Years from now, in the midst of the worst financial meltdown ever, Jim Bacon must want to know that somewhere, somehow, a graduate student poring over old tomes came across his articles about the fiscal sky falling. You heard it here first!
Jim is right about a few things in his latest missive about America going broke. Inflation could indeed be a threat given all of the deficit spending that has been going on the both the Bush and Obama Administrations.
In the former, we ended up with huge bills for a war in Iraq based on faulty intelligence and then for panicky bailouts of huge banks and car companies. In the latter situation, the causes were the lack of effective regulation and the Bushies being asleep at the switch. Obama is struggling to deal with the resulting messes and he’s fair game for criticism about his effectiveness or lack of it so far.
Typical of conservatives, Jim ignores Bush and blames Obama. But there is another point. Bacon bases his article on economics columnist Robert Samuelson who notes some of the same thing that Bacon has noted — namely the danger of the increasing rate of debt as a part of GDP. But Jim claims Samuelson backs his claims but if you read Samuelson he does only to a point. He actually states that odds are against a wealthy state having to face a horrible downturn after being deprived of international or domestic credit to ease the debt burden. In other words, Bacon is only giving you part of Samuelson’s argument.
Second problem: Jim sees the bundle of yarn starting to get untwined with Japan. Maybe, but it’s a big maybe and Jim ignores recent history when Japan’s biggest problem with a decade-long slump was deflation, not inflation.
For those with nothing better to do, here’s part of a blog I did earlier this year for CBS Interactive:
Now it’s Japan’s turn and it is a story more of serious missteps rather than successes.
Most everyone knows that after decades of trend-setting growth, Japan badly stumbled in the late 1980s. The 1990s became the “Lost Decade” as Japan dealt with deflation, bank failures, recession and its ossified keiretsu economic structure that worked well in the 1960s and 1970s but had become badly outdated.
Its genesis involved a number of issues, including competing regulation by the Ministry of Finance and the Bank of Japan, ineffective financial liberalization, a real estate bubble, and a buying spree of foreign assets. What had been a low interest monetary policy came to a jolting halt when the Bank of Japan slammed on the brakes by raising interest rates in 1990.
That touched of a recession lasting lasted eight years, rendering worthless about half of all loans made by Japanese banks. Since many of those loans involved artificially high real estate and dodgy stock market plays, the economy was further whipsawed. Banks such as Hoikkaido Takushoku and Yamaichi Securities Company failed and two other big banks, Long Term Credit Bank and Nippon Credit were eventually nationalized.
Japanese officials tried some familiar remedies, such as creating its own version of a “bridge” or “bad” bank to soak up toxic assets. But the consensus is that Japan made a series of missteps that are themselves instructive:
Japanese officials took too long to understand and attempt to rescue their financial system.
The central bank took too long to address deflation issues.
A fiscal stimulus attempt was cut off in 1997 when taxes were hiked.
Japan took an entire decade — from 1988 to 1998 — to start cleaning up and recapitalize its banks.
Japanese officials waited until 2003, an incredibly long period, to force banks to submit to audits and identify bad debts.
Peter Galuszka
