It doesn’t take a genius to see the problem with spending your way out of a debt crisis (the geniuses, in fact, seem to be blind on this one). The idea that an ever-increasing level of spending can make a nation more prosperous (and keep it that way) is clearly ridiculous.

In an article posted today on CNN Money.com, entitled “Is the Fed out of bullets?”, the following quote appears:

"Whenever the next recession comes, it is very important that policymakers have had the opportunity to reload their gun to fight the downturn," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. "Today it's not clear that there's a lot more policymakers can do."

What is he saying? The Sheriff is out of ammo. This is hardly surprising, but it is very bad news. With our national debt so high that even Alan Greenspan thinks we’ve hit our limit, the futility of our national policy becomes evident to everyone. Everyone except the career politicians in Washington, that is. With each administration vying to outspend its predecessor, it’s hard to tell one party from another (though one offers us unaffordable foreign wars while the other concocts unsustainable social programs).

Of those who still think we can spend our way out of our mess, some have cited Japan as an example of such a policy in action. It’s too bad for them that in Japan they have come to the conclusion it isn’t working.

Ever since the early 1990’s, when Japan’s “miracle” economy stalled, unemployment started to grow and stagnation became the order of the day, Japan has been furiously borrowing money to spend, in an effort to return to their glory days. Unfortunately, no amount of money can make a super power, economic or otherwise, out of a has-been. The money has been spent (on social programs mostly) and now Japan has a national debt equal to twice their gross domestic product. There really isn’t a way out for them other than repudiation of the debt and severe trimming of their social programs.

Japan is in a place we do not want to be. Where Japan is, however, is where we are clearly headed, and only a few short years lie between us and that destination. For us, though, the problem will be much worse due to mostly foreign holding of our debt (about 95% of Japan’s debt is domestically held). When the cost of our borrowing rises (it will) and holders of our debt become concerned with our credit-worthiness (they already have), and the costs of our programs spiral out of sight (they did that a while back), we will have the perfect storm.
“The foolish man … built his house upon the sand; and the rain fell, and the flood came and the wind blew, and beat against that house, and great was the fall of it.”

 


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