[R-G] [BillTottenWeblog] Japan proves folly of stimulus plan

[Bill Totten]

by Professor Richard A Werner

Financial Times FT.com (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

Links:

{1}
http://www.management.soton.ac.uk/research/Werner%20Unintended%20Consequence

s%20of%20the%20Debt%202008.pdf


{2} http://www.management.soton.ac.uk/research/CBFSD.php

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