Bill Totten's Weblog

Tuesday, April 07, 2009

Japan proves folly of stimulus plan

by Professor Richard A Werner

Financial Times (April 03 2009)

Sir, In his interview with the FT (April 1), Taro Aso, Japan's prime minister, claims that "because of the experience of the past fifteen years", Japan knows what is necessary to stimulate the economy: "I think there are countries that understand the importance of fiscal mobilisation and there are some other countries that do not - which is why, I believe, Germany has come up with their views". In other words, Mr Aso is asserting that it is out of ignorance of the facts, especially concerning Japan's fiscal experience, that the German leader objects to further fiscal stimulation. A bit rich, I think, coming from the leader of a country where for almost two decades government and central bank have failed to create a sustainable recovery.

It is precisely the Japanese experience that has demonstrated, with an unusually high degree of statistical probability, that fiscal stimulation per se will have no positive impact on economic growth but merely leave us with a costly debt burden. I show in an empirical research paper {1}, available on the School of Management's website {2}, that for every yen the Japanese government injected in fiscal stimulation, private demand declined by one yen. This is due to the bond financing of the fiscal spending: effectively, while the government injects money with its right hand, it takes it out of the economy with its left hand via its bond financing.

Angela Merkel is right on fiscal policy. This crisis is a monetary phenomenon. Thus monetary policy - credit creation policy to be precise - is required to get out of it speedily and with least cost to society.

Richard A Werner,

Director, Centre for Banking, Finance and Sustainable Development,

School of Management,

University of Southampton, UK




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Bill Totten


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