President Obama and his Keynesian Policies are Working on a Lost Decade just like Japan’s

Posted by PITHOCRATES - May 19th, 2013

Week in Review

In the Eighties Japan Inc. was going strong.  The Japanese economy roared.  And the Nikkei soared.  The Japanese had more money than they knew what to do with it.  So they started buying U.S. assets.  People feared that Japan would one day own America.  And urged that we had to follow their lead before it was too late.  The American government should partner with business like in Japan.  So smart bureaucrats could maximize economic output.  Instead of leaving it to inefficient market forces.

But Japan Inc. was state capitalism at its worse.  Instead of letting the market determine the allocations of scarce resources that have alternate uses the government stepped in with their crony capitalist friends.  Leading to corruption.  And a lot of malinvestments.  Money invested poorly.  Causing great asset bubbles.  That burst in the Nineties.  Where Japan Inc. was replaced by the Lost Decade.  A decade or more of deflation.  To wring out all the inflation the government fueled with their artificially low interest rates that caused all of that malinvestment.  And those asset bubbles.  If you’re too young to have lived during this you can still see it in action.  This time in the United States (see The U.S. looks like Japan: Investors rejoice by Paul R. La Monica posted 5/16/2013 on CNNMoney).

The U.S. economy is still not close to being fully recovered from the Great Recession, but investors could give a mouse’s posterior about this sad fact…

…Consumer prices fell for the second straight month. The absence of runaway inflation is of course a good thing, especially when you consider that the Federal Reserve has pumped an inordinate amount of money into the system with its asset purchase programs. But if prices continue to dip, that’s a big problem. Deflation is much worse than mild inflation. Just ask Japan.

Ah yes, Japan! It has taken steps to combat deflation with a vengeance this year. The Bank of Japan’s stimulus, dubbed Abenomics in honor of the country’s prime minister, is like the Fed’s quantitative easing…on steroids.

There’s the rub. The longer that the U.S. stays in tepid growth mode — what I’ve been calling the “low and slow barbecue recovery” since 2010 — the comparisons to Japan will only increase. After all, the U.S. also has an aging population and a large government debt load. The Great Recession ended in June 2009 and here we are in May 2013 still with a lackluster recovery. So we’re almost halfway to our own Lost Decade…

The problem here is Keynesian economics.  It was Keynesian economics that got Japan into the mess they’re in by playing with interest rates to stimulate artificial economic activity.  But Keynesians are like drunks.  They think a little hair of the dog can cure their hangover.  So they binge again on artificially low interest rates to create more artificial economic activity.  Which will end the same way.  As it ended in the Nineties.  A long painful deflation to wring out all of that inflation they pumped into the economy.  Just as the Americans will go through.  Because Keynesians dominate their monetary policy, too.

Even though there are many smart people, including members of the Fed, who are worried that QE ∞ will eventually cause a huge inflation headache and create more nasty asset bubbles down the road, the market doesn’t expect the Fed to pull back on its easing anytime soon…

That’s why stocks could keep climbing. It doesn’t matter that the economy is not healthy enough to make most average consumers feel better. Wall Street only cares about the Fed.

This can’t last forever, of course. Sooner or later, the economy is either going to slow so much that we have to start worrying about another recession (and no amount of stimulus will help prevent a market pullback if that happens) or the economy will start showing signs of a legitimate, sustainable and robust recovery. In that latter case, the Fed will have no choice but to end QE and start raising interest rates.

But for now, at least, investors can enjoy the fact that the United States is basically morphing into Japan Lite. Who cares about the health of the economy as long as central banks keep those printing presses running 24/7/365? Joy.

The selling point of Keynesian economics was eliminating the recessionary side of the business cycle.  So it is interesting that some of our worse recessions have been in the era of Keynesian economics.  I mean, that’s what the New Deal was.  Keynesian.  And what did it give us?  The Great Depression.  Why?  Why are the recessions so painful in the era when they were supposed to be less painful?  Because all Keynesian economics does is to delay economic corrections.  By delaying the onset of recessions.  And because it delays the correction it allows a bubble to grow greater.  So when the correction comes prices have farther to fall.  Which makes a recovery in the Keynesian era more drawn out.  And more painful.  Unless you like your recessions to last a decade.  Or more.

So while Main Street America continues to suffer under President Obama’s Keynesian policies Wall Street is doing just fine.  As rich people always do when partnering with government.  Only Main Street suffers the fallout of their Lost Decades.

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