Stimuluszilla Killed Japan and Is Heading Our Way

Keynesians, listen up. Krugman, pay attention. Stimulus without structural reform (public and private sector cuts and and restructuring) is doomed to fail. Look no further than Japan, where government debt is an astonishing 200% of GDP. The brilliant former Morgan Stanley chief economist, Andy Xie, makes a convincing case that we are headed for the same:

Andy Xie:

Anyone who doesn't believe in the harm of a financial bubble but does believe in Keynesian stimulus magic should visit Japan. A likely dip for the Anglo-Saxon economies next year will underscore these truths. The same goes for anyone who thinks China's latest real estate bubble, asset borrowing and shadow banking system are worthwhile substitutes for real economic growth.

We can learn much from Japan's experience. The global economy -- mainly the Anglo-Saxon economy -- is facing the consequences of a massive credit bubble. The remedies most governments have embraced are to keep interest rates low and fiscal deficits high. These are the same policies Japan pursued after its bubble burst nearly two decades ago. How today's bubble economies are treating bankruptcies and bad debt is shockingly similar to what was seen in Japan. The United States and others have suspended mark-to-market accounting rules to let banks stay afloat despite large amounts of toxic assets. It's the same "let them earn their way back" strategy that Japan pursued. The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions.

As the global economy is again showing signs of growth in the third quarter, most governments are celebrating the effectiveness of their policies. Yet Japan's experience forces us to pause: Its economy experienced many such growth bounces over the past two decades, but was unable to sustain any of them. The problem was Japan only used stimulus, not restructuring, to cope with the bursting of its bubble. After the demise of any big bubble, serious structural problems that hamper economic growth remain. Stimulus can only provide short-term support that makes structural reform possible. When policymakers celebrate the short-term impact of stimulus and forget structural reforms, economies slump again. I think the Anglo-Saxon economies will dip again next year.

It's really an outstanding piece of work whichyou can read here. The parallels between Japan and the U.S. are startling and a bit scary.

The nature of the problem here as well as Japan is political, which makes it all the more frustrating considering the sheer insanity of politics and partisan bickering.

The solution is simple, except few in the public sector are brave enough (the private sector does not have this problem except for the banking industry, and well, it's not a private industry) to advance the restrucuring and reform that is essential for a positive economic outcome.

Politicians have huge egos, bankrupt souls, and the only care about getting re-elected. They hate recessions ultimately because they fear a voter backlash and the possibility of being sent back home from cozy Washington. So they are generally prepared to do anything to avoid/prevent/mitigate the process. Such is why they will vote to spend money whether they have it or not. Throw trillions in cash at the problem, shy away from fixing the structural issues, and maybe it can be held together long enough to be re-elected for another term.

Too bad the trillions are coming from you and your kids (and grandkids) and they never asked for your permission. Throw the bums out in 2010. That is our best only option.

Comments

[Michael Clark:]

The stimulus is in the stock market, I fear. Just another party for Wall Street. Is that what 'infrastructure' means?


On Sep 18 12:52 PM Dave Wrixon wrote:

> Inflating activity by Stimulus is not a recovery. It is only really
> a recovery when you get to the "Look Mum, No Hands" moment. All Obama
> has achieved to date is to get America much deeper into dept.
>
> And what happened to all those Roads and Bridges that would form
> the core of tomorrow's infrastructure that would support growth?
>
>
> Frankly, the Stimulus is the equivalent of a night on the town. The
> pockets are empty, the fine liqueur has been pissed up against the
> wall, and the patient is too sick to hold down his breakfast, whilst
> the head-ache seems to be endless. But yes, if you ask the local
> publican whether the economy is helpful, he is hardly likely to complain.

Sep 18 01:45 PM

[Michael Clark:]

I think I'm turning Japanese, I think I'm turning Japanese, I really think so...

(Apologies for those too old or too young to remember that song.)

Sep 18 01:47 PM

[Witchy:]

Yeah, yeah, yeah. Throw the bums out. Does throwing cliches around solve problems? What if the new guys replacing the old bums are new bums? They only differ in the fine points of bumhood. Some bums like trees and like lounging under them, others only see a tree the way a dog sees a fire hydrant. Each tends to interfere with the ways of the other.

