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Japan's Economy Shows Limits of Keynesian Policies
In the 1980s, Japan was an unstoppable economic juggernaut that everyone
feared. It all ended when a spectacular stock market and real estate bubble
blew up in the early 1990s. These bubbles were the ultimate outcome of
excessive stimulus over many decades. Initially, that stimulus acted to revive
the Japanese economy from the ruins of World War II. In the end, huge asset
bubbles resulted. These collapsed throughout the 1990s and the first decade
of the 2000s. One government stimulus program after another during that
time only had temporary impact on the economy. As soon as the stimulus
ended, economic growth disappeared. The U.S. is currently finding itself in
the same situation.
Interest rates policy - also did not revive the economy. Japanese government
longer-term bond interest rates also collapsed, with the 10-year rate falling
below 0.5% at one point. Extremely low government bond rates indicate too
much liquidity exists in an economy and the government is getting too big a
share of it. Businesses can be starved for capital under such circumstances
and this in turn limits economic growth instead of stimulating it. This same
pattern is emerging in the United States right now. The two-year bond interest
rate has been at record lows for weeks.
Keynesian economics became the almost universal approach for economic
policy in the developed economies after World War II. Keynes
recommended initiatives, stimulus during a downturn and paying off the
stimulus debt during the recovery, got horribly mangled to more and more
stimulus during a downturn and somewhat less stimulus during a recovery.
This is essentially an ongoing money-printing scam. Like many scams, it
works well as long as it doesn't get out of control. Eventually though some
huge crisis becomes inevitable after decades of excessive stimulus and the
economy falls apart. Stimulus no longer works then. After two decades, the
Japanese have failed to realize this. The economic establishment in the U.S.
is equally oblivious.
China is only in the early stages of the stimulus manipulation of its economy
and is now the world's current economic powerhouse. It surpassed the UK
(the world's largest economy until the U.S knocked it out of the box around
1880) in 2005, Germany in 2007, and now Japan in 2010. Media reports in
2009, estimated that China would overtake Japan in 2012 or 2013. Time
seems to be speeding up. The Washington Post also predicted last year that
China could overtake the U.S. as early as 2027, which was much sooner than
other predictions, which are as late as 2040. Even 2027 might prove to be
optimistic however.
Daryl Montgomery
In the 1980s, Japan was an unstoppable economic juggernaut that everyone
feared. It all ended when a spectacular stock market and real estate bubble
blew up in the early 1990s. These bubbles were the ultimate outcome of
excessive stimulus over many decades. Initially, that stimulus acted to revive
the Japanese economy from the ruins of World War II. In the end, huge asset
bubbles resulted. These collapsed throughout the 1990s and the first decade
of the 2000s. One government stimulus program after another during that
time only had temporary impact on the economy. As soon as the stimulus
ended, economic growth disappeared. The U.S. is currently finding itself in
the same situation.
Interest rates policy - also did not revive the economy. Japanese government
longer-term bond interest rates also collapsed, with the 10-year rate falling
below 0.5% at one point. Extremely low government bond rates indicate too
much liquidity exists in an economy and the government is getting too big a
share of it. Businesses can be starved for capital under such circumstances
and this in turn limits economic growth instead of stimulating it. This same
pattern is emerging in the United States right now. The two-year bond interest
rate has been at record lows for weeks.
Keynesian economics became the almost universal approach for economic
policy in the developed economies after World War II. Keynes
recommended initiatives, stimulus during a downturn and paying off the
stimulus debt during the recovery, got horribly mangled to more and more
stimulus during a downturn and somewhat less stimulus during a recovery.
This is essentially an ongoing money-printing scam. Like many scams, it
works well as long as it doesn't get out of control. Eventually though some
huge crisis becomes inevitable after decades of excessive stimulus and the
economy falls apart. Stimulus no longer works then. After two decades, the
Japanese have failed to realize this. The economic establishment in the U.S.
is equally oblivious.
China is only in the early stages of the stimulus manipulation of its economy
and is now the world's current economic powerhouse. It surpassed the UK
(the world's largest economy until the U.S knocked it out of the box around
1880) in 2005, Germany in 2007, and now Japan in 2010. Media reports in
2009, estimated that China would overtake Japan in 2012 or 2013. Time
seems to be speeding up. The Washington Post also predicted last year that
China could overtake the U.S. as early as 2027, which was much sooner than
other predictions, which are as late as 2040. Even 2027 might prove to be
optimistic however.
Daryl Montgomery
Author, "Inflation Investing: A Guide for the 2010s"
The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on how
to make profitable
investing choices in the
current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on how
to make profitable
investing choices in the
current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Japan's Economy
Shows Limits of
Keynesian Policies
Shows Limits of
Keynesian Policies
The truth and nothing but...