41

Modern Monetary Theory says that a sovereign countries will never go bankrupt. It can just print more money.

Of course, printing more money would lead to inflation.

But some countries have the opposite problems. Japan has deflation, not inflation.

So why doesn't Japan fix that by printing more money?

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    I think your question is likely to be a better fit on Economics SE than it is here. – Joe C Jun 16 at 20:35
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    @JoeC I think this is very relevant to political discourse. In my EU member country, which has high debt and no option of printing money, it is a omnipresent topic – Mario Trucco Jun 17 at 13:20
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    @MarioTrucco that is true, and you are correct that it's relevant to the political discourse, but the OP might get a better answer on Economics.SE – Jared Smith Jun 17 at 14:42
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    Using MMT in this question is a red herring. The MMT insight is that money-printing (vs borrowing) does not itself generate inflation--accounting is just numbers; only the real economy of material goods matters. That's orthogonal to whether Japan wants an inflationary monetary policy or not. Indeed if Japan wanted inflation per se, they'd have to operate outside MMT by printing money for the sake of inflation vs. the MMT prescription of doing so to fund public-spending priorities. – Tiercelet Jun 17 at 15:45
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    Didn't Germany try the "print more money" after World War I and it worked out poorly? – user11101 Jun 18 at 2:09
52

Mostly because Japan doesn't actually have deflation at the moment (although it may have between 1998 and 2008). In the last ten years, Japan's inflation rate has been as high as 3.7%.

Another way of saying this may be that they already did fix their problem.

Japan had deflation, primarily between 1998 and 2008 with occasional returns since. But since October of 2016, Japan's inflation has been positive every month. So right now, they have no slack that they could fill by printing money. Some people might dispute that claim, arguing that an inflation rate of (e.g.) 2% would be better than Japan's 1%. But we can guess that the central bank of Japan is not among those people.

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    This is totally correct and a worthy observation, but just pushes the problem back a step: you've done nothing to explain why Japan put their economy through the wringer for over a decade. – Jared Smith Jun 17 at 14:44
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    @JaredSmith What "wringer"? motherjones.com/kevin-drum/2019/04/… (Note that as someone who generally rejects ideas about a central body being responsible for preventing downturns, I reject that article's reasoning that inflation is good because it allows central banks to stimulate.) In what way have the lives of Japanese people been made so terrible by deflation? – jpmc26 Jun 19 at 21:49
  • @jpmc26 I'm no expert, but my impression is that various experts thought Japan's deflationary monetary policy was bad. – Jared Smith Jun 21 at 18:50
  • @JaredSmith The only "bad" thing I can find in the article that your link references seems to be, "because there isn't enough money flowing and your economy is failing to make all the trades it could make." That doesn't sound like a "wringer." It sounds like maybe the Japanese valued something other than maximum exchanges. Maybe they favored low public debt, for instance. (I, for one, would appreciate if our government spent more responsibly and actually considered staying within its budget a higher priority.) Was there any serious economic hardship? Did people starve? Lose their homes? – jpmc26 Jun 21 at 19:19
59

This modern theory is far from commonly accepted.

One comment is that printing itself out of debt may be possible for country that is a global reserve currency, but only as long as it is a global reserve currency. This status changes over time.

If Japan were to print, investors would demand more interest for government and private debt. That's known as a spread or risk premium and it is usually applied to corporate bonds vs. government bonds, but it can also be used to analyze various government bonds. Consider the spread between Eurozone bonds, even if that is not quite the same because they can't just print money.

Printing money reduces faith in the currency. Some countries have enough faith in their currency that they can print a little. But no country has a sufficient "reservoir of faith" to do so indefinitely.

