Will America Follow Japan?

Japan has spent the better part of the last ten years trying to spend its way out of economic problems. The governments have used various stimulus and public works spending to try and get their economy to pick up from their last slide. Now with the worst recession in recent times weighing further on that economy the government is finding it harder to borrow money. There is now also the real fear of inflation related to all of this selling debt.

The country possesses a very high level of debt already and is now planning further debt issuance in 2009 to keep up social spending as the country goes to elections. Neither the current government nor the opposition will run on a platform of cutting government spending or reducing debt. The original platform of the Liberal Democrats currently in power had attempted to insert language controlling welfare growth but this was voted down by its members. This was part of a government plan to try and level off spending and reduce the increase in the national debt.

If there continues to be further debt issued that may increase the rate of return to entice buyers. These rate increases affect borrowing through out the economy and may lead to inflation. Some worry that that is the path the U.S. is heading down with the great increases in spending and deficits that the Obama Administration is proposing. Obviously inflation on top of the massive declines in the economy and financial markets over the last twelve months will only hinder the recovery and future growth.

Obviously all this will play out over the next twelve to twenty-four months as the effects of the new government spending and borrowing filter through the economy. There is another argument that the inflation won’t happen as there is too much excess capacity in the U.S. economy. This if the government changed their policy to not increase spending might be able to absorb the shock and minimize the overall effect.

This is all predictions and guesses but the example of Japan is not encouraging.