–Japan, Ireland, Greece: Facts vs. Mainstream Economists

The debt hawks are to economics as the creationists are to biology.

The mainstream economists never change, but my hope is if I continue to demonstrate the inconsistencies of mainstream economics, eventually the word will get to the politicians, the media and the public. Here is a quick sampling of 10/26/10 AP articles:

TOKYO — Japan’s Cabinet approved an extra budget to help finance $63 billion of stimulus spending aimed at spurring the country’s lackluster economy as it battles deflation and a strong yen.”

The CIA’s World Factbook 2010 shows Japan’s Debt/GDP at 189%. According to mainstream economics (aka debt-hawk economics), that Debt/GDP ratio should force a terrible inflation on Japan, and its debt should be “unsustainable.” But Japan is battling deflation, and seems to have so little difficulty “sustaining” its debt. And it will spend an additional $63 billion. See the disconnect?

The same source lists the Debt/GDP ratio for the U.S. as 53% (More recent data from the Treasury shows this to be 66%), far lower than Japan’s. Yet, the debt hawks claim – without any supporting data — the U.S. federal debt must be reduced by raising taxes and/or reduced spending, either or both of which will injure the economy.

But wait, there’s more. According to mainstream economics, all that borrowing should have forced Japan’s interest rates up, which should be bad for economic growth. But Japan’s benchmark interest rate is 0%, as low as it has been in 5 years. The reason: Japan’s benchmark interest rate is not market-derived; it is set by the Japanese government, just as the U.S. Fed Funds rate is set by the Fed.

“DUBLIN — Ireland’s government said it must slash euro15 billion ($20.8 billion) from its annual budgets in a four-year plan designed to bring Europe’s highest deficit back within EU limits.”

The EU demands that its nations have a Deficit/GDP ratio below 3%. However, as Ireland reduces stimulus spending, GDP also will fall. So, Ireland must chase a moving target, in which reductions in the numerator cause reductions in the denominator. Visualize a dog chasing its tail, and you have the EU mainstream economics version of Ireland.

ATHENS, Greece — Greece’s central bank governor says the government must not relent in its planned deficit-cutting efforts but warns against further tax increases, which would deepen the recession.

Just so we understand, tax increases will “deepen the recession” (by removing money from the economy), but deficit cuts, which also will remove money from the economy, are O.K.???

And this is what the science of economics has become.

There are two and only two solutions for Greece and Ireland. Either,
1. Return to Monetary Sovereignty by re-adopting your sovereign currency
2. Have the EU create a true United States of Europe whereby the EU would supply euros to its member nations as needed.

There are no other solutions. Oh yes, and stop demanding that your member nations commit economic suicide.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

11 thoughts on “–Japan, Ireland, Greece: Facts vs. Mainstream Economists

  1. Firstly, agree your points, make total sense.

    Second, while the Japanese bond issuance is bought domestically, the mainstream will continue to say it is a special case (and therefore so it its deflation), and that the US is in a totally different position (“reliance” of foreign investors to “fund” the deficit).

    While I agree that the Japanese are not financially constrained (by bond issuance), until the mainstream actually see this occurring without the world blowing up, the “fundin” arguments will remain, wil they not? And therefore, the push for austerity…


    1. It’s hardly surprising that the Japanese bonds are bought domestically. They are a net exporting nation.

      So simply sectoral accounting logic will tell you that the bonds *have* to be bought ‘domestically’. In aggregate nobody else has any spare Yen.


  2. The mainstream economists have seen this (bond issuance) occurring in America since 1940, and for 70 years, have been calling it a “Ticking Time Bomb.” I don’t think the mainstream economists are swayed by facts. They know what they know, and that’s it.

    But if we can get the word to enough columnists and the public, eventually the economists will tell us it was obvious and they knew it all the time.

    I write to economists all over the country. Not one in 100 understands the implications of monetary sovereignty, nor do they want to.

    Rodger Malcolm Mitchell


  3. given the shifting Japanse demographics, we might have a real live test of MMT before long…at least have the “opportunity” to….


    1. adonis, there have been continuing live tests of MMT since 1971.

      In that connection, I should mention that I differ from MMT in one area: Inflation. MMT followers would use taxation as an inflation control. I would use interest rates.

      Rodger Malcolm Mitchell


      1. What live tests have there been? Has a sovereign govt actually spent without using either taxes or borrowing to “fund” it? I can’t think of one, but that doesn’t mean it hasn’t happened I guess. And if it has (as I’m sure you’re going to describe for me), why hasn’t it been made a HUGE example of?


  4. The U.S. already has spent $8 trillion, unsupported by any taxes, and never has any difficulty paying its bills. That seems like a reasonable test.

    I suppose a negative test of MMT would come if the U.S. were unable to pay its bills (like the PIIGS), something the debt-hawks have been predicting for 70 years.

    “Borrowing” merely is an exchange of dollars previously created by the U.S. government for T-securities newly created by the U.S. government. Dollars are T-securities that pay no interest and have no maturity date. Both are created without limit.

    One definition of money is called “L,” which includes M3 + short term bonds and T-bills. Creating T-bills is the same as creating money.

    By the way, here is an accounting fact for you to consider: Federal spending does not increase the federal debt. Federal borrowing does. Eliminate the borrowing and you eliminate the debt.

    Rodger Malcolm Mitchell


  5. to be clear, I’m on your side…..I would, however, like a bit more information on the $8tn you mention that is unsupported by taxes. I like the ideas MMT espouses and think they are entirely logical, however something of that size would a) surely have been seized upon by the neo liberal muppets and b) an intriguing real life proof of MMT’s claims …


  6. Sorry, I misunderstood your answer. Clearly those funds were borrowed to make up the G-T difference. So that’s not what I had in mind. What I meant was that it would be interesting if Japan decided ‘not’ to borrow that difference and, instead, disbursed the funds ‘without’ debt. Borrowing the deficit isn’t a test of MMT at all as far as I can see. Printing is.


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