Only Paul Krugman can try and turn economics into a political game of “what if.” In reality, both parties are responsible for where we are today and both parties won’t change the outcome tomorrow unless their is a Constitutional amendment handcuffing their spending madness.
But lets look at what Krugman suggests the U.S. government should do, and what the consequences will be here vs. what Japan has done during their last decade plus of deflation.
Krugman said in his most recent op-ed for the NY Times called “Things Could Be Worse;”
For all its flaws, Japanese policy limited and contained the damage from a financial bust. And the question in America now is whether we’ll do the same — or whether we will take a hard right turn into economic disaster.
In the above statement by Krugman, he admits there were flaws in the Japanese policy but that these flaws “contained the damage.” He doesn’t specifically state what those flaws were, but questions whether a “hard right turn,” aka, electing Republicans, will lead to economic disaster.
In reality, the Japanese Government has been adding to the problem since the beginning of their deflationary credit contraction revealed by the fact that the debt to GDP ratio went from 60% in 1991 to over 227% today. This is the real “flaw.”
What would Japan’s economy be like if the government didn’t do any spending? The answer is, they wouldn’t have all this debt to pay off today, and their economy would be flourishing.
Krugman says of this era;
And the policy response was too little, too late. The Bank of Japan cut interest rates and took other steps to pump up spending, but it was always behind the curve and persistent deflation took hold.
Deflation is a good thing as it allows the bad debt to be wiped clean either by paying it back or by default. Lower prices, a consequence of deflation, allows more people to purchase consumer goods, durable goods, real estate, at lower prices. How is this a bad thing? It’s only bad for those companies that relied on too much credit, including banks. Everyone else benefits.
But Krugman wants the U.S. to be proactive with government spending, rather than do what Japan did in being “always behind the curve.” Indeed this administration and the last, here in the U.S., have been proactive to the tune of increasing the fiscal budget dramatically. Yet we still have high unemployment and no real growth.
Businesses Do What Government Can’t Fathom; Cut Back
Non-financial Japanese businesses knew what to do. They cut back as seen in the following chart. But look at what the government has done since 1990 (in reality since 1980). This is what Krugman says the U.S. should do…print money to generate growth.
But what in reality has this Japanese government spending accomplished, and more importantly, at what cost?
While it is true that the Japanese have increased their exports, it is at the expense of adding more debt to the nations balance sheet. Revenues in 1999 went from $463 billion to $1.75 trillion by 2009, but expenditures went from 809 billion to 2.4 trillion and the real growth rate went from -2.6% to -5.3%.
Krugman suggests we follow this path and he actually said he is “envying” what the Japanese have done.
So I find myself almost envying the Japanese. Yes, their performance has been disappointing. But things could have been worse. And the case Democrats now need to make — the case the president finally began to make in Cleveland this week — is that if Republicans regain power, things will indeed be worse.
If you want to make things worse in America, go ahead and elect democrats as their spending knows no bounds. But if you think republicans are going to save the day, think again. It is only through constitutional change, limiting what both the left and right can do, constraining them to the taxable base, that we’ll see a potential return to prosperity. But it won’t be without the hardship that comes first.
If your rowboat is taking on water, you reach for the bucket and get rid of the water, you don’t add more water to the boat. Consider the water to be government debt. Adding more debt to the rowboat economy will sink it.
How Does the Japanese Example Relate to Gold?
Gold has appreciated against the Yen to the tune of 247% the last 10 years. If deflation was bad for gold, then why did gold priced in Yen appreciate 247% the last 10 years? Could it be because investors chose gold over the YEN as a safe haven? This has occurred even though the Yen has appreciated versus the dollar. The consequences of the high debt to GDP ratio of the Japanese government and its effect on the Yen will surface soon enough.
Krugman’s Closing Thought; Expect To Be Disappointed At Best
Americans, understandably, are disappointed over, frustrated with and angry about the state of the economy; but disappointment is better than disaster.
This is the best hope a Nobel prize winning economist has for America; disappointment?
Well, that is what all the bright Harvard, Princeton, Yale and Wharton boys have given us to this day. Are you happy with it? Perhaps these economists could learn a thing or two from the Austrians economists. Or perhaps you are confident your row boat will stay afloat.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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