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Coronavirus Japanification — When a crisis makes ”politically impossible” “politically inevitable”:

The historical crisis, COVID-19 pandemic, might have already staged the unexpected debut of MMT as a contingency measure in the main stream of the world economy.

Michio Suginoo
18 min readApr 4, 2020

The crisis of COVID-19 pandemic, shutting down the market-oriented economy, is rapidly transforming our social, political, and economic landscape. It is now making ‘politically impossible’ into ‘political inevitable’ in many spheres of our life. The pandemic has forced many governments to face with the dilemma between ‘medical catastrophe’ and ‘economic starvation’. Now, what has become ‘politically inevitable’ and imminent is a massive Keynesian fiscal program that would provide the vulnerable population with financial resources so that they can survive during the lockdown of the economy. Moreover, in some countries facing fiscal constraints, an equally massive scale of ‘monetization of fiscal deficit’ is ‘inevitable’ in order to fund such program. Simply put, the unprecedented pandemic crisis is staging a debut of ‘Modern Money Theory’ as a crisis management tool. As a matter of fact, this is a method that Japan has been taking for many years in a totally different vernacular context. In this sense, the pandemic is forcing the world to gravitate toward ‘Japanification’.

A Crisis makes ‘Politically Impossible’ to ‘Politically Inevitable’.

Naomi Klein cited the following statement of Milton Friedman, the prominent American economist of the 20th century, in her recent video clip, “Coronavirus Capitalism — and how to beat it” (2020).

“Only a crisis — actual or perceived — produces real changes. When that crisis occurs the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.” (Friedman, 2002, p. xiv)

Her video portrays the coronavirus pandemic crisis as a potential for a positive social and political evolution. Her intention was to shed a bright light at the end of this darkness caused by the pandemic crisis. Her argument is based on historical analogy that it was the crisis of the Great Depression which brought the New Deal Program and other then-new social institutions that protected the vulnerable population from the depression. In her view, Coronavirus (COVID-19), analogous to the Great Depression, is a crisis that is about to transform the political environment to incorporate ‘New Green Deal’ program — which, in her view, would address not only the environmental issues, but also a range of rapidly deteriorating social inequality in the United States — into being.

While I admire Klein’s ambitious hypothesis which extends into a wide range of issues, in this article I would like to focus on the economic paradigm of COVID-19 crisis.

Wide range of responses among political leaders across the globe

Against the new strain of the coronavirus, we have neither vaccine nor biological immune system built-in in our body as of today. A safe and viable vaccine is expected at least one year away, according to some medical authorities (Al Jazeera, 2020). Until then, we have no viable cure for COVID-19; what we can do at this stage is only the alleviation of its penetration into the population. In this context, an increasing number of countries are conducting collective social distancing, mandatory quarantine.

As the coronavirus spread through the world, it separated the political leaders into a wide spectrum of different responses, forcing them to face the dilemma between two extreme choices: the economic growth or the health of lives. In order to put it into a perspective, let’s focus on the two extreme ends of the spectrum: Argentina and Brazil — they are next to each other geographically and share a massive border. And the Presidents of these countries took diametrically opposite responses.

From the early stage of the local COIVD-19 development, the Argentinean president, Alberto Fernandez, has prioritized the health of his people over the temporal economic disturbance and decisively conducted confinement measures, despite the economic hardship in the middle of Argentinean debt negotiation with its creditors. His following remarks clarify his commitment to alleviate COVID-19 incidences: “Faced with the dilemma of preserving the economy or life, we do not hesitate: we choose life,” (Jourdan & Garrison, 2020); “a falling economy can always get back up, but a life lost is never coming back” (TIMES/TELAM, 2020). President Fernandez demonstrated his commitment by managing to receive a relief loan of USD 300 million from the World Bank. (TIMES/PERFIL, 2020)

