How the U.S. Is a Good Example of What Not to Do to Kick-Start Economic Recovery
By George Leong
When America began to spend and spend in the 1980s with very little regard for its mounting federal national debt, we all realized it was not sustainable, especially if the cost side was not controlled. The end result was higher taxes and budgetary cuts from the sequestration. When a country’s gross national debt is more than its gross domestic product (GDP), you know you have a fiscal problem.
The same thing seems to be happening across the Pacific Ocean. In Japan, Prime Minister Shinzo Abe desperately wants to make sure his aggressive 10-year stimulus plan goes forward.
In fact, as I have said on numerous occasions, the Japanese appear to be taking a lead from our economic recovery strategy—which is to spend massively with little regard for the national debt and hope the economy follows suit. The problem is that it’s ill-advised. Just take a look at the current economy, where we are seeing only marginal GDP growth after massive spending, adding more and more to the national debt.
Japan will likely also end up in a similar situation as ours, except its gross national debt will be more than two times larger than its GDP. Only Greece has a worse national debt-to-GDP ratio than Japan, and we all know what happened to Greece (though the country was a mess everywhere).
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And to funnel the cash and easy money into Japan’s economic vein, the Bank of Japan will continue to offer cheap money in hopes of driving consumption (sound familiar?). Sure, this plan sounds great in theory, but I’m just not convinced Abe will be able to recreate the Japan that once was.
And to pay for this cheap money, something has to give. On Thursday, Japan’s Cabinet agreed to a plan to cut the country’s welfare and spending in public works. Are you surprised by their decision on who will benefit and who will suffer from Abe’s stimulus and associated cuts?
Again, the lower echelon of Japan’s income earners will get shafted to help pay for the great economic revolution that Abe wants. Sorry, but I think the cuts stink. Japan has a massive network of the rich and super-rich, and the stimulus will help this group the most. Again, sound familiar?
Abe, in his great wisdom, is also examining increasing the sales tax. Again, it will hurt mostly the poor and middle class, along with the possibility of impacting consumer spending, which is counter intuitive to what Abe wants. Luckily, America didn’t increase sales taxes—or at least not the type we can see on the surface, as there are numerous hidden taxes.
So what I suggest to Abe is to take a quick look at America and see if the massive spending and addition to the national debt by the government and the Federal Reserve has helped.
Maybe after seeing it in action, Abe will do an about-face and look at alternative strategies. If Abe does continue to spend freely and add to the country’s national debt, I would expect Japanese stocks to benefit, just as stocks benefited in the U.S. economy.
This article How the U.S. Is a Good Example of What Not to Do to Kick-Start Economic Recovery was originally published at Investment Contrarians
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