Repeat after me: The U.S. is not Japan. But that doesn't mean everything's okay
Richard Katz, who knows a whole lot more about Japan than I do, writes in the new Foreign Affairs that likening our government's handling of the financial crisis so far to Japan in the 1990s is balderdash:
It took the Bank of Japan nearly nine years to bring the overnight interest rate from its 1991 peak of eight percent down to zero. The U.S. Federal Reserve did that within 16 months of declaring a financial emergency, which it did in August 2007. It has also applied all sorts of unconventional measures to keep credit from drying up.
It took Tokyo eight years to use public money to recapitalize the banks; Washington began to do so in less than a year. Worse yet, Tokyo used government money to help the banks keep lending to insolvent borrowers; U.S. banks have been rapidly writing off their bad debt. Although Tokyo did eventually apply many fiscal stimulus measures, it did so too late and too erratically to have a sufficient impact. The U.S. government, by contrast, has already applied fiscal stimulus, and the Obama administration is proposing a multiyear program totaling as much as five to six percent of U.S. GDP.
I've made this same point myself, so I certainly don't disagree with Katz. It does always worry me, though, when people (including myself) say We're not going to fall into this particular trap because we've learned from others' mistakes, or we're better, or whatever. Because, you know, maybe we'll just fall into some other trap.
The great Peter Bernstein has a disconcerting piece in today's FT about the impossibility of saying anything conclusive about the long run:
Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?
We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.
So no, we're not going to have a lost decade like Japan's. But we might have an even worse one.
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1
I prefer to think that our government's swift action will create a much shorter recession and restore confidence across the board. As long as we don't let the Republicans' old game of fear politics continue to sieze the headlines.
Read more at kpsilverman.wordpress.com
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2
WE'RE TURNING JAPANESE
(Turning Japanese, The Vapors)
WilliamBanzai7We've got a giant bucket of horrendous economic news
You wrote "We love you" We wrote back "we too"
We sit here staring at Bloombergs, there's nothing else to do
Oh it's in color the DOW keeps going down
Our eyes are glazed, and our deficit is flying in the clouds
Now we can kiss our own depressed asses goodbye when there's no one else aroundWe've got a picture, We've got your picture
Like a million years of stagnant economic hell
We want a doctor to take your financial picture
So we can look at your Lost Decade from inside as well
You've got us turning up and turning down
And turning in and turning 'roundWe're turning Japanese
I think We're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so
We're turning Japanese
I think We're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think soNo loans, no bonus, no jobs, no women
No fun, no sun, no good news, no wonder it's dark
Everyone around us is in layoff danger
Investors all avoid us like a cyclone rangerThat's why We're turning Japanese
I think We're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so
We're turning Japanese
I think e're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so -
3
"The long run is an impenetrable mystery. It always has been."
.
I thought Keynes had a blunt solution to that mystery. -
4
I think one of the ways in which we ARE like Japan is that the bulk of our population is older (and aging) at this point, which is similar in demography to Japan's at the beginning of their financial crisis.
Will the huge bulge of Boomers reinvest in the markets, in housing or in other large investments when this is over, or are they all gone for good; happy to pack it in and sit on their money for the next 10 years in case it rains?
The savings habits of the generation that lived through the Great Depression are well documented and may be part of the reason for the long, slow market growth after the crash (the Dow, for instance, didn't hit it's 1929 peak after the Depression until 1954...25 years later!)
The same thing happened in Japan... the older generation saved, and they ended up with huge amounts of public sector debt but huge amounts of private savings because the older population couldn't be convinced to reinvest. That should be a concern.
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5
Of course, the US is not Japan. Japan has never been in bad debt, let alone the mind-boggling 10.3 trillion dollars (shooting up to 11 trillions soon) the US is owing.
To partially fulfill the pledge made during the presidential campaign, the White House team has just come out with a huge 3.5 trillion budget mainly on health, education and environment -- bold move indeed. By taxing the rich (the very rich) and reducing defense-cum-war expenditure, the president hopes to close the immense deficit gap. Somehow, nothing seemed to have mentioned on how the gargantuan national debt would be serviced or reduced.
Squeezing the rich and the large corporate may not be a viable task in the current crippling financial mess, they are smart enough to know how to evade taxes or avoid being tapped. Cutting military and defense expenses may push the generals into tight corners, they would want to retain the status quo for enhancing the American global hegemony and continue escalating the war in Afghanistan.
With the US GDP continues shrinking, the Washington administration is betting on things to work out as planned quickly. But who really knows? What happens if there will be an equally quick BACKLASH? Just wait.
(Tan Boon Tee, btt1943@yahoo.com)
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