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Source link: http://archive.mises.org/9850/why-not-make-it-three-lost-decades/

Why not make it three lost decades?

April 27, 2009 by

In the past 8 months, Japan’s Prime Minister Taro Aso and the LDP have put together three stimulus (spending) packages totaling more than 5% of GDP.

This new 25 trillion yen is on top of the multi-trillion yen worth ($6.3 trillion) of spending Japan’s government went through between 1991 and last fall.

What will come of it? Here is one result of the previous spending:

Or as explained by the graph’s authors:

By weakening the private economy, government borrowing is not an inflationary threat. Much light on this matter can be shed by examining Japan from 1988 to the 2008 and the U.S. from 1929 to 1941. In the case of Japan government debt to GDP ratio surged from 50% to almost 170%. So, if large increases in government debt were the key to economic prosperity, Japan would be in the greatest boom of all time. Instead, their economy is in shambles. After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.

In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in 1989, and the yield on long Japanese Government Bonds was less than 1.5% (Chart 6). As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector (Chart 7). Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.

Via Mish

See also: Japan from the CEE
Japanese taxpayers still haven’t spent enough
The Japanese just didn’t try hard enough
Explaining Japan’s Recession
What Happened to Japan?
Japan’s Bust: An Austrian Critique of the Fed’s Explanation

{ 10 comments }

Joe B April 27, 2009 at 7:51 am

“Japan is in the midst of its worst recession since the end of World War II”

So $6.3 trillion of government spending so far has had the same net economic effect as two atomic bombs. That puts Obomba’s bailouts to date at around four nukes. How many nukes will it take to fix this economy?

Gil April 27, 2009 at 9:10 am

But isn’t there a difference between a prolonged economic downturn and total economic collapse? The U.S.A. and Japan may have fallen on hard times but aren’t both countries are still the first and second biggest economies respectively? Or to put it another way – look at the drop in the standard of living during the 1930s in the U.S.A. wasn’t it terrible? But then wasn’t the state of living in the 1930′s was still better than what many people endure today in parts of Africa and Asia? At least those who queued up for food in the Great Depression got food. It’s akin to Bill Gates losing 99% of wealth tomorrow – he’d still be left with $400 million (using Wiki’s $40 billion current figure). I’d be worried when average Japanese found themselves as of the same standard of living as the average Indonesian but not until then.

Silas Barta April 27, 2009 at 9:26 am

One thing people don’t mention is that even though Japan had a lost decade, her economy was still able to produce:

-The PlayStation, PlayStation 2, N64, and GameCube
-The Final Fantasy Series
-Dance Dance Revolution
-Cars that Americans want to buy
-The Prius
-Lots of cool gadgets
-Hello Kitty and Pokemon

America’s lost decade won’t be so hot.

banker April 27, 2009 at 9:34 am

Assuming 0% return on investment from those trillions the Japanese government has spent, everyone would have to subtract maybe 70% of the value from their savings. Plus the $1trillion in US treasures owned by the BoJ or Ministry of Finance (forgot who owns them), you have a recipe for catastrophe. Basically, the massive number of baby boomers have had most of their savings spend already on projects (highways, playstations, etc) that will not benefit them when they retire. When these people retire, their savings won’t support them in retirement and they don’t have enough kids to support them either.

If the Japanese government keeps spending money, I am positive that trade balance will reverse and inflation comes back to Japan. Exporting for nothing for 10 years just made people work hard for low wages. There is not much left to spend, catastrophe is close by.

Ohhh Henry April 27, 2009 at 10:41 am

To a political and bureaucratic regime which has managed to preserve essentially 100% of its power during a period in which the general public has experienced stagnant to declining real wealth, there is no such thing as a lost decade. More like, mission accomplished.

Brian Gladish April 27, 2009 at 12:29 pm

“As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector (Chart 7).”

Can someone explain this? Why is a linkage drawn between the debt to GDP ration and a fall in interest rates? I would expect that interest rates would rise as it became more and more difficult to sell government debt. Is it because of “quantitative easing,” meaning that the BoJ is willing to buy debt at very low interest rates? Can we expect that here – low interest rates as far as the eye can see while trillions are created and the currency debased? Or is it just that the authors are plain wrong on this point?

David Spellman April 27, 2009 at 4:38 pm

The consequences of actions take so long to appear in many cases that it is easy to deny the causality. People can smoke cigarettes for decades before getting cancer. Termites can east away at a house for decades before it caves in. Governments can pursue foolish economic policies for decades before the nation collapses.

All the while, people can claim that their behavior is not harmful. Everything may look okay on the surface despite signals that are intentionally ignored. Then the final reckoning comes in the doctor’s report, or the engineer’s report, or the accountant’s report: destruction has arrived.

It will take a while for Japan to die. In the mean time, they are limping along well enough to be used as a poster child for what we must do to save ourselves. The disease proceeds slowly, thus enticing other victims to be infected. Rome was not built in a day, nor was it destroyed in a day. It takes decades of slow decay to kill a nation.

But one day the cliff will appear before us and when we drive off it, we will enjoy the exhilaration of flying for a moment before we crash on the rocks far below.

BioTube April 27, 2009 at 8:01 pm

Mitsubishi, Sony, Nintendo et al seem to have kept the Japanese economy going in spite of governmental actionsforget cheese – that’s the power of anime). However, we’ve got no such companies to do that for us.

Econ Student April 28, 2009 at 11:53 pm

Actually, I have been living in Japan for about 18 months. As a foreigner, it can sometimes be hard to see what goes on inside Japanese society, but they are having problems. I hate to write this, but economically, the country resembles a grave yard and offers no opportunity.

anon April 29, 2009 at 12:55 am

“I hate to write this, but economically, the country resembles a grave yard and offers no opportunity.”

How so?

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