No need to panic, a lot of analysts tell us, since far from being on the verge of some earth shattering event Japan has invented the economic equivalent of a mechanical perpetual motion machine. Or as Nobel economist Paul Krugman put it recently, “while there is much shaking of heads about Japanese debt, the ill-effects if any of that debt are by no means obvious”. Maybe there is just one word missing here – yet.
This, however, will not be the viewpoint taken here. The rise and rise of Japanese debt is far from benign, and the dynamic, we are convinced, will at some point become unsustainable. Unfortunately by the time we reach that point it will be too late. Indeed, given that we agree with Krugman that the underlying cause of Japan’s malaise is demographic, after several decades of ultra-low fertility in all probability it already is too late. The root of the problem is, as he says – wait for it – that there is “a shortage of Japanese”.
To use an analogy – it isn’t simply a question of a planet which has slipped off or strayed from its orbit (or “good equilibrium”), and just needs a nudge to get it back on, what we have is a planet which has veered off onto a whole new trajectory, one which leads to who knows where. This situation was never contemplated by the founders of neoclassical theory, and yet, having started in Japan, the phenomenon is now extending itself steadily across all developed economies in one measure or another.
There is a heavy focus on demography in this article – just a lack of Japanese. However, I would like to point out that Japan has moved to a whole new trajectory because it is stuck in the middle of a phase change. It wants to collapse, but the people and leaders won’t let it. So it remains stuck in a pre-collapse state forever, or until it is allowed to collapse. Piling on more debt to solve their problem, many countries in the West are following Japan’s lead. Given that the debt won’t go away without a default, these countries will remain stuck until default and collapse.
It’s not just debt either. Corruption has spread throughout society as well. How can this be cleared out? The US has similar problems as you will see in the next article, “How Not to Run a Pension.”