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    This is a mis-characterization of MMT. "Printing yourself out of debt" is not an MMT goal--rather MMT observes that national debt is a meaningless number, like computing the total number of points awarded by the NFL to teams in 2018. What matters to inflation is the real economy. The MMT position is that borrowing to fund public spending, vs. printing money to do so, is basically interchangeable (except borrowing makes a voluntary commitment to divert public resources to private hands on an ongoing basis); if the government needs to reduce money in circulation, it can just raise taxes. – Tiercelet Jun 17 at 15:59
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    @Tiercelet Correction - It needs not to raise taxes but instead actively withold money from the population. Countries spend back the money taxes generate, thus putting it back on circulation. You need to grab the money and stash it away/destroy it to actively reduce the money in circulation. – T. Sar Jun 17 at 17:06
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    @o.m. well, both. The question brought in MMT unnecessarily ("inflationary money policy" =/= MMT), but the idea of Japan "printing itself out of debt" was introduced in this answer, not in OP. MMT proponents would not advise Japan to print itself out of debt as a goal in itself (though an overall decrease in debt would happen if the country chose to stop using debt financing and also retired outstanding debt when it matured). – Tiercelet Jun 17 at 21:27
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    @Tiercelet Taxes literally put money in the hands of the govermnent. This money is going back to the market in a way or another. You can say the purpose of taxes is to "reduce demand", but once you take a look at real taxes, and what is done with the collected money, that idea falls to the ground. Taxes are government income, first and foremost. – T. Sar Jun 18 at 8:28
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    The question asserts that Japan has a deflationary economy. If you want to do a frame challenge, you should do so explicitly. Simply saying that countries are restricted in how much money they can print by the threat of inflation, when the question asserts that there is deflation, doesn't really answer the question. – Acccumulation Jun 18 at 15:28
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During and after the financial crisis a number of governments actually did so, through a programme called "Quantitative Easing". Their central banks "printed" money (actually, incremented their own balance with themselves) and then used this money to buy corporate bonds (i.e. they lent the newly created money to industry). Because the newly created money was only lent out rather than spent the government can pull it back in as the economy recovers and the money supply increases of its own accord.

This is necessary because the amount of money sloshing around the economy is several times what the government actually creates; when you put money in the bank the bank then lends that money out to someone else, who then puts it in a bank account, and so on. So each dollar created by the government actually appears in multiple places at once. When there is a liquidity crunch (like in 2008) lots of that extra money disappears, so there is less money in the economy, so what there is becomes more valuable, and you get deflation.

Hence by putting out money with strings attached so they can yank it back, the central banks can adjust the amount of liquid money in the economy and keep inflation on target. At least in theory.

3

If you owe other countries money, and then you print a bunch of money and thus devalue your currency, your creditors will be angry because you will now be paying them less than they expected.

Borrowing money always comes with risk, which is why creditors apply interest rates to their loans. The higher the risk, the higher the interest rate. If potential creditors know that you are willing to devalue your currency to help with monetary problems at home, they will view lending to you as more risky and demand a higher interest rate.

If you need to do business with other countries, and all countries do, you will need to use your currency to do so. At this point it does no good to have printed yourself out of a monetary crisis, as the the goods you're trading for are worth just as much as before your currency was worth less. You have more leeway if the business you're conducting is already in your currency (thus the US has an obvious advantage here), but that's a quick way to get countries to stop doing business in that currency.

Additionally, most economies operate under an assumption of constant economic growth, in the sense that their economy will be larger in X years than it is today. You can make more money, with some amount of risk, if you take on debt to fuel that growth - in the same way that one may take out a loan to buy a house, hoping that the house will be worth more when you aim to sell it than it is today. Governments do this by issuing bonds, allowing others to purchase government debt. The government hopes that the money they gain from selling these bonds will fuel the economy such that the money they lose paying out the bond+interest is less than the money they gained by spending money they didn't have before the bond was purchased.

Therefore, since economies need money to grow, there are three options:

  • Don't go into debt
  • Let others pay for your debt, promising to pay them back (Bonds)
  • Pay for your own debt, by printing money until there is no debt

The first option has, to say the least, fallen out of vogue. The third option makes creditors world-wide lose faith in your economy, which leads to adverse effects with trading and funding. This leaves the second option, which is how countries have been addressing this.

It's not quite this black and white of course, the Quantitative Easing program after the 09 financial crisis is a good example of, in essence, large-scale government printing of money to alleviate a crisis. There is no hard and fast rule when it comes to determining what will undermine confidence in your currency, just like attaching an interest rate to a loan, there is a risk/reward ratio for any action. Trust, however, is easy to lose and challenging to regain.

