It seems like I'm missing something basic. I would like to understand when the inflation happens and where it comes from. More money chasing fewer goods, sure, but if we already have too much of a money-equivalent, why aren't bondholders chasing goods with it already? And, clearly there isn't any inflation.

It seems like demand should have increased when the government sold the bonds and spent the money.

You and everybody else. Japan's current situation seems to stump most economic models.

I wonder if there's something about culture and having basic survival needs met. Most economic models assume effectively unlimited long-term demand: as productivity grows and people in existing sectors are thrown out of work, they will find new things to do, and the people who have reaped the financial rewards of productivity growth will find things that they want to spend money on, creating new jobs for the previously unemployed. What if this doesn't happen? What if instead of using money as a means to an end, people use it as the end itself, effectively treating it as a scorecard to be maximized without spending it? And what if on the other end, instead of people finding new ways to obtain money, they opt out of the economy instead, creating alternate games (literally - video games are apparently the main extra-economic outlet) to play. With basic survival needs taken care of by parents, there's no forcing function that makes them participate in the economy. You'd get a reality that looks fairly similar to our actual reality, in Japan and increasingly in other developed areas of the globe.

>What if instead of using money as a means to an end, people use it as the end itself

This line got me thinking about so many things from my own life. You opened my eyes to another view point I had missed for the past 10 years. I am truly thankful to you for posting this comment.

I would be really grateful if you can let us know your thoughts that if interest rates go to zero, would the asset prices continue to increase to infinity?

I've thought about negative interest rates specifically at length, and I can't imagine a situation where they don't lead to a chaotic breakdown in capital markets or even a currency collapse. The problem is in the compounding: normally there's a negative feedback loop against borrowing too much because you have to pay back more than you borrowed, and if you don't, you go bankrupt and can't borrow any more. With negative rates, there's a positive feedback loop: the more you borrow, the more you make in profit, so everybody is incentivized to borrow as much as they possibly can, nobody wants to pay anything back, total debt increases to infinity, and with it the amount of money in circulation and asset prices also increase to infinity. Additionally, the most profitable sector of the economy becomes borrowing money, so all productive work stops and people focus on financial gains.

This is pretty much the definition of hyperinflation, so there's a template for what happens here, but not in the developed world.

I suspect that a lot of the demand for Bitcoin is also driven by fear of this scenario. In the world above, the incentive for savers is to simply not play in the established financial world; they'll take their savings and put it in assets that are not rapidly going to zero. If only there were a transferrable currency that's deflationary by design and immune to manipulations of supply & interest rates...

> I would like to understand when the inflation happens and where it comes from. More money chasing fewer goods, sure

It comes from weakening the perceived future security of the currency, which reduces demand for it; once you monetize fiscal needs, your currency is perceived as one more at risk of being devalued to monetize fiscal needs, which itself devalues it.

So it's all about perception? The Bank of Japan has been trying to credibly promise 2% inflation for a while and failing [1]. Maybe if they monetized some of the debt, people would take them seriously?

[1] https://www.japantimes.co.jp/news/2019/08/23/business/econom...

But the government spent the money over decades.

Monetizing the debt overnight is like a dam braking.

I don't think there is any reason to do it overnight, so why would they do that? It would make more sense to pay off bonds as they mature.