Insane People Run Japan

Insanity

n. Mental illness of such a severe nature that a person cannot distinguish fantasy from reality, cannot conduct her/his affairs due to psychosis, or is subject to uncontrollable impulsive behavior. (See here.)

The above is a legal definition as distinguished from the popular quote (misattributed to Albert Einstein), “Insanity is doing the same thing over and over and expecting different results.” By either definition Japanese politicians and the economists who advise them qualify as “insane.”

New elected prime minister Shinzo Abe of the so-called “conservative” Liberal Democratic Party announced today,

Fresh from an election victory, Japan’s next prime minister, Shinzo Abe, pressed ahead with his top priority of reviving the sickly economy, vowing a hefty spending package and increasing the pressure on the central bank for quick action to pull the country out of recession and deflation. …

Mr. Abe, who said he would form a cabinet on Dec. 26, vowed a “large-scale” budget for government spending to help boost an economy heading toward a third straight quarter of contraction and to end decades of deflation. The budget will take into account the gap between oversupply and weak demand in the economy. …

Mr. Abe vows to force an “accord” on the BOJ to replace its looser goal of 1% inflation with a binding 2% target and to undertake “unlimited” monetary easing to achieve it. He has suggested radical measures for the bank, such as gobbling up government bonds to push more money into the economy and buying foreign bonds to weaken the yen. He has threatened to revise the law granting the central bank its independence if it refuses to cooperate.

The BOJ has resisted Mr. Abe’s ideas as unrealistic and potentially risky, but the new premier will have the chance to nominate replacements for the top three BOJ officials in March and April. Mr. Abe said he would revive the LDP-era Council on Economic and Fiscal Policy, indicating it will be another vehicle to pressure the BOJ.

Markets have responded enthusiastically to Mr. Abe’s campaign pledges since November. …

What the story fails to mention is that these same policies have been tried over and over in Japan and have resulted in 20 years of economic stagnation. The result is that Japan’s sovereign debt is the highest of any nation (230% of GDP). This cannot last forever as Greece found out. One of the major downsides to all this is that they have run out of internal capital to finance their debt. Apparently they have tapped out the massive postal savings system and they are being forced to turn to external finance markets to sell sovereign paper. And, Japan’s famed high savings rate is now around 2% as an aging population draws down savings for retirement.

Everyone who travels to Japan praises their bullet train system, their fine roads, their modern subways and airports, and bridges to nowhere. But if these policies create economic prosperity, where is the proof? I challenge anyone to show where such policies have ever worked, anywhere.

Such policies have the insidious effect of sucking capital and resources out of the private economy where they may actually help businesses grow. Instead the government wastes the capital on projects that are unneeded but favor political cronies. The quantitative easing policy will even more hollow out their capital base by misdirecting investment into things that aren’t very profitable and thus are wasted. This more than anything explains their economic malaise.

Japan will stay economically mired. Perhaps a brief blip will result from the government spending (after all, GDP just measures spending, not necessarily economic growth). But then when the money is spent, they will contract again and experience zero or negative growth. Inflation will remain low as QE directs money to nonproductive asset, and demand shrinks, lending shrinks, and money supply eventually contracts. We call this “going Japanese”. It may have a ring of familiarity here in the USA.

I must add one more name to my insanity list: Paul Krugman. He has urged these ruinous policies on Japan (and the US) for years and every time they fail, he says they just didn’t spend enough. Poor fellow.

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8 comments to Insane People Run Japan

  • Frank R.

    Just Japan? (That was a rhetorical question.)

    • I.M.Skeptical

      These unsustainable economic activities seem to go on and on long past when you would expect them to collapse. But eventually the activities must come to an end. When will Japan or the USA reach the Keynesian Endpoint?

  • dd

    nicely done, Jeff. ha, i am laughing but also crying (in the figurative).

    poor him, poor USA. it’s as good as done.

    the question is, does Krugman want it this way? we know the answer, to bigmac’s comments on the last piece you wrote, Jeff.

    “bigmac” is a wise man.

  • I think they will rather blow the yen then admit bankrupcy. I’d say its one or the other since tax revenue doesn’t even cover half the budget anymore. A budget that soon consists mostly of paying interest on debt.

    Also, how much debt is the Jap government forced to roll every year? It’s likely something to the tune of 40-50% of GDP. If deflation ever stops, I’d say its over for real. When people don’t want to get more or less 0% back on their investments, who will buy JGBs?

  • Janeb

    Actually don’t feel sorry for Krugman. He’ll be fine (just like Al Gore). Pity the poor saps (the average Joe) who gets destroyed by out of control government spending and meddling. you know, the “99%”, most of whom voted for Santa Claus Obama.

  • Linus Huber

    If the function of money is reduced to simply being the means for manipulation by the elite in the form of corresponding monetary policies, it will produce not only negative after-effects in the way discussed above (mal-investments) but will slowly inflict injuries to the social fabric of the populace. Money does not simply functions as means for payment/settlement but represents a bond between different actors in a society. Abusive monetary policy undermines step by step the trust between each person in a society as it mysteriously and undetected destroys the principles of the market economy, the rule of law and democratic values.

  • [...] Insanity n. Mental illness of such a severe nature that a person cannot distinguish fantasy from reality, cannot conduct her/his affairs due to psychosis, or  [...]

  • ohioralph

    Linus H.
    I like your connection of monetary depreciation to societal dysfunction.
    This connection is occurring in our glorification of the military which has created a drug culture represented by the recent violence in schools, movie theaters and shopping malls. The moral hazard of destroying the value of money creates a nation of speculators. Easy money weakens ethics which is ever present in the banking community, the great facilitator of something from nothing. The cycle is endless.