Japan about to infect world economy . April 6th , 2013 .

That Japan is in a very delicate situation since long ago is nothing new , but latest measures by the japanese government are indeed alarmingly worrying for the already ailing world economy .
Injecting unlimited liquidity in an economy whose problem is a persistently weak demand , is not the right solution at all .
Liquidity is just a complementary instrument that have to be continuously kept in line with the moment of an economy , but canot be given a main star role .

If liquidity is flooded and economy actors do not absorbe it , assets of all kinds will be either forced to a zero value or a further extremely overvalued price and in any case economy will be thrown into an out of control volatility .

As I always repeat the only problem in economy is to keep the balance demand vs, offer .
Just that . No more , no less .

If that balance is broken the government in turn has to be able to assess the reasons for the rupture .

Japan’s rupture of balance between offer and demand is the result of these three aspects :

-The enormous housing price bubble generated during the eighties ( over twenty years ago )

– The highly dependence of japanese economy on exports –

– The sick monetarism official strategy giving way to a non stop purchase of competitor economies currencies and the inevitable exaggerate own debt to match the purchase of foreign debt , which has been subsequently transferred to japanese private sector and consequently burdened its competitiveness .

Under such circumstances insist in flooding the market with a liquidity that canot be used by economy actors because it implies further indebtment with no reward , is simply an exercise of ignorance whose only important consequence will be the chaotic additional weakness of japanese yen and the beginning of an era of volatility that considering the problems of dolar and euro , may prove definitely deadly for world economy .

What Japan and other economies suffering the traumas of their well deserved situation because of the rupture of the balance between offer and demand that they have caused by allowing and feeding and era of speculation have to do , is to take measures that will help restore the purchase power and trust of the demand .

The first of those measures has to be acceleration of deflation with determination
Japan has not done anything in that direction and believe me there are only two alternatives , either “V” or “L” transition paths to recovery .
That is either shorter strong recession or long lasting depression or a mixture of both wich will always depend on the global influences of global world economy .

The second but simultaneous action should be the reshaping of tax scheme to help careful shifting of ailing economy sectors to renewed added value ( richness producing ) ventures and investments .

The third and urgent action is to reduce sovereign debt with all sort of drastic cuts in non productive state structure and policies .

It is simply impossible to keep the profits generated by a bubble because those benefits are not added value to the economy . Added value is the result of ventures and investments promoting a wide share of demand that will conclude in a powerful middle class with healthy purchase capacity .

That can only be achieved by stimulation of long term richness producing investment with an optimum GINI indicator adequately matching the moment and specific resources of the economy considered .

Bubbles are the wrong way of growing because they promote concentration of richness in very few hands while giving way to a high inflation that majority canot afford and that means that to keep demand going after bubble you have to resort to an exaggerate indebtment that will accelerate the process to a point where neither sovereign nor private debt can be paid back .

If a majority canot safely purchase consumer goods etc..to match production investments without necessarily having to rely on credit , the economy is bound to collapse .

And try to make an effort to guess where we are now ¡¡¡

Brahmason

Brahmason@gmail.com

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Published in: on abril 6, 2013 at 11:51 am  Comments (12)  

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