A Look Into The Future

The U.S. continues to tread Japan’s declining path with a 10-year lag. This allows us to look into ur future as Japan shows us where its path leads. As U.S. government debt passes 100% of GDP, Japan has surged through 200%.  The U.S. is borrowing about 40% of government spending, while Japan is now borrowing nearly 60%, when supplementary appropriations are taken into account.

As government debt stifles growth, deflation cannot be shaken off, the yen remains strong and Japanese bond yields remain low.

Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago.

Industrial output slumped 2.6 percent from October, more than all the forecasts in a Bloomberg News survey of 29 economists, a government report showed today in Tokyo. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month.

The combination of falling tax revenues and rising government debt is an explosive mixture. The slightest rise in interest rates will trigger a death spiral as, even at today’s hyper-low rates, interest is eating up more than 15% of government revenues and could quickly swallow more than 100% at realistic rates.

Government spending does not ‘spur growth’. If it did, Japan would have been the world’s growth engine for the past two decades. In reality, every cent the government spends must be taken from the private sector and therefore can no longer be spent or invested by it. We can see what the government’s spending achieves (not much) – what we can not see is what would have been achieved had the government left well enough alone and the private sector had saved, spent and invested instead. This is the ‘broken window effect’ – one must not only consider the obvious economic effects of a policy, but also the ‘unseen’ ones. Government spending is a burden, not a boon.

Like its counterparts in Europe, Japan’s government tries to get its house in order not by reducing spending – apparently a completely taboo subject in Japan – but by raising taxes. This will predictably – just as it does in Europe – double the burden on the economy. Since these tax hikes are immensely unpopular in Japan, it is not necessarily likely that they will happen. Moreover, there may be no more time to take effective countermeasures against the growing debt load: the death spiral may well begin before such measures can be implemented and take effect.

This is the future of “kicking the can down the road.” Perhaps we still have time to deal with the problems if we move quickly. One may hope.

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