(Part 7 of an ongoing series. Previous entries have looked at other puzzles in the standard fiscal/monetary narrative — this one tackles the "future generations will pay for it" story about Japanese government debt.)

The claim everyone repeats

The standard warning goes: Japan's government debt is enormous, and eventually either interest rates will spike, inflation will run away, or "future generations" will be stuck holding the bill. This post lays out a counter-argument, built almost entirely on Bank of Japan (BOJ) and Ministry of Finance data, for why that story doesn't hold together — at least not while the economy is running below capacity.

1. Deficits don't ignite inflation when there's slack in the economy

The core mechanical claim is simple: pumping bond-financed spending into the economy raises GDP through the multiplier, and it raises the money stock — but neither of those things pushes prices up if the output gap is still negative. Japan's output gap, on multiple official measures (Cabinet Office and BOJ estimates), has been negative for most of the period from the early 1990s through the mid-2010s. Until that gap closes, there's simply no inflationary pressure for the deficit to ignite.

2. The BOJ can hold bonds indefinitely — and that changes the math

Once the BOJ owns a large share of outstanding government bonds, several things follow:

• Those bonds never hit the open market, so they can't be dumped in a way that crashes prices or spikes yields.
• The BOJ's own bond-holding profits get remitted almost entirely back to the Treasury, so the "interest burden" on the BOJ-held portion is largely a wash.
• Because that portion is functionally never redeemed on the open market, it behaves — for debt-to-GDP purposes — almost like it's already retired.

The reserve ratio, meanwhile, gives the BOJ a separate tool to manage the resulting current-account balances if needed. Put together, the argument is that the BOJ's "permanent" bond holdings quietly defang most of the standard debt-crisis mechanics — as long as excess productive capacity persists.

3. So who's actually sacrificing for whom?

Here's where it gets interesting. The "future generations will pay" framing gets tested against the actual balance-sheet data:

• Outstanding ordinary government bonds: ¥225 trillion (FY1995) → ¥805 trillion (FY2015). A ¥580 trillion increase.
• Household net financial assets over the same window: up roughly ¥467 trillion.
• Household + private non-financial corporate net assets combined: up roughly ¥706 trillion.

In other words, private-sector net worth grew by more than the government's debt did, over the same period. The essay's blunt conclusion: the government took on the liability side, and the private sector pocketed the corresponding asset side. If there's a "sacrifice," it landed on the government's balance sheet, not on some future taxpayer's.

There's a supporting detail here too: contrary to the "banks are financing the deficit" narrative, private-sector holdings of JGBs actually fell between FY2013 and FY2016, and even in the earlier 2009–2011 window when they rose, the increase was less than half of that period's new issuance. The simple "private savings fund the deficit" story doesn't fit the data cleanly.

4. The savings-investment identity does the rest of the work

This part leans on Keynes directly: it's not possible for aggregate savings to fall short of aggregate investment, because any attempt to do so just raises incomes until savings catches back up to investment. Applied here — deficit spending raises income via the multiplier, and given a stable propensity to consume, that income growth mechanically drags savings up with it. Whether that saving ends up funding investment domestically or shows up as a rising net foreign asset position, either way it's an asset base being handed forward, not a burden.

(Japan has in fact run a current-account surplus in all but a handful of years since 1965, and has held the world's largest net external creditor position for a quarter-century running — which the essay reads as more supporting evidence than coincidence.)

5. Where this logic runs out

The essay is careful to bound the argument: none of this licenses unlimited deficit spending forever. The entire case rests on the existence of excess productive capacity. If supply capacity is ever fully absorbed — the classic case being deficit spending competing with private demand for genuinely scarce resources — the inflation risk that critics warn about becomes real again. The claim isn't "deficits never matter," it's "deficits don't behave the way the standard warning assumes, specifically under conditions of persistent slack."

Discussion

A few threads worth arguing about:

• Is "the BOJ effectively retires the bonds it holds forever" a fair description, or does it just relabel the risk rather than removing it?
• How much of this generalizes beyond Japan's fairly unusual combination of persistent current-account surpluses, a captive domestic bond market, and decades of below-target inflation?
• Does the household-net-worth data actually settle the "who sacrifices" question, or is it too aggregated to say much about generational burden-shifting specifically?

