No.8｜Government bonds are highly addictive(Part 2)

This article is a translation of this article.

In the previous article (No.7), I introduced the difficulty of Financial Recon-struction through natural revenue growth. In the first place, recession and economic downturn are unrelated to fiscal discipline, and such an approach does not make sense in itself.

The essential problems of government bonds are (A) Invisible Inflationary Progression, (B) Growing Asset Disparity, and (C) Intergenerational Inequality. Let's take it step by step.

One very important fact is that "government borrowing increases someone's wealth" (like the law of conservation of mass). When the government issues government bonds, it means throwing money around in the market. In fact, the government's nearly 1,000 trillion yen in debt has increased personal wealth by nearly 1,000 trillion yen. Theoretically, the government can borrow as much money as it wants, and personal assets will increase accordingly.

However, an increase in the amount of money in circulation will, in principle, reduce the rarity of money and increase inflation. But how is it that inflation has not progressed in spite of all this fiscal stimulus and unconventional easing policy?

The simple explanation is that the supply continued to exceed the demand. There are several factors that contribute to this.

(1) Mature as a society and having the bare essentials met
(2) Development of the sharing economy and second-hand market
(3) Improving productivity with technological innovation
(4) Increased supply capacity due to globalization
(5) Saving propensity for retirement induced by the nation's financial instability
(6) Lower consumption due to uneven wealth

(1) and (2) decrease the overall demand. (3) The development of mechanization and information technology has significantly increased per capita productivity. (4) is the transfer of industry to developing countries. (5) decreases demand as people try to save up their own funds for retirement due to fear of the future. (6) is affected by the fact that consumption does not grow in proportion to assets, even if assets are concentrated in the richest part of the population.

That is, even as the number of banknotes issued has increased, the supply has always strengthened and there has been no corresponding demand. As a result, there was no inflation. No matter how hard the government tried to increase demand, there was always an excess of supply. Instead, the fiscal stimulus and extra-dimensional easing measures have led to fiscal instability, increasing the propensity to save and reducing demand. And a series of scattered distributions were distributed unequally, significantly increasing the asset gap between the haves and have-nots.

The money that continued to be dispersed went into savings rather than consumption, thus suppressing inflation. It does not mean that the distortions are eliminated, only that energy (future demand) continues to be stored in the strains.

The stored strains are released when supply and demand are out of balance. The problem arises when the number of elderly people increases and the number of workers decreases, and money set aside for retirement begins to flow into the market. Money dropped through a dam will flood the market, driving up prices sharply. A battle for a limited labor force begins, with wads of cash.

In particular, medical and nursing care will be in short supply. Many people will change jobs, especially in the fields of medicine, nursing, and nursing care, where human life is involved and mechanization is difficult. Nevertheless, in a super-aging society, labor will continue to be scarce, and productivity in other industries will decline due to labor shortages. (The lack of manpower leads to a lack of successors and the loss of cultivated skills.) A shortage of labor creates a situation where no matter how much money you have, you can't get services.

In 2019, the Diet took up the issue of 20 million yen for retirement, announced by the Market Working Group of the Financial Services Council of the Financial Services Agency. The elderly couple in their old age needed 20 million yen to live well into their lifetime. The 20 million yen figure itself is not very meaningful, as different households have different consumption styles. It is more a matter of assuming that the service will always be available at the current price point. Unless technological innovation leads to significant productivity gains, the supply-demand balance is broken and costs are driven up. Does not take into account the risk of diminishing financial assets!

The current generation is living in an era in which the government handed out money in a big way and yet prices still rose at a steady pace. Money was given away that should not have been given away, and prices did not go up when they should have gone up, resulting in significant benefits. But there is no such convenient "free lunch". The basis of the world is equivalent exchange, where future generations' heavy losses (diminution of asset values) due to rapid future inflation will balance the books. Today's young generation will not have a prosperous retirement.

Once the temptation to buy government bonds has been seized upon, it is difficult to escape the temptation. If it's like someone else's credit card and you're allowed to use it as much as you want, it's a rational decision to spend it. Government bonds are sometimes referred to as "financial child abuse". We are unilaterally reassigning the burden that should be borne now to the next generation. By the time the bill is paid, the person who started the debt has passed away.

Issuance of government bonds is easy. From the politician's point of view, it is a good idea to be able to reap the benefits of services without placing a burden on the current generation. It looks like a magic wand that brings something out of nothing. Even if we issue large amounts of government bonds, we do not immediately observe inflation and it appears to be completely under control.

Government bonds are not such a blessing. It is like a ferocious beast and a national disease. Government bonds are addictive and stop the pain that should be felt. Prescribed patients appear to be healthy. However, the underlying treatment is postponed, and the whole body is undermined. If they feel pain, they will try to increase the dose further. Government bonds paralyze people's thinking, and the slow-acting poison undermines organizations and ultimately causes social chaos. Problems occur in the shadows, are usually invisible, and their nature makes it difficult to agree on solutions. (This is the same situation with climate change and pandemics. Problems are not perceived as risks until they appear.)

This is the tragedy of the common ground on the common property of a nation, caused by moral hazard. And by the time the problem actually surfaces, the society is exhausted and a feedback loop of decline can occur. Once a beast of prey starts to rampage, it is not something the state can control.

The problem is difficult to solve: The population pyramid in 2050 looks like this As the median age of the electorate gets older and older, we will continue to have a government of the elderly, by the elderly, and for the elderly, called a silver democracy. The burden is passed on to the young and then to the next generation.

Japanese Population Pyramid (Left: male, right: female)
Cited from http://www.ipss.go.jp/site-ad/TopPageData/PopPyramid2017_J.html

Unfortunately, one of the most common misconceptions is the idea that one can improve the fiscal balance by not saving and instead actively consuming. (The so-called trickle-down hypothesis.) This is apparently true, but still not accurate.

Certainly, if those who have money are willing to spend it, the economy will improve and workers' incomes will increase somewhat. Higher average household income may make it easier to have children. Some improvement in national finances could lead to an effective birthrate reduction. However, the problem is that this behavior is so inefficient.

No one else can decide what to spend the money on. If a person does not have many or dozens of services that he or she wants to consume (e.g., dining out, sightseeing, luxury goods, etc.) in between, we will not be able to collect the tax dollars needed to support child care and poor households. How can you say that it takes a lot of cooks, tourist attractions, and luxury goods to earn the tax revenue to build a single nursery!

Only donations can provide direct support. But it is nonsense to expect such behavior from everyone.

"When a hole is made in the bottom of the ship, all that needs to be done is to repair the hole and let the water out. There is a lot of work to be done. Even under such circumstances, they still seek to do the most extravagant things on board. If you put effort into that service, there will be a shortage of people to fill the vital hole."

The root of the problem lies in the fact that low taxes have kept revenues low, assets are not being redistributed, and not enough labor and money are being invested in solving the underlying problems. The loosening of fiscal discipline is independent of economic circumstances and is merely a result of the voters' choices.

There are always horses of a thousand miles, but not always people who recognize talent.

Even if someone is struggling to solve a problem, society is not aware of it. Even when capable people are aware of the crisis, they are not given the opportunity to play an active role in today's society. Most of the work now is not directly related to solving the problem.

The biggest victims are the youth and the next generation. Young people are especially politically disinterested, have little political voice, and are unaware of the structure of exploitation. They are left to maintain the status quo and are forced to take a blank check. Young people are not social sustainers for the elderly.

A plunge in the value of the currency means a loss of trust in the government. Isn't the greatest intangible asset we lose the spirit of law-abiding and helping each other? Its loss makes the solution of any challenge more difficult.