The NEW New Economy?

The Seattle Times updates us on what life is like in a country with neither a new economy nor even an old Alan Greenspan: “Last month consumer prices in Tokyo fell 0.6 percent from the previous year, marking the 21st consecutive month that prices dropped,” the government said. “And there is no sign they will stop falling.”

“Indeed, falling prices have ruined corporate profits, saddled banks with hundreds of billions of dollars in bad debt and wrecked home values. Ordinary Japanese are worried, and policy-makers are puzzled about what to do.” No one fully understands what went wrong in Japan. But almost every economist in North America is sure that it won’t be repeated here, whatever it is.

For some reason, the Japanese abandoned their boom/borrow/spend psychology after stocks crashed in 1990. Despite a full-time central banker, interest rates of zero, and lavish fiscal spending – nothing has induced ordinary Japanese to resume their bubbly ways. Consumer spending, for example, fell 4.4% this April, over the same period a year ago.

Japan’s economy lost ground in the first three months of the year, with negative GDP growth of 0.2%…suggesting the nation is headed into its fourth recession in a decade.

“I don’t think you can point to a single, post-World War II case of national deflation on such a massive and continuous scale,” comments Robert Alan Feldman, economist for Morgan Stanley in Tokyo. “These are just not normal times.”

But as they say at the bar across the street, the Bear’s Den… “who’s to say what’s normal?”

In today’s letter I take up the issue with both a simple question and a simple answer.

To the question: “why won’t Japan’s consumers consume more?”. I offer the following hypothesis: because they are getting old.

All of nature breathes in and breathes out, expands and contracts, booms and busts… The lifecycle of a human being is no different. We begin as small animals; then, we grow into big ones. If we are lucky, we contract again… and finally whither to dust.

I offer no judgment on this process, nor a remedy. I merely report it.

At a certain point in our lives, the desire to expand ceases and is replaced with a desire to cut back, to downsize, to take life more slowly… and reduce the level of risk and excitement. We give up rock climbing and begin rock gardening, for example. We sell our big houses – in which we raised our children and endured the sturm and drang of the teenaged years – in favor of a smaller place, perhaps with a smaller yard…or maybe even a condo in an adult community.

Economists may argue about whether Mr. Greenspan’s counterparts at the Bank of Japan lowered rates…or failed to increase the money supply…fast enough, or whether the government has propped up failing institutions, or been unwilling to ‘restructure’ the economy (whatever that means). Meanwhile, the Japanese – with the oldest population of any major nation – grow older. And as old people have always done, they seem to be downscaling their lives. They are saving, rather than spending…and preparing for retirement.

The Japanese are demonstrating what economists call “the paradox of saving.” An economy needs savings in order to invest in new and better means of production. But taking money out of the consumer economy reduces sales and profits in the near term. Companies pay out wages – but the money doesn’t come back in sales. Instead, it gets squirreled away for the future.

The New Economy was supposed to be one in which this didn’t happen – because information technology was thought to require less in the way of capital investment (less savings) and because it was supposed to reduce costs so fast that it generated huge savings and huge profits. Money would not have to be taken out of the consumer economy.

There are many new things about our economy. But what if the most important new thing really has nothing to do with technology…and everything to do with aging populations? What if Japan’s deflationary economy, rather than America’s recently booming one, represents the wave of the future… the NEW new economy?

Imagine millions and millions of people preparing for retirement. They no longer borrow money to finance a bigger home. They no longer buy bigger cars for taking family vacations. They have all the time savings devices and household appliances they need. And they are no longer buying stocks ‘for the long run.’ They bought stocks ‘for the long run’ 10 or 15 years ago. Now the long run has come.

A Japanese investor who was 65 years old in 1989, is now 72. And if he had $300,000 worth of retirement savings – invested in stocks in December of ’89…and left there until yesterday – he now has only about $75,000. What will he live on?

Nor do public social security systems offer much comfort or hope of fiscal stimulus.. “We are living in a fool’s paradise,” writes Dr. Gary North., “as all citizens of Western industrial democracies [including Japan] have pay- as-you-go funding (i.e., unfunded) for their government- guaranteed retirement and medical insurance systems. Every Western nation has a birth rate lower than 2.1 children per family, which is the replacement rate. The number of workers coming into the economy will be insufficient to fund the old-age pension systems.”

The U.S. benefits from young immigrants, who help support America’s retirees. But Japan has never cottoned to immigration. The Japanese look only to themselves. Is it any wonder they save their money?

“For the U.S. the day of demographic reckoning may be as far away as 2017, but 2011 should see preliminary signs of crisis in the Social Security/Medicare systems,” Dr. North concludes. “For Japan, the crisis will begin soon: in 2003.”

Did it begin, in fact, 13 years ahead of schedule – as baby boomers anticipated their retirement years and decided to take precautions? Did the shock of falling asset prices in the early ’90s frighten Japan’s 50-something population into taking a more modest and conservative approach to their personal finances? And could this New Economy arrive in America years ahead of schedule too – as 76 million baby boomers begin to scale down their lives, pay down their debt, reduce their spending and their stock market investments?

Could it be that whether Mr. Greenspan’s Fed heads East or West…sooner or later it will find itself in Japan? Maybe, dear reader, maybe.

Your editor, thinking about cutting back…

Bill Bonner
Paris, France
June 26, 2001

P.S. Deflation has its bright side. You can buy a hamburger in Tokyo for only half what cost a year ago. Shirts are down by 60%. Other consumer items – from houses to golf club memberships – are available at deep discounts.

*** “Why don’t you tell it like it is,” asks a Daily Reckoning reader. “Greenspan and his cronies at the Fed couldn’t care less about the economy or the markets. Their job right now is to save the banks. Where is all of the liquidity infusion going? And why is it remaining in the banks? …The Fed is doing what it was created by the banks to do, bail them out of bad loan portfolios at the expense of the taxpayers.”

