Japan Was First - And the Bill Is Now Due
Why the “Free Lunch” Era Is Ending - and What Japan Tells Us About the Future of the U.S. and the World
For years, it seemed like Japan had cracked the code. While other nations worried about ballooning debt and the risks of money-printing, Japan ran massive deficits, expanded its central bank balance sheet more than tenfold, and still kept inflation tame. This gave rise to a dangerous illusion — that there was, perhaps, a “free lunch” in economics after all. That extraordinary tools like quantitative easing (QE) or MMT-style spending weren’t just crisis levers, but permanent fixtures of modern policymaking. But they never were. These were always emergency measures, not sustainable strategies. And now, after decades of apparent calm, the costs Japan deferred are showing up - in rising inflation, surging bond yields, and growing political pressure. What felt like stability was really a long delay. The bill is arriving — and Japan’s reckoning is a preview of what’s to come for the rest of the world.
Our SEM Services are based on my Macro Framework, focused on understanding the interaction between business cycles, monetary policy and market psychology.
The Great Misunderstanding About Japan
For years, analysts pointed to Japan as proof that unlimited borrowing and central-bank intervention carry no consequences. Japan’s case was cited to argue that:
Massive Debt Doesn’t Matter: Even with public debt over twice its GDP, Japan seemed to suffer no penalty – government bonds remained stable and affordable. In fact, under normal logic such debt “should lead to a selloff in bonds and higher yields”, yet for a long time Japan’s 30-year bonds yielded just ~3%[1].
Central Banks Can Suppress Yields Indefinitely: The Bank of Japan (BOJ) showed that aggressive bond-buying and yield curve control could keep interest rates near zero perpetually, or so it appeared.
QE Doesn’t Create Inflation: Despite the BOJ injecting trillions of yen into the economy, inflation stayed muted for decades, suggesting to some that money-printing would not spark price increases.
These beliefs, drawn from Japan’s seeming exception, heavily influenced policymakers after 2008 and during the COVID-19 pandemic. Japan’s example became the justification for ever-expanding stimulus and debt: if Japan could do it without pain, why not everyone? The key misunderstanding is this: Japan was not evidence of a new economic law, but rather of the power of delay. Its “free lunch” was never truly free – just postponed.
Key Point: Japan’s decades of calm were not a new paradigm. They were an anomaly in which consequences were incubating out of sight. What we’re witnessing now is the eventual eruption of those consequences, not a vindication of costless debt.
2. The Question Keynes Never Answered
John Maynard Keynes famously quipped, “In the long run, we are all dead,” when pressed about the consequences of continual stimulus. It was a witty dodge – but it left an important theoretical question unanswered: What happens when the future finally becomes the present, after repeated interventions? Keynes answered how to fight a recession with deficit spending and easy money, but not how to eventually exit from an endlessly stimulated economy.
Consider the scenario Japan and other economies now face, which Keynes never had to confront in practice:
Multiple rounds of fiscal and monetary stimulus have been applied over years (or decades).
Interest rates have been pushed to zero (or even negative) and held there.
Huge amounts of future demand were effectively “pulled forward” to prop up the economy repeatedly.
Keynes did not spell out the endgame for such a scenario – he sidestepped by implying that in the distant future any fallout wouldn’t matter (“we are all dead”). But for today’s policymakers, the distant future has arrived. What do you do when you’ve been borrowing growth from the future for decades, and the future has now arrived with growth already spent? This is the grim question central bankers assumed they’d never have to answer. They thought endless stimulus would always kick the can further. Japan’s situation forces the issue: after 30 years of avoiding the “long run,” the long run is here.
