rates — a desperate attempt to inject liquidity into the economy. It has failed because, with corporations and individuals in negative asset territory, no-one wanted to borrow any more. The Japanese economy ground to a halt.

During most of the 1990s and up until about 2006, the policies of western governments, particularly the United States, could be described as a failed attempt to avoid the fate of Japan. Interest rates were progressively lowered, which led to greater recklessness, and then to the ultimate recklessness, the derivatives debacle, which nearly brought down the entire financial system in 2007.

The world economy now suffers from Japan-style levels of indebtedness, and central banks have been making Japan-style efforts to keep the ball rolling. The current level of global debt is, according to the IMF, $US164 trillion, which equates with 224 per cent of global GDP. About $US21 trillion has been created by the G7 central banks since the global financial crisis, and the central banks, especially the US Federal Reserve, have been providing low interest money to the banks to keep the private banking system operating.

Instead of prosecuting the bankers whose criminal recklessness created the GFC, they were instead showered with cheap money that made it extremely easy to turn a profit because, having got it for almost nothing, they could lend it out at higher rates. This pump priming (called quantitative easing) was more successful than the Japanese efforts to stimulate the economy, but it has led to crippling indebtedness.

When debt becomes unsustainably large, typically there are only two ways out: rampant inflation, which erodes the real value of the debt, or debt forgiveness. Inflation does not seem to be likely to occur, although there has certainly been massive asset inflation, especially in property markets and stock markets (where cheap debt is being used for large scale share buybacks). But globalisation, which drives down wage rates, has translated into lower prices in many of the goods that are measured in consumer price indexes.

That means that some form of debt forgiveness is probably the only way to get out of the current holding pattern in which government interest rates around the developed world are being kept close to zero — a strategy that has meant that the finance sector has become stronger and stronger relative to the real economy. The parasite is slowly killing the host.

So here is a prediction. Japan will be the first country to undertake debt cancellation. It is well placed to do so, because most of Japan’s debt is owed to Japanese entities; financially the country is hermetically sealed off to a large extent. And it may as well, because the debt will never be paid back anyway.

Japan has two other reasons to at least consider such a move. One is that it has had close to 30 years of stagnation, so it is now obvious that using the usual levers of monetary and fiscal policy will not work.

The other is that the Japanese have a better sense than many in the West that money is a created artefact, a social fiction we invent (this even applies to gold, whose value is only stable because we decide that is the case — otherwise it is just a yellow metal).

This writer can remember a discussion in the 1980s with a Japanese financial analyst in which the interviewer expressed alarm that Japanese stock valuations were ten times higher than in the West. The analyst assured the interviewer that he just did not understand the unique, Japanese approach to finance.

At some point, that unique approach to finance could well result in the Japanese simply cancelling some of their debt. Just as Japan led the world into the era of asset bubbles and ridiculous levels of debt, it may well lead the world out of the trap it is falling into.

It would send a signal to the rest of the world that the only way to avoid a further crisis in money, of the kind we saw in the global financial crisis, is to do what societies have done for 5000 years when debt becomes unsustainable — write it off and start again.

David James is the managing editor of businessadvantagepng.com. He has a PhD in English Literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare’s ghost.

This article first appeared in Eureka Street

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7 Responses to DAVID JAMES. Japan could lead the way in forgiving debt

  1. Robert Fox says:

    See Steve Keen on patreon.com/ProfSteveKeen for a practical proposal.

  2. Don Macrae says:

    A very interesting article, thank you.

    Something I would like to understand but don’t is why low interest rates lead to growth of the finance sector.

  3. John Bloomfield says:

    Mr James,
    your article above is a confused and wrong analysis of the issue of mounting debt problems facing the advanced national economies. Over-indebtedness is most certainly an ominously looming national problem, but not in the central bank/sovereign debt sense you propound.
    Govt./CB debt (denominated in that nations own currency) is not real debt in the commonly understood sense of the word – govt debt is a private sector commercial/financial asset.
    See Prof. Bill Mitchell’s excellent article re Japan’s govt. debt here.
    Govt/CB debt, denominated in the fiat currency of a sovereign monopolist currency issuer is always sustainable – they are the fiat currency issuer after all.

    Institutions obtain govt securities by asset transfer – they exchange their liquid asset (cash) for an interest bearing contract certificate of agreed interest and period. At expiration of that period their deposited cash asset is returned to them.

    ‘Forgiveness’ applied to govt. debt can only mean that a corresponding private commercial asset is destroyed, rather than repaid – producing results surely contrary to intention.

    The real debt problem that must be addressed is private/household debt incurred by currency users – private debt is the debt to which debt forgiveness must be directed, not govt./CB debt.

    An excellent article re Japan by Steven Hail here.
    Japan’s Household debt has actually fallen since the 2008 GFC – as a direct result of the increased Japanese govts. deficit spending.

    The ‘5000 years’ link you provided makes clear that debt forgiveness as practiced in the past applies only to private/personal debt – not to institutional or commercial debt.
    “..proclamations explicitly cancelled all existing non-commercial debts…”
    Ancient civilisations knew well that debts that couldn’t be paid back, wouldn’t be paid back – and they needed the productive capacity and military services of those debtors to secure their nation – locking them away was thus not a desirable or sustainable option.

    • Don Macrae says:

      Ah, Magic Money Theory…

      • John Doyle says:

        John, got it! Don, shame on you.
        John, few understand that “Government Debt” is a pseudonym for corporate welfare. All that money is not spent by the federal government so it is a safe place to store spare financial assets where they are guaranteed safe and earn interest.
        Private debt. Yes that can be a big issue, but it is the fault of lax and wilful government actions, such as having surpluses in their budgets, and thereby forcing the non government sector into growing their debts to balance the books.
        Do, get real. Your nonsensical quip is damaging to the need for our politicians to understand the damage they cause in society with the current economic narrative. I’m not going to explain it but since you are reading this blog, it won’t take much to get the real picture.

        • John Bloomfield says:

          Thanks for that reply Mr Doyle,
          We economic realists should make a point of referring to govt. ‘budget’ surpluses as ‘ tax surpluses’ – what they actually are.
          Citizens enduring rising personal debt & austerity due govt.cutbacks may then recognise the harm unwarranted (ideologically driven) tax surpluses inflict on economic activity & private wealth.

  4. John Bloomfield says:

    Oops.. – correction to corrupted link to Bill Mitchell’s excellent article here.

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