On the other hand, the President of its neighbour, Brazil, demonstrated a totally opposite attitude to prioritize the economy over the health of the people. The president Jair Bolsonaro, promoting his media campaign, “Brazil cannot stop”, made a remark: “We have to work. There are deaths, but that is up to God, we cannot stop” and “If we do not die of the illness, we will die of hunger” and called for the end of the current quarantine to return to the business as usual as soon as possible (Boadle, Paraguassu, & Simoes, 2020). Finally, that prompted the attorney general’s office to involve the federal court to intervene the President’s campaign. As result, on the 28th of March, a federal court in Rio de Janeiro “banned the government from disseminating propaganda against confinement measures aimed at controlling the coronavirus pandemic.” (TIMES/AFP, 2020)

Dilemma between “medical catastrophe” and “economic starvation”

The contrasting responses from these two leaders raise a fundamental question: what is the role of the government in this crisis — to save the lives of people or to save the economy? When we align the situation on the framework of ‘what is “the end” and what are “the means” of the government’, without doubt, the lives of people should be “the end” and the economy should be one of “the means”. At the same time, if the governments across the world abandon the economy, people would lose income to survive: it could lead to “economic starvation”. If they try to continue the ordinary market-oriented economy, COVID-19 will spread like a rapid wild fire. It not only exacerbates “medical catastrophe”, but also, as a consequence, the economy will collapse: the double whammy of “medical catastrophe” and “economic starvation”. This has created a dilemma in the rapidly unfolding unprecedented medical crisis that demands an imminent action.

Are we the prisoners of this dilemma? Or, can we liberate ourselves from the trap of the dilemma — to protect people from both “economic starvation” and “medical catastrophe”? In other words, is there any economic measure to achieve “the end” without trapping ourselves in the limit of the means: can the government shut down the market-oriented economy and save the lives of people at the same time in this crisis?

Keynesian Economics: When “politically impossible” can become “politically inevitable”

Coronavirus transformed the paradigm of the globalized economy in a rapid speed. It shut down the market-oriented economy in many COVID19-infected countries. As the virus spread in an exponential growth, an increasing number of governments are succumbed to order mandatory quarantine to conduct an effective ‘social distancing’ to flatten the curve of the growth of COVID19 infection. As result, many businesses closed down and many people are now out of job, stripped of their income stream.

Repeatedly, as of the time of writing, the market-oriented economy is not functioning in the way we used to know. The governments should abandon the ordinary economic principle and formulate a “crisis management” framework. Now, what has become ‘politically inevitable’ is the necessity of an aggressive Keynesian fiscal program to financially protect people from the unexpected sudden freeze of income stream.

The question is where the government could get the financial resource from to fund the Keynesian policy. Some OECD countries are already burdened with high level of debt. Chart 1 compares the government debt level across OECD nations (plus Argentina for the reference purpose).

Where to get the funding from?

Modern Money Theory (MMT)

Now, from those “ideas lying around”, shines a possible solution with some conditions attached to it: to monetize the fiscal deficit, or Modern Money Theory’s instrument. What is Modern Money Theory (MMT)? Basically, MMT prescribes “fiscal deficit monetization” or “the central government’s debt monetization” to fund Keynesian fiscal programs: in other words, the doctrine suggests that the central bank uses computer to mark up money (or print money) to fund the central government’s fiscal deficit. In such a transaction, there is no tax payers’ money involved. Since the creditor is the central bank and the money is just marked up via computer, the government does not need to pay back the debt. Cut a long story short, in principle, the government can implement it without tax revenue. This is well explained by Professor Stephanie Kelton in her recent article at the New York Times (Kelton, 2020)

What an easy solution! Has any country done this? If any, did that country get into trouble?

As a matter of fact, Japan has been doing this for some time; and today it is becoming business as usual. In 2018, I wrote an article about it at Medium (Suginoo, 2018). Here, I will make a quick overview.

