Japan’s Rainy Day

In the face of unprecedented destruction, Japan’s real challenge will lie in financing the recovery.

As Japan continues to suffer through the aftermath of a record-setting 9.0 earthquake followed by a catastrophic tsunami and still more aftershocks, it now must contend with the threat of multiple nuclear power plant meltdowns spawned by the original disasters. The world is appalled by the devastation and suffering of the Japanese people and inspired by their orderly conduct in the face of apocalypse. However, the worst is yet to come as Japan’s ability to recover from this unprecedented destruction will be greatly hampered by its choice to deplete its treasury and increase its borrowing costs through the pursuit of stimulus spending over the last couple of decades.

In the 1980s, Japan experienced a massive real estate bubble that created immense paper wealth. Japanese companies used this newfound wealth to over leverage their financial positions and go on a buying binge snapping up pricey real estate holdings. When the bubble collapsed in 1991, the Japanese government sought to paper over the resulting financial crisis with stimulus spending and easy money to counter the deflationary economic spiral caused by the collapse. This stimulus spending has resulted in an $11 trillion debt and two decades of lost economic growth as Japanese banks have never been forced to deal with the toxic assets still on their books. The Japanese debt to GDP ratio stands at a staggering 200% and has resulted in further credit downgrades and increased borrowing costs.

In contrast, the United States created the Resolution Trust Corporation to purchase underperforming assets from savings and loan associations resulting from their industry meltdown is the early 1980s. The financial medicine was painful, thrifts were closed, and people lost money, but the recovery was relatively speedy and trust was restored to the financial system. By refusing to take a dose of this harsh financial medicine, Japan has lost two decades of growth and never dealt with the underlying problems in its financial system. Even America forgot the success of the RTC when it embarked on a similar program of stimulus spending and easy money to deal with the financial meltdown of 2008. Ben Bernanke continues to advise the Japanese to pursue their stimulus spending despite its lack of success in reigniting the Japanese economy.

After suffering through the 1995 Kobe earthquake which killed over 6000 people and caused over $102 billion in damage, Japan is faced with an even bigger disaster that insurers estimate could easily be the most costly in history. Still struggling to absorb the Kobe disaster, this is not a good time to be the world’s most indebted nation. The present catastrophe could well prove to be the straw that breaks Japan and relegates her back to third-world status. Among Japan’s many strengths are its export economy and strong identity as a nation of savers. Japan rose from the ashes of WWII with our assistance to become one of the most prosperous nations on earth, but multiple catastrophes can lay low even the mightiest nation.

As hard as it is on the Japanese people, this crisis serves as a wakeup call to the United States to get its financial house in order before it is faced with a disaster of this magnitude. Many have warned of the impending financial doom awaiting us on our present course; advice that has been routinely ignored by the present progressive cabal inheriting the executive branch of our government. Obama admits to trillion dollar deficits for the foreseeable future and assumes that no disasters will befall us as we struggle to adjust to the new reality of crushing debt. The earthquake could just as easily have struck the California coast as it sits on the same ring of fire as Japan. Then it would be us with no financial reserves to undertake the recovery necessary to return us to our present standing in the world. As it is now, our strained financial picture leaves us very little in the way of being able to assist Japan with its recovery through financial means.

America has always stood ready to assist any country suffering through a natural disaster. This attitude has always been possible through its immense wealth. However, our reckless spending has endangered both our ability to help others and to help ourselves. Other nations possess abundant wealth, but only America has been willing to step up and help those in need. And need I remind anyone that many nations in the world would not only refuse their assistance, but would actually celebrate if America were the one suffering this tragedy. It is for this reason that it is incumbent upon us to right our mighty ship of state so that we may not only be strong for our own people, but also stand strong for others in need around the world.

The Japanese are an honorable and resilient people who have suffered a massive disaster. They have our sympathy as we cry for their loss. They have our assistance as we place supplies and equipment at their disposal. Let us pray that they recover quickly and that our resources prove to be enough to ease their suffering. Let us also use this as a wake up call to prepare our house so that we may more quickly recover from a future storm.

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