Twenty years on Japan is still paying its bubble-era bills
economist.com
economist.com
Back in the 70s, Japan's rise as a world economic power was fueled by government loans to private industry, allowing banks to fund abnormally large investments in industries, specifically manufacturing and technology, which helped support the rise of the global Japanese brands (Honda, Sony, etc).
These same funds also helped inflate the massive real estate bubble the article briefly covers by selling the concept of the limited real estate space in Japan. What investors in Japanese real estate failed to realize is that even though there is a limited space in Japan, there is an unlimited price that a given piece of land may be valued at but a limited price that it can be intrinsically worth compared to the value of all other assets (hence the overinflated valuations of the properties).
For a long time (70s and 80s), Japanese companies made solid progress in commanding global sectors, and their auto companies still do. However, the loans became so large and the earnings generated by the firms eventually declined to levels where the loan payments could not be made. The subsequent bank write-offs on all assets were the cause and/or effect (really a self-perpetuating vicious cycle).
I cover these to give a positive spin on the United States situation. While the government has made a number of mistakes in regulating the banking industry and partially inflating the housing sector, it has not tried to directly inflate the economy to the scale the Japanese government did in the 70s. The United States government is propping up some American industries, but again, not to the extent of the Japanese government in the 90s. If that were the case, they absolutely would not have let Lehman Brothers fail. The government is in a tough position, trying to prevent political and economic chaos while allowing markets to reach their own equilibriums.
For anyone who fears the China may be catching the United States economy, there is a good amount of evidence that China may be suffering the same syndrome Japan had in the 70s (building its economy based on government money). China will likely deal with the problem more efficiently once a bust occurs, but it does mean that China could be less of a threat than many suspect, assuming the United States is able to innovate at a reasonable rate.
Here is a decent article/example of what I am talking about with China: http://www.bloggingstocks.com/2009/09/09/petrochinas-sugar-d...
I agree with you on the obstacles facing China to becoming a superpower which are far greater than others imagine. Working there, you see how inefficiently resource allocation has been for state owned enterprises which in turn have propped up stock prices and real estate. How they're able to deal with any bust politically is what scares me.
The government is already largely hated/strongly disliked in many quarters (there are many who have long memories not to mention the obvious and very visible corruption). It bears mention that that China liberalized not because they wanted to, but because they had no choice given how poor their people were. When the bust happens, the increased civil unrest and the government's overriding resolve to maintain power will be a volatile combination - one that Japan didn't have to deal with.
I also agree that the parallel of Japan seems more relevant to China than the US. China's non performing assets in their banking sector has likely grown quite significantly with the push for lending in the last year. The average Chinese aren't stupid either - which makes it a potential catastrophe if certain world leaders get their wish that the RMB is allowed to float. Capital will rush out of China and its domestic banks causing a financial crisis and ironically potentially a RMB that is worth substantially less than it is today.
of course with government customers couldn't traditionally just "go elsewhere". this is showing signs of changing (lichtenstein, switzerland, hong kong, singapore, etc.).
The difference, and why so few people fail to analyze China along similar lines, is that China is so big, and China is historically communist. We've all acted very confused about what's going on over there, when really it's essentially following the same patterns, just on a larger scale. Eventually, the economy of China will grow to be so large that a pure export-driven economy will no longer work, the cost of employing factory workers won't necessarily realize the same cost savings that they do now, and then they'll have to being transitioning their economy over to other areas of expertise.
Japan and Korea both largely settled on hi-tech partnerships in electronics and manufacturing and automobile manufacturing, which while still export-driven in the technical sense, is loads different than making under priced radios and other flashy and cheap trinkets. China is still largely in the cheap trinket export market, but the plethora of automobile manufacturers, and some notable acquisitions in that areas, as well as an internal push towards hi-tech manufacturing (the Longsoon processor for example) makes me think they'll be in the same state in 20 or 30 years.
The problem with that argument is that the US govt may have changed its behavior after letting LB fail. Letting LB fail is also consistent with "we're going to make sure that politically-connected companies will survive".
In other words, LB's failure does not tell us that the US govt is not in the biz of propping up some american industries. It doesn't even tell us taht the US govt isn't in the biz of propping up the financial sector.
In other news, the US govt bought the rest of GMAC last week. GMAC provides financing for many GM and Chrysler buyers. (I think that GMAC also owns DiTech.)
Also, the US Govt announced that the sky is the limit for bailing out Fannie and Freddie.
Fannie and Freddie have always been quasi-government organizations running with government contracts/charters.
To make the conversation slightly political (since we are discussing government influence on the economy), I don't agree with most of the actions the government has taken in relation to the auto industry.
Still, it's not as though the Post Office is acting as a savings account like a bank as was the case in Japan. That's a different shade of gray than what's occurring in the USA.
Yet, as late as early 2008, suggesting that there was actually a federal guarantee or that Fannie and Freddie should be under significant govt oversight was a sure way to get attacked politically. (McCain got absolutely hammered when he tried in a couple of years earlier.)
Fannie and Freddie execs were prominent in Obama's campaign and some of them landed prominent jobs in the administration.
This goes back a bit to the debate over whether or not it's possible to have economic growth without dynamism. That yes, you do have booms but you also have busts but that the net benefits of the booms (in productivity and innovation) far outweigh the consequences of any bust. Governments who attempt to dampen busts (e.g. minimum wage, stimulus, propping up businesses that should otherwise die off) as a corollary also tend to dampen recovery and growth (e.g. resulting higher interest rates, slower hiring, stagnant growth of new businesses as zombie firms squeeze resources that would have otherwise been reallocated).
