Japan (and much of the world) is ridiculously leveraged. Japan is the greatest G20 debtor (as a percentage of GDP) but also the greatest American creditor per capita (Japan holds nearly as much US Treasury debt as China, but with a much smaller — and declining — population). How can a nation become highly indebted and hold so much of other nations’ debt at the same time?

So much “money” is created that there is an ever-pervasive struggle to capture more of an ever-expanding money supply. Those who understand the precariously provisional nature of purchasing power are in a rush to invest or spend the money as quickly as humanly (or electronically) possible. Even if the invested “capital” is borrowed or printed ex nihilo, the investor will continue to believe that they “must” borrow and invest in order to make a “spread” on their investments.

When the money supply expands geometrically at the speed of the printing press, the time value of money rises ever higher to uncertain levels. No one knows how much money they will need to satisfy basic needs. Even governments are now in the dark, since they can not (or will not) compel the central banks to report their actual volume of money printed. When no one, not even governments, can trust the stability of currency, who will have the discipline of savings and thrift?

My beginner’s knowledge of Austrian economics tells me that if the government inflates the money supply, rising prices will be one of the results. However, according to the Concise Encyclopedia of Economics report on Japan, Japan did not suffer this. Why not?

Maybe Russia can save the west. In Rothbard’s “Mystery of Banking” (or maybe it was AGD or “What has govt done to our money”) he states that possible way out of this mess is if Russia somehow wakes up and introduces a gold standard, there may be a chance to turn all of this paper money addiction around in our lifetimes.

Is Japan following the same trajectory as the U.S.? Are Japan’s zombie banks holding excess reserves rather than loaning the money out in the form of fractional reserve loans? In other words, are the forces of recession still stronger than the forces of price inflation? How long can that continue? When does stagflation set in?

to nathan mayer:

you missed the key part – the new money didn’t still still, it emigrated. see “yen carry-trade” for how america’s various bubbles were financed by the japanese money growth seeking higher returns offshore.

there was never any deflation in japan (in the austrian sense), only falling asset prices and flat cpi.

Thanks, nathan and newson. (I just realized that “here” in cyberspace means as much as it does in outer space: not very much! (I’m in Japan and lived thru the bubble, but I didn’t have the knowledge I needed to make sense of what was going on). That Economist graph is terrifying: Japan seems to have the most to lose of the Asian countries if the US defaults or if the dollar tanks completely. Oh, but I forgot: there’s no need to worry because as nice Mr Cheney has reminded us, “Deficits don’t matter”.