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March 3, 2010



As we continue to hear of unprecedented economic times, I cannot help but think that the situation that developed in 2008 has happened before, in Japan. During the 1960s, 70s, and 80s, Japan experienced a period of unprecedented economic growth. Starting in the 1970s or 80s, asset prices rose faster than paychecks (as it did with us in 2004-07) and a bubble began to form. In 1990, the asset bubble propping the Japanese economy burst. The recession that followed has dogged Japan for nearly two decades.

As you can see from figure 1, the recession started in 1990 as GDP fell dramatically and things have not been the same in the two decades since.

Now, Japan combated their recession slightly differently from ours because they did not have "toxic" assets or failing investment banks. Nonetheless, Japan did the same thing as the United States by printing large amounts of money. As you can see from the next two charts, the Japanese money supply accelerated and in 2002, it surged by 25%.

In the same time period, it appears as if the Japanese have monetized some of their debt. As you can see from the below chart from 1996 to 2009, Japan's debt is ballooning. In the below video, Japanese debt is listed as approaching $10 trillion in the near future. While that is slightly less than the US number, Japanese GDP is much lower. Therefore, Japan's debt to GDP ratio is much higher than the US. In fact, the US debt is 64% of GDP as of early this year while Japan's is 197%! (Source)

The lesson is that by printing money, which we are definitely doing to fight this recession, we aren't creating growth. Japan's fiscal house is in such bad shape that the same hedge fund investor who made billions shorting sub-prime housing in 2006 is now shorting the Japanese economy stating that they are undoubtedly about to default on their debt.

If we follow the same road as the Japanese (and we are by monetizing debt, buying bad assets, and bailing out inefficient companies), we are going to find ourselves unable to borrow any money in the future. Entitlement, defense, and other federal spending programs would grind to a halt. Not to mention, our interest rates would skyrocket, our economy would plunge further into recession than this last crisis could have ever put us, and the "good intentions" of a government failing to adhere to reality would turn into our worst nightmare realized.

This latest study on Japan shows that we cannot print our way out of this mess. As I have suggested in previous articles, we need to take a more creative look at our economic problems. Let's put one issue at a time under the microscope and make pin-pointed policy decisions. Instead of doing that, however, we are printing money, writing blank checks to bailout businesses (AIG), and trying to expand entitlements at a time when we can't even afford the status quo (health care).

What do you think?

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