"[We] have to switch [the Japanese] mindset... we are looking for the trigger."

Japan's Finance Minister Accidentally Reveals How It All Ends: "War"

Zero Hedge,

26 March, 2016

While this all started with a currency "war," it seems - according to a stunningly candid transcript of Japan's finance minister's conversation with none other than Paul Krugman - that the real endgame here is actual war. Aso remarked that "a similar [deflationary mindset] had occurred in the US in the 1930s. What solved the question? War! Because World War II had occurred during the 1940s and that became the solution for the United States. [We] have to switch [the Japanese] mindset... we are looking for the trigger."

Japanese Prime Minister Shinzo Abe has been the most hawkishly militaristic PM of a generation, shifting from the passive society to an aggressor, beginning around 2013. This has only been emboldened by rising nationalism and escalatuing tensions in the South China Sea.

We note this by way of background as just-released transcripts of a conversation between Japanese finance minister Aso and Uber-Keynesian Paul Krugman reveal perhaps the reality that Japan faces as its economic and social structure collapses...

(Minister of Finance Aso)

During the 1930’s, I remember that in the United States likewise there was a situation of deflation. And the New Deal policies have been introduced by then President Roosevelt. As a result, it worked out very nicely, but the largest issue associated with it is that for a long period of time entrepreneurs and managers of companies did not go to make a capital investment by receiving the loan. It had continued up until the late 1930’s and that is the situation occurring in Japan too. The record high earnings have been generated by the Japanese companies but they would not spend in the capital investment. There are lots of earnings at hand on the part of the corporate in Japan. It should be used for wage hike or dividend payment or the capital investment, but they are not doing that. They are just holding onto their cash and deposits. Reserved earnings have kept going up.

A similar situation had occurred in the US in the 1930’s.

What solved the question? War! Because World War II had occurred during the 1940’s and that became the solution for the United States. So, let’s look at the entrepreneurs in Japan. They are stuck with the deflationary mindset.

They have to switch their mindset and should start making capital investments. We are looking for the trigger. That is the utmost concern.

(Prof. Krugman)

The important point about the war from the macroeconomic point of view is that it was a very large fiscal stimulus. That fact that it was a war is very unfortunate. It was simply something that led to a fiscal stimulus that would not otherwise have happened.

In fact, the story in the 1930’s was that the New Deal, Roosevelt backed off the fiscal stimulus in 1937, because then, as now, there were many calls for balancing the budget. That was a terrible mistake. It caused the major second recession.

Yes, obviously we are looking for ways to achieve something like that without war.

Obviously... though war would be handy eh? All that ammunition manufacturing and no inflationary pressure as everyone of them gets shot away. What could go wrong?

So here is  74 seconds of pure Krugmanism from the mouth of the man himself - Keynes 1939 (pre-war) radio address on the beginning of The Grand Experiment...

Krugman Goes To Japan, Scolds Abe For Worrying About Quadrillion Yen Debt Pile, Leaves