A lot of bad stuff has been done in the name of restructuring. Especially if the numbers tossed, bulldozed around by the generals of restructuring happen to be real people and real trees and such. Having bums get in the way might not be such bad thing.

Sep 18 02:02 PM

[LKofEnglish:]

I agree this is FAR WORSE than what Japan did. They still have a strong currency. They still have powerful exports. In other words the theory proposed by our regime is that we're so rich we can afford some inflation. I like the idea: we got it all, why not add 20% interest rates on the overnight into the mix, I just don't believe this is a good "economic" strategy. Indeed, the politics are looking a little dicey what with cuttin off old geezers from medicare and launching that economic torpedo at the united states postal service. And to think the dems said this was "all about priorities." and yours are?

Sep 18 02:47 PM

[thiazole:]

I'm not defending Obama or the kind of "stimulus" that he has passed, but I do defend the idea of stimulus and stimulative monetary policy. If we had done nothing, we would have seen massive deflation and as a result our debt to GDP ratio would be just as bad if not worse with an economy in a deflationary spiral. When you enter a recession like this with a lot of debt on the books, your debt to GDP ratio will grow no matter what you do.

Japan is in a unique position in that it has a population whose saving habits border on neurotic. No matter how much they stimulate the economy, people refuse to spend. Perhaps the Japanese government should try giving stimulus that expires if people don't spend it right away.

On Sep 18 12:52 PM Dave Wrixon wrote:

> Inflating activity by Stimulus is not a recovery. It is only really
> a recovery when you get to the "Look Mum, No Hands" moment. All Obama
> has achieved to date is to get America much deeper into dept.

Sep 18 03:04 PM

[thiazole:]

You should also apologize to those of us who know what those lyrics were really about.


On Sep 18 01:47 PM Michael Clark wrote:

> I think I'm turning Japanese, I think I'm turning Japanese, I really
> think so...
>
> (Apologies for those too old or too young to remember that song.)

Sep 18 03:06 PM

[EEB:]

What are the Anglo-Saxon economies? The Angles and the Saxons aren't around anymore.

Sep 18 05:58 PM

[Fighting Yoda:]

Keynesian stimulus does not work - it did not work for us during the depression did not work for Japan in the 90s. Japan did not just have 1 lost decade it now has 2 - and running. Japan had the lost decade despite huge stimulus programs - a new one every year, they paved the entire country side in the name of infrastructure spend. Govt ran deficits 200% of GDP. Japan at least had the money- national savings, trade surplus and a strong currency, all unlike us. Most important thing Japan had going for it was world wide boom, unlike now a worldwide great recession. But alas Japan could not get out of the funk.

Keynesian stimulus is just populism - politicians appear to do something - sounds appeasing. But it all leads to misallocation of capital and Govt inefficiencies simply kill everything.

All Japanese policies were criticized by us - zombie banks and even stimulus and deficits. But that is where we are going - we are supposedly smarter - have learnt from the mistakes of past. But if have learnt why do we have the same policies, and if we are smart why do we have these catastrophic problems repeatedly. Nobody has answer to that - but we always greeted with political slogans - 'American resilience will win out'.

What is our plan - bigger stimulus with money that we don't have. Since easy cheap money and debt caused the problem - we will have even easier, cheaper money and bigger debts.

We are headed towards catastrophe - our children and grand children will be enslaved by our debt. The crooks on Wall Street once again will make out like bandits - of course they will - they are aided and abetted by the politicians - it simply is oligarchy.

Ye I fully agree: "Throw the bums out in 2010. That is our best only option."

Sep 18 06:26 PM

[The Geoffster:]

Fighting Yoda wrote,
"'Ye I fully agree: "Throw the bums out in 2010. That is our best only option.'"
But don't replace them.

Sep 18 09:32 PM

[Guillaume:]

You keep repeating this, but I still wonder what this "further" means?
You mean "has to start to fall" maybe...

On Sep 18 08:16 PM Market-Tim3r wrote:

> this market has to fall further
>
> hat tip to tinyurl.com/n854tt for the good articles

Sep 18 09:44 PM

[Guillaume:]

Is that a prediction or a prayer, by the way?



