Japan’s 1990s were lost for all the same reasons America’s 2011 was lost - the status quo prevailed. In 1986, Japanese economic growth fell from 4.4 percent to 2.9 percent. In response, the Bank of Japan slashed the discount rate in half, from 5 percent to 2.5 percent. During the next three years, Japan created one of the largest economic bubbles in history. It didn’t last. Real estate prices fell by 80 percent from 1991 to 1998, and the stock market collapsed to a quarter of its 1989 high.
Throughout the 1990s, Japan tried at least 10 fiscal stimulus programs and left interest rates below zero, while economic growth kept marching southward. None of this did anything other than ruin Japan’s fiscal health, taking the country from the best fiscal position in 1990 to annual deficits of 7 percent of gross domestic product and a national debt of 227 percent of GDP. Sound familiar?
The president has vowed that his new pile of programs will be different. He has called for new publicly funded infrastructure projects, and yet that’s exactly what Japan tried in the 1990s, repeatedly on a massive scale ($1.4 trillion in 2011 dollars). Rural towns were paved over, given grand new bridges, and a huge highway system was built. All of it failed to spur growth, and similar schemes are bound to fail as well.
Economic growth is not created from the top down. Government’s main job is providing a constant, consistent playing field - something Washington lawmakers have done much to undermine over the past decade. Americans can create wealth. Extending unemployment benefits indefinitely, playing around with new gimmicks or suggesting more stimulus won’t help in the long run. Leaving individuals free to use their talents and keep what they earn will. The recovery will only start with significant regulatory relief.
Eurozone Downgrades - Desperate, But Not Serious - Forex.com
The much-feared, yet equally much-anticipated, EU sovereign credit rating downgrades have arrived. The winners were Germany, the Netherlands, Finland, and Luxembourg, which saw their AAA ratings sustained. The losers were Belgium, Austria and France, which were cut one grade to AA+. The biggest losers were Italy, Spain and Portugal, which were cut two grades to BBB+, three steps above junk. The hope was that France could maintain its AAA rating, but a single notch downgrade was not entirely unexpected. Still, it does jeopardize the AAA rating of the EFSF and the successor ESM, but we will need to see the ratings agencies make that determination later.
Debt crisis: as it happened January 16, 2012 - Szu Ping Chan and Andrew Trotman
S&P has stripped the European Financial Stability Facility (EFSF) of its AAA crown, potentially pushing up the bail-out fund's borrowing costs, and adding to the eurozone's general woes. S&P said that the fund was only as good as its backers, and that the EFSF could face further downgrades if "additional credit enhancements" were not put in place. The head of the EFSF said the downgrade would not reduce its €440bn lending capacity, though Germany's finance minister Wolfgang Schaeuble has ruled out any hike in EFSF guarantees.
