Sunday, April 30th, 2017 MST

Massive money creation fails to stimulate Japan’s economy

Austrian economists assert that governments cannot “manage” economies, but that such efforts only make things worse.  Japan is a perfect example.

Shinzo Abe campaigned for Prime Minister on a Keynesian platform of reviving Japan’s economy with massive spending and cheap money.  He further proclaimed that his stimulus program would lay to rest Japan’s most dreaded fear: deflation.  Now more than three years later, it is cleared that Abe has failed.

Japan has the highest government debt in the world, equal to nearly two and a half years’ worth of economic output.  Additionally, Japan suffers an aging population that is consuming assets.

Mr. Abe defends his economic program, saying that it is “a work in progress.”  He also blames a weak global economy for its failure.

Abe inherited a schedule of tax increases that were supposed to close the gap between spending and revenue, the first of which he let be implemented in 2014.  Immediately, consumer spending dried up, and Japan fell into recession.  Tax increases, of course, are incompatible with Keynesian fiscal spending and money creation increases.

Now, Abe is putting off until October 2019 the second scheduled tax increase.  The 2014 increase took the consumption tax from 5 percent to 8, and the second increase (if imposed) will take it to 10 percent.

Critics of Abe’s postponement cite consumption taxes (value-added) in Europe that are more than twice as high.  Considering the mess that the Eurozone’s economies are in, one has to wonder why make that comparison.  (The European Central Bank is in the midst of its own massive money creation program in an effort to alleviate economic pain there.)

Opponents of the tax increase to close the gap between spending and tax revenue say Japan would be better off borrowing more from the domestic bond market, which is funded by Japan’s prolific savers.  After all, they reason, it’s like the right pocket owing the left pocket!

Today’s economic thinking is dominated by Keynesianism, which calls for fiat money creation and deficit spending to correct the world’s ills.  We now have eighty years of dealing with Keynesian programs, and abundant evidence shows that they don’t work.  But, that will not keep Ivory Tower economists from continuing to advocate such programs.

This is the ideal climate for investing in gold and silver.  Take advantage of current low prices.  When summer is over, investors will return to the markets and evaluate the situation, which is not good.

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