The most perplexing line I read last week was (paraphrasing) “Japanese debt isn’t a big deal since they owe it to themselves”- so lets take a little stroll around this statement.
Frank has $1,000 in his bank account, he takes it out and buys a flat screen TV. He also writes himself a $1,000 IOU to himself because hes really into wasting time, and he sets the due date for repaying that IOU for the next day. The next day comes and obviously he can’t repay his IOU, he defaults- and as there is no underlying collateral in the deal the IOU is worthless and also destroyed. From from an outside perspective nothing has changed- the day before he had an asset he marked at $1,000 and a debt of the same amount, they canceled each other out perfectly and it made no real impact on his life. Why then include the fact that he purchased a TV with that money? No reason, no reason at all.
Ok, how does this kind of debt work on a larger scale with multiple people involved. This time Frank has a son, Jim, and he puts $20,000 in a college savings account for Sonny Jim and he tells him about it. When Jim goes to get a summer job in high school Frank tells him to participate in volunteer activities instead so he can pad his college application (please ignore that $20,000 only pays for approximately 2.5 weeks of college these days) as college is taken care of. Now the night before Jim’s graduation Frank is so proud he heads out, gets loaded, goes to a casino and puts the entire college fund on red. Had Frank been a Wesley Snipes connoisseur he would have known to always bet on black, but he wasn’t and he lost the whole fund and also had one hell of a hangover. Frank now sticks an IOU to himself (the bank account he gambled with was in his name) and Sonny Jim goes off to college. 2.5 weeks later a tuition bill arrives, in other words Frank’s IOU to himself comes due. The day before the bill comes Frank had a $20,000 asset (the IOU) and a $20,000 liability- netting out to zero. The day it comes due he has no money to repay the IOU and the uncollateralized asset is worth zero- asset and liability cancel each other and there are no problems… right? Only poor Sonny Jim has already altered his life in numerous ways on the promise of his father providing for his education. Instead of working and saving and choosing a school he can actually afford he volunteers and takes SAT classes and gets admitted into a school he cannot afford.
One of these scenarios is a good analogy for government debt, and the other isn’t. I would leave it to the reader to figure out him/herself but since this blog has no readers, and if it did have them they would most likely be products of our public school system, I’ll expand.
Japanese Citizens hold ~90% of their governments debt. The government gets its money by taxing its citizens: therefore any repudiation of government debt means lower taxation on its citizens and debts cancel out and everyone was as well off before the repudiation.
Unless of course one sector of the economy holds more debt than they owe in taxes, and another owes more in taxes than they hold in debt. Curses to inter generational imbalances!!!! If only teenagers had the same savings and life expectancy and work ability as senior citizens! The geriatric Japanese have spent their lives working and saving and as they retire have virtually no tax debt expected and tons of IOUs from the government to be redeemed. The young, go getting, Hello Kitty generation has no IOUs and tons of tax debt to be expected. One of these two groups wins in default and the other loses horribly.
And if anyone says to you “but their debt is in Yen- they can just print the money they need” had them an encyclopedia with the word “hyperinflation” bookmarked. If they still don’t get it hand them a dictionary with the words “suicide”, “for”, “the”, “good”, “of”, “mankind” bookmarked.
No that’s too much extrapolation. I think you’ll notice that the comments have dropped off since a certain poster started posting. For instance, Obama never comments anymore, for one.
The term minority is relative- silence can also be relative. Since you use the term “the really silent minority” to me that means that the number of readers is less than the number of bloggers on this site. Since the total is at a maximum of 2 (which is counting my barely literate posting along with your barely existent posting individually) that puts the number of readers at <= 1. I am truly sorry if I extrapolated that to mean zero- you are correct, there indeed could be a misguided reader out there. Though I don’t know if you or I could claim credit in misguiding them- as they were mostly likely very confused or else they never would have become readers.
I resent the implication that this blog has no readers. My readership is comprised of what I call “the really silent minority.”