The Contrary Investing Report
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Japanese Stimulus Spending History: Kinda Like Crack Cocaine

by Brett on July 21, 2010

Astute reader Shaun forwarded along a great email with his thoughts about the sovereign debt situation, and included a couple of fantastic charts that illustrate examples from Japan and Argentina.  Both charts are courtesy of Reggie Middleton’s excellent BoomBustBlog.

The first item we’ll explore is Japan, a nation that has become increasingly hooked on public sector stimulus since its credit bubble burst in 1990.  As you can see below, when stimulus waned, the Nikkei was soon to follow:

Nikkei vs. spending in public sectorSource: Reggie Middleton’s BoomBustBlog

No doubt our astute readers know that there is no such thing as economic stimulus – that would imply that there’s a such thing as a free lunch!  And we know better –  TANSTAAFL!

What’s branded as stimulus is really coercive wealth redistribution from the productive private sector to the unproductive private sector.  Like a drug addict, short term gains prove to be short lived, and the longer you stay hooked on the dope, the harder it is to kick the habit.

The result is a set of “lower highs” (there’s nothing like the first time, after all) and “lower lows” – until the addict eventually hits rock bottom (or in sovereign debt terms, default).  At which point the healing/restructuring process can begin.

The downward spiral that leads to sovereign default can occur fast and quick, as evidenced by Argentina bond prices and yields in their 2001 default.  As you can see in the chart below, one year can make quite the difference in a debt crisis:

argentina bond price chart 1990's

Source: Reggie Middleton’s BoomBustBlog

As Shaun presciently summed up in his email: “Makets are NOT ready for this.”  I couldn’t agree more!

Thanks again to Shaun for writing in with these excellent tidbits, and again a big hat tip to Reggie Middleton for the outstanding charts!


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