TL;DR

MMT is technically accurate in its premises, but short-sighted concerning the effects of what it proposes. Printing money to solve monetary problems only creates a host of potentially worse problems.

3

The ever-present danger in printing money is hyperinflation

In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, often the US Dollar. Prices typically remain stable in terms of other relatively stable currencies.

The oversimplified explanation is that when you print money, the supply of money goes up, while demand stays the same, which means the value of the money drops. This is not something a healthy economy does, so the economy undertaking it is typically in poor shape to start with. Since we're talking about the value of money changing, that causes prices to rise dramatically. As the buying power falls, more currency is printed to offset the decreased value, until the currency becomes virtually worthless.

Modern Monetary Theory says that a sovereign countries will never go bankrupt.

Not quite. We've got several instances of it in modern times, but the two big ones are 1930s Germany and modern day Venezuela. A sovereign nation cannot not go bankrupt (you can always print money for internal debts, even if the money is worthless), but that does not mean another sovereign nation cannot force repayment.

  • Germany

    Since reparations were required to be repaid in hard currency, not the rapidly depreciating paper mark, one strategy that Germany used was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations, greatly exacerbating the inflation of the paper mark.

    Late in 1922, Germany failed to pay France an installment of reparations on time, and France responded in January 1923 by sending troops to occupy the Ruhr, Germany's main industrial region.

  • Venezuela (from this Washington Post story)

    In exchange for modest loans and bailouts over the past decade, Russia now owns significant parts of at least five oil fields in Venezuela, which holds the world’s largest reserves, along with 30 years’ worth of future output from two Caribbean natural-gas fields.

    Venezuela also has signed over 49.9 percent of Citgo, its wholly owned company in the United States — including three Gulf Coast refineries and a countrywide web of pipelines — as collateral to Russia’s state-owned Rosneft oil behemoth for a reported $1.5 billion in desperately needed cash.

Printing money on a large scale depresses the economy. That's why healthy governments avoid it.

  • FWIW, there are many, many more instances of hyperinflation in modern times in Latin America. A 1998 article notes "During the 1980s and early 1990s most of Latin America's economies were plagued by hyperinflation. In 1990 the region's average inflation rate hit a peak of 438%. Since then, however, central banks have tightened the monetary reins. The IMF forecasts that the region's inflation rate will drop into single figures next year for the first time since 1960." economist.com/emerging-market-indicators/1998/11/05/… – ohwilleke Jun 18 at 22:54
  • Oh there's plenty of examples, it's just one is current, and the other lead to World War II. – Machavity Jun 18 at 22:55
12

This isn't quite an accurate summary of MMT, which isn't really relevant to the question either. Let's review a couple things.

Inflation

Inflation occurs when the money supply grows more rapidly than the value of the goods and services in the real economy, shifting the balance of economic/financial power from net savers (generally people and corporations who were well-off to start with) to net borrowers--those who didn't have the money to pay cash up front to begin with--which in modern society includes the vast majority of young people (due to educational debt), aspiring homeowners, etc.

Controlled inflation (provided there is sufficient political power in the hands of workers and seniors on fixed incomes to demand cost of living increases) is usually healthy for an economy, because it disincentivizes hoarding. Money that will be worth less in the future is better off spent on stuff (demand for which drives increased output) or invested in productive capacity that generates a return (to meet that demand). Since you can't just sit on your money and watch it be worth more, you have to put the money to work; and since loans will be paid back with cheaper future-money, the risk of borrowing for a speculative enterprise is somewhat reduced. (Of course, lenders raise rates to compensate; there is no free lunch here. But on the whole, inflationary policy leads to looser and cheaper lending.)

On the other hand, without inflation, savers have no incentive to invest in increased productive capacity--lower inflation means less demand means less market for the goods produced, anyway! If your money will be worth more in the future just from sitting on it, you either sit on it, or invest in very stable investments with predictable returns (such as prime land ownership, which is unlikely to lose value, and which is especially attractive if there are fixed rents, since a deflationary environment means the monthly take will just be worth more and more). Deflationary environments also tend to lead to the concentration of existing productive resources (such as, again, prime land) in the hands of the wealthiest parts of society, since more marginal owners of productive resources are often forced by their increasing debt service obligations to sell at unfavorable terms.

