Japan’s false economic recovery

| August 17, 2009 | 0 Comments
Japan's false economic recovery

Today’s news that Japan has stepped out of recession is, superficially, good news.

However, before anyone opens the champagne, it’s worth pointing out that there’s nothing natural about Japan’s economic growth in the slightest.

In April Japan unveiled a £100 billion stimulus package on top of previous stimulus attempts, resulting in a total boost of £260 billion over the economic year.

It should be worrying to observers that considering the size stimulus package, that only 0.9% growth was delivered.

Bullish observers will no doubt suggest this means the stimulus package is working, and that along with France and Germany, the world is slowly moving out of recession.

The reality is more likely that we are simply observing a W-shaped recovery - an initial economic downturn boosted into positive territory by extensive government borrow and spend - but that such stimulus packages are inevitably short-term solutions.

As a crude analogy, the stimulus packages have worked like temporary tax breaks, providing a limited boost to affected economies.

The problem is, none of the original economic problems have been addressed, consumer spending remains muted, unemployment is moving out of control (and insidiously, many people are now falling outside official statistics, resulting in artificially low figures - especially in the US).

And, underlining everything, is the massive debts that governments have built up in trying to provide temporary respite and relief from economic falls.

Come this autumn, expect to see further cheer as no doubt Britain will report better figures than expected for economic growth.

The big warning is that none of this economic growth is founded on real credit, but instead by governments taking on massive debts.

In short, the whole process of economic recovery now taking place is another debt bubble.

We’ve seen what happens when debt bubbles are created - the original credit crunch was created through private companies creating a debt bubble.

While governments inflating their debt has helped slow, even temporarily reversed, the collapse of the debt bubble, the actual result in simple terms is that the private bubble has now moved into public hands.

Now that this is in play, the collapse of this debt bubble is being prevented by the continued printing of excess money.

The more money is printed, the more private debt can be reduced - and transferred to public liability.

Of course, the moment this printing stops, economic conditions will try to return to equilibrium - by deflating further.

And if the printing continues, it simply means that the economic crisis has further to deflate, and will deflate for longer.

Japan’s recovery is no better than a subprime mortgage being paid for via credit card debt. There is little real economic sense behind it, and rather than delay the inevitable, it intensifies the problem.

That is one reason why stock markets continue to fall - whatever the spin played out in this news, the underlying economic conditions haven’t changed at all. We have merely slowed economic fall, but there is little strength available to keep that pace slowed.

Economics demands that the economic cycle cannot be stopped. Governments have tried to defy fundamentals, but there is little further room to do so.

This is what the Japanese recovery underlines - we can slow the realities of economic depression, but ultimately, we cannot stop it happening.

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