BP's Tony Hayward on Way Out

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Paul Ng

Does Japan really have a public debt problem?

Does Japan really have a public debt problem?

June 13, 2010 4:19pm | Share

The conventional wisdom in both Japan itself and the west is that the country has an unmanageable public debt problem. I find this quite unpersuasive. All the country needs to do is generate, say, expectations of 3 per cent inflation and the public debt problem should melt away like snow. But the longer it waits the bigger the ultimate adjustment will need to be.

In 2010, according to the Organisation for Economic Co-operation and Development, Japan will pay net interest of 1.1 per cent of gross domestic product on net financial liabilities of 105 per cent of GDP. Since 2000, Japan’s average rate of deflation (on the GDP deflator, the widest measure of inflation) was 1.2 per cent. So let’s treat the expected real rate of interest on Japanese government borrowing at 2 per cent.

So here is the plan.

First, extend the maturity of debt to at least 15 years from the today’s average of 5.2 years. (Whoever was responsible for allowing Japanese debt to be so short term when the government can borrow at incredibly low long-term interest rates seems utterly incompetent.) That would bring average Japanese maturities above the far more sensible UK level of 13 years.

Second, hire a central bank governor who knows how to create inflation - an Argentine, for example. I am quite sure that any moderately determined central banker could do this, if he wanted to do so, by direct purchase of public and private sector assets on a sufficiently large scale. The government should prod this along by giving the Bank of Japan an inflation target of 3 per cent, after maturities have been extended, while informing the policy committee that all its members will be sacked, ignominiously, if they fail to hit the target within two years.

Third, let us suppose inflation indeed goes to 3 per cent. That should raise the interest rate on JGBs to 5 per cent. Other things equal, the market value of the outstanding net government debt would fall by 40 per cent. So now the Japanese government buys back the outstanding debt at its new market price, reducing the face value by 40 per cent of GDP. In the new inflationary environment, the Japanese find the real value of their huge holdings of cash falling sharply. So they buy real assets and consumer goods, instead, and, at last, the economy expands vigorously.

Fourth, now the government raises taxes and cuts spending, moving into a small primary surplus. Assume that the government only needs to borrow to roll over its debt and the debt ratio stabilises. How big a primary surplus is needed depends only on the relation between the real rate of interest and the rate of growth of the economy.

So there we have it. By extending maturities of debt, moving from deflation to modest inflation, Japan eliminates almost half of its outstanding debt, relative to GDP, and normalises the economy, in the process.

It is simple, really. The government has baited the trap. Now all it needs to do is spring it.

Countries with their own central banks do not need to default; they can inflate, instead. Provided they can borrow at long enough maturities and on favourable terms, the amount of inflation needed to eliminate huge debt overhangs is not enormous, provided it is unexpected. In Japan, any inflation would now be unexpected, given current long-term interest rates. So the solution there seems to be perfectly straightforward. What do you think? Leave your responses below.

via: http://blogs.ft.com/martin-wolf-exchange/2010/06/13/does-japan-really-have-a-public-debt-problem/

Written by: Martin Wolf

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Paul

A man we should read more about

Martin Wolf (born 1946) is a British journalist. He is associate editor and chief economics commentator at the Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000.

Wolf is son of an Austrian Jewish father who escaped to England before World War II and a Dutch Jewish mother who lost near thirty immediate family in the Holocaust.^[2] He left Nuffield College, Oxford University with a master of philosophy degree in economics in 1971 to join the World Bank's young professionals programme, becoming a senior economist in 1974. He left the World Bank in 1981, to become Director of Studies at the Trade Policy Research Centre, in London. He joined the Financial Times in 1987; he has been associate editor since 1990 and chief economics commentator since 1996.

He was joint winner of the Wincott Foundation senior prize for excellence in financial journalism in both 1989 and 1997. He won the RTZ David Watt memorial prize in 1994. He is visiting fellow of Nuffield College, Oxford, a Special Professor at the University of Nottinghamand an honorary fellow of the Oxford Institute for Economic Policy.

He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999. He was awarded the honorary degree of Doctor of Letters, honoris causa, by the University of Nottingham in 2006, and was made Doctor of Science (Economics) ofUniversity of London, honoris causa, by the London School of Economics in the same year. He is a regular participant in the annualBilderberg meetings of politicians and bankers.

