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  • Japan Leads the Way Down a Dark Hole

    Japan’s newly minted finance minister, Naoto Kan, seems an excellent choice to lead Japan on an expedited road to fiscal perdition. For those who argue the best way to deal with the coming financial crisis is to precipitate it quickly, Mr. Kan’s choice should be particularly welcome.

    The governments of the industrialized world are almost uniformly embarking on a crash course in sovereign debt calamity. In raw dollar terms, the United States is leading with a budget deficit in 2009 of $1.4 trillion and even more expected for 2010 and thereafter. But for fiscal chutzpah, the Japanese are the clear leader, with a debt-to-GDP ratio over 200 percent and climbing fast.

    Finance Minister Kan appears likely to extend Japan’s lead. A political operative with “little, if any experience in fiscal affairs or macroeconomic issues” according to the Financial Times, he is more prone to worry about fiscal stimulus than fiscal restraint.

    Many governments of the industrialized world are playing a game of deficit spending chicken, hoping credit markets will continue to underwrite their folly. Japan has been cut some slack because of its prodigious domestic saving, but that slack will soon be taken up and then some by all the government debt.

    But Greece has already been put on notice by its creditors. The U.K. appears completely at sea under its lamest of ducks, Prime Minister Gordon Brown. And the United States government operates as though stern words about fiscal discipline can substitute indefinitely for spending restraint. Memo to Washington: the markets are not fooled for long.

    For proof, look at Tokyo. The Nikkei closed 2009 near 10,500. It closed 1989 near 39,000. And Japanese investors have it exactly right. Japan’s world-beating debt-to-GDP ratio has yielded an economy which was about the same size in 2009 as it was in 1993. Japan took a two-year sharp and painful recession and, through the miracle of deficit spending, turned a short, sharp recession into a two-decade absolute calamity. Now the rest of the world seems to want to follow suit.

    It is especially astounding that the world should be coming out of a near cataclysmic financial disaster predicated on the deadly mixture of bad public policies and private debt, only to charge full speed toward yet another disastrous mix of bad public policies and bad public debt. There is still time to shift course. But the appointment of Mr. Kan is not an omen for hope.

    Co-authored by J.D. Foster.

    Posted in International [slideshow_deploy]

    10 Responses to Japan Leads the Way Down a Dark Hole

    1. Dennis A. Social Cir says:

      The dems think we can borrow our way out of trouble. I think history has shown it is not possible. WE THE PEOPLE NEED TO GAIN CONTROLL OF THE CONGRESS AND ALL ASSOCIATED THERE, THEY NEED TO LEARN HOW TO LIVE IN A BUDGET LIKE THE REST OF THE COUNTRY. THE HANDOUTS HAVE TO STOP, PEOPLE NEED TO LEARN HOW TO MAKE THEIR OWN DECISIONS IN THERE LIVES.

    2. Daver Ft. Worth says:

      I think it's very fitting! The Japanese protectionist trade policies, their once hyper-aggressive US real-estate acquisitions as well as their always marginal "dumping" policies make them the perfect lemming to lead the currect cacophony of so called world leaders off the economic cliff.

    3. Truthful James, Illi says:

      The orgy of debt in the United States extended to all sectors of the economy — government, industry, commerce and household. As such it inflated GDP.

      The government is still eating tomorrow's seed corn, The collapse of the Housing bubble was a signal to change course. The household balance sheet has traditionally been principally anchored by the asset value of the residence. This paper value increases normally at something approaching the rate of inflation over time. On the liability side households have a mix of home mortgage debt and installment debt. The mixture of these type of debt is in a presumed equilibrium

      When homes zoomed in value, the equity on the household balance sheet also increased. This was a signal to households that the amount of installment debt could b increased without risk. High interest rate installment debt was used to purchase fast depreciating assets. This debt could be rolled over into low interest rate "home equity" loans, lowering the monthly burden on the home owner's income.

      With the collapse of the housing bubble and onset of the financial crisis in which the nation finds itself, the President suggested that households increase current spending.

      Households though differently. Because of the uncertain nature of the economy and the drop in value of their principal asset, households logically moved to reduce installment debt (itself a form of dis-savings. Those without installment debt reudced consumption and increased savings.

      How did we get into this vortex in which consumers are considered to be the drivers of the economy? Government policies in support of the principle of free trade in a world economy have reduced the importance of our industrial sector. Our capitalists have maximized profits and thus shareholder wealth, by moving production to low labor cost markets overseas. As a consequence, the most important economic multiplier "Value Added by Manufacturing" has been reduced. Wages in countries overseas have been kept artificially low reducing he purchasing power of labor and thus the market for our manufactured goods.

      The hope was that the multiplier above might be superseded by a new one: "Value Created By Ideas." Unfortunately, our educations system has lagged behind. As well, knowledge transfer to foreign countries is almost a free good.

    4. Lebo, florida says:

      Wow,

      Current approach of the government spending their way out of a recession/depression by printing/minting worthless money didn't work for

      Rome-

      Germany

      Argentina

      Japan

      UK

      Or the USA during the "Great Depression"

      So I think it's great Obama, Pelosi, Barney Frank, Dingy Harry Reid et al want to try it again. Maybe it will work this time!!

      I seem to recall something about the definition of insanity being related to doing the same thing time and time again, and expecting a different result.

      What a bunch of idiots. So sad.

      Lebo

    5. Perry OK says:

      Hey out there! Anyone home? Guess not, since we no longer value anything but MONEY.

      Where oh where have all our jobs gone? Over seas of course! My how sweet, OUR world economy, OUR world leadership, OUR what???

      Oh how humble the home and hearth of the simple man. Our family can not see the reason for a new car, the ones we have work. Our CREDIT score is good but could be better if we BORROWED more. But cash is a good thing, as more and more of us are finding out. We know a lot of people who used to live out side of there means. Some still do. Please remember these times of trial in the future! Reflect your hard earned knowledge to the voting booth. Limit the amount of time anyone has in office. The blood of our leadership must be refreshed my term limits. To avoid the skulldrugery of our current parties. Fresh faces and new ideas for washington will go along way.

      Remember if you can not afford it now. Don't let another pollution say he will give it to. As you will most likely lose it and he will make us pay for you!

    6. Alexander Kubaiski, says:

      I find it hard to believe how ignorant and disabled (mentally), the new generation of leaders have become. It is sad to see the common sense becoming a major minority. When the obvious does not produce the obvious conclusion, something is wrong – very wrong. When the truth produces nothing else but a horde of megalomaniacs bent on bending it, a pity becomes it.

      We have become a nation of tolerant intolerance.

      At Economics 101 we all learned about the ABC of fiscal responsibility. What we see defies all the accountability at all levels of economics in almost every country. What happened to the honor and integrity, when you need a crew of lawyers to protect you from the law?

      Japan’s “two-decade absolute calamity” is at our doorsteps. As long as we continue voting via party lines, America will follow the footprints of Japan’s recession.

    7. Alena says:

      I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

      Alena

      http://mortgagecalculato-r.com

    8. Steve; Missouri says:

      If reckless spending gets us out of a recession, then how / why do we ever get in a recession?

    9. Pingback: The art of war

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