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What More Can Central Banks Do? An Interview with Dr. William White
If 40% of all of the expenditures of the government are being financed by the central bank, the historical record indicates that hyperinflation is significantly more likely. And what is really interesting at the moment in terms of magic numbers, for what all magic numbers are worth, is that the asset buying program at the Bank of Japan is now equivalent to financing 40% of government expenditures. We’re talking big numbers here.
I don’t think you need rational expectations, just people seeing the writing on the wall.
Everything is fine until inflationary pressures or something else shocks up the interest rates. And the minute they go up, it becomes obvious that government debt service has gone high enough so they will have no recourse but to have the central bank finance still more. And when that happens the writing is on the wall, the currency collapses and the inflation becomes essentially uncontrollable. This is a highly non-linear process that cannot be captured by the econometric models that are in widespread use. They are essentially linear.
I don’t think you need rational expectations, just people seeing the writing on the wall.
Everything is fine until inflationary pressures or something else shocks up the interest rates. And the minute they go up, it becomes obvious that government debt service has gone high enough so they will have no recourse but to have the central bank finance still more. And when that happens the writing is on the wall, the currency collapses and the inflation becomes essentially uncontrollable. This is a highly non-linear process that cannot be captured by the econometric models that are in widespread use. They are essentially linear.
In Japan, I think Abenomics is not working and will in fact backfire – raising prices when the typical salaryman hasn’t seen a salary increase in two decades equals a cut in real terms, meaning he will hunker down.