Japan’s MMT as historical accident

According to Chart 1 above, as of 2018, Japan’s government debt level is around 230% of GDP, the world highest record today. If we translate this into the budgetary perspective, 1% rise in interest rate would wipe out about 20% of the annual tax revenue. (Suginoo, 2018)

Chart 2 shows the historical passage of Japan’s sovereign debt monetization. According to the chart, the monetized portion of Japan’s government debt is estimated about 39% in 2018. In a way, when we net out the monetized portion — which the government has no repayment obligation — Japan’s non-monetized government debt — which represents the amount of the future repayment obligation — would be approximately equivalent to 138% of GDP. From 230% of GDP to 138% of GDP: What a reduction in the real debt repayment burden!

Japanification: Fiscal deficit monetization — conditions apply

How swell? Can any country follow Japan’s debt magic? No: it is a special tool with some conditions applied. Here is the list of conditions:

Currency Issuing Nation: In order to be able to monetize its fiscal deficit at own discretion, the government has to be the issuer of the currency.

Absence of Inflation Risk: The monetization of the fiscal deficit could be inflationary.

Resilience to Currency Depreciation: Fiscal deficit monetization might destabilize the currency exchange rate.

Now, let’s look at these factors item by item.

The first condition: in order to be able to monetize its fiscal deficit at own discretion, the government has to be the issuer of the currency:

This is almost a necessary condition. Unfortunately, any Eurozone state that uses Euro for its currency cannot conduct fiscal deficit monetization at one’s discretion: simply because it relies on the supra-national institution, ECB, for the issuance of the currency.

But this first condition is no more than a “necessary condition”. It just tells us that if a country does not satisfy this particular condition, it cannot conduct “fiscal deficit monetization” at one’s own discretion. In other words, it does not necessarily mean, any currency-issuer country can monetize its fiscal deficit without risk. Why?

It is because “fiscal deficit monetization” could incur other risks — inflation risk and currency risk. Now, in order to clear these risks arising from “fiscal deficit monetization”, the country has to satisfy the following two other conditions as “sufficient conditions”.

The second condition, the absence of inflation risk:

The monetization of the fiscal deficit could cause inflation. So, an inflationary condition is unfavourable for “fiscal deficit monetization”, simply because it would add fuel into the existing fire (inflation)..

  • For example, a country with an economy operating with full capacity utilization rate would be on the verge of undesirable level of inflation.
  • As another example, supply disruption, causing supply shortage, could also trigger inflation.

In this respect, Japan’s debt monetization case happened to be feasible — whether it is effective/efficient for the economy or not is another question — because Japan is experiencing a prolonged period of low inflation or deflationary environment, if not deflation per se: despite a massive monetary easing, Japan failed to normalize the level of inflation since the vernacular financial crisis in the 90s. One of the major reasons for that today is its aging population: it is structural, thus, secular (long-term). Should inflation emerge for whatever reason in the future, its monetized fiscal deficit could add fuel into the fire of inflation and destabilize the economy. Then, Japan would face the difficulty in continuing fiscal deficit monetization. Simply put, inflation would put the limit to Japan’s historical experiment of MMT. Overall, the viability of Japan’s “monetized fiscal deficit” needs to be understood in its vernacular context of structural and secular low-inflationary environment, strictly speaking.

The current COVID-19 situation is tricky in the context of inflation, since it created supply disruption (inflationary) as well as demand destruction (deflationary) — in addition, it accompanied with the oil producing oligarchies’ power struggle for the market share, which crashed the crude oil price. How would the combination of these confronting developments play out: inflation, deflation, or stagflation? In this context, a vigilant assessment of inflation would be required for the deployment of ‘fiscal debt monetization’ this time.

In addition, its use should be limited only during the crisis period since its long-term use can create secular inflation environment. As a matter of fact, Nouriel Roubini, who has been prescribing ‘fiscal deficit monetization’ as a policy response to the COVID-19 pandemic crisis for some time, stresses that it needs to be terminated once we are out of the woods of the crisis. (Roubini, 2020)

The third condition, the resilience to currency risk:

Third, currency risk. Fiscal deficit monetization might induce speculators to dump the country’s currency. If the domestic economy is not resilient enough to currency risk, it might destabilize the domestic economy.

