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Karim writes:

There is a piece typifying the logic behind the buying of high strike payers in Japan (Japanese govt debt ‘Ponzi Scheme’).

Also heard GS put a similar piece out today but have not seen.

Makes no sense but seems to be gathering steam.

Right, the sustainability issue with floating FX is the issue of the sustainability of low inflation.

The ‘risk’ is that ‘excessive’ deficit spending adds inflationary demand, weakens the currency, etc. however the article seems to reject that argument as it suggests quantitative easing will continue due to weakness of demand, etc.

Nor are the ‘sustainability remedies’ applicable to floating FX. Any ‘stress’ is taken out by the exchange rate, and the way things generally work ‘excessive’ deficits increase nominal gdp/inflation and tend to stabilize debt/gdp ratios when that point of ‘excessiveness’ is reached.

As always, it’s about inflation, not solvency.
Govt spending is in no case inherently revenue constrained.
Any such constraints are necessarily self imposed.

This is all not to say this type of rhetoric can not trigger portfolio shifts and trading plays that can substantially move markets while they last.

In fact, that’s often what bubbles are.

Decline in Government Debt Sustainability
An extended period of heavy fiscal deficits will reduce the sustainability of government debt, which is already in the danger zone. The general-government debt was equivalent to 196% of GDP at the end of FY2008 (156% for long-term debt) and we project a rise to 222% (181%) for end-FY2010. This escalation is in part the consequence of low nominal GDP growth — we forecast an average -1.4% for 2009-10—and the average JGB yield is almost continuously above the nominal growth rate. The sustainability remedies are a deep cut in the debt ratio through sales and liquidation of government assets, combined with a demographic boost for the potential growth rate from measures to boost the birthrate and encourage immigration.