To: Henry Volquardsen who wrote (5363 ) 1/8/2002 8:57:16 PM From: John Pitera Read Replies (3) | Respond to Good Article Henry, I very much agree with many of the authors points. I definitely think that a reflation of an ailing economy is the better option, even though there is no painfree way out of some economic situations. forseer of the future cap. -g-Japan appears poised to follow the passive route of outright default rather than the more active route of reflation. Reflation, even if it leads beyond price stability to some inflation, is a better strategy than default because moving from deflation to rising prices taxes evenly the holders of government debt as rising prices push up interest rates and push down the value of the debt. The default approach toward which Japan is heading will be more abrupt, arbitrary, and disruptive to Japanese and global markets. Beyond financial market turmoil, abrupt default entails a significant additional risk that jeopardizes further employment and growth in Japan and worldwide. Japan's deflation and debt crisis now constitute systemic risk to the global economy. Japan's Debt Dynamics nominal GDP is falling at an annual rate of about 5 percent . Stabilizing the Japanese government's debt-to-GDP ratio would require that nominal GDP rises at a rate equal to the interest rate on its outstanding debt, or about 1 percent. The fact that nominal GDP is falling at a 5 percent rate means that Japan's debt-to-GDP ratio will rise at least 6 percent a year, even without a sudden need to recapitalize insolvent banks. That debt ratio is now 130 percent, and at 6 percent a year it will double in just over a decade . That fact will itself accelerate the collapse of Japanese government bonds unless deflation is reversed.