Healthy inflation is distinct from runaway inflation or "hyperinflation"; but while this is much talked-about, it's extremely rare. All instances that I'm aware of--1930s Germany, modern Venezuela, Zimbabwe, etc--are the result of either a sustained shock to a country's real productive capacity (Zimbabwe), or the value of that output (Venezuela, Chile briefly), or the result of having excessive debts denominated in foreign currencies which cannot be acquired by the State due to balance-of-trade issues (Weimar Germany), or some combination of those. Hyperinflation is not the result of policy decisions.

MMT

Promoting inflation is not inherently related to MMT, nor is it an MMT policy goal per se. MMT is a description of how the economy actually operates. (Your linked Wikipedia article is good; you might see also here.

Specifically: governments create money by spending and destroy money through taxes (which also have the effect of creating demand for the money in the first place--everybody wants [dollars, euros, dinars...] because they know [the USA, the European governments, the various Ottoman successor states...] will be demanding them in taxes, which means a lot of other people will want to get their hands on them). To ensure price stability, the governments need to make sure this system creates money at the same rate as the economy creates goods and services. If too much money has been created and prices are rising, then taxation will bleed that excess money from the system. Bond issuance can serve that purpose as well--though because bonds pay interest, they are inherently inflationary, assuming that more money will exist in the future to pay them back.

In any event, neither taxes nor bonds can fund government spending. The US Government is the only legitimate source of dollars. It would be impossible for the government to demand dollars in taxes or borrow them with bonds, without them having been given to the people in the first place--usually in exchange for goods and services. Doing it the other way around would require universal counterfeiting!

Within this framework, MMT says that if maximizing economic output is an accepted goal, then it is desirable to fund investment into fully utilizing and expanding the productive capacity of the country, and this can be achieved by a fiscal policy of government spending to utilize slack resources that were otherwise not being used. The prototypical example is a jobs guarantee--if the economy can't figure out how to use unemployed workers, the government can be an employer of last resort, hiring them to do something or another that has some social benefit.

Again, I want to stress that MMT is not a set of policy prescriptions or economic goals. It's a description of how public finance actually works, and a set of economic and fiscal recommendations conditionally put forward based on state policy goals. Those recommendations are not ends in themselves, but are in service to political goals set by the political process (contrasting with, say, favoring deflation is pretty much baked into hard-money metals-standard economics).

So let's leave MMT out of the rest of this.

Japan & the Deflationary '90s

This gets to the point: the question of running inflationary monetary policy is one of political goals and political decisions. By now, Japan no longer has a deflation problem. They do have positive inflation rates--could be higher, but reasonable. The issue was more in the 90s to early 2010s. There are two components of this.

First is the larger global context. In the 1990s, the massive revolution in personal computer technology led to a sustained investment boom across the industrialized world. Those investments really were investments--they increased per-worker output in nearly every industry they touched. This was happening just as a wave of "Third-Way" politicians were also gaining prominence--people like Bill Clinton in the US and Tony Blair in the UK, who wanted to stake out a position of being pro-business but socially liberal. They took advantage of the computerization boom to draw down support for public spending--which, after all (or so the thinking went), wasn't needed; everybody was flush!--and use the dividends to continue reducing taxes and reducing regulation while also paying down government debt. This was an inherently deflationary goal, but it was a widespread one at the time. That's the global context for Japan's deflationary decades.

In the more Japanese context, the 90s and early 2000s were coming off a sustained economic boom from the 1970s-1980s. The investment boom ongoing in the US and Europe had hit Japan a decade or two earlier. A tremendous amount of investment to rebuild the infrastructure destroyed in WWII--much of it coming from outright gifted foreign aid--had led to the Japanese Economic Miracle, which was still paying huge dividends through the 1980s. However, towards the end of that period, most of the sustained growth was starting to die out: the obvious avenues for infrastructural improvements and productive investment had been pursued already. By the late 1980s, Japanese companies--which had always been (and remain) very well integrated with the government, even in the immediate pre-war period--had a ton of cash and no real good ideas for how to use it usefully. This was the period in which Western commentators were terrified of Japanese money, as Japanese businesses, for want of a better idea, bought American companies and American real estate (Pebble Beach, for instance). That's one of two ways accumulated money can go--it can either pursue productive investment, or buy scarce goods and live off rent.

