Frequently cited as an example of how to not run monetary policy, Japan is said to have lost some 20 years of prosperity due to central management. Despite this, Japan is simultaneously cited as an example of high productivity, something the US cannot lay consistent claim to.

While the Japanese economy entered its crisis a long time ago, it turns out it’s pain may be just beginning. More foreboding, the US’s moves now resemble Japan’s. Except we’ve broken the back of our own productivity.

Excerpted from the Telegraph, Ambrose Evans-Pritchard on the failure of Keynesian policy:

Regime-change in Tokyo and the arrival of Yukio Hatoyama’s neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the “new social policy” – have concentrated the minds of investors at long last. “Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan,” said Albert Edwards, a Japan-veteran at Société Générale.

The IMF expects Japan’s gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014

“Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving,” said the IMF.

Japan’s $1.5 trillion state pension fund (the world’s biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce has been contracting since 2005.

“The debt situation is irrecoverable,” said Carl Weinberg from High Frequency Economics. “I don’t see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this.”

Mr Hatoyama inherited a country that was already hurtling into sovereign “Chapter 11″. The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in “nominal” terms than a year ago.

It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

While the numbers won’t match, the respective trends and philosophies do – check the bolded parts to find the US: Trust debt, interlink and socialize as much as possible, spend like there’s no tomorrow, and never seriously question the underpinning mechanics of the system itself. Tomorrow will simply have to take care of itself because we’re just trying to survive today, an odd situation for the modern, increasingly progressive Western world.

The parallels are not universal, to be sure, and “ultra-easy monetary policy” sounds like morphine to the addict, but the scope is such that any thought to a serious rethinking of the nature of money should happen and should happen now.

Does the White House understand this?

Related: All we need now is something to kick it all over the cliff and Nouriel Roubini may have found it:

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

So, what’s the point? It’s this: We have the wrong people pursuing the wrong policies in charge of a big problem.  With capitalism being accused of wrecking the economy, it turns out we’d already been turning to them – the anti-capitalists – for a very long time.

And we had an example.

UPDATES:

Bailout monies flushed as CIT goes bankrupt.

CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds. Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.

Then: McClatchey says Goldman knew:

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman’s role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm’s activities.

The problem with fiat money isn’t that it doesn’t function like money.  The problem is that it’s ripe for manipulation and corruption – in the comments, geoffb points to just how badly things go when we entrust individuals with fantastic power instead of letting markets work.  Considering how little we know about the spiraling reserve-note endgame and it’s unending sea of financial instruments and riggings, handing everything we have to a relative few at the top is folly.  That’s the problem with fiat money – it’s the ultimate encroachment on classical liberalism; the ultimate collective-maker.

Last: World responds as they said it would.

“It’s almost worth the Great Depression to learn how little our big men know.”
- Will Rogers