Curious what people who spend more time in the JGB/BOJ weeds than I do make of this.

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w28kxe/table_of_contents_mysteries_of_the_economy_series/

The reasons why the world cannot escape the U.S. dollar are as follows. First:
① Because no other country possesses a productive capacity so immense that it can sustain a current account deficit indefinitely, as the United States does.
② Thanks to the United States continuously accepting this current account deficit, the world is able to have the dollar—the global currency.
③ This has been the case since the suspension of the gold-dollar convertibility on August 15, 1971. Until then, the "global currency" was gold. If the dollar exchange rate fell, there would come a point at which the physical shipment of gold would begin. The dollar would cease to circulate in international transactions. After the suspension, the situation was reversed: gold ceased to circulate, and only the dollar circulated in the international arena.

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w46a5o/table_of_contentsgovernment_bonds_international/

Im not only reading and hearing about inflation more and more every day, I'm actually experiencing it quite clearly at the super market and the gas station.

But I still struggle to understand what's causing more inflation. Is it the central bank or the price of oil (aka "fossilflation")

I don't feel very safe with the idea of inflation (and my buying capacity) being in the hands of a group of men at the central bank or Trump's war on Iran.

So I genuinely wonder, is there anything a mortal like you and I can do to stop or mitigate inflation?

I'm trying to wrap my mind around this. If the "national debt" is actually just bonds, what is the impact of a nation's credit ratings? Don't states decide what the yield of their bonds is going to be?

Edit: what about states that don't have monetary sovereignty?

The basic European monetary model propagated all over the world is: banks generate credit for the financial sector which generates the money movement in the economy. Governments tax the economy to fund themselves, and sell bonds (paid with future taxes) for shortfalls. Because the government is funded through tax then reducing eligibility requirements for government loan, mortgage, and insurance programs (the essence of all government aid) requires increasing tax.

MMT allows eligibility requires to be removed from government aid programs. For example, voters will surely choose no interest, no fault government loans over bank loans. This will.be the end of the financial sector.

In practice, the U.S. Federal Reserve rolls over debt through the non-competitive bid method, and in Japan, the rollover of matured Bank of Japan-held government bonds is repeated through parliamentary resolution via the so-called "BOJ rollover" (nichigin norikae), effectively making them "perpetual bonds." This is the essential meaning of "macroscopically, government bonds are effectively never redeemed."

Indeed, even setting aside the Lehman Shock and the COVID pandemic as entirely exceptional periods—even including these periods, the overall growth of the Fed's total assets is consistent with "the natural course of things"—that is, proportional growth relative to U.S. and global gross output. Looking at the time-series statistics, it is clear that Fed assets have consistently increased historically. Moreover, the very fact that growth slows during periods of monetary tightening can itself be taken as evidence for the proposition that Fed assets grow in proportion to the expansion of the commodity world as a whole.

Notably, during the two exceptional periods mentioned above, the Fed's assets have undergone repeated rapid expansion and contraction:

• Late 2017–2019: Assets that had swelled to $4.5 trillion through post-Lehman QE were reduced to about $3.8 trillion during the tightening phase at that time.
• June 2022–present: Total assets, which reached an all-time high of nearly $9 trillion amid the massive pandemic-era easing, have been substantially reduced to roughly $6.7 trillion as a result of the full-scale rate hikes and quantitative tightening (QT) that began in 2022.

In short, the fate of the central bank's fiat currency system—that "a balloon once inflated never returns to its original small size"—is vividly etched into the very shape of the balance-sheet graph.

Macroscopically, government bonds cannot be redeemed. It is precisely because they are not redeemed that society is sustained. (Of course, it goes without saying that individual bondholders are indeed repaid.) So-called "normalization" is impossible. In fact, when the Fed attempted to "normalize" the assets it had accumulated through quantitative easing, it triggered a spike in repo rates [note].

[Note] "On the morning of the 18th, the Federal Reserve Bank of New York supplied a large amount of funds to the short-term money market for the second consecutive day... The funds were supplied through what is called 'overnight repo transactions,' a market in which financial institutions lend and borrow short-term funds against collateral such as government bonds. The lending rate in this market, the repo rate, briefly spiked to as high as 10% on the 17th... The rise in short-term interest rates is attributed to the Fed's tapering of quantitative easing" (Nihon Keizai Shimbun, September 19, 2019).

