In love and commerce, taking implies giving. On Valentine’s Day and throughout the year, undoubtedly the prudent Federal Reserve remembers the benefits of having and needs of both debtors and creditors. This regulatory chaperone surely would declare that they passionately strive to perform their very best (do what’s most reasonable according to their interpretation of their regulatory duties) for all parties concerned. Besides, they must balance competing interests. Besides again, the Fed has a long run horizon. The Fed’s recent policies nevertheless imply not only an ethics of inflation, but also manifest somewhat greater affection for debtors than creditors.
Japan’s general government gross debt as a percent of its GDP is gigantic, at 241.0 percent for 2012 (IMF, Fiscal Monitor Update, Table 1, 1/24/12). This dwarfs America’s 107.6pc and the Euro area’s 91.1pc. Japan’s general government debt has been huge for several years. How does it keep financing this massive total? And if Japan can keep doing it, doesn’t America really have a lot of room to go (and time to wait)?
Japan may have more domestic savings than America, or be more of a nation of savers from an overall cultural perspective. Japan has run a current account surplus for quite some time, in direct contrast to the bulging United States current account deficit. (See the September 2011 World Economic Outlook, Statistical Appendix, Table A10.)
However, Japan’s ability to accumulate and finance its big general government deficit also may be due to its more favorable treatment of creditors. And despite low interest rates! Creditors of the Japanese government have earned, and have earned for quite some time, a net positive return due to deflation alongside low government interest rates.
So how long will the Fed and US Treasury get away with offering negative (or very low) real returns on US government debt?
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Sweet Talking, Slick Banking- Federal Reserve Policy (2-14-12)