Thomas Klitgaard and Harry Wheeler write,
The discussion above offers up a perspective on what is meant by “monetizing debt.” This term refers to a central bank buying government bonds and promising to keep them on its balance sheet with the result that the increase in reserves in the banking system translates into higher prices. This outcome, though, requires that the central bank not pay the appropriate interest rates on reserves. If it does, then an asset purchase program is just an effort that shortens the maturity of public-sector debt and will likely have few or no implications for future inflation.
Pointer from Mark Thoma.
Another implication is that it makes the interest cost of the government more sensitive to movements in short-term interest rates. So a sudden loss of confidence in the government by investors which raises interest rates would become self-reinforcing. And if the only way out of such a debt crisis is to print money, then there are implications for future inflation.
For another perspective: http://www.city-journal.org/html/end-fiscal-dominance-14582.html
Every time a libertarian quotes the doom double panic of high government debt and falling working age demographics in the US, I always state that Japan is 25 years ahead of the US and will reach this panic much earlier than US. At this point total GDP can not grow as the falling population is larger than any productivity gains on a per worker basis. (It should be note that the great inflation threat has never occurred in Japan with low rates for 25 years.)
So as a libertarian economist, what in the hell is going to happen to Japan the next 20 years? And are they the canary in the coalmine for modern welfare states?
Japan isn’t in trouble already?
I think so but the market is not acting like it. I don’t see a huge outflow of capital there and Abeconomics is reasonably popular. And they are picking stupid diplomatic battles with China on empty islands. Frankly, the nation is acting like they don’t need major changes and looking for minor shifts.
As an outsider it seems like the nation is going down the wrong path on paper. My fascination with the modern Japan, is how the most competitive nation in the 1980s is turned in a nation of Grandpa Simpsons. And I do wonder if all developed nations go down their own version of modern Japan. (I still don’t think China has a huge crash but they are fast-forwarding the Japanese Post War model.)
Another implication is the Fed currently owns 25% of the publicly held debt. Now that really is owing it to yourself.