–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.”

-Richard Koo–If you don’t believe me, believe him

An alternative to popular faith
Listen to Richard Koo’s tape at http://www.ritholtz.com/blog/2009/11/richard-koo-great-recessions-lessons-learned-from-japan/comment-page-1/#comment-233008. He says some of what I have been saying for the past 15 years. Federal deficit spending is absolutely, positively necessary for economic growth.

I hope our government leaders listen to him, though I doubt they will. They sure haven’t listened to me. The reason: The debt hawks have the nation worried, because they equate federal debt with personal debt. So you hear that your grandchildren will have to pay the debt, and large deficits cause inflation, and surpluses are more prudent than deficits — none of which are true.

So, we struggle with trying to provide universal health care, which the government can and should provide, while debt fear negatively impacts the physical and financial health of millions.

Deficit spending grows the economy and can provide health care, too — and it never needs to be paid back. Never. But Congress, the President and most of the economists simply don’t get it. They don’t even look at our economic history, which repeatedly shows long-term deficit spending is necessary for long-term economic growth.

Rodger Malcolm Mitchell