Regarding Kevin Rafferty's Feb. 9 article, " 'Shoganai' won't save Japan": It is obvious that Keynesian theory did not work for Japan and that the United States is now hooked on the same theory. Why does it matter? Because of the concern over sovereign debt and the problems with debt in various U.S. states and the migration of the problem to Europe.
At the very least, the Keynesian approach raises long-term interest rates, which then exceed the growth rate and put pressure on government budgets. There is only one way out of such a mess and that is to apply the opposite of Keynesian theory. Government must downsize and become a smaller part of the economy. There is no other possible exit once you have borrowed too much. You can print money and buy government debt, but that's a temporary measure as it destroys long-term confidence, increases long rates and adds to the debt burden. Japan's direction must change because sovereign debt is under scrutiny.
Keynesian theory was not meant to resolve a structural problem, and debt destroys growth. While tax increases may be necessary, efficiency and competitiveness are the only real exit strategy. Japan is on the radar, and the credit rating agencies are going to be more vigilant after screwing up on U.S. mortgage-backed securities. There is little time left to maintain investor confidence, and, yes, it will prove painful.
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