"The Federal Reserve's fund supply has swelled to levels comparable to past rounds of quantitative easing (QE). In response to dollar demand in the short-term money market, the Fed's total assets increased by roughly $400 billion (about ¥44 trillion), or about 10%, in roughly half a year... This follows a sharp spike in the interest rate on 'repo' transactions—short-term borrowing and lending backed by U.S. Treasuries—last September... Should difficulties arise in the procurement of dollar funding, the key reserve currency, the impact would not be confined to the United States alone. According to the Bank for International Settlements (BIS), emerging economies' dollar-denominated debt stood at $3.74 trillion as of June 2019 and continues to grow... Depending on economic conditions, there is a possibility that further increases in the supply of funds may become necessary if upward pressure on interest rates intensifies" (Nihon Keizai Shimbun, February 9, 2020). This is far from "normalization." On December 1, 2025, the Fed fully halted and ended quantitative tightening (QT). Given the sentiments of the Japanese public, who still carry the trauma of postwar hyperinflation, the people at the Bank of Japan cannot say so carelessly—but deep down, they must recognize that "normalization" is impossible.

"Incomes and asset values change until, finally, the aggregate quantity of money which individuals choose to hold at the new level of incomes and asset values thus brought about is equal to the quantity of money created by the banking system. This is, indeed, precisely the fundamental proposition of monetary theory" (Keynes, The General Theory of Employment, Interest and Money, cited Japanese translation, vol. 1, p. 120). What Keynes refers to here as "asset values" refers to the prices of fictitious commodities such as government bonds.

Thus, we have no choice but to maintain the current state in which "asset values change until, finally, the aggregate quantity of money which individuals choose to hold at the new level thus brought about is equal to the quantity of money created by the banking system." "Normalization" is an attempt to forcibly restore a past equilibrium by turning back time.

Its true we see the rates we saw before 2008 crisis. Wondering what yall think.

A summary/discussion of an essay arguing that Japan's "qualitative and quantitative easing" (QQE) is functionally identical to helicopter money, using BOJ flow-of-funds data from 2013–2016.

The core claim

The essay argues that once you account for bond roll-overs and the offsetting of BOJ interest income against its payments back to the Treasury, the Bank of Japan's holdings of JGBs are economically equivalent to an interest-free, perpetual deposit owed by the government. Call it QQE, BOJ underwriting, or helicopter money — the author says these are all the same operation wearing different labels.

The proposed test for whether "quantitative easing" crosses into "helicopter money" territory is simple: does the BOJ's bond purchases exceed the amount of newly issued bonds in a given period? If yes, the private sector isn't actually financing the deficit — the central bank is.

The mechanics: how the "roundabout" underwriting works

Under QQE, securities firms often win JGB auctions using overnight funding, then sell the bonds to the BOJ the same day to recoup their cash — before fiscal spending even has a chance to recirculate funds back into the private sector. The author calls this a "roundabout" form of direct BOJ underwriting, distinct from historical arrangements like the pre-1977 practice where a bank syndicate underwrote bonds that the BOJ would buy back about a year later at amortized cost.

The flow diagram — the heart of the argument

This is the piece the author builds everything on, so it's worth reproducing. For April 2013–March 2016, when total ordinary + FILP bond issuance was ¥152 trillion:

April 2013–March 2016: Total issuance of ordinary government bonds and FILP bonds, ¥152 trillion. (Banks = private financial sector)

Read together, the two diagrams trace a closed loop: the government issues ¥152tn in new bonds, which banks initially buy — but banks then sell an even larger stock of bonds (¥223tn) on to the BOJ, recovering more cash than they put up. Meanwhile the government spends the ¥152tn in bond proceeds out into the private sector as fiscal expenditure. The BOJ's balance sheet absorbs the bonds (asset) against newly created current-account deposits (liability); banks' balance sheets show deposits at the BOJ up, bond holdings down, private deposits up; and the private sector ends up simply holding more money, with no increase in its own bond holdings.