On Sep 18 08:16 PM Market-Tim3r wrote:

> this market has to fall further
>
> hat tip to tinyurl.com/n854tt for the good articles

Sep 18 09:46 PM

[bob adamson:]

Were the stimulus initiatives of the G8 beginning in the late fall of 2008 simply a ruinously expensive diversion that delayed and even diverted these nations from allowing the natural forces of the market to exercise their necessary powers of creative destruction without interference? Is the restructuring that the economy requires best achieved by such simple, unimpeded, creative destruction? These appear to be the questions that “The Daily Bail” implicitly pose and then answer to with a resounding YES. I disagree.

The practical choice facing the central banks and national governments of the G8 during the late fall and winter of 2008/9 was to allow unimaginable collapse and chaos to ensue (i.e. allow first the banking system to implode occasioned by the realization that 20 trillion dollar or more of derivative and other secularized debt related asset assumed value was substantially worthless and then watch first the general financial system and then the general global economy implode in an unprecedented deflationary black hole) or stabilize this 20 trillion dollar or more problem by massive governmental fiscal and monetary stimulus (i.e. give a governmental guarantee, backed by infusions of money and credit by government insofar as required, that this 20 trillion dollar or more void would not be allowed to collapse). There was no third thrifty option at that point in time as any attempt to monetize or discharge this magnitude of debt then would, in effect, be a decision to allow collapse and chaos to ensue.

Valid arguments may be advance that the crisis built up because of government attempts world wide, particularly since WW II, to limit risk in the economy. That argument is similar to that of professional foresters who now make an excellent case that 60 years of fire suppression in the west of the US and Canada (and undoubtedly elsewhere as well) simply made the forests more vulnerable to more severe fires (i.e. more frequent small fires periodically are natural and forests are healthier and safer for them). I acknowledge that a case can be made for extending this analogy to the current economic situation but I believe that the suggested cure would be even worse than the current problems. In short, conflagration represented by the economic collapse that would have occurred last winter would have destroyed both the sound as well as the inefficient elements of the economy and resulting chaos would have crippled governments’ and enterprises’ capacity to embark on needed reforms and restructuring and would have burdened them with even greater debt than that entailed through stimulus measures.

To my mind both Marxists, on the one hand, and Libertarian and Austrian School enthusiasts, on the other, are too quick to embrace the noble notion of a great cleansing destruction of the inefficient and inappropriate elements of the economy and society. Such utopian thinking ignores the potential for great unnecessary suffering entailed in such ‘great leaps forward’.

While acknowledging that the cost of the stimulus programs is massive and that the current recovery is artificial insofar as it was both induced by and now depends upon continued government stimulus, I conclude for the reasons stated above that the alternative over the past year would have been much worse. Obviously, I also hold that creative destruction through free market action, whatever its merits during a mild recession, was not and is not the way forward in the current recession. Further, I hold that there are positive measures that governments should take to achieve the needed restructuring.

First, let’s discuss the derivative and other secularized debt related asset valuation problem that overhangs the banking and financial sectors. A major thrust of action that must begin is control and orderly discharge of the 20 trillion dollar or more of assumed value which is now judged to be substantially worthless. Monetizing it raises the fear of hyperinflation; repudiating it the fear of catastrophic deflation. While modest attempts at both partial monetizing and partial repudiation will occur, the basic thrust has and must be to re-inflate over time the market value for a portion of this derivative mass where appropriate and to write off other portions against future profits from other sources (including, perhaps, the proceeds of orderly bankruptcies of some banks and near banks that contributed unduly to the build-up to the crisis). All this will have to be coordinated and achieved in an orderly fashion over a lengthy period and this entails a significant role for government in direction of the process. Finding the right balance amongst these various elements of response will be difficult but simply ‘leaving it to market forces’ would be disastrous.