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Paul Ng

Steve Jobs Part 2

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Paul

What Steve Jobs Worried The Most?

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Paul

Where is the demand?

No doubt that Chinaman have become the most powerful creature in the world to support the economy. Not only they give a huge support in the C (consumption) but also the I (investment) in the component of GDP (expenditure approach) world widely. To generalize a bit, Chinaman hold a huge portion in the worldwide demand theoretically.

How about in reality? Do Chinaman really hold a huge portion of demand world widely?

In my point of view, Chinaman do hold a huge portion of demand but in a unequally distributed way. What I mean in here is that China government has the power to manipulate the demand distribution. It can easily manipulate the demand power through its emigration policy. By allowing more Chinaman to consume and invest in a place, China government can easily manipulate the demand distribution. In fact, geographical factors also affect the demand distribution. If that place is too tough or too far to reach, even China government let go the emigration restriction; Chinaman would still hesitate about emigrating to that place. You may argue that immigration policy of other countries should also affect the demand distribution. Yet, I considered this effect to be so small since I assume that every country is try to maximize its own profit (try to capture the Chinaman demand power).

So what is the effect under this unevenly distributed demand power?

Pricing problem.

Back to the basic, think about the supply and demand curve. Assuming in equilibrium in the initial point / demand suddenly boost up due to Chinaman effect / Chinaman effect is sustainable, which mean not a temporary effect / sustainable increase in the demand curve / left shift in demand curve / price upward movement

Overall, what you get should be increase in price in that particular place.

Next?

In the LR, supply side will have to work out a bit / supply increase in the market / supply curve shift / price decline / quantity increase overall and price is constant (theoretically)

Add in worldwide factor?

1. Yuan will appreciation to USD

2. Yuan will appreciate to HKD

Next?

1. Supply side cost increase (Producer cost increase due to FX movement)

2. Demand side keep on increasing (Demand curve stay constant)

3. Increase in demand is faster than increase in supply

4. Price keep on inclining

Finally?

1. Create a place like HK

2. C and I keep on increasing

3. Price keep on moving up

4. Local HK people keep on facing the currency depreciation effect

5. Demand keep on increasing but cost keep on increasing in the same time

6. To the extreme, local people gain nothing despite the Chinaman demand power

One Step Beyond?

Tell you next time

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Paul Ng

BUY BYD (1211.hk)

One of Warren's big investment BYD has dropped to $49

It would be a good time to buy some shares now

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MC

Invest in South Beach?

“This fall, I’m going to take my talents to South Beach and join the Miami Heat” (Lebron James)
This is considered the most debated free agent deal in sports history. Even president Obama has some words on it.

Lebron James decided to join the Miami Heat along with Dwyane Wade and Chris Bosh one day after the Wade and Bosh deal to sign the Heat. If anyone who does not follow Basketball, these three fellows are the top 10 players in the NBA league ( Lebron is considered the best to many NBA analyst).

According to the Associate Press, before the Cleveland Cavaliers (the team Lebron played for for the past 7 years) drafted Lebron James, the city is quiet on the street after work and the arena rarely is 50% full during a Cavalier game. After Lebron's arrival, games are mostly sold out and bars and restaurants are packed with people during a Cavalier game. This is what Lebron has changed the city.

Currently, Lebron has moved to South Beach and saying the three trio will form their own Hollywood in Florida. How is this going to help the economy in Miami?

I believe there will be great benefits to the city. More people who love basketball will move to or travel to Miami who has a great potential to win a championship or more. Also, more tourists will choose to stay in Miami longer when they go on cruise to Bahama's or the Caribbean Sea and enjoy the basketball fever.

Since more tourists will come, the demand for houses will increase, here should be great opportunities over there and investing in real estates in downtown and South Beach area will be a choice right now before the basketball season starts.

Check it out and see.

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MC

Stock of the week

Hi All

Take a look at the online contact lenses company: Coastal Contacts

Stock code: COA.TO

The business has come out of a bad quarter but it has been expanding it's plant in

its' main base Vancouver.

Stock price should be under priced.

Right now it's $1.27/ share

I am seeing it to reach $1.5 in two months.

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MC

Google TV?