11/12/09 Beunos Aires, Argentina – “It’s amazing; the US is doing everything that Japan did wrong,” said a friend yesterday.
Let’s see, in the 1980s Japan’s corporate leaders thought they were
going to take over the world. Investors thought so too. They expanded.
They wheeled. They dealed. Prices shot up and they all thought they
In the ’80s, everyone wanted to be Japanese. Management consultants
used Japanese words to describe commonplace insights. For example,
instead of saying that businesses always need to try to do things
better, they referred to “kaizen” as if it were the secret of success.
And US economists urged the Reagan Administration to have an
“industrial policy” – because that was what Japan had. Japanese
businesses were the envy of the world. Japan was the world’s second
largest economy. But in growth and stock prices it was Numero Uno.
It turned out, as it always does, that Japan did not have the secret
to everlasting success. Instead, what it had was what comes before a
fall. The stock market crashed in Tokyo in 1989. The Japanese economy
entered a recession. At first, the experts believed it was temporary.
They urged investors to take advantage of the opportunity to buy into
Japan, Inc. at record low prices. They thought Japanese industry was
unstoppable…unbeatable. It would recover in no time, they said.
But Japan, Inc. didn’t recover. Instead, it went into a long,
drawn-out recession that lasted year after year…with on-again, off
again deflation…and several stock market rallies. Each time stocks
rallied, they fell again. Each time the economy began to grow…along
came another setback. This continued for the next 20 years…until March
of this year…when Tokyo stocks hit their lowest point for the whole
bear market. A generation of investors had been nearly wiped out. Over
two generations they had made nothing. Trillions worth of wealth had
What did the Japanese authorities do during these last two decades?
They fought the correction every step of the way, with the boldest
attempt at fiscal and monetary stimulus every undertaken up to that
point. Interest rates came down to effectively zero. And government
spending soared, creating the largest deficits in Japanese history.
Now, Japan’s national debt approaches 200% of GDP – a peacetime record.
If it continues to grow at this rate, it will hit 300% of GDP in just a
few more years.
Sound familiar? It should. The key US interest rate is now
effectively zero. The Fed says it will leave it there for “as long as
it takes.” And deficits have reached staggering levels – 13% of GDP. At
this rate, the US debt/GDP ratio will hit 100% in just a few years. And
if it continues, US debt/GDP will reach 200% not long after – as
recession-reduced tax revenues meet stimulus-increased outlays.
But wait…the feds say they won’t let it happen. They’ll turn this
thing around. The economy will begin to grow. Tax revenues will rise.
Prices will go up.
Hey…that’s just what the Japanese said!
So far, the US is doing almost exactly what the Japanese
did…propping up zombie companies and stimulating the economy as best it
But if it does the same thing the Japanese did, won’t the US get the same results the Japanese got?
Here is where it gets interesting. Because the US economy is not
exactly like the Japanese economy. Japan had high savings…and a
positive trade balance. It could run up huge government debts and “owe
it to itself.” It could finance its government debts with the savings
of its own people, in other words. It never had to worry about
foreigners refusing to buy its bonds…or selling them suddenly.
America’s government debt is different. The US doesn’t save enough
to finance its own deficits. So it depends on the kindness of
strangers. And if those strangers ever lose faith in America’s ability
or willingness to repay its debts, they’ll drop the dollar like an
annoying girlfriend. And when they do, the whole global monetary system
will come crashing down.
But suppose savings rates go up in America – to, say, 10% of GDP,
like they were before the bubble years. That would make $1.4 trillion
of savings available to finance the feds’ deficits. And suppose the
slump continues…as we think it will, with another big scare in the
investment markets. People will seek safety in…yes, you guessed it…US
bonds. This will take the pressure off the dollar and permit the US to
finance its countercyclical spending without depending heavily on
foreigners. The recession/depression will be annoying…but not
insufferable. And Bernanke will figure het has more to lose by
undermining the dollar than to gain from it. In that case, the
Japan-like slump could go on for many years – just as it has in Japan!