Japan's Debt Finally Catching Up to It?

LvMIC:

There is a fatal flaw that permeates every conceivable scheme of government enterprise and ineluctably prevents it from rational pricing and efficient allocation of resources. Because of this flaw, government enterprise can neverbe operated on a “business” basis, no matter what the government’s intentions.

What is this fatal flaw? It is the fact that government can obtain virtually unlimited resources by means of its coercive tax power.

—Murray Rothbard writing in Power and Market

A few weeks ago, economist attack dog Paul Krugman once again declared government debt, unlike that of private parties, is irrelevant because “we owe it to ourselves.”  Well it looks like the citizens of Japan are about to pay back some of that great debt to themselves.  Via Bloomberg:

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

It’s all fun and games till the bill shows up.  For years, Krugman and his Keynesian cohorts have given ideological cover for politicians to play big spender.  With Japan’s, quite frankly, unbelievable debt to GDP ratio reaching epic heights; the Prime Minister is looking to take proactive steps to outwit potential bond vigilantes.  Take a look at the projected increase in the country’s debt to GDP ratio:


For almost two decades, Japan went on a public spending spree to get itself out of a sharp economic downturn and prop up its banking sector.  This accomplished little however when nominally comparing its stock market recently to that of twenty years ago:

It should be emphasized that despite conventional wisdom, Japan’s so called “Lost Decade” was not so lost.  Even so, the country’s spending is finally catching up with it as taxpayers may be looted to pay off bond holders.

Keynesians have a habit of emphasizing aggregation when trying to explain economic phenomena.  The rational behind Krugman’s “we owe it to ourselves” claim is that while the government is indebted, that debt, which is often in the form of bonds and treasuries, is held by the same public.  So when debt is passed down between generations, so too are those same bonds and treasuries.  Put simply, debt is passed down but so are financial assets; so no net loss on the aggregate.  As Austrian economist and overall funny guy Bob Murphy recently showed though, that is not always the case.

Even holding true that there is no net loss on the aggregate in regard to public debt, the fallacy of believing no harm done lies in relying on such all-encompassing measures.  Just because government debt is owed in large part to domestic holders (Krugman admits the “we owe it to ourselves” case doesn’t apply to foreigners) doesn’t mean that everyone benefits.  If John Q. Public owns no government bonds and taxes are raised to pay off debt holders, clearly he does not benefit.  He is forced to partially pay for the previous borrowing.

Purchasing government debt is a voluntary action where the investors believe themselves to be better off through purchase.  But taxes aren’t voluntary.  Whenever the day of reckoning comes, someone must pay the piper.  Government owns no resources, only what politicians and bureaucrats take from the public to distribute accordingly.  The people of Japan should be wary of their skyrocketing public debt and whatever attempts public officials take to keep the Ponzi Scheme intact.