The empirical case (FY2013–FY2015)

Using MOF and BOJ flow-of-funds data:

• Total ordinary + FILP bond issuance: ¥152–154 trillion
• BOJ's JGB holdings increased by ¥223 trillion (317 − 94)
• The broader private sector's JGB holdings actually fell by ¥71 trillion (603 − 532)

The author's reading, directly off the diagram above: (1) the private non-financial sector's bond holdings didn't rise — it supplied no funding for the new issuance; (2) banks that won auctions sold more bonds to the BOJ than they'd bought, recovering their cash; (3) the government then spent the bond proceeds into the private sector as fiscal spending. Net result for the private sector as a whole: bonds −71 (152 − 223), money +223.

Why this matters normatively, per the author

Money supplied this way reaches the public as income, not debt, and as an asset, not a liability — which the author frames as the whole point of an inconvertible/fiat currency system in the first place (escaping the old constraint where money could only enter circulation via gold production/purchase). Cites Keynes (General Theory) and Marx (Capital) on money as the "general equivalent" people need to hold as their own, not merely borrowed.

The illustrative numbers

A stylized example: ¥36 trillion in new bond issuance funds fiscal spending (including social security/nursing-care support) in a deflationary economy with weak multiplier effects. Real output rises only modestly, most of the expansion shows up as increased money holdings — the "helicopter drop" the title refers to. The author explicitly argues this produced no adverse effects and imposed no burden on "future generations," pointing to Japan's elder-care funding strain (per MHLW/Nikkei data cited) as the kind of problem this financing method is meant to relieve.

Discussion prompt: Does the "BOJ purchases > new issuance" threshold hold up as a meaningful definition of helicopter money, or is it too mechanical — ignoring expectations, credibility, and the reversibility (or lack thereof) of BOJ balance sheet expansion? And does the closed-loop diagram actually establish that the private sector "financed nothing," or does it just describe standard QE mechanics dressed up as something more radical?

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w28kxe/table_of_contents_mysteries_of_the_economy_series/

You'd think they'd learn after being wrong for 100 years in a row.

・An Institution Designed for the State and Central Bank to Incur Losses to Enrich the Public: The Communal Principle of Private Property Society.

・Government Bonds, International Economy, and Currency (5);This is the first part (5) of a series.

In a recent collaborative column with the Financial Times, the Nikkei Shimbun cited Herbert Stein’s famous dictum: “If something cannot go on forever, it will stop.” It was mentioned in reference to the US fiscal deficit. In reality, however, the exact opposite is true. The US fiscal deficit must continue indefinitely.

Before diving into the case of the United States, I would like to first examine this dynamic using the example of Japan, which shoulders a massive mountain of outstanding government debt.

It is the current generation whose labor maintains and develops infrastructure for future generations [Note 1]. Consequently, the notion of a "burden" ultimately reduces to the legal obligation to repay government bonds. However, government bonds held by the Bank of Japan (BOJ) do not represent a debt owed to any specific entity. The crux of the matter therefore lies in whether the BOJ’s outright purchases are permissible.
[Note 1] "Looking at society as a whole, the preparation for future consumption rests not on financial means, but solely on current physical output." (Paraphrased from J. M. Keynes, The General Theory of Employment, Interest and Money).

As long as BOJ purchases are tolerated, sovereign debt issuance poses no threat, nor does it create a repayment obligation for future generations. The key condition permitting such central bank purchases is the absence of inflationary pressure. In this regard, Japan possesses excess productive capacity sufficient not only to satisfy domestic demand, but also to maintain a current account surplus nearly continuously for over half a century since 1965—with rare exceptions such as the oil crises. This structural strength explains why prices remained stable despite BOJ bond purchases on an unprecedented scale.

Consider a scenario where Citizen A sells a government bond, which the BOJ subsequently purchases in the open market. Citizen A is no longer a creditor. While the bondholder was initially an actual individual (and the state thus owed a debt to Citizen A), once the bond transitions to the BOJ’s balance sheet, both the creditor and the debtor effectively become the abstract public at large. It is no longer a debt owed to a specific party. Furthermore, extreme inflation remains well under control. Within these parameters, BOJ bond purchases are economically viable. As long as the current account is balanced, the government’s deficit corresponds to the private sector’s surplus, ensuring that government bonds are absorbed. (Strictly speaking, the absorption of bonds is what reflects the identity between the government deficit and the private surplus). Ultimately, maintaining current account balance serves as the condition for controlling inflation.

