Japan's lost decade: can it happen here?

[Meadbh]

If the economy is getting you down, you might prefer not to read this:

globeandmail.com: Is Japan's 'lost decade' a window to the future?

[OAG]

Pretty sobering. Thanks for posting it.

[socca]

Thanks much - enjoyed the article.

If things did not get even worse, it was partly because governments were transferring the cost of maintaining the Japanese standard of living to future generations. Because of all that pump-priming government spending, governments have run budget deficits year after year for almost two decades. Total public debt has grown to 180 per cent of gross domestic product, the highest for any industrialized country. Someone is going to have to pay that down one day through higher taxes.

Will Fed and Treasury Dept officials get us out of the current mess by engaging in exactly the same behavior as those American citizens who got us into the mess: enjoying borrowed money today, and worrying about how to pay it back tomorrow? If not, then what is the alternative?

[samclem]

Originally Posted by socca

Thanks much - enjoyed the article.



Will Fed and Treasury Dept officials get us out of the current mess by engaging in exactly the same behavior as those American citizens who got us into the mess: enjoying borrowed money today, and worrying about how to pay it back tomorrow? If not, then what is the alternative?

Yes, it is very clear they intend to dump cash in (variously identified as "stimuli", "bailouts", "investments," "pump-priming," "government-purchased equity shares" etc) to avoid short term pain.

There will be only two ways to pay this back: Higher receipts from taxes or printing more money. My bet is on the less visible alternative: printing more money and higher inflation.

[. . . Yrs to Go]

Some similarities, many differences.

1) Japan has a culture of savers, we are a nation of spenders. While many on this board will no doubt see the virtue of the Japanese spending culture and the vice of American consumerism, Japan has long been burdened by the "paradox of thrift". That is the economy can't grow unless people are willing to spend money . . . I doubt the American economy will suffer a similar fate even if our savings rate does rise from currently anemic levels.

2) The Japanese bubble was monstrous. Consider this statement "A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.)." By comparison, New York City real estate goes for $1,000-$2,000 per square foot +/-.

3) We're recognizing losses at lightning speed by comparison. With our mark-to-market rules our banks are suffering from losses related to expected defaults not actual ones. Japan's banks hid losses for years, delaying consolidation, capital raising, and recovery. We've easily got more than a four year head start on their "lost decade".

4) Our institutions and labor are far more flexible. Our economy is reorganizing itself at a pace that government can't match. People and capital are moving out of over supplied areas (finance, home building, etc) and will eventually find work in new areas (maybe at the Toyota plant in Alabama ). Japan meanwhile kept unneeded workers and companies alive (think GM, Ford, Chrysler on an nationwide scale) which retarded the relocation and recovery process.

We'll have a brutal recession . . . but Japan we ain't.

[BunsGettingFirm]

Originally Posted by . . . Yrs to Go

Some similarities, many differences.

1) Japan has a culture of savers, we are a nation of spenders. While many on this board will no doubt see the virtue of the Japanese spending culture and the vice of American consumerism, Japan has long been burdened by the "paradox of thrift". That is the economy can't grow unless people are willing to spend money . . . I doubt the American economy will suffer a similar fate even if our savings rate does rise from currently anemic levels.

2) The Japanese bubble was monstrous. Consider this statement "A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.)." By comparison, New York City real estate goes for $1,000-$2,000 per square foot +/-.

3) We're recognizing losses at lightning speed by comparison. With our mark-to-market rules our banks are suffering from losses related to expected defaults not actual ones. Japan's banks hid losses for years, delaying consolidation, capital raising, and recovery. We've easily got more than a four year head start on their "lost decade".

4) Our institutions and labor are far more flexible. Our economy is reorganizing itself at a pace that government can't match. People and capital are moving out of over supplied areas (finance, home building, etc) and will eventually find work in new areas (maybe at the Toyota plant in Alabama ). Japan meanwhile kept unneeded workers and companies alive (think GM, Ford, Chrysler on an nationwide scale) which retarded the relocation and recovery process.

We'll have a brutal recession . . . but Japan we ain't.

I will immediately stop studying for the CFA exam and start picking up a wrench -- to hit myself over the head.

[unclemick]

Warning! Do not piss off the Norwegian Widow! This is America. If ya'll get stingy on her dividend and interest payments - think pssst Wellesley.

