–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.”

–Japan: Debt/GDP = 218%. So?

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