Well, the result of all that success was a bubble, and the bubble popped spectacularly in 1989. The major corporations--all tightly integrated with each other, with the Japanese government, and with the banking industry--suddenly had deeply-underwater assets, many held overseas. The government did actually shift policy gears to try to keep them afloat--there were repeated bailouts of Japanese banks, for instance, and a concerted effort to lower the value of the yen relative to other currencies in order to stimulate exports. Unfortunately, the popular reaction to the bust was to become very conservative about spending money. The public demand switched from consumption to reserves--savings--which still had no particularly useful investment outlet. Now you have a vicious cycle where the common people all try to save. If you raise inflation too much, you'll only drive people to save harder, tamping down the emerging inflationary trends. Japan would have been inflating away the yen-denominated deposits of its citizens and assets of its banks, while the banks' attached companies kept paying for foreign investments made in other currencies. As a result, the government and Bank of Japan took a cautious policy approach that lasted for nearly twenty years. Couple that with the fact that the Rest of the World was pursuing a deflationary, debt-paydown policy at the same time--meaning Japan could not benefit from the extra demand created by government spending overseas--and they were, frankly, stuck, without the political will to increase spending in productive ways, nor to produce enough inflation to actually restart the economy.

  • "Inflation occurs when the money supply grows more rapidly than the value of the goods and services in the real economy, shifting the balance of economic/financial power from wealthy savers to less-wealthy borrowers." Inflation doesn't have such a clear rich/poor divide. It also helps keep wages low as employees have to negotiate for cost of living increases just to stay even, this hurts the working poor and middle class the most. – lazarusL Jun 18 at 12:33
  • "Without inflation, the best move for the wealthy is to use money to acquire inelastic resources (like land), and then extract rent from the use of them, which creates a permanent drag on the consumption of everyone else." Why is that the case? Land is a great asset in an inflationary environment as it increases in value with inflation. – lazarusL Jun 18 at 12:36
  • @lazarusL thanks, good questions. I've edited to clarify and respond to your points. – Tiercelet Jun 18 at 21:40
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    @lazarusL Even worse; the argument assumes that poor people are always debtors and rich people are always creditors. The problem is, one of the main ways you can provide security to yourself (and your family) is by savings and investment - which is exactly what inflation discourages you from. So not only are you poorer every year while your real wages and savings deteriorate, you're also prevented from accumulating wealth and encouraged to live in debt. All the while the numbers go up, so many people don't even realize there's a problem as they get even poorer. – Luaan Jun 19 at 8:05
  • @Luaan I do not assume poor people are debtors, but that debtors are usually poor, and creditors rich--private parties cannot lend what they don't have; is this really controversial?\\Inflation may discourage investment some, but not enough for people to stop doing it; it simply encourages investment that yields a return, vs hoarding money unproductively and waiting for it to be worth more. With the choice of having $1mil in the bank (or the stock market!) and having to service a $1mil loan, I'd absolutely take the former, to heck with inflation--it's better to have money than owe it. – Tiercelet Jun 19 at 22:26
2

Japan is a special case. Largely because it doesn't have any real military.

By not deflating its currency, Japan allows other countries, and most notably the US to exercise a so-called "carry trade." The US deflates its currency while running trade deficits. This is a policy of a "weak dollar". The US issues long-term bonds, which are repaid with dollars of lower value in the future. The countries which sell to the US, end up buying a certain amount of these bonds and accepting payments on them, in the future, with lower-value dollars. By not doing the same thing, Japan effectively allows the US to trade with Japan at a discount.

This isn't done for free though. Japan enjoys a full security guarantee from the US. Japan doesn't have a standing military despite its proximity to a number of nations hostile to it. These nations were even more hostile during the Cold War. So the security guarantee started to play an important role back then. While it can be argued, that it started with the US being an occupational power in Japan and was a result of the US not wanting Japan to re-militarize, that's clearly not the case today.