She's gonna go on the warpath!

Country - don't say you have not been warned.

heh heh heh - today the mailbox - tomorrow .

[. . . Yrs to Go]

Originally Posted by BunsGettingFirm

I will immediately stop studying for the CFA exam and start picking up a wrench -- to hit myself over the head.

Sorry to say, but we probably will have a depression in the financial sector of the economy.

[Moemg]

Interesting article .Thanks for posting !

[Geoffrey]

Originally Posted by . . . Yrs to Go

Some similarities, many differences.

1) Japan has a culture of savers, we are a nation of spenders. While many on this board will no doubt see the virtue of the Japanese spending culture and the vice of American consumerism, Japan has long been burdened by the "paradox of thrift". That is the economy can't grow unless people are willing to spend money . . . I doubt the American economy will suffer a similar fate even if our savings rate does rise from currently anemic levels.

I believe you are correct that the Japanese were a nation of savers at the time their real estate bubble burst. However, because the Japanese did have substantial savings going into the “lost decade” the typical Japanese citizen was able to keep spending more or less as he or she did before -- this helped keep the Japanese economy afloat. In contrast, the American consumer, by in large, is completely tapped out. Thus, the typical American consumer is going to have to substanially rein in his or her spending. Accordingly, I'm not so sure that our lack of savings can be chalked up as "good thing" in terms of comparing ourselves to Japan.

As an aside, anyone who has visited Japan during the last 5 or 10 years will realize that the Japanese have, indeed, learned the fine art of consumerism. And, even though the Japanese are dutifully spending their hard-earned yen (rather than saving it), the Japanese economy still remains sluggish at best.

Perhaps the U.S. economy will recover quicker than the Japanese economy . . . but I'm not quite so confident.

[. . . Yrs to Go]

Originally Posted by Geoffrey

Perhaps the U.S. economy will recover quicker than the Japanese economy . . . but I'm not quite so confident.

That was my intended point. We'll go through a painful adjustment process where the credit fueled spending, and associated over capacity, will need to be cleansed from the economy (that is, after all, what recessions do). But unless the process completely changes our culture (which I'm guessing is unlikely) our marginal propensity to spend will still be higher than what it is in Japan. That higher propensity to spend should lead to a faster rebound.

[lets-retire]

Originally Posted by . . . Yrs to Go

That was my intended point. We'll go through a painful adjustment process where the credit fueled spending, and associated over capacity, will need to be cleansed from the economy (that is, after all, what recessions do). But unless the process completely changes our culture (which I'm guessing is unlikely) our marginal propensity to spend will still be higher than what it is in Japan. That higher propensity to spend should lead to a faster rebound.

Wouldn't a periodic recession be a good thing? It seems a recession was coming when Clinton left the White House, but was staved off for several years. I recall hearing how the economy was doing very odd things and wasn't responding how it normally would to the stimulus provided by the FED. I also recall in 2002 several mortgage bankers privately predicting a depression in the housing market within the next several months. Obviously that didn't play out. What my question/comment is is since the economy hasn't been reacting as normal and as you point out there is a lot of over production in the economy from the use of credit, wouldn't it be a better option to let a recession continue for a bit before working to stop it? So instead of attempting to prevent a recession, allow them to occur periodically then work to stop it.

[. . . Yrs to Go]

Originally Posted by lets-retire

. . . wouldn't it be a better option to let a recession continue for a bit before working to stop it? So instead of attempting to prevent a recession, allow them to occur periodically then work to stop it.

I don't think preventing a recession is possible. Our government officials do us a disservice by not admitting that some of this pain is necessary and, even in some respects, desirable. That is simply not a good way to get, or stay, elected in a country of people unwilling to hear painful truths.

On the other hand, it is possible for these painful adjustments to become self reinforcing and do material damage beyond what is necessary to simply reallocate people and capital from unproductive uses to more promising ones. A good example is our banking collapse. If our banking system were to fail, it would quite likely take every other industry down with it. That simply can't be allowed to happen. But the line between needed intervention and excessive intervention is anything but clear. Very intelligent people debate this point intensely. And the stakes are high on both sides.

So the question policy makers face today is whether the risks of doing too little outweigh the risks of doing too much.

[lets-retire]

That makes sense. Thanks.