08/27/10 Ouzilly, France – According to an article that appeared in The New York Times, written by Norihiro Kato, the Japanese have gotten good at sloughing off their worldly cares. Japan is no longer the world’s number two economy; it was eclipsed this summer by China. But the Japanese are used to slippage. We all know the story of their 20-year economic decline; Japan’s GDP actually peaked out about 15 years ago. It has been sliding ever since. That is only a part of the story. In terms of rice production, the Japanese have been downsizing for more than 40 years. Japan’s population, too, grew by 1% per year from 1917 to 1977. It peaked out in 2005. There are fewer Japanese now than there were 5 years ago. If the trend continues, eventually there will be none.
Our back page dictum: people come to think what they must think when they must think it. What do people on the road to extinction think? Ask the Japanese. According to Kato, they become less competitive and more reflective, almost zen-like, turning an eye inward, away from striving, fighting, jostling and whacking…gracefully accepting whatever the economic gods send their way. In the meantime, they stay at home and save their money; like a lap dancer in retirement, they know it is all downhill from here.
Over in the developed West on the other hand, resignation and capitulation have not yet caught on. People still rage against the dying light of the Bubble Epoque and count on quantitative easing to get it going again.
In the US, half a million Americans filed for jobless benefits last week – the highest number in 9 months. At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month decrease since 1968. Again, the direction is all wrong. Housing led the US out of 7 of the last 8 recessions. Now, it is holding it back! One out of every 7 mortgages is delinquent or in foreclosure. The nation is on target to foreclose on more than a million houses this year – a new record.
So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan? There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot. There are those who think Europe and America will follow in Japan’s footsteps. And those who think it will not. Taking no chances, our Daily Reckoning has firmly held both opinions at one time or another.
The US is not Japan, say many. Japan’s 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current account surplus. The US is confronted with the opposite situation: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will unable to stay on the road to Tokyo. Instead, it will soon be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan’s orderly ruination.
Those who think the US and Europe are following on Japan’s heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with money borrowed from the public. This effectively transferred the burden of debt from the private sector to the public sector, while holding the economy in a state of suspended animation for two decades. Meanwhile, Japan’s people were getting older…more cautious…and more resigned to slippage.
This seems to be what is happening in America too. The private sector is de-leveraging. The latest report shows credit card debt at an 8-year low. Mortgage debt is dropping sharply too – thanks to defaults and foreclosures. Banks and private companies are stockpiling cash in anticipation of a cold winter. Households are playing it cool too.
Ben Bernanke must have gotten the message sometime between the 4th of July and the Assumption of the Virgin. On the 11th of August, the Fed announced another round of quantitative easing designed to fight against the decline. Of course, Japan tried quantitative easing too. It failed, just as monetary and fiscal stimulus had failed.
But who knows? Maybe the Japanese are just losers. They are the only people on earth to have atomic weapons dropped on them. Then again, that only seemed to encourage them. After 1945, the Japanese and the Germans picked themselves up and went from absolute ruin to become the world’s most admired economies. Let us hope the authorities don’t draw the obvious lesson: on the evidence, nuking may pack more stimulus punch than quantitative easing.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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The DJ A recovered today! Ben Bernanke fixed it. He has more stimulus up his sleeve. Nothing but rabbits come out of his hat.
Another important difference is that Japan will never experience race riots…
The current economic depression in the United States will not change until consumer debt levels have been dramatically reduced. The best way of going about this should have been with restricted use tax refunds 2 years ago. At the height of the financial melt-down, the government should have held-off bailing out the banks directly. Instead, they should have utilized IRS records to determine who deducted mortgage interest expense on their 2007 returns. This should have been followed by the US Treasury issuing checks for the full amount of interest paid on mortgages for 2007 to every tax payer who claimed the deduction. The checks would have one restriction, they could only be deposited as a payment to reduce principle on an existing mortgage balance. In this way, the banks would have been recapitalized while destroying consumer debt. It would have stabilized housing price declines by making more owners eligible to refinance based on their increased equity. It would have prevented countless foreclosures. And it would have replenished the bank’s balance sheets while at the same time rescuing many consumers from insovlency. There would have been some downside, mainly inflation. Additionally, many without mortgages would have protested because they didn’t receive the subsidy, ignoring the fact that their own pension plan was probably loaded with crappy loans that would eventually default without the bailout. Still, all things considered, it would have been a far better approach than what has transpired. As it is now, banks have gotten everything. They’ve gotten bailed out. They still took possesion of millions of homes through foreclosure, and the most of the executives running the banks then had the audacity pay themselves tens of billions in bonuses. If the outcome from all of this isn’t some sort of eventual social explosion, then human nature has departed from any past historical predictibility.
I find it interesting that lack of population growth somehow means extinction.. ” Japan’s population, too, grew by 1% per year from 1917 to 1977. It peaked out in 2005. There are fewer Japanese now than there were 5 years ago. If the trend continues, eventually there will be none…”
If you read Limits to Growth , you will find that finding a steady-state is the only way to survive.. and that means population. The Japanese aren’t going extinct because the population isn’t constantly growing… the model of perpetual growth to support the people at the top… is called a Ponzi Scheme.. and its as bad for population, and sustainability as it is for investors…
This is good news for the Bikini Atoll !
perhaps Ben’s “…unusual stimlus…” promised will be a stunning attempt to erase sovereign debt world wide, a form of a jubilee not shared by the common folk
it would fit their MO
“Nothing but rabbits come out of his hat.” Its not his hat that those rabbits are coming out of>
“There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot.”
Ha! loving that statement
Japanese economy should not be compared with those who have hundreds of years old history. Japan has come up in a very short span of time. Concept of quality control has been introduced by them. And there is no doubt that soon Japan will rule the world of economy.