As an example, a country, when a significant portion of its sovereign debt is denominated in foreign-currencies, might not be resilient to currency depreciation. When the domestic currency depreciates substantially against that foreign currencies of the denomination of its debt, the value of the debt in terms of the local currency would explode. That would further deteriorate the currency depreciation. Then, it could lead to a vicious cycle. In this way, the monetized fiscal deficit expansion could trigger the local currency’s depreciation and destabilize the economy. This could be the case of Argentina. Once again let’s take a look at Chart 1: we can compare the government debt levels between Japan (in the green bar) and Argentina (in the red bar) in Chart 1. Argentina’s debt level is below100% while Japan’s case is around 230%. And an irony is that, although Japan has a higher debt-to-GDP ratio than Argentina, Japan has a better credit rating than Argentina. Japanese Government Bonds (JGB) remains the investment grade as of 2019 (Moody’s Investor Service, 2019). On the other hand, Argentina, with much lower debt level than Japan’s debt, is rated Caa2 by Moody’s. (Moody’s Investor Service, 2020) Perplexing sovereign debt to GDP ratio! Is life not fair?

Among many differences between these countries, one critical factor is the proportion of foreign-currency-denominated bonds. A material portion of Argentina’s sovereign debt is denominated in USD. That is one primary reason, if not the only one, why Argentina’s economy is sensitive to currency risk. Should Argentinean peso depreciate dramatically, the local currency value (ARS) of USD-denominated sovereign debt would implode; in addition, it would inflate the domestic prices of the export items which are priced in USD in the international markets as well as the imported products, resulting domestic inflation. (Suginoo, 2018) So, the monetized fiscal deficit could deteriorate the currency exchange rate, thus, destabilize the domestic economy of Argentina. In the absence of the resilience against currency risk, the tool would not be effective to save the economy for this particular case.

Overall, a country would need to clear at least all these three conditions in order to conduct “fiscal deficit monetization” effectively to save the domestic economy.

Prospect and opinion

COVID-19 globally forced many national governments to shut down the market-oriented economy to a great extent. As result, many people as well as many businesses lost the source of their income. Now, we need a “crisis management” economics, not an ordinary market-oriented economics. In this context, what has become inevitable is the need for a national government to provide financial support to those people and businesses who lost the source of income and protect them from both ‘medical crisis’ and ‘economic starvation’. Simply put, a massive Keynesian fiscal program has become inevitable, at least during the pandemic crisis. As an additional pain, the freeze of the economy evaporated the source of tax income for the government. Burdened with their legacy government debts, some central governments face fiscal constraints to fund Keynesian policies. In this context, historical experiment of Japan, the monetization of “fiscal deficit” — the “Modern Money Theory” tool which has been deemed as a taboo by the main stream economist — has surfaced as a possible crisis management measure. The crisis of the coronavirus pandemic, as historical accident, might be staging the debut of the MMT tool in major economies.

According to Professor Stephanie Kelton, COVID-19 pandemic already unleashed MMT: the United States is now implementing the monetization of fiscal deficit in order to fund the historical scale of Keynesian fiscal policy, the coronavirus relief package of USD 2 Trillion (Kelton, 2020). (FYI: While the relief package made it possible for the government to pursue the common good — to fund Keynesian program to save the vulnerable population — it also cast a shadow of the corrupted political reality in the Congress: the package also includes a wide range of exorbitant corporate welfare. (Stoller, 2020) )

As stated above, unfortunately, fiscal deficit monetization comes with some conditions attached to it. Thus, countries that can implement it at own discretion without material risk would be limited.

As an example, Eurozone nations are constrained with the necessary condition, which is that the national government needs to be the issuer of the currency. For them the monetization of fiscal deficit cannot be conducted at the national level. They need to get a consensus in EU Parliament. As a reminder, in Chart 1, those bar in white represent some of Eurozone states. Among those Eurozone countries with debt above 100%, we can observe two of most severely COVID-19 infected countries, Italy and Spain. In the face of this pandemic crisis, they are constrained by this condition together with their vernacular fiscal constraints and cannot conduct an ample Keynesian fiscal policy to save the lives of their nationals. These economic constraints can exacerbate a humanitarian crisis in Italy and Spain.

