In The Long Run We Are All Dead

It has been pointed out that the example of Japan tells us that everything is hunky-dory. This is Krugman's opinion. As I pointed out two weeks ago, this is not entirely wrong. 

However, it is clear that because of the power of compound interest, our current path is not sustainable. We may have a few years to make the needed changes, but what we are doing now cannot continue. It will take us ten years or so to reach the point Japan is at now. 

How is Japan doing? Uniquely, Prime Minister Yoshihiko Noda is being honest with his people:

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.” 

It is as difficult to cut spending in Japan as it is in America, so Noda is proposing to double the national sales tax to ten percent. 

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

Why is Noda concerned? It is the exact same reason I am. If interest rates increase, a very bad deficit becomes a catastrophe. 

Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

Even with this massive tax increase, things could get very bad in Japan. 

“The proposed increase in the consumption tax to 10% would not be enough to put the public finances on a sustainable track,” David Rea, a Japan economist at Capital Economics Ltd. In London, wrote in a report last week. “A larger increase is needed, and soon, but is highly unlikely without a specific mandate from the electorate as support from the opposition and even some elements of the ruling party is non-existent.”

This is the problem everywhere. There are a certain number of politicians who refuse to see reality. In America they are called Republicans and Democrats. I suppose Republicans could take comfort in that the fact that the Republican car is racing toward the cliff at 40 mph while the Democratic car is racing at 60 mph, but I am not comforted. Yes, as Lord Keynes said, in the long run we are all dead. This is not an encouraging fact as we live in Keynes' long run.