Debt Jubilee Without Creating Inflation

Debt cancellation and without creating inflation, Japan has managed to find a way to get rid of nearly half the national debt. This could also be an option for the US. Let's be straight. The US government is never going to be free of its $20 trillion federal debt. Year in and year out the taxpayers are going to be footing the interest.

Debt cancellation and without creating inflation, Japan has managed to find a way to get rid of nearly half the national debt by around $720 billion each year (¥80tn).

If the proposed plans up until 2026 go ahead, the Federal Reserve will increase the fed funds rate to 3.5%, and put federal securities to the market for sale; the estimated tab is going to come in at an annual figure of $83 billion. For interest alone, that is close to $1 trillion every year for the taxpayers to fund.

We are seeing an all-time high for personal incomes taxes, coming in at $1.6 trillion a year based on the $550 billion in the initial four months of the 2017 fiscal year. Even at this significant level, giving $830 billion to the bondholders is going to take more than half of the take from annual personal income. However, what choice is there?

Is Debt  Ridding Creates A lot of interest? 

Debt that Japan has managed to identify and get rid of one was at the time that the US has been increasing its 'sovereign' indebtedness, as well as the interest on it. 

Japan has been getting rid of its obligation by around $720 billion each year (¥80tn). What are they doing? They are selling the deficit to their central bank, in effect returning the interest to the government. At a time when the majority of central banks have finished up with their quantitative easing programs and are gearing up to sell their federal securities, we see the Bank of Japan purchasing its government's obligation in a significant way. It effect it becomes a debt 'jubilee' - the liability owed is without interest and is simply rolled from one year to the next.

Eric Lonergan, the fund manager, noted that the Bank of Japan is currently going down the route of owning the majority of outstanding government indebtedness within the country (at the moment it owns around 40%). The holdings by the Bank of Japan form part of the consolidated government balance sheet. You could say that its holdings are a debt cancellation but in an accounting format. As, if one buys back their own mortgage, they don't effectively have a mortgage.

If the Federal Reserve followed the same example and bought 40% of the national indebtedness in the US, $8 trillion could be held in federal securities, this being three times what is currently detained from the quantitative easing programs. A computer screen generating 8 trillion dollars! Monetarists would be in shock. Surely this would cause uncontrollable hyperinflation!

However, if we take Japan as an example, this would not happen. Japan holds a record rate for low inflation, at 0.02%. That is far away from the Fed's target inflation rate of 2%; rather it is 1/100th of 2 percent - very close to zero. The unemployment rate in Japan is also at a 22-year low, coming in at 2.8% and the Japanese Yen saw an increase of nearly 6% in comparison to the US dollar for the year.

The process of selling government indebtedness to the central bank has in no way increased Japanese prices, despite this being the intent of the Bank of Japan. At the same time, the economy continues to do well. The February 2017 article, "The Enduring Mystery of Japan's Economy," found in Mother Jones, noted that over the past 20 years, the gross domestic product per capita in Japan has steadily increased and now sees a 20% rise.

Of course, this does not mean that things are picture perfect in Japan. Forty percent of the workers in Japan do not have secure full-time work, nor appropriate pensions or health insurance. However, the point of interest here is that the central bank providing significant money-printing to buy back government's deficit has not resulted in inflation, the very concern that causes other countries to hold back.

Inflation of the current money supply does not occur from quantitative easing. As was the case for Japan, in the US QE is nothing more than an asset swap happening within the reserve accounts of banks. Reserves and government securities are swapped, they cannot be used or lent into the consumer economy, rather they can only be used to purchase further government securities or be lent to other banks.

Other central banks would do well to consider the example of Japan concerning their own government indebtedness. We live in a different era. In the past, the changing of the guard was celebrated by extensive debt collection. We are in need of a jubilee in our time, freeing the governments of their liability obligation, which in turn could give relief for citizens too.



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