Also note that the leadership of the Yakuza is very politically conservative. Putting the brakes on economic development would also serve to slow down social and cultural change, as well as producing a climate generally friendlier to extreme right-wing politics.
The moves in the US to weaken mark to market accounting rules to paper over weakness give great pause.
Granted, you could make the argument that these banks should have had greater reserves, but it is also useful and relevant to note that many of these banks may not have failed if they were not forced to sell of some of these assets at their lows as a result of regulatory requirements that did not exist only a year or two earlier (I forget the date).
Japan's fertility rate is in the "lowest of the low", a rate from which no other society has ever recovered. You can plot it out so that it's projected there will be no Japanese left by the end of the next? century, but a gentle "will the last person please turn out the lights" scenario is extremely unlikely in such a rough neighborhood, where so many of the neighbors have serious grudges from 20th century Imperial Japan (at the time of the atomic bombings, the monthly death toll of the conquered people was in the low six figures; they killed 250K Chinese just trying to find one Doolittle crew, etc. etc. etc. etc.).
All that money invested in the Postal Savings System is, as far as I know, gone. As the article noted, it's invested in "safe" government bonds, i.e. the money has been long spent and with the current and rising worthy of a 3rd World country debt to GDP ratio it's vanishingly unlikely it'll ever be repaid. Especially if each succeeding decade continues to be "lost".
However, all that said, the Japanese have a modern history of substantial and successful (at least at some levels) remaking of their society, e.g. Sengoku (civil war) -> Bakufu (military government AKA shogunate) -> Meji Restoration sliding into Imperial Japan -> post-WWII fantastic recovery.
Although perhaps this success is mostly to be judged from the viewpoint of the ruling class, which has been been all too often fantastically inept. Japan hasn't been run for the benefit of the people as far back as I know (e.g. Sengoku), and one might observe that its terminal demographics are a reflection of the people having reached a tipping point (check out some of the comments in the article; I can say that from what I've read descent rice is beyond the budget of many if not most Japanese (they're now into the 2nd generation of thrifty mothers feeding their children bread for breakfast and noodles for lunch)).
Maybe they'll recover. But it won't happen absent something that changes the reward structure so that family creation becomes healthy.
Money isn't exactly invested in the Post Office, it's deposited in their savings accounts. Those deposits are guaranteed just like savings accounts in any other country. Well, if everyone tried to take out all their money at the same time we'd have a problem, but that's true of any bank in a fractional-reserve banking system.
Japanese bonds are one of the most liquid investments in the world. If you're are so sure they'll never be repaid, contact your broker and find a cheap way to short them! Seriously, if Japan defaulted we'd have a much worse crisis than the recent one. More likely, Japan will just gradually increase the tax burden and devalue the currency in order to pay the debt.
Japan is aging at a terrific rate, and those elders will be pulling money at net out of their savings accounts (especially those who have had pension records lost by prefectures). So there will be a "run on the bank" at some level, but not the sort that causes a panic.
Bottom line here is that by definition current consumption must come from current production. Now they might be able to snare some current production from other countries by selling those bonds abroad ... but all in all I just don't see the current Japan Inc. making it work for too many more decades.
Peoples and societies have gone extinct before, I don't think you can say it's impossible in this case.
so.. a double blow, the great recession and the new decade of retirement, its a slow fade to #4 or #5 in world GDP.
IIRC, he even suggested that Europe's long period of stagnation during the Dark Ages was because real interest rates were so high that rational entrepreneurs would never invest in new technology, because there was no conceivable way that they could generate a positive return on capital. And that the pyramids were ancient Egypt's solution to the problem of Keynesian stimulus (i.e. nobody was investing, so they built the pyramids to forcibly confiscate money through taxes and then distribute it to workers who would actually spend it).
It makes me wonder what we're in for over the next 10 years. I don't really believe the "permanently stuck in a deflationary trap" theory - there's too much evidence against it. But I think the normal way countries get out of it is through war, which isn't terribly rosy either. In addition to the direct Keynesian stimulus, it also encourages rapid technological development, which opens up new markets that then become fertile ground for investment after the war.
How about an upsurge in space exploration? The colonization of Mars, enabled by plasma rocket technologies like VASIMIR? The exploration and colonization of Mars has been likened to the exploration and colonization of the Americas. Mars has sunlight and soil suitable for cultivation of terrestrial crops, and geology influenced by large amounts of water, which likely means deposits of easily exploitable ores. (The point being, to exploit resources locally, and to use Mars as a base of solar-system wide civilization, not to export back to Earth. Mars is positioned advantageously to be the center of economic power of such a civilization. Earth, disadvantaged by its large gravity well, will become a 2nd rate location.)
It sounds far-fetched, but I think a careful examination of technology will reveal it to be quite plausible. Unfortunately, opportunities for colonization have historically led to war.
I don't disagree with your comment. I'd like to read a good article or paper explaining/disproving the deflationary trap.
The idea that war has worked to end depressions is well debunked. In any useful measure economies always deteriorate through war. Living standards in the US fell all through WWII and continued falling until demobilization. GDP goes up during war because of weapon purchases. And unemployment goes down when you draft (enslave) people. So these are meaningless measures. You have to look at households.