March 18, 2011
Floyd Norris has a good piece about how overconfidence in the ability to deal with risks led to both the financial crisis and the crisis with Japan’s nuclear power plant. The piece makes the essential point that seems to have escaped great economic thinkers here, that there is no way Japan can default on its debt.
Even though Japan’s debt is more than twice its GDP (about three times the size of the U.S. debt), there is no risk of default since its debt is in its own currency. In this way Japan is like the United States and the United Kingdom, and unlike Greece and Ireland.
In the worst case scenario, Japan or the United States would print lots of money and see inflation. Given that Japan has been flirting with deflation for almost two decades this doesn’t seem like a plausible scenario, but in any case it is not the story of Greece being held at the mercy of the bond vigilantes who will not buy its debt.
The people who hold up Greece’s crisis as a possible scenario for Japan and the United States deserve our contempt if they are deliberately misleading their audience or our empathy if their mistake stems from their problems with understanding basic economics. However their arguments do not deserve serious consideration by people involved in policy debates.
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