October 15, 2003

DOES ECONOMICS WORK? (via Political Theory): :

The Real Risks of Deficits (Robert J. Shiller, Project Syndicate)

Deficits raise not only immediate political issues, but also issues of distributive justice between generations, and of intergenerational risk sharing. No generation should be forced to accept unnecessary economic risks imposed by another generation. Whether or not deficits treat future generations properly depends on how a government's systems for taxation and expenditure are designed.

Those who advocate running deficits often portray them as necessary to fix an economy in which confidence is draining away. Following Keynes, they argue that running deficits will restore confidence before a recession or depression can take hold. It is like putting a patient on Prozac before he becomes suicidal.

But such arguments, although valid at times, have their limits. Japan's public deficits spawned a national debt of 140% of annual GDP, without producing any economic resurgence.

Japan: The rapid run on dollar assets (Hussain Khan, 10/10/03, Asia Times)
With the Nikkei stock average currently flirting with 11,000, up about 45 percent from its post-bubble 13-year low of 7,607.88 in April, it is starting to appear that a run on US dollar assets could well be causing the rise in Japanese stock markets.

The yen has surged through the psychological barrier of 110:US$1, creating a sense of crisis as the run on dollar assets gains momentum. Japanese authorities are cautious about intervening heavily before Prime Minister Junichiro Koizumi reaches an understanding on the currency in his meeting with US President George W Bush on October 17-18 in Tokyo.

According to one estimate, by Kyoto University Economics Professor Takamitsu Sawa, foreign investors have markedly improved the fundamentals of the Japanese economy by turning into huge net buyers of more than US$1.7 trillion in Japanese equities and assets and, by running away from their dollar positions, are thus generating a self-feeding cycle of further selling dollar assets and pushing up the Japanese markets even more.

The flight of global investors from the dollar has serious implications, not only for the health of markets such as Japan's, but because of the peril to the US economy and thus the global economy as well, for which the United States has acted as economic engine and importer of last the resort.

So, investors are fleeing the U.S., with a national debt that is 65% of GDP, for Japan, with its debt of 140%, but we're supposed to worry about debt?

Posted by Orrin Judd at October 15, 2003 12:32 AM

I'm no economist, but even I know that Japan's funk is caused by their culture.

Posted by: Sandy P. at October 15, 2003 10:35 AM

If Khan's right US assets should be declining in value.

Posted by: Robert Schwartz at October 16, 2003 1:08 AM

Robert Shiller fails to note the colossal burden imposed on Gen X and Y by the SS system. The burden is so great that, unless something unpredictable happens, it's my opinion that the gov't will have to renege on some of its promises.

The good news is, I expect the unpredictable to occur.

Posted by: Michael Herdegen at October 16, 2003 7:29 AM