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I'm begging you to write a post about sustainable Ponzi games and govt. debt in low-interest rate environments.

All our conventional economic wisdom on growth vs interest rates and dynamic efficiency seems out of step with our current reality (or if it isn't, I need to understand it better.) And I think you have a comparative advantage here.

Just to get you started, why not have a look at that classic paper by Ball Elmendorf and Mankiw? (http://www.jstor.org/stable/2601125)
Always nice to read stuff on govt. finances by the director of the CBO

But your strategy space discussion is probably more useful and durable then a lot of the mindless talking-head speculation on the Eurozone and milk prices that some of the other bloggers are enjoying.

Isn't that comment on Japan the wrong way round? Japan's NGDP growth rate has rarely gone above 1%, and often been negative over the last twenty years; interest rates have been usually higher.

Sorry, I just read it the wrong way around. Please ignore me.

Environmentally sound publishing: reduce, re-use, recycle - lots of academics and pundits have built entire careers off of one or two ideas recycled over and over again. I know that you just couldn't bring yourself to do it - a kind of academic variant on "I'd rather be dead than singing "Satisfaction" when I'm forty-five" - but people are still paying to hear Mick Jagger. Sometimes an argument that doesn't convince people the 1st time they hear it convinces people the 10th time.

Still, I feel exactly the same way - there are lots of things I don't write about because the post would come down to "it's complicated" or because I find them too distressing (e.g. environmental issues, anything that seriously threatens my kids' well-being) - or just because I'm bored of talking about them e.g. the issues I talk about every year in public finance class.

Good find Simon! That's an interesting paper I hadn't read, and yes, it's directly relevant.

Did you read my two old posts on the subject?

1. Actually you are right. There is nothing new to add here, it is important that you blogged about it when it was possible to do something about it on monetary policy side. Since noone responsible doesnt do anything sensible, there is simply too much guessing as for how bad it will actually be. One would have to have crystall ball to do this kind of prediction.

2. I do not know anything about it so I will pass this.

3. This is interesting. I always thought that it is not the old debt that is a problem, but a new one. Japan has low interest for decades, so I think that most of the debt is actually issued as low interest one. If interest rates rise now, many savers who hold government bonds will take hit as they will be fixed to gain low nominal payments from government.

So for instance, if Japan already issued (and is now paying down) 100% GDP worth of 30 year bonds with nominal yield of 1,8% it is the same level of liability as 64% GDP worth of UK 30 year bonds with nominal return of 2,98% (I ignore principal). But anyways I would love to see any article about this as you are right that there is not enough of them around.

4. For me this other invisible elephant in the room is China. I would say that given the nature of the regime it is even more clouded than Eurozone issues by political impact. But this is basically it, unless I count some infrequent (mostly optimistic) post from Scott Sumner and another infrequent anecdotes from other sources it is all just one big unknown to me. If anybody know some reliable source of macro analysis for China I would be very grateful to be pointed in right direction.

Actually, Nick, I'd like to see more car posts (kidding but only partly because I really like cars).

Seriously, I think a series of posts on Japan would be useful. Lots has been written about Japan, none of it very satisfying in my view so I have generally given up following it. Most of it seems way too fussy and complicated and therefore probably wrong. Lots of charts and data but no clear story. Plus, I think data interpretation may be an issue. One person sees deflation, someone else says but hey, wait a sec, RGDP's growing and so's RGDP per labourer/capita (or whatever). This is a lost decade? Then, someone mentions demographics and lets their voice trail off.... Perhaps one place to start is the yen carry trade and how it could have been sustained - aren't market forces, particularly in the financial markets, supposed to eliminate/equilibrate this sort of thing?

"But I don't have anything to say on the subject I haven't already said."
Maybe you should keep on saying things you already said until someone hears. I don't know what you said about the eurozone, but I'm pretty confident no one there with the power to do anything heard about it.
Yes, that's activism rather than science, but sometimes scientists have to convince before they elaborate. Think of climate scientists for example...


The yen carry trade was quite unprofitable for a time - when the yen appreciated from 145 to the USD to 102 to the USD. That;s about the time when Bernanke/ Krugman et al were kicking, metaphorically speaking, BoJ for being too timid. From then on, BoJ tried to not be too timid. And yet disinflation persisted. Everyone said that was because BoJ's actions were thought to be be temporary, reversible and hence the expectations fairy failed. Perhpas, it was simply because financial flows dominated real flows, and all that BoJ's actions did was make the carry trade more profitable.

