Keynesian Reincarnation

Posted: Jun 06, 2013 12:01 AM

Japanese Prime Minister Shinzo Abe, another in the long line of Mario Draghi-and-Ben Bernanke clones, has reconfirmed that the only way to get out of an economic hole is by digging the hole deeper, that is if you’re of the Keynesian bent. 

Perhaps one of the greatest reclamation projects ever accomplished was the Land of the Rising Sun’s actual emergence from the depths of destruction created by the Second World War.        It was an island that was almost totally obliterated, an economy in shambles, citizens with almost no future, and of course, no hope.  From 1946 to 1949, the occupation government led by General Douglas MacArthur utilized one philosophy, namely Keynesianism, which was driven by FDR’s New Deal.  The Supreme Commander for the Allied Powers (SCAP) knew nothing different.  Thus, the same economists who had sadly provided the United States with the Great Depression were called on in order to work their professed magic in Japan.  The policies were a disaster.  Taxes such as a value added tax (VAT), income tax, corporate tax, and excess profits and wealth taxes were all either imposed or raised.  In addition, the Japanese yen was devalued in an attempt to lower unemployment.  Hyperinflation flowed over the country like a tsunami consuming an island.  In addition, SCAP instituted wage and price controls.  Indeed, if the intention was to cripple and keep the Japanese military, economy, and people at bay, a better program could not have been found. 

It appears that since the resurrected glory days of Japan (after 1949 to the late 1980s), aided by non-Keynesian policymakers Joseph Dodge and Carl Shoup, the government has once again decided to embrace the echoes of the past under the guise of “Abenomics.”

Massive currency devaluation, the unsettling of the retail electric market, discussions of tax increases, and, of course, the encouragement of pension plans to take more risk by purchasing stock, has unsettled the Asian markets  — from bullish to bearish — as reality has finally set in.  Perhaps by revisiting the Douglas MacArthur era, Abe will get a small whiff of the inflation that he and the rest of the world are so longing for.  However, in this situation the old adage of “be careful what you wish for” is certainly appropriate.  Hyperinflation in addition to the recent 2011 nuclear debacle, deteriorating exports, and an aging population could ultimately “set” the Rising Sun. 

Regarding the end result of going down the central bankers’ rabbit hole, if any country including the United States is curious about the outcome, they simply need to look at Japan as the prototype. 

I’m not exactly sure that when General MacArthur said, “I will return,” he had in mind that it would be an “Abe-reincarnation” as Shinzo Abe.