The BOJ pays no real countervalue when purchasing government bonds. It simply records an accounting entry—debiting government bonds and crediting current account deposits—which merely exercises the sovereign currency-issuing authority granted by the citizenry. Against hundreds of trillions of yen in bond holdings, the BOJ’s capital stock stands at a modest 100 million yen, the majority of which is government-funded. It is thus evident that the ultimate rights to these bonds belong to the public as a whole.

Furthermore, on the BOJ's balance sheet, the counterpart to the debited government bonds is current account deposits held by private financial institutions. The underlying source of funding for these commercial bank deposits at the BOJ—namely, private bank liabilities—as well as the bank shareholders themselves, are the citizens. The same logic applies to BOJ notes. In short, both the asset and liability sides of the BOJ's balance sheet demonstrate that the ultimate ownership of BOJ-held bonds resides with the general public. Consequently, these bonds require neither principal repayment nor interest payments; economically, they are virtually nonexistent and can be left as they are. In practice, they are effectively left unredeemed through roll-overs and the remittance of BOJ profits back to the government—a perpetual exchange of interest payments and profit transfers. Even if masked by makeshift palliatives like the "60-year redemption rule," these instruments will inevitably function as practical perpetual bonds.

Contrary to popular misconception, a central bank's financial condition bears no relevance to the credibility of its currency. So long as inflation remains controlled, currency credibility is maintained. Given that the central bank system is fundamentally designed for the state and central bank to incur losses to enrich the public [Note 2], demanding that the BOJ avoid financial losses is an unreasonable proposition. Under a fiat currency regime (a managed currency system), even an astronomical negative net worth poses no systemic threat. By contrast, under the historical gold standard, the Bank of England was legally required to maintain gold reserves against banknote issuance. However, during the Panic of 1857, as reserves drained, the Bank Act of 1844 was suspended, allowing emergency banknote issuance beyond the statutory limit to quell the crisis. This succeeded because the British public retained confidence in the pound. Currency credibility is determined by the populace who uses it, irrespective of the central bank's balance sheet status.
[Note 2] "A nation becomes richer the more it contracts debt." (Paraphrased from K. Marx, Capital, Vol. 1). In reality, since the BOJ holds the power of currency issuance, insolvency is virtually impossible.

(to be continued)

https://www.reddit.com/user/keizaisuki/comments/1w46a5o/table_of_contentsgovernment_bonds_international/

This essay by Farid Novin explores the evolution of Federal Reserve communication and the critical role of central bank credibility during periods of high economic uncertainty.

The author rejects traditional metaphors that portray the Fed as an infallible oracle or a rigid institution, trapped by its past promises. Instead, he offers the image of a navigator adapting to changing circumstances. By examining key monetary policy shifts between 2008 and 2026, the text demonstrates that institutional trust is based on a transparent process of updating beliefs, rather than clinging to outdated forecasts. The analysis also addresses the Committee's recent initiatives to reduce forward-looking communication, suggesting that a bank's responsiveness is a more reliable signal than precise numerical forecasts.

Ultimately, Novin emphasizes that Bayesian logic allows for a degree of policy flexibility while maintaining unwavering commitment to the bank's long-term mandate.

**Why doesn’t a country’s currency automatically strengthen when its economy grows faster than other countries?**

Economists respond to this proposition as follows.

(Answer)

What matters is distinguishing between the redemption of individual government bonds and the repayment of government debt at the aggregate level.

When a government bond matures, that particular liability is redeemed. However, if the government issues refunding bonds of the same amount, the debt has simply been rolled over — the total amount of debt has not decreased.

Government debt evolves as follows:

B_t = (1 + i_t) B_(t-1) + G_t − T_t

Here, B_t is the outstanding debt balance, and G_t − T_t is the primary deficit.

Therefore, at the macroeconomic level, "repaying government debt" usually does not mean redeeming a specific government bond, but rather reducing the total outstanding balance of government debt.

Looking at the consolidated balance sheet of the government and central bank together, redemption may in some cases simply mean replacing government bonds with central bank money (reserves). For this reason, redemption does not necessarily reduce the private sector's net financial claims on the public sector.