Second, and more controversially, I strongly disagree with the notion that further dramatic cuts to government programs and the public sector generally need to be an integral part to the restructuring. Such exaggerated cutting is to my mind emblematic of the utopian ‘great cleansing destruction’ mindset discussed above and would only add to the deflationary pressures we are trying to resist at present. In fact, an excellent case can be made that an enlarged but well designed, managed and targeted public sector will (a) allow transfer from business of a major part of the cost and responsibility for pension, health and other employee benefits (i.e. make businesses more focused and efficient), (b) provide such benefits more efficiently and effectively to citizens generally (i.e. points (a) and (b) together, while they entail some increase in taxes, lead to a net improvement of living standards at a reduced net cost if done intelligently), and (c) create an economic ballast to moderate but not interfere with the private sector free market business cycle.

Hasn’t Japan tried much of this and failed? Arguably it simply injected sufficient stimulus to artificially stabilize the Japanese economy and neither truly jump started that economy nor addressed its significant structural problems. Thus, it simply bled considerable money continuously over an extended period without leading to resolution of the economy’s problems.

Sep 18 11:30 PM

[User 190919:]

Throw the bums out in 2010 - Why ? That would open the gate to let that last bunch of bums come slithering back in ! The answer is
not switching back and forth political garbage. Moms should stay
at home building a better bunch bastards. Putting a dad back into
the mix might help as well. Politicians come from families.

Sep 19 12:06 PM

[Jimbo:]

One "structural" problem is the history of people graduating from law school, getting elected to congress, and never leaving until dead or hired by lobbying groups. We need a constitutional limit on congressional terms and NO lobbying after leaving congress. I believe this would help cut down on the disgusting corruption afflicting BOTH political parties.

Sep 19 12:58 PM

[MarkitWacha:]

This guy is a Marxist. Whenever some idiot mentions the words 'we should', he/she is implying that 'YOU' should give up some of your liberty (tax money = liberty).

Kiss my grits. Come to Texas so I can open up a can of whoopass on you, and take away YOUR liberty by putting you in the hospital.

The 'creative destruction' of BofA, Chase, and AIG would have given me and my kin thousands of opportunities. Instead, we get NOTHING but more concentration of power in the hands of bureaucrats 2000 miles away. BofA's deposits have grown by 30% since the crisis. !@#$!@#$!#

"He who would give up liberty for safety deserves neither." --Franklin


On Sep 18 11:30 PM bob adamson wrote:

