Wednesday, July 11, 2012

Forgotten Lessons from Japan's Lost Decades

For nearly two decades Japan has witnessed stagnating growth and mild deflation. Over the course of this period, Japan has experimented with various forms of monetary “stimulus” as well as fiscal stimulus, increasing public sector debt by nearly 400%.
Source: The New Arthurian

By many accounts, Japan should be a shining example of functional finance,demonstrating the positive impact of fiscal and monetary stimulus working together. Reality, however, depicts a largely different story.

The New Arthurian offers four lessons from the struggles in Japan...

Lesson 1: No recovery was created by increasing the money.
Lesson 2: No recovery was created by replacing private debt with public.
Lesson 3: There was little or no "erosion" of debt by inflation.
Lesson 4: Try debt forgiveness.
Most economists are currently calling for either greater monetary or fiscal stimulus, or in some cases both. I fear that this apparent focus on broad macro stimulus overlooks some of the subtler inefficiencies within developed economies that played an equal, if not greater, role in the current economic crisis. Tax laws and regulations that encourage the use of credit over money, promote greater inequality and subsidize various industries with political favor will largely remain in place under most of the proposed policy solutions. Until these issues, and numerous others, are dealt with, our fate may follow a similar path as Japan, whereby monetary and fiscal stimulus are only enough to continue muddling through.   


  1. Woj --
    I fumbled the conclusion on that one, I think, but you picked up the ball and went in for the touchdown. Good game!

    1. Art,
      No worries. You've been making similar points for quite some time on your site. Happy to be on the same team!

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