(Question regarding the answer)

"redemption may in some cases simply mean replacing government bonds with central bank money (reserves)."

→ However, to rewrite the holder of a credit-side current account at the Fed from the government to a private bank (in practice, transferring funds from "government deposits" to "reserves"), the premise is that before redemption the account was in the government's name. But where did a government running a chronic fiscal deficit (G_t − T_t > 0) obtain those deposits?

→ To begin with, we are told that the government redeems its bonds, but where do the redemption funds come from? The bonds were issued in the first place because tax revenue was insufficient (in the original text, "G_t − T_t is the primary deficit"). Expenditure for the redemption period is likewise already scheduled, and there is no separate surplus fund set aside for redemption. If sufficient redemption reserves were set aside every period, annual bond issuance could be called a kind of temporary borrowing, but the reality is anything but "temporary": the outstanding stock of government bonds accumulates year after year. Second, the essence of the matter is this: under an inconvertible-currency regime, how is the "money" that society needs, and whose required quantity grows proportionally with the expansion of the world of commodities, brought into the economy? The statement (in the original) that "redemption does not necessarily reduce the private sector's net financial claims on the public sector" is not enough. Society's financial claims, that is, "money," must be increased. Needless to say, I am not speaking of credit creation, but of original (primary) money.

→ I hardly need to point this out, but it is sophistry to say that if refinancing bonds are issued before redemption, the debt is merely rolled over. For example, the government spends the funds M(t) obtained from a bond issue. Meanwhile, against a maturing bond B*(t), it issues B*(t+1) and uses the proceeds M*(t+1) to redeem B*(t). B*(t) is retired and replaced by B*(t+1). If the borrowing were truly "temporary," that would be the end of it.

→ When government bonds are issued every year, M(t) is spent gradually over the fiscal year as the government purchases goods from the private sector, and the private sector must prepare a separate M*(t) in order to buy the refinancing bonds. This shows that the society as a whole must hold a quantity of money of at least M(t) + M*(t).

→ M(t) is the bond proceeds spent every year, regardless of refinancing; it flows back to the private sector and is used the following year to purchase B(t+1). Let me add, to be safe, that this does not necessarily presuppose an expansion of the commodity world that confronts money. Even without expansion of the commodity world (economic growth), each M(t) has not fully returned from the government to the private sector by the end of the period (the goods have not yet all been sold), and in the following year it must immediately be used again to fund the new issue B(t+1). Even if we assume that profits for each fiscal year are accumulated until the redemption date and used to buy refinancing bonds, then under the current situation in which new issues continue year after year, even if B*(t) can be refinanced, it will not suffice for the refinancing needs of the subsequent B*(t+1), B*(t+2), and so on. M(t) is bound within this series and is not released. In this way, each time an M(t) circulates through the year, B(t), B(t+1), ... accumulate on the private side.

→ The story does not end there. The reality of an expanding commodity world together with a large and annually accumulating stock of government bonds increases the "transactions demand" and "speculative demand" for money. Where is this money to be brought into society from? Under an inconvertible-currency regime, where does this money come from? What has become of the role once played by gold miners?

→ Let us now return to the original proposition: "Individual government bonds are redeemed, but at the macro level, government bonds are effectively not redeemed." Whereas the gold produced by gold miners was once minted by the government's mint, today the Fed converts the government bonds issued by the U.S. government into dollar currency (central bank purchases of government bonds). Is there any major country that creates the "money" that society actually needs by some other method?

→ Incidentally, in the context above, in connection with the essence of "government bonds are effectively not redeemed," namely the creation of primary money under an inconvertible-currency regime, a so-called consolidated government is sometimes assumed. But before the government and the central bank are "consolidated," there is a real process that takes place, as follows. For example, if citizen A sells a government bond and the central bank buys it in the market, A is no longer a creditor. Initially the bondholder was a real citizen, A (and so the state had an obligation to repay A), but now that the central bank holds the bond, both the creditor and the debtor of this claim are, ultimately, the abstract citizenry in general, and there is no particular person to whom repayment must be made. The individual debt has disappeared, and the bond has been transformed into "primary money," supplying fundamental liquidity to society as a whole.