Tuesday, December 18, 2012

 

Japan is finished, Reaching the Keynesian end point

Isn't insomnia great?

Japan has a new gov't and they are about to do something very foolish.

If the new government has its way, there will be inflation—final straw for the young, whose wages won’t keep up with it. These are some of the consequences of a deficit-funded joyride by Japan Inc., the current generation of retirees and near-retirees, and other interest groups. [Emphasis added.]

So what happens to bond yields under an inflationary policy?  They go up.  Then what about Japan's massive (240% of GDP) debt.  They have to pay higher interest rates on that debt.  It won't take much inflation for debt payments to swamp tax revenue.  They can't inflate their way out of the debt. Their only choice is to grow their way out but they don't seem to have the political will to enact pro-growth policies.  (I'm guessing because it would require massive restructuring of their economy which would put a lot of people out of work for more than a few years.  One thing about unemployment, it focuses the mind on making yourself productive.)  

Please watch the 16 minute mark of this video for more on Japan's dilemma.  Actually watch the whole thing if you want to know the current state of the world economy.  Warning: it's depressing but you will come out of it appreciating the U.S. economic system.  

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