Free Money can be Costly

by Laura Ehrenberg-Chesler on August 16, 2012

in Debt,deficit spending,politics

In our 8/14 research from Ed Yardeni, he makes a compelling case for why “free money”, read 0% interest rates, can be very costly for the countries which maintain this policy over an extended period of time.

Japan is the poster child for where geriatric societies with generous social welfare programs are headed. There’s plenty of free money in Japan with the 10-year government bond yield under 1% (Fig. 7). The government has been borrowing lots of it. The national government debt is at a record 200% of nominal GDP (Fig. 8).

An excellent on this subject in the 8/11 WSJ reported that “Japan, burdened with the highest debt load of any developed nation, on Friday took its biggest step in years to contain the problem, approving a plan to double the national sales tax by 2015 from to 10% from 5%.” Nevertheless, the legislation won’t fix the fiscal problem, as the new revenues will be more than offset by projected outlays. Here’s more from the article:

“The burden of escalating payments for the elderly is falling on an increasingly pinched younger generation of Japanese. While spending on elderly benefits–and the cost of serving debts to fund them–rises steadily, government expenditures on education and science have fallen.

“That is creating irritation among many in their 20s and 30s who have had to make do with low-paying temporary jobs, as companies have responded to two decades of stagnation by reducing the number of young people they hire and cutting pay and benefits.”

We agree with Mr. Yardeni that if we continue to borrow as if government money were free, our children and grandchildren will pay a very high price.




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