Philip Pilkington: Beyond growth – are we entering a new phase of economic maturity? argues that Japan’s lost decades were not so bad when you look at social welfare, a dimension that eludes Paul Krugman. Japanese aggregate debt to GDP climbed to levels far beyond where America is now, and mirabile dictu, life expectancy increased and in general social welfare remained very high relative to barbaric American standards. Pilkington is citing work by Modern Monetary Theory proponent Bill Mitchell. I have been hard on MMT because it shares all the weaknesses of fiat money systems—and in fact exploits them to advance social welfare. In Japan’s case, they were able to assume staggering amounts of debt because they are a high saving society and largely owed it to themselves. Their currency remained strong, there was no hyperinflation, and people hung together. (There is a larger question: the societies with very high kinship coefficients across the population such as Japan and the Scandinavian countries seem to be satisfied with government services requiring much higher levels of taxation than Americans put up with; are content with much flatter income and wealth distributions; and also score happier on many measures of general happiness.) This is not to say that Japan shouldn’t have shut down their zombie banks and purged the bad debt from the books—they would have been even better off if they had; but powerful interests being what they are, they didn’t. Just as America is proving incapable of writing off its bad debts, instead pursuing the illusion that the banking system will recapitalize over time if interest rates are held low enough for long enough. The pin that pricks this bubble, I believe, is the off-balance-sheet derivatives exposure to the housing market that has not yet cleared. If the housing market continues downward, how many CDSs will be triggered? And how will the Fed attempt to bury those bailouts from the public? And will they be able to?
The difference between Japan and America, of course, is the level of social cohesion and shared sacrifice. The Japanese pull together. America is being pulled apart. I applaud the agenda that proponents of MMT seek to achieve by printing money, I just doubt that those objectives would be achieved in the United States by printing money. So far, the evidence suggests most stimulus monetary or fiscal goes into the pockets of the well-heeled.
Hence Steve Keen’s fairly obvious but nicely presented views on debt-financed aggregate demand: when the debt growth stops, unless the lost aggregate demand is replaced, there is a multiplier-magnified contraction of the economy. Much of the growth of aggregate demand in the United States in the past decade or more has been debt-financed.
This is why I subscribe to Strauss and Howe’s prophesy of a profound national crisis in the United States, culminating about 2020 and concluding about 2026. As the big mouths at PIMCO like to say, what we have now financial repression. All indications—renewal of the “Patriot” Act, and dark intimations about how the government is actually interpreting it—point to more direct forms of repression being readied.
Americans need to forge a new social contract soon or descend into decades or centuries of grinding neo-feudalism, by which I mean banana republic-style inequality and its attendant inefficiency. America’s greatest resource is her people, and if the people lose heart, they become wage slaves on the plantation. History teaches that vast inequalities always fuel revolutions, sooner or later. If we lack genetic ties, we need to cling to the classic American ideals of fairness and freedom and equality before the law. Adam Smith maintained that capitalism without a moral context—think of the medieval doctrine of “fair price”—cannot succeed in anything but crass exploitation.
I have to believe we can live up to our ideals.