Nevertheless, politically, they could negotiate through European Parliament to implement the monetization. In the middle of this unprecedented crisis, they need to distinguish between what is the end and what is the means of EU. European Parliament needs to answer to a fundamental question, what is the ultimate objective of EU — ‘humanitarian pursuit’ or ‘economic pursuit’? Which is the end of EU? Under the current circumstance — in which inflation expectation is low — the monetization of fiscal deficit in collaboration with ECB would resolve the issue of economic constraints of these countries without burdening them with additional liabilities: therefore, it should be deemed as a contingency tool and as a part of the means to the end. If EU Parliament fails to allow these two countries to take such a contingency measure to fund Keynesian fiscal program under this extraordinary time, that political failure would account for ‘humanitarian disaster’: thus, it would fail its raison d’être. It could also lead to an existential crisis of EU itself. History would tell us in the future. Here is a relevant article that covers the relevant development in the Eurozone as of the time of writing. (Al Jazeera, 2020)

As another example, Argentina, constrained with USD-denominated sovereign debt, would be vulnerable to both currency and inflation risks. Argentina is the issuer of own currency. But, under normal circumstances, if it decides to conduct the monetization of fiscal deficit, Argentina would expose itself to these risks. Nevertheless, I am hoping that the context of humanitarian mission that is aimed at saving its people from the pandemic would grant Argentina a solid legitimate justification for a conditional moratorium — to freeze debt service temporarily during the pandemic crisis given the condition that Argentina commit itself to honour the debt service once the situation normalizes. I believe that the creditors should also share of the risk of “force majeure” of the debtor. Then, with such a consented moratorium, Argentina might well experiment a “tentative” monetization of fiscal deficit only during the pandemic crisis. It might involve a series of further government interventions on prices, currency exchange, and capital flow. Although all of these interventions are deemed risky for Argentina in ordinary times, the current circumstance — under which many borders are shut down to a great extent, if not completely — is globally shaping a semi-deglobalized market condition: it would leave Argentina in a “semi-autarky” state anyway. When the market-economy is not operating, the government interventions on the domestic economy together with fiscal deficit monetization might be effective in controlling inflation. As result, they could avoid a material collapse of the currency withint Argentinean currency intervention capacity. That is not to say that fiscal deficit monetization is a perfect solution; but that is to say that it would cause less damage than any other conventional measures. It might prove effective during the period of the war against our common enemy, the pandemic, in preventing the system from collapsing.

Overall, we need a contingency plan in this global pandemic crisis. We can also learn this point from the history: even the UK’s gold standard of the early 20th century had a built-in special contingency clause to allow the government to suspend the gold convertibility, which was the very cornerstone of the gold standard, during an extraordinary contingency such as wars and systemic economic crisis. This unprecedented crisis requires our governments to shift their mind-setting to the crisis management from the ordinary economic thinking. It would involve a series of experiments. MMT’s solution is not without problem. Nevertheless, it can be applied with vigilance in order to protect people from both “economic starvation” and “medical catastrophe”.

Even the gold standard of the past had a contingency clause — to allow the country to suspend its commitment to the very operating principle of the monetary regime only in crisis times. So, why don’t we have a contingency measure now to break the rules of the ordinary time and conduct ‘the monetization of fiscal deficit’ as a contingency tool during the pandemic crisis of today? Let’s do it and survive!

Michio Suginoo

Copyrights reserved by Michio Suginoo

REFERENCES

Economics
Crisis
Modern Money Theory
Political Economy
Political Philosophy

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Michio Suginoo
Michio Suginoo

Written by Michio Suginoo

100 Followers
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CFA, Data Science, Innovation, Paradigm Shift, Paradox Hunting, Teleological Pursuit, https://www.linkedin.com/in/reversalpoint/

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