Tuesday, May 22, 2012

Ambrose Evans-Pritchard: Japan's fiscal death is a warning to the West

In a Telegraph article, Ambrose Evans-Pritchard describes what countries that adopt the Japanese model for handling a bank solvency led financial crisis have to look forward to.

Japan's 20-year battle with stagnation is a warning to the West. 
The country failed to purge its banks swiftly and relied on Keynesian fiscal projects to prime pump the economy each time growth stalled.
Sounds exactly the like the policies adopted by the EU, UK and US that your humble blogger describes as the Japanese model.
The result was a string of false dawns, with public debt ratcheting ever upwards. 
The Bank of Japan dabbled with quantitative easing, but too little and too late. The bonds were purchased from a moribund banking system, a recipe for failure since this has little effect on the M3 money supply. "Japan was never early enough or ambitious enough in its use of monetary stimulus," said Jamie Dannhauser from Lombard Street Research.
The Bank of England's Monetary Policy Committee member Alan Posen just gave a speech in Tokyo in which he said that monetary policy alone is not the answer and that it cannot fix structural problems.
It let asset prices slide, and let nominal GDP contract. 
The result has been rising debt on a shrinking economic base. "Once this starts it is very hard to stop. That is the danger for Ireland and Spain," he said. 
Adding more debt on top of the real economy which already has more debt than it can afford is not a solution to the problem.
For Japan, the lost decades are tunning into a lost century.
Fortunately, there is a way to avoid Japan's fate.  Policymakers could adopt the Swedish model with ultra transparency.

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