> Were the stimulus initiatives of the G8 beginning in the late fall
> of 2008 simply a ruinously expensive diversion that delayed and even
> diverted these nations from allowing the natural forces of the market
> to exercise their necessary powers of creative destruction without
> interference? Is the restructuring that the economy requires best
> achieved by such simple, unimpeded, creative destruction? These appear
> to be the questions that “The Daily Bail” implicitly pose and then
> answer to with a resounding YES. I disagree.
>
> The practical choice facing the central banks and national governments
> of the G8 during the late fall and winter of 2008/9 was to allow
> unimaginable collapse and chaos to ensue (i.e. allow first the banking
> system to implode occasioned by the realization that 20 trillion
> dollar or more of derivative and other secularized debt related asset
> assumed value was substantially worthless and then watch first the
> general financial system and then the general global economy implode
> in an unprecedented deflationary black hole) or stabilize this 20
> trillion dollar or more problem by massive governmental fiscal and
> monetary stimulus (i.e. give a governmental guarantee, backed by
> infusions of money and credit by government insofar as required,
> that this 20 trillion dollar or more void would not be allowed to
> collapse). There was no third thrifty option at that point in time
> as any attempt to monetize or discharge this magnitude of debt then
> would, in effect, be a decision to allow collapse and chaos to ensue.
>
>
> Valid arguments may be advance that the crisis built up because of
> government attempts world wide, particularly since WW II, to limit
> risk in the economy. That argument is similar to that of professional
> foresters who now make an excellent case that 60 years of fire suppression
> in the west of the US and Canada (and undoubtedly elsewhere as well)
> simply made the forests more vulnerable to more severe fires (i.e.
> more frequent small fires periodically are natural and forests are
> healthier and safer for them). I acknowledge that a case can be made
> for extending this analogy to the current economic situation but
> I believe that the suggested cure would be even worse than the current
> problems. In short, conflagration represented by the economic collapse
> that would have occurred last winter would have destroyed both the
> sound as well as the inefficient elements of the economy and resulting
> chaos would have crippled governments’ and enterprises’ capacity
> to embark on needed reforms and restructuring and would have burdened
> them with even greater debt than that entailed through stimulus measures.
>
>
> To my mind both Marxists, on the one hand, and Libertarian and Austrian
> School enthusiasts, on the other, are too quick to embrace the noble
> notion of a great cleansing destruction of the inefficient and inappropriate
> elements of the economy and society. Such utopian thinking ignores
> the potential for great unnecessary suffering entailed in such ‘great
> leaps forward’.
>
> While acknowledging that the cost of the stimulus programs is massive
> and that the current recovery is artificial insofar as it was both
> induced by and now depends upon continued government stimulus, I
> conclude for the reasons stated above that the alternative over the
> past year would have been much worse. Obviously, I also hold that
> creative destruction through free market action, whatever its merits
> during a mild recession, was not and is not the way forward in the
> current recession. Further, I hold that there are positive measures
> that governments should take to achieve the needed restructuring.
>
>
> First, let’s discuss the derivative and other secularized debt related
> asset valuation problem that overhangs the banking and financial
> sectors. A major thrust of action that must begin is control and
> orderly discharge of the 20 trillion dollar or more of assumed value
> which is now judged to be substantially worthless. Monetizing it
> raises the fear of hyperinflation; repudiating it the fear of catastrophic
> deflation. While modest attempts at both partial monetizing and partial
> repudiation will occur, the basic thrust has and must be to re-inflate
> over time the market value for a portion of this derivative mass
> where appropriate and to write off other portions against future
> profits from other sources (including, perhaps, the proceeds of orderly
> bankruptcies of some banks and near banks that contributed unduly
> to the build-up to the crisis). All this will have to be coordinated
> and achieved in an orderly fashion over a lengthy period and this
> entails a significant role for government in direction of the process.
> Finding the right balance amongst these various elements of response
> will be difficult but simply ‘leaving it to market forces’ would
> be disastrous.
>
> Second, and more controversially, I strongly disagree with the notion
> that further dramatic cuts to government programs and the public
> sector generally need to be an integral part to the restructuring.
> Such exaggerated cutting is to my mind emblematic of the utopian
> ‘great cleansing destruction’ mindset discussed above and would only
> add to the deflationary pressures we are trying to resist at present.
> In fact, an excellent case can be made that an enlarged but well
> designed, managed and targeted public sector will (a) allow transfer
> from business of a major part of the cost and responsibility for
> pension, health and other employee benefits (i.e. make businesses
> more focused and efficient), (b) provide such benefits more efficiently
> and effectively to citizens generally (i.e. points (a) and (b) together,
> while they entail some increase in taxes, lead to a net improvement
> of living standards at a reduced net cost if done intelligently),
> and (c) create an economic ballast to moderate but not interfere
> with the private sector free market business cycle.
>
> Hasn’t Japan tried much of this and failed? Arguably it simply injected
> sufficient stimulus to artificially stabilize the Japanese economy
> and neither truly jump started that economy nor addressed its significant
> structural problems. Thus, it simply bled considerable money continuously
> over an extended period without leading to resolution of the economy’s
> problems.

Sep 19 04:40 PM

[bob adamson:]

MarkitWacha says "The 'creative destruction' of BofA, Chase, and AIG would have given me and my kin thousands of opportunities.". If only that were true. Few would object if those banks and near banks (and their owners and principal officers) directly responsible for the multi-trillion dollar disappearing asset problem (i.e. the derivative and other securitized debts which have flooded the global market and are now thought, with cause, to be substantially worthless, certainly in the short run) at the heart of the current crisis could be held directly liable for the massive debt and, if necessary, bankrupted in the process. How though would aggressively pursuing this option late last year as the sole response to the crisis have possibly had only the benign effects of which you fanaticize? As it was, bank credit to individuals and businesses substantially dried up as the US and UK banking systems tottered throwing the “real” (as distinct to the narrow banking sector) global economy into deep recession. Wouldn’t this freeze-up have been much deeper and unimaginably longer if no central bank and government fiscal and monetary stimulus had been mobilized to bridge this credit market gap? How could you and you kin have benefited in the resulting chaos? I’d really like an answer.


