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Monday, Aug. 29, 2011

JAPANESE PERSPECTIVES

Global fiscal reactor meltdown contains a warning for Japan


Special to The Japan Times

Public finances are melting down in Europe, in America and of course Japan. The situation is going nuclear, left, right and center. It's not so much China Syndrome as it is Global Syndrome.

Operators manning those fiscal reactors ought to have vented their radioactive gases a long time ago. Nobody seems to have thought about preparing for that particular contingency, however. No manual seems to exist on how to let the steam out of government budgets that are rapidly overheating. A hydrogen explosion in public finances was never supposed to happen. It was unthinkable.

Thinking the unthinkable is prohibited. Since it tempts fate to do so, it should never be done. in Japan, such things come under the heading of "soteigai."

Soteigai is the Japanese word for "outside the realm of assumption." It is apparently one of the key elements in the nuclear policy lexicon of this country, but insofar as fiscal reactors are concerned, the word seems to be present in the dictionaries of nation states everywhere.

The steam bubbles building up in fiscal reactors everywhere are all chock full of toxic substances. Those substances are called deficit-financing bonds, which are otherwise known as borrowing-from-Paul-to-pay-back-Peter bonds. Such bonds are truly toxic. They are habit-forming and very difficult to get rid of once they emerge.

Their emergence should be avoided as much as possible. This is another way of saying that governments should only issue bonds when they are otherwise in surplus. That way the debts thus incurred can be paid back quite painlessly. If money is urgently needed for a specific policy objective, by all means issue bonds to cover it.

Japan's post-earthquake reconstruction efforts would be a case in point. Things only start to get difficult when governments are already borrowing money to pay back past liabilities when additional debt-issuance needs occur.

Fiscal reactors should never be allowed to operate at full capacity, let alone above that limit. And yet that is precisely what they did around the world in the aftermath of the Lehman crisis. Governments everywhere went full throttle and beyond in trying to get their economies all the way back to the bubbly levels they had reached in the runup to the financial meltdown.

In so doing they sowed the seeds of their own destruction. What policymakers ought to have aimed for then was a coaxing of economic activity down to more normal and saner levels. A round of rolling power cuts on both Wall Street and Main Street might have been a lot more helpful than the gung-ho powering up of fiscal reactors everywhere.

As is invariably the case, it was the weakest link in the chain that broke first. The Greek fiscal reactor was the first to suffer a hydrogen explosion. In a makeshift attempt to cool the core, helicopters arrived on the scene from elsewhere in Europe to pour money into the problem. Lack of coordination in the helicopter team has so far resulted in a lot of waste and little progress in containing the danger. A cold shutdown is nowhere in sight for the Greek reactor.

Meanwhile, other fiscal reactors in the eurozone have started to exhibit problems of their own.

The American fiscal reactor is effectively out of operation. But the really frightening one is Japan's. Cracks are increasingly apparent in both the pressure vessel and containment vessel. Highly toxic stuff is about to ooze out into the open. Yet the myth continues to be believed that fiscal power plants financed by Japanese investors can run forever. Evacuation plans are soteigai.

Marvellous.

Noriko Hama is an economist and professor of Doshisha University Graduate School of Business.


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