An alternative to popular faith

In a previous post, I told you the Federal Debt/GDP ratio was an apples/oranges statistic, often quoted, but completely meaningless. (See: Debt/GDP). According to debt hawks and old-line economists, a high ratio portends inflation, recession and any number of other terrible economic outcomes. Of course, there is no evidence for this; it’s just popular faith unsupported by facts.

Read this article:

Associated Press; 6/22/10: TOKYO – “Japan’s economy, the world’s second largest, will expand at a faster pace in the current fiscal year than previously forecast as robust exports to Asia and improving corporate earnings are underpinning a broadening recovery.

“The Cabinet Office said Tuesday that Japan’s gross domestic product will rise 2.6 percent in the year to March 2011. “The upward projection was due to brisk growth in exports, especially to Asia. The forecast was also upbeat thanks to a recovery in capital spending and improving corporate earnings,” said Takashi Hanagaki, an official from the Cabinet Office.

“Earlier in the month, Japan upgraded its economic growth in the January-March quarter to an annualized pace of 5 percent from 4.9 percent in a preliminary report. But the encouraging figures, including Tuesday’s upward GDP revision, are tempered by persistent deflation and other negatives, including a lackluster labor market.

Japan is also one of the most indebted countries in the world. Its public debt reached 218.6 percent of GDP last year, according to the International Monetary Fund.

So here is Japan, with its 218% Debt/GDP ratio. It’s growth is anywhere between 2.6% and 5%. It’s large national debt has not caused the inflation debt hawks predict. On the contrary, Japan is fighting deflation. Further, the large national debt has not taken the place of capital spending as debt hawks also predict, but actually has facilitated capital spending as well as earnings.

Those are the facts, all of which will be disregarded by the debt hawks, the traditional economists and the media, who just know in their hearts that debt is bad, facts be damned. In fact, the AP article ended with this amazing sentence:

Tackling the ballooning national debt is among most pressing tasks for Japan’s new Prime Minster Naoto Kan.

Wrong. And that is why economics is a religion, not a science.

Rodger Malcolm Mitchell