Today this arrangement is convenient for both sides. Japanese society does not have to participate in the arms race of modern warfare. It does not have to spend the human capital of having its young men spend a time of their lives in the military. And the US gets a discounted trade arrangement with Japan in exchange for spending part of its human capital and its economy on maintaining military readiness which can defend both the US and (among others) Japan against any future aggression.

Edit: based on a (relatively) new developments pointed out in the comments, this may need a bit nuance.

Newer Developments

Japan started strengthening its defense forces in the mid 90s. Starting in 1995, it began a program of re-building its own air force. These planes started entering service sometime between 2010 and 2017. According to Wikipedia, the JASDF had an estimated 50,324 personnel as of 2013, and as of 2013 operated 777 aircraft, approximately 373 of them fighter aircraft.

Around the same time as the reliance on the US protection guarantees became somewhat less important (despite the fact that Japan is still under the US nuclear umbrella), "Abenomics" (named after PM Abe) became a new political trend in Japan. It pursues the policy of somewhat softer Yen (which really means printing more money).

In 2019,

Japan's GDP stands at $5.2T

US' GDP stands at $20.5T

In 2016,

US' military expenses were $611B

Japan's military expenses were $46B

In 2017

Japan spent $5.5B on the US base in Japan. It's not clear to me (from a cursory glance) if that number is a part of Japan's (~$46B) defense budget.

Some Ratios

US GDP / Japan's GDP ~ 4.1

US military budget / Japan's military Budget ~ 13 (assuming the base expenses are not included in the $46B)

US military budget / Japan's military Budget ~ 15 (assuming the base expenses are included in the $46B)

Which shows that the cost of the military is roughly 3-4 times greater to the US than it is to Japan.

Assuming that these ratios remain roughly the same for these years (2016-2019), these ratios demonstrate why the security guarantee is still (largely) in place. It is no longer the main day-to-day form of defense, but rather an insurance policy against an all-out war. So it makes sense that some of the "discounting" of the trade due to the currency imbalance would be wound down, but only somewhat.

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    Nitpick, Japan does have a reasonably well-funded and powerful military, and even though its only allowed to be "for self defense", this changed in a controversial 2015 vote allowing Japan to militarily assist allies overseas, primarily in response to the prevalence at the time of ISIS – Gramatik Jun 18 at 15:19
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    @Gramatic I see my view is dated by about 10 years. The wikipedia article says that 96 fighter jets were produced by 2008. Maybe worthwhile to think whether Abenomics (which was seen as a reversal of a strong Yen policy) was part of a decoupling of this arrangement. – grovkin Jun 18 at 19:50
0

You can only print yourself out of debt, if all your debt is in your own currency. If your debt is, say, in USD and you can't print USD, then printing more of your own money will not help much, as the USD/[your currency] rate will skyrocket. Japan is not in a situation where it would need to print itself out of debt though.

More to the point, a country weakening their own currency does a favour to domestic exporters who sell goods in USD but pay salaries in Yen. Of course, this advantage comes at the expense of general population who earns Yen yet has to spend (the Yen equivalent of) USD on exported goods, travelling abroad, etc. That's why it's hard for the government to push for a weak currency policy in a democratic country: a party advocating or implementing such a policy will simply lose the next elections, unless they can convince people this is necessary.

  • But in the case of Japan most of the national debt is indeed held in that currency. – Trilarion Jun 25 at 19:47
  • @Trilarion What I meant to say is that Japan is far from bankruptcy so it doesn't need to dilute its debt by hyperinflation, not that it can't do so. – Dmitry Grigoryev Jun 26 at 5:54
-4

Currency manipulation and Inflation.

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    This is a really short answer, could you expand on it? – F1Krazy Jun 19 at 15:36
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    I'm on the mobile app for this website and it would be very painful to go into deeper details of how my answer helps answers the question. I will come back to my answer on desktop and add missing info. During this time you can take my answer and expand it as your own answer as inspirational – jehovahsays Jun 19 at 15:40

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