*** Well, yes, that is what the Fed is doing. But the banks are not independent of the rest of the economy or of the markets. And Mr. Greenspan has his reputation to worry about…as well as the banks’ bottomlines.

*** Tomorrow, the Fed chief will probably cut rates again…maybe by 25 basis points, maybe by 50. What else can he do?

*** “The Fed…doesn’t have a choice,” opines Alan Abelson of Barron’s. “Its strenuous hacking away at rates, frequent and substantial as the cuts have been, and a wide-open monetary throttle have failed to right the listing economy. Wall Street’s hopes and cries to the contrary, things are not getting better; they seem to be getting worse.”

*** “At last tally,” Abelson explains, “operating rates [in the manufacturing sector were the lowest since ’83, when the U.S. was emerging from a killer recession. Business is spending on capital projects at the droopiest pace in nearly a decade… Unemployment is taking on some chronic overtones: Nearly three million people filed continued claims for jobless benefits the past three weeks, more than at any time since ’92…”

*** “The Federal Reserve,” he continues, “has not been able to turn the economy around…What it has done…is to shore up a very wobbly stock market. Which is nothing to sneerat, since that way lies free-fall, panic, and Japan.”

*** Which way lies Japan? More below…

But, first, let’s hear from Eric…what’s new on Wall Street:


– As investors tire of beating up on technology stocks, they are starting to pick on some of the big stocks inside the Dow. Yesterday, the big board fell another 100 points, even as the Nasdaq managed a modest 16-point gain.

– The biggest losers? Several stocks that have been holding tough through most of the year: Home Depot, Caterpillar, General Electric, and Wal-Mart.

– Walgreen’s, another pillar of strength in the stock market, crumbled yesterday as well. Shares of the nation’s No. 1 drugstore chain fell more than 10% after the company reported fiscal third-quarter earnings that did not meet Wall Street estimates.

– “We don’t call ourselves recession-proof, but we’re certainly recession-resistant,” said President David Bernauer. Maybe so, but that’s cold comfort to Walgreen’s shareholders.

– From Merck to Gap Stores to Walgreen’s, the list of “recession-resistant” companies announcing disappointing earnings is growing longer by the day. Apparently, there are not enough credit card-wielding patriots out there buying goods they can’t afford.

– It looks like Peter Monk and the other boys at Barrick Gold read the Daily Reckoning. Less than 24 hours after we quoted Michael Martin saying, “I know ‘they’ don’t ring a bell at the bottom, but I am. You need to own a few gold stocks right now,” Barrick elected to own one – Homestake Mining.

– In a $2.3 billion all-stock deal, Barrick Gold will acquire rival Homestake Mining to become the world’s second-largest gold producer behind South Africa’s AngloGold Ltd. Homestake shares soared 20% on the news.

– Two UK inmates gained their freedom under a 900-year-old royal decree by saving the life of a prison worker who was attacked by a boar, the BBC and the UK’s Independent newspaper reported. The decree, named the Royal Prerogative of Mercy, provides for prisoners to gain their freedom by performing “acts of courage or other meritorious conduct.” If only it were that easy to get out of a losing stock.

– Now that George W. and the Republicans occupy the White House, a couple noticeable fashions are back in style: 1) drilling for oil in pristine wilderness regions; 2) Wearing coats and ties. Republicans couldn’t be happier, of course. But they’re not alone. Because ties are making a comeback, so are the stocks of companies that sell traditional business attire. Shares of Nautica and Polo both hit new 52-week highs recently. Even Phillips-Van Heusen is surging higher.

– The slowing economy is also contributing to the changing business fashion trends. “We’re in an economic situation where the boss can say, ‘Go home and come back wearing something with a collar.’ We didn’t have that a year ago,” Crain’s reports.

– We Americans may be “turning Japanese” but the Japanese have been “turning American” for several years. Note the upcoming IPO of McDonald’s Japan Ltd. The $1 billion share sale is the biggest one in Japan so far this year. McDonald’s has been selling Big Macs in Japan for 30 years and now sells two out of every three fast-food burgers consumed by the Japanese. [But at lower prices than a year ago….more below…Bill]

– “It was just a few months ago, it seemed, that it was almost impossible to book a hotel around in Manhattan,” observes “But those days are over – at least for now – because of a slackening economy and a record construction boom.” According to a recent report by Pricewaterhouse Coopers, the occupancy rate during the first quarter of 2001 was 72.3%, down from 78.2% in the same period last year.


*** “The greens have beaten the coal industry silly over the past quarter decade,” writes John Myers. “In 1975, at the height of the energy crisis, the price of coal hit $100 a ton. In constant 2001 terms that would put the price of coal close to $300 a ton. Of course, seal-huggers, more interested in trees than humans, have declared war on coal and thrown roadblocks against its use. By 1999 the price of coal had fallen to just $20 a ton. That was just one-tenth of its price during its heyday. Even after a revival, the price of coal is selling for only $40 a ton, a fraction of what it was fetching 25 years ago.”

*** Paris is hot. I’m ready to leave. But Baltimore is even hotter. Oh la la…

*** Henry, 10, got his report card yesterday. All A’s. It’s nice to have at least one good student in the family.

*** And Maria’s dance group did a hip hop performance at the Casino de Paris theater on Sunday evening. The theatre was sold out…I couldn’t get in…so I avoided the sweaty spectacle and instead drifted over to Trinity church, whereI was just in time for a cool evening mass.

*** Elizabeth reported that Maria danced well… but was unimpressed with hip hop. “It was jerky and graceless,” she reported, “I think Maria should stick to ballet.”

The Daily Reckoning