The carry trade sustained because of BoJ's intervention, and ate away most of what would have been the real benefits to the intervention. At least that's one theory. It makes sense to me.


"The carry trade sustained because of BoJ's intervention"

That was my assumption too but I don't understand the dynamic - one can't really argue there was persistent excess supply of money since NGDP was basically flat (or so people keep saying) and, in any case, that would have resulted in some sort of interest rate parity thing with an inflation premium in yen interest rates. As far as real interest rates and poor Japanese growth expectations go, why did enough Japanese savings not get directed to foreign investment projects to bring Japanese real rates into line with world rates?

Maybe there's an easy answer but I haven't come across what struck me as a convincing story as yet.

If the economists only had something as fit to its task as a hammer is to hammering.

It's more like economists have a lake of water and a hill to climb & pretend what they have is a multi-purpose hammer and some screw heads to turn with it.

They have neither the right task identified nor the right tools to do that task.

Well, I am glad you blog; I find it very enlightening, after a lot of wrestling with what you are saying. But that means it is just intellectually challenging in a good way.

If you look at my latest post (hit my name) you will see I finally got my head around something I emailed you privately about and you were very helpful with, so thank you.


I didn't really understand your comment. The *excess supply of money* was being channelled into the carry trade, rather than consumer spending and business investment. Hence no NGDP, no inflation. Interest rate parity did hold, until about 2000. The low(er) rates on yen led to yen appreciation. Since then, the BoJ did not let the yen appreciate. So IRP did not hold. Traders kept borrowing in yen and investing in $ assets. This would have led to an increase in JPY real rates, but BoJ didn't let it happen.

Great post! More like this, please, Nick.

Nick, a question about high debt/low interest rates (for countries, not individuals).

My understanding is Spain and Ireland were on OK fiscal shape in 2007 but they had very high debt so when interest rates ticked up a bit they had a horrible fiscal problem. While I (think I) get the argument that an interest rate cannot be negative in absolute terms so there is a zero bound beyond which monetary policy does nothing it seems that you have to be able to deal with the interest on borrowed money /after/ things have returned to normal.

What are the constraints in fiscal stimulus? Is the USA becoming like Japan? (What are the implications for us Canadians?)

More on #3 please.


PS: The occasional "I canoed this river from here to here, saw three moose and a black bear." style posts would be awesome.

Hi Ritwik.

You said:

"The *excess supply of money* was being channelled into the carry trade, rather than consumer spending and business investment. Hence no NGDP, no inflation. Interest rate parity did hold, until about 2000. The low(er) rates on yen led to yen appreciation. Since then, the BoJ did not let the yen appreciate. So IRP did not hold."

I am struggling here. If there is accommodative monetary intervention (supplying money in excess of the demand to hold it), one of two things must happen - either the demand to hold it goes up or it doesn't, in which case prices (expressed in that currency) of something somewhere go up (the hot potato thing). As I understand it, the carry trade is not a demand to hold yen - it is a demand to borrow yen, sell it for other currency and buy interest yielding assets in the other currency. In other words, the carry traders sell the yen as part of the trade, they don't hold it. Someone else is holding it. Perhaps I am missing something here, but the carry trade cannot absorb an excess supply for money.

To me even the term "carry trade" really means exploiting previously unexploited arbitrage opportunities. In other words, the very existence or persistence of the carry trade implies disequilibrium and failure to meet interest rate parity. So how does it persist for years?

The failure of the BoJ to permit yen appreciation is not by itself enough to result in violation of IRP. The BoJ can target exchange rates or inflation rates but not both. Under explicit or implicit exchange rate targeting, IRP would be achieved via the inflation differential component of IRP.

Great post.
#1 read the Wolfson prize essays to see what the winners think should be the breakup exit path.

I think Greece, and Germany, should both be printing 1 year 0% Bearer Bonds, to pay gov't bills, so they stop borrowing from "the market" -- and banks will have more encouragement to lend to private firms.

#4-tg What is "money", in the sense How much money did Warren Buffet have in 1950, 1960, 1970, 1980, 1990, 2000? In fact, he had shares of Berkshire Hathaway, which were worth millions in market value (from about '60 on?), but not so much non-reinvested income, nor other assets like expensive houses. He was rich because of his Net Worth.

The post 2006/2008 net worth bubble pop has created huge reductions in the net worths of most middle Net Worth Americans (similar but not quite the same as middle income). The Ag Demand remains depressed, and will remain depressed, while the net worth of so many remains so much lower than "trend" of 1990-2006. (

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