We all remember the economic Japanese boom of the 1980’s. Japan could do no wrong. But then, in the 1990’s it became perfectly clear that the previous boom was created by exceptionally low interest rates. The reasons for those levels are debatable but ultimately, irrelevant. It was the Bank of Japan’s (BoJ) decision.
As a consequence of this, asset prices (particularly properties) skyrocketed. This created a huge speculative bubble which popped in 1991. Most banks moved into bankruptcy territory. Theoretically.
The BoJ intervened by pumping trillions of yens into those banks to keep them from becoming actually bankrupted. If this would to happen, there would have been a colossal economic crash. The country would have been devastated… or so they told us.
This policy of saving the banks at almost any cost gave rise to a new species: the Zombie Banks. Banks who appeared to be alive but were utterly dead.
Since then, the BoJ has held a steady hand by not creating more funny money; in economic terms it kept the Monetary Base constant. The BoJ also kept the interest rate near zero. All of which created a constant appreciation of the yen against other currencies and a price de-preciation in Japan.
In other words, the Japanese economy was oscillating in the range of 1% to 2% GDP with occasional visits to the negative territory. Companies were doing OK but not growing. People were doing better because at home, effective prices were dropping.
Now, since December, the new government of Shinzo Abe came up with a brilliant and never before seen solution: print money. It is actually so revolutionary that it’s called Abenomics.
Since then, the GDP has skyrocketed (well, not really, but has lifted somewhat) and the price of the yen has dropped. Inflation is back.
The problem is that now, as interest rates are climbing to compensate for the printed money, so are the obligations on Japanese debt, which is in the order of 200% GDP.
Japanese companies are doing better because the Yen has depreciated significantly. However, people are doing poorly because they now have inflation and with it constant increases in the cost of living.
Monetary – Mercantilist approach? Of course! What else?
So, in order to compensate for this increase in payments, a relevant increase in consumption tax must be imposed. The debate rages on. The newspaper Yomiuri Shimbun reports on the debate. To increase the tax to 8% by April 2014 or to 10% by 2015? To be or not to be… stupid that is.
Now, let’s recap. Japan fueled a monetary / mercantilist approach in the 1980’s which lead to a bubble pop in 1990’s. Since then, Japan has been limping along, but at least people had a break. Now, they are going back to 1980 with the same approach but people are doing far worse. Not to mention that Japan is now in terrible financial shape compared to 1980. What is the genius Abe expecting? A different result!
That’s right! If at first you don’t succeed, repeat, repeat and repeat until…. until what?
This is clearly madness. Governments blindly repeat economic recipes that do not work. But why is that? Because they are locked into Political and Economic Theories that are past their prime and have stopped working altogether.
Japanese troubles have just been re-ignited. Expect another bust (or at least a meltdown) in the near future.
In contrast, take a look at an Absolute Austro-Libertarian System where there is no central government and it is impossible to regulate money supply or interest rates. Companies trade without barriers and so mercantilist approaches are impossible. There is constant price de-preciation which benefits people. At the same time, there is widespread competition which increases choices for the consumer. There are no catastrophic booms and busts simply because there is no cheap money. This is the best of any world for the cheap, cheap price of getting rid of governments (which are useless anyways).
Your choice. Gold or funny money.
Note: please see the Glossary if you are unfamiliar with certain words.