On Sep 19 04:40 PM MarkitWacha wrote:

> This guy is a Marxist. Whenever some idiot mentions the words 'we
> should', he/she is implying that 'YOU' should give up some of your
> liberty (tax money = liberty).
>
> Kiss my grits. Come to Texas so I can open up a can of whoopass on
> you, and take away YOUR liberty by putting you in the hospital.<br/>
>
> The 'creative destruction' of BofA, Chase, and AIG would have given
> me and my kin thousands of opportunities. Instead, we get NOTHING
> but more concentration of power in the hands of bureaucrats 2000
> miles away. BofA's deposits have grown by 30% since the crisis. !@#$!@#$!#
>
>
> "He who would give up liberty for safety deserves neither." --Franklin
>

Sep 19 07:34 PM

[Dave Wrixon:]

High interests rates might actually be the answer. High interest rates in the UK stimulated inward investment and turned the economy around. Low interest rates in Japan by contrast led to capital flight, largely through the Carry Trade and nearly two decades of stagnation. And as pointed out, the US point of departure is far worse than that of Japan, but perhaps as yet, no worse than that of the UK back in 1980.


On Sep 18 02:47 PM LKofEnglish wrote:

> I agree this is FAR WORSE than what Japan did. They still have a
> strong currency. They still have powerful exports. In other words
> the theory proposed by our regime is that we're so rich we can afford
> some inflation. I like the idea: we got it all, why not add 20%
> interest rates on the overnight into the mix, I just don't believe
> this is a good "economic" strategy. Indeed, the politics are looking
> a little dicey what with cuttin off old geezers from medicare and
> launching that economic torpedo at the united states postal service.
> And to think the dems said this was "all about priorities." and
> yours are?

Sep 20 02:26 AM

[Albertarocks:]

On Sep 18 11:54 AM Socialism cannot compete! wrote:

> People keep arguing whether we're looking at a V or a W. We're gonna
> have an L.

The soulless politicians just don't get it. Therefore we could be headed not for a V, not for a W, not for a U, not for an L, but for an I

Sep 20 12:39 PM

[Denis Gould:]

Japan does seem to be the best template for what we can expect in the future. And on that basis things don't look good. With 200% government debt to GDP they either get the growth and inflation they have so conspicuously failed to achieve and grow out of the debt, or they run primary budget surpluses and get rid of the debt that way, or they default.

But it's worse than that! The economic indicator that really matters is unemployment, after all you hardly care about a recession as long as you keep your job. On that measure Japan is a relatively successful 5.7% unemployed, a full 4% lower than the US rate. After 20 years of stagnation.

Sep 21 03:26 AM

[bob adamson:]

As of October 28th the assessment below appears to be on course. The challenge is for the US not to fall into the Japanese pattern because of insufficient stimulus and structural reform; not that stimulus will lead to inflation in the current environment.


On Sep 18 11:30 PM bob adamson wrote:

