Want to see the disastrous result of Keynesian policies?
Ex-Morgan Stanley economist Andy Xie reminds us to look no further than Japan where evidence becomes starker by the day.
Japan’s government debt runs at 200% of GDP, far higher than that of the US, but at a level the US could potentially achieve should Keynesians take the country down a similar path.
Despite years of massive stimulus, the country’s 2009 GDP is set to be lower, in nominal terms, than what it achieved way back in 1993. Even corporate debt still stands at 180% of GDP since companies were prevented from going bankrupt and failed to earn their way out of debt.
Where did all the stimulus money go? Down a funnel of inefficient waste whereby bad companies were supported, asset prices were kept from bottoming, and good money was thrown after useless projects.
Caijing: 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.
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