With 2 percent inflation target, Japan signals new strategy to end deflation

[Redfairen]

Source: Washington Post

Japan’s central bank on Tuesday doubled its inflation target to 2 percent, a main pillar in the country’s drastic new strategy to break away from a two-decade economic stagnation.

The Bank of Japan’s new commitment, coupled with the government’s splurge of spending on public works projects, represents a controversial rethink about the way developed countries should repair their crisis-battered economies.

Under Prime Minister Shinzo Abe, elected last month, Japan has turned away from the well-worn practices followed by economies under duress — conventions that call for austerity and debt reduction. Japan, instead, is trying to spend its way out of a recession, rather than cutting back.

The goal is to shake the world’s third-largest economy from two of its most unrelenting problems, chronic deflation and a strong currency, which hurts Japan’s exporters by making their products more expensive overseas. But the strategy represents a particular gamble for a nation already with the highest debt burden in the developed world, at 220 percent of the gross domestic product.

Read more: http://www.washingtonpost.com/world/with-2-percent-inflation-target-japan-signals-new-strategy-to-end-deflation/2013/01/22/6ab6d182-6479-11e2-9e1b-07db1d2ccd5b_story.html?tid=pm_pop

[AdHocSolver]

1. Economies suffer when wealth is overly concentrated in the hands of a few.

Austerity measures and debt reduction worsen economic stagnation for the same reason that concentration of wealth in the hands of a few creates economic stagnation in the first place.

If the masses don't have money to spend, then economic activity shrinks, and the economy shrinks.

An economy only functions well when wealth is spread out among the masses who have the desire and wherewithal to buy and sell goods and services. This activity is reflected in such measures as Gross Domestic Product.

When wealth is withdrawn from circulation, such as hoarding money by the wealthy, or by instituting so-called austerity measures, money is taken away from the people who would spend it and thereby contribute to the economy.

It should be readily apparent that money withheld from the U.S. economy, for example, by being hidden in the Cayman Islands, does not contribute to the U.S. economy.

Reduced government spending to "reduce the debt" removes money from the people most likely to spend it, the middle class. The size of the debt is not the problem. The problem only occurs if the group that owes the money can't obtain the revenue necessary to pay off the debt. This is why reducing taxes on the money hoarders, the wealthy, is counterproductive.

This is why the tax code needs to be changed so that the wealthy cannot avoid paying their fair share of taxes. The money that the wealthy hoard reduces economic activity by the middle class who would spend it.

This is why the high cost of health care causes economic stagnation. The money that would be spent by the middle class is instead sucked up by insurance companies, drug companies, and the medical establishment.

This is why the Fed's policy of keeping interest rates low on the assets of depositors, while keeping interest rates comparatively high on borrowers (such as on credit card purchases), is exacerbating the recession.

The economic stagnation is also explained by the elimination of jobs due to the corporate outsourcing of jobs. Unemployed people can't afford to buy goods and services and they pay little in taxes.

The Japanese economic problems are exacerbated by the multinational corporations sending most of their manufacturing jobs to low wage countries such as China. Higher quality, higher priced Japanese goods cannot compete for the U.S. dollar against cheaper Chinese goods due to the reduced earning capacity of the U.S. middle class.

The only effective way to correct the immediate economic problems the U.S. faces, which would also help to alleviate some of the economic problems faced by other industrialized countries is to change the economic rules, such as reform the tax code, to put more money into the hands of the middle class, that is now hoarded by the corporations and the wealthy.