After the World War I, hyperinflation in Germany set the stage for World War II. Reparations to the victors of World War I required Germany to send 10 percent of its economic output out of the country. It was impossible to do that and rebuild Germany without printing more money, which led to inflation and eventually hyperinflation.
Developed economies are voluntarily accepting large amounts of nonproductive spending with interest payments. Surprisingly, deflationary Japan may be closer to hyperinflation than any other developed economy is, especially with the government targeting 2 percent inflation.
With no inflation in Japan, interest rates have been low, which has allowed the government to borrow enormous amounts of money. This year, Japan’s government will spend about $1 trillion and faces a budget deficit of more than $200 billion. This gap will be met with borrowing, just as it is in the United States.
Even at low rates, interest payments in Japan equal about 25 percent of the government’s spending, according to The Japan Times. This expense is now about 5 percent of the nation’s gross domestic product (GDP). It seems likely that 10 percent would trigger a crisis, as it has in the past.
If interest rates rise 2 percent, in line with the inflation target the Japanese government has established, the interest payments would require the government to allocate a percentage of GDP to interest similar to the burden the Weimar Republic in Germany after World War I faced.
For now, the U.S. government is spending about 1.5 percent of GDP on interest expenses and is at least several years away from a crisis by this measure. By watching Japan, we can see what will happen when interest payments in the United States become a potential source of hyperinflation. Hopefully the world can avoid the large scale problems we saw last time countries faced large external payments.
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