So, I recently read this in a Maudlin economic newsletter, concerning the BOJ and Abenomics:
"It costs the Japanese government 24% of its revenues just to pay the interest on its debt at current rates. According to my friend Grant Williams (author of Things That Make You Go Hmmm...), if rates rise to just 2.2%, then it will take 80% of revenues to pay the interest. Even at the low current rates, the explosion in Japanese debt has meant that interest rate expense has risen from Y7 trillion to over Y10 trillion. Note in the chart below (also from Kyle) that the Japanese government is now issuing more in bonds than it pays in interest. Somewhere, Charles Ponzi is smiling."
Was discussing with coworker and we became stunted by the exact dynamics behind the rise in the cost of debt for Japan (and all other central banks with their respective currencies).
Obviously, at the margin, it becomes more expensive to borrow. If you're buying govt bonds at 1%, and the yields go to 2%, your interest expenses increase but as the JGBs are fixed rates, the interest on the previously accumulated Y7trn in govt bonds doesn't become more expensive.... right?
Is this increase in costs associated with buying new bonds at the margin, and the maturity transformation occuring with current short term holdings? Maybe someone more familiar with debt capital markets could lend an explanation here....
Haven't read the whole article (feel free to post it and I will!) but from reading "that the Japanese government is now issuing more in bonds than it pays in interest.." it sounds like they are constantly rolling over debt. Have 1B in debt service due May 1? Let's issue 1B+ of bonds to pay it. Because of the constant issuing their future cost on DS is going up as rates do.
"It costs the Japanese government 24% of its revenues just to pay the interest on its debt at current rates. According to my friend Grant Williams (author of Things That Make You Go Hmmm...), if rates rise to just 2.2%, then it will take 80% of revenues to pay the interest." This may be an exaggeration due to the fact they, as you noted, will be paying the original rate on old bonds. He may just be saying if you were to substitute in 2.2% to their current bonds DS then it would go from 24% to 80%.. Again, I'd have to see the whole article but I am guessing that is what they are getting at here.
This is why it really helps when the Fed buys bonds and remits the interest payments back to the treasury. You avoid all of this silly debt servicing stuff. This is what happens when you run deficits over long periods of time. Eventually, that debt needs to be either rolled over or paid off. It is easier to simply issue more debt, and probably the only choice since you are running a deficit, so you issue more and then eat the higher costs. This is the cycle that the EU avoided via the ESFS or whatever it was called that they put on. They lend the money to banks who can then buy their own sovereign debt and pledge it as collateral. Woo!
I mean you can see the issue here. As you issue more and more debt to cover the rising debt service costs, which in turn widen your deficit and force you to issue more debt thus raising your risk factor and thus your interest rate it quickly becomes unsustainable. That is what they are getting at really, at least from what you posted. I could have also just said that Cruncharoo got it right and called it a day. haha.
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