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March 26, 2012

[SSJ: 7311] Re: Why Noda is pushing for a tax increase

From: Ron Dore
Date: 2012/03/26

Replies to Rick and Mike:
While Mike is deafening himself with his chainsaw, let him forget both Arrow's theoretical impossibilities and the practical impossibilities of Japanese cowardly stasis politics, and think "what if" for a bit.

My scenario is certainly the one Rick gives as number 3. But first let me set out two general assumptions.
1. The route to normal 1-2% inflation can be via alarming fears of hyperinflation, as it was 1974-1979 2. Output gaps (recessions) usually begin in the capital goods sector and recoveries also begin in the capital good sector. That's what makes the recovery of optimism and animal spirits leading to investment on the part of firms with a low level of indebtedness and a readiness to borrow at 5-6% real interest rates so important.

Anyway Rick's third scenario is as follows.


SCENARIO 3: The MOF adds Y1 trillion to the deficit; the BOJ creates new money which it simply hands over to the MOF so it can pay its bills. It gets no JGBs in exchange.

RESULT: A zero increase in the gross debt of the MOF and a zero increase in the NET debt owed. The increase in the monetary base is Y1 trillion. The operation prevents the increase in the fiscal deficit from pushing interest rates upward.


The reasons why I think on the contrary that, combined with other measures.
it could push interest rates upwards.
1. Particularly if Ogata's idea was also implemented and the accounting laws require firms to report separately the JGBs they hold to maturity (booked at face value) and those they hold for trading purposes (booked to market) the liquidity of the bond market would shrink and unloading on the part of the 5% foreign owners would have a greater effect. I cannot think that such a shocking departure from the principles of sound finance as to print money without auctioning bonds would fail to hit Japan's reputation on Wall Street and the City hard. I don't know what proportion has to be sold off to bring interest rates to 5-6%, but I think nervous bankers at home and abroad would supply it.
2. With simultaneous announcement of a %5 inflation target and a shove to wages, a fortiori.
3. We were talking about a notional trillion deficit.
Mike says he thinks Ron Dore is saying "don't try cutting the deficit now, however much you think an increase in sales tax will eventually be necessary"
Absolutely, and if the response to the attempt to start inflation is soggy, increase the deficit.

If I were at home I would work off my frustration at the world's irrationality by getting my son to start up my chainsaw which I no longer have the pull to do, and go and cut down an innocent sapling, but the sensible alternative seems to be bed.
Ron Dore

Ronald Dore

Approved by ssjmod at 11:21 AM