> Were the stimulus initiatives of the G8 beginning in the late fall
> of 2008 simply a ruinously expensive diversion that delayed and even
> diverted these nations from allowing the natural forces of the market
> to exercise their necessary powers of creative destruction without
> interference? Is the restructuring that the economy requires best
> achieved by such simple, unimpeded, creative destruction? These appear
> to be the questions that “The Daily Bail” implicitly pose and then
> answer to with a resounding YES. I disagree.
>
> The practical choice facing the central banks and national governments
> of the G8 during the late fall and winter of 2008/9 was to allow
> unimaginable collapse and chaos to ensue (i.e. allow first the banking
> system to implode occasioned by the realization that 20 trillion
> dollar or more of derivative and other secularized debt related asset
> assumed value was substantially worthless and then watch first the
> general financial system and then the general global economy implode
> in an unprecedented deflationary black hole) or stabilize this 20
> trillion dollar or more problem by massive governmental fiscal and
> monetary stimulus (i.e. give a governmental guarantee, backed by
> infusions of money and credit by government insofar as required,
> that this 20 trillion dollar or more void would not be allowed to
> collapse). There was no third thrifty option at that point in time
> as any attempt to monetize or discharge this magnitude of debt then
> would, in effect, be a decision to allow collapse and chaos to ensue.
>
>
> Valid arguments may be advance that the crisis built up because of
> government attempts world wide, particularly since WW II, to limit
> risk in the economy. That argument is similar to that of professional
> foresters who now make an excellent case that 60 years of fire suppression
> in the west of the US and Canada (and undoubtedly elsewhere as well)
> simply made the forests more vulnerable to more severe fires (i.e.
> more frequent small fires periodically are natural and forests are
> healthier and safer for them). I acknowledge that a case can be made
> for extending this analogy to the current economic situation but
> I believe that the suggested cure would be even worse than the current
> problems. In short, conflagration represented by the economic collapse
> that would have occurred last winter would have destroyed both the
> sound as well as the inefficient elements of the economy and resulting
> chaos would have crippled governments’ and enterprises’ capacity
> to embark on needed reforms and restructuring and would have burdened
> them with even greater debt than that entailed through stimulus measures.
>
>
> To my mind both Marxists, on the one hand, and Libertarian and Austrian
> School enthusiasts, on the other, are too quick to embrace the noble
> notion of a great cleansing destruction of the inefficient and inappropriate
> elements of the economy and society. Such utopian thinking ignores
> the potential for great unnecessary suffering entailed in such ‘great
> leaps forward’.
>
> While acknowledging that the cost of the stimulus programs is massive
> and that the current recovery is artificial insofar as it was both
> induced by and now depends upon continued government stimulus, I
> conclude for the reasons stated above that the alternative over the
> past year would have been much worse. Obviously, I also hold that
> creative destruction through free market action, whatever its merits
> during a mild recession, was not and is not the way forward in the
> current recession. Further, I hold that there are positive measures
> that governments should take to achieve the needed restructuring.
>
>
> First, let’s discuss the derivative and other secularized debt related
> asset valuation problem that overhangs the banking and financial
> sectors. A major thrust of action that must begin is control and
> orderly discharge of the 20 trillion dollar or more of assumed value
> which is now judged to be substantially worthless. Monetizing it
> raises the fear of hyperinflation; repudiating it the fear of catastrophic
> deflation. While modest attempts at both partial monetizing and partial
> repudiation will occur, the basic thrust has and must be to re-inflate
> over time the market value for a portion of this derivative mass
> where appropriate and to write off other portions against future
> profits from other sources (including, perhaps, the proceeds of orderly
> bankruptcies of some banks and near banks that contributed unduly
> to the build-up to the crisis). All this will have to be coordinated
> and achieved in an orderly fashion over a lengthy period and this
> entails a significant role for government in direction of the process.
> Finding the right balance amongst these various elements of response
> will be difficult but simply ‘leaving it to market forces’ would
> be disastrous.
>
> Second, and more controversially, I strongly disagree with the notion
> that further dramatic cuts to government programs and the public
> sector generally need to be an integral part to the restructuring.
> Such exaggerated cutting is to my mind emblematic of the utopian
> ‘great cleansing destruction’ mindset discussed above and would only
> add to the deflationary pressures we are trying to resist at present.
> In fact, an excellent case can be made that an enlarged but well
> designed, managed and targeted public sector will (a) allow transfer
> from business of a major part of the cost and responsibility for
> pension, health and other employee benefits (i.e. make businesses
> more focused and efficient), (b) provide such benefits more efficiently
> and effectively to citizens generally (i.e. points (a) and (b) together,
> while they entail some increase in taxes, lead to a net improvement
> of living standards at a reduced net cost if done intelligently),
> and (c) create an economic ballast to moderate but not interfere
> with the private sector free market business cycle.
>
> Hasn’t Japan tried much of this and failed? Arguably it simply injected
> sufficient stimulus to artificially stabilize the Japanese economy
> and neither truly jump started that economy nor addressed its significant
> structural problems. Thus, it simply bled considerable money continuously
> over an extended period without leading to resolution of the economy’s
> problems.

Oct 28 07:08 PM