Japan, which spent itself into oblivion fighting deflation (and losing), now needs to raise taxes in the midst of that deflation.

Please consider Sengoku Says Japan’s Finances Near ‘Edge of a Cliff’

Japan’s top government spokesman said the country’s fiscal situation is “approaching the edge of a cliff,” underscoring Prime Minister Naoto Kan’s call for a national debate on raising the 5 percent sales tax.

Kan is “expressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate,” Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. “The supporting fiscal conditions don’t allow for any delays, it’s finally approaching the edge of a cliff.”

The prime minister last night said in an interview with TV Asahi that he would “stake my political life” on addressing Japan’s rising social welfare costs and increasing public debt. The day before he said “now is the time” to face these problems.

Japan’s public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, both estimates the highest among countries tracked by the Organization for Economic Cooperation and Development, according to the group’s forecasts.

Keynesian, Monetarist Deflation Cures Fail

The Keynesian cure for deflation is government spending. The Monetarist cure for deflation is quantitative easing. Japan tried both and the only visible result is government debt to the tune of 200% of GDP.

As Japan’s aging work force heads into retirement, retirees need to draw down on their accumulated savings but they can’t. Government buffoons fighting deflation spent it all and 100% more. So now, Japan stands at the edge of a cliff and needs to tax those retirees enough to pay their retirement pensions. Those pensions were squandered building bridges to nowhere, allegedly to end deflation.

Now the plan is to raise taxes enough to pay the retirees. Is that really supposed to work? For how long?

Raising taxes in the midst of deflation hardly seems right, but the alternative is default or further escalation of government debt. Compounding the problem, rising interest rates would crucify Japan as interest rates on the national debt already consumes most of government revenues.

At some point the Yen will sink to reflect this reality. In an extreme case, hyperinflation is possible. Yes dear reader, in spite of all the talk about hyperinflation in the US, the odds of it elsewhere are far greater. Note that “greater” means just that. It is not an explicit call for hyperinflation.

The Prime Minister’s statement “Japan is approaching the edge of a cliff” is a sure sign Japan has already fallen off a cliff. Politicians do not admit problems until it is too late to fix them. Thus, we have official admission that Japan’s demographic time bomb has just gone off. The only question now is how quickly the problem escalates.

One might think that economists would learn something from this, but they would be wrong.

Keynesian clowns think Japan failed to defeat deflation because government did not spend enough fast enough. In other words, Keynesian clowns think the way to get out of a hole is to dig deeper, faster.

Meanwhile, Monetarist clowns feel the central bank did not ease enough fast enough. They think if you just print enough money someone will spend it. In Japan, all printing money did was artificially suppress interest rates as the money went into government bonds.

Question of the Day: Do economists (in general) somewhere along the line acquire an inability to reason, or does an innate inability to reason lead one to a career as an economist?

Mike “Mish” Shedlock
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