Japan’s Stealth Austerity Doesn’t Work

by Rodger Malcolm Mitchell, www.nofica.com

Austerity, aka deficit reduction, stems from the belief that government income pays for government spending. This is belief is correct for monetarily non-sovereign entities: Cities, counties, states, businesses and people.

You and I need income in order to spend. So do our local governments. We are monetarily non-sovereign.

However, it is not true for Monetarily Sovereign entities: U.S., UK, Canada, China, Japan et al. A Monetarily Sovereign entity is sovereign over its own sovereign currency, and so, has the unlimited ability to create its currency. A Monetarily Sovereign entity never can run short of its own currency, and never needs to ask anyone for its own currency.

So, a Monetarily Sovereign entity never needs to tax or borrow, in order to obtain its own sovereign currency. It is sovereign.

In that regard, I recommend an outstanding article describing Japan’s Prime Minister, Shinzo Abe’s humorous-if-not-so-sad efforts to stimulate Japan’s economy.

Here are a few excerpts:

The Move: (Have the) Bank of Japan double its inflation target to 2% (and) print “unlimited yen” to help achieve its inflation target.

In just three months, from January to April, Mr Abe said that his government would spend an extra $114bn (£75bn).

The Risk: If the measures work and prices start to rise, then eventually interest rates will too. This would see the government’s interest payments go up substantially.

In a worst-case scenario, the government may have to raise more money to meet those payments,

Why this is wrong: Banks don’t simply “print” currency. They create currency by lending, which requires more borrowers. No provision was made to increase borrowing.

Further, forcing government interest rates up is not a “problem“; it’s a benefit, as that does add currency to the economy. The notion that interest payments are a problem indicates a profound confusion about the difference between Monetary Sovereignty and monetary non-sovereignty.

After all, Japan already has said it wants to increase government spending, so how could interest payments be a problem?

The Move: Boosting government spending to help spur growth. In just three months, from January to April, Mr Abe said that his government would spend an extra $114bn (£75bn)

The Risk: Increased spending will further undermine Japan’s finances. Japan’s public debt, which stands close to 240% of its GDP, is already the highest among industrialised nations.

Why this is wrong: Actually, increased government spending is exactly what’s needed. But, Japan still believes it is monetarily non-sovereign, and is paranoid about government debt (which for a Monetarily Sovereign government is meaningless).

Japan could pay off that debt tomorrow if it wished, merely by transferring the yen already in debt accounts to checking accounts.

The fact that Japan’s debt is 240% of GDP, and Japan never has difficulty paying this debt, should have been the clue that debt/GDP is a meaningless number.

What the article doesn’t mention may be the most important factor of all:

Japan raises sales tax in an attempt to rein in public debt. April 1, 2014

From Tuesday, sales tax will increase from 5% to 8%. It will rise again, to 10%, in October 2015. The stepped tax increases are aimed at covering rising social welfare costs linked to Japan’s ageing population.

Japan currently has one of the lowest birth rates in the world. It also has the world’s highest ratio of elderly to young people, raising serious concerns about future economic growth.

Why this is wrong: Taxes do not pay for the spending of a Monetarily Sovereign government. But sales taxes, which are highly regressive, remove money from the economy, especially from the very people whose spending is necessary to grow the economy: Lower- and middle-class buyers.

Japan has adopted the U.S. Big Lie that Social Security, and indeed the entire nation, will go bankrupt unless taxes are increased or benefits decreased. It can be true of a monetarily non-sovereign entity, but not of a Monetarily Sovereign government.

The tax increase is part of a stealth austerity that has as its sole goal and outcome: The widening of the Gap between the rich and the rest.

And now, it has not stimulated Japan’s economy, and it has not worked as advertised.

Gee, tax increases don’t stimulate?

Who’da thunk?

Mitchell’s laws:

• The more federal budgets are cut and taxes increased, the weaker an economy becomes.
• Austerity is the government’s method for widening the gap between rich and poor, which ultimately leads to civil disorder.
• Until the 99% understand the need for federal deficits, the upper 1% will rule.
• To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
• Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
• The penalty for ignorance is slavery.
• Everything in economics devolves to motive, and the motive is the gap.