U.S. Versus Japan Versus South Korea

Another in our search for countries who took their tough medicine, did not "kick the can" down the road, and now have a much easier long-term outlook than the United States. Who (of course) is not at all like Japan... just ask our leaders.

The irony here folks, for those of you who were not following things a decade ago, is there was a major currency crisis in the late 90s which started in Thailand. Many Asian economies took very hard hits. What happened next? America swooped in (along with the IMF) and handed out advice: make hard decisions which inflict pain in near term, shore up your budgets, cut debt... then we'll help you. It's very easy to talk when you don't walk in their shoes. Now the great irony is the US was correct in their advice.

But the next irony - we will not take our own advice. Because we don't like pain.... it is not politically convenient. Plus we're America - we don't do pain. So we'll follow the Japan experience although in magnitude that makes Japan look like a sissy. Because that's what superpowers do.

Just remember as long as the stock market goes up due to a flood of liquidity, it is "saying" this is the correct course of action. All is right in the world, until we look back in a few years and shake our heads. Similar to how the market was up and "saying" all was right in the world in the middle part of the decade. Until we look back now. Although this time around we can begin shaking now...

We looked at how the conservative actions of Chile in boom times helped them weather the storm [May 28, 2009: WSJ - Prudent Chile Thrives Amid Downturn] - today we'll take a quick look at South Korea which (was forced) to make some very tough decisions a decade ago. Decisions we're going to skip.

Via Bloomberg

• Nouriel Roubini, Dr. Doom himself, has found an economy even he can love: South Korea. That might sound surprising for a nation in the news for the wrong reasons. North Korea’s nuclear test, the suicide of former President Roh Moo Hyun and stock-market-bubble worries are making for some very ugly headlines this week. Getting Roubini’s seal of approval has been a rare and welcome news- cycle counterpoint.
• Recent Korean data “suggest there is the beginning of an economic recovery, and growth might be already positive in the second quarter,” Roubini said at a May 27 conference in Seoul.
• And there are ....reasons the world should be paying more attention to Asia’s No. 4 economy. One, the lessons larger economies can draw from its experiences.
• The reason Roubini says Korea may grow more than 1.5 percent next year is the economic-policy changes made over the last 10 years. The 1997-1998 Asian crisis seemed like a curse at the time. It devastated the nation of 49 million and forced the government to accept a humiliating International Monetary Fund bailout.
• Today, that experience is proving to be a blessing in disguise.

Now the magic... sit down for this.

• The government assessed the magnitude of its problems and admitted how bad things were.

Keep sitting...

• It allowed weak companies and commercial and merchant banks to fail.

Please don't get up, I know this is hard to take since "We're #1"

• It acted quickly to rid balance sheets of bad assets.
• As a result, Korea was the first Asian economy to recover from the crisis and repay the IMF.

Contrast and compare?

• Economists pondering how bad things might get in the U.S. tend to look at Japan. More insights may be found in Korea.
• Even though they are spending trillions of dollars stimulating the economy, U.S. officials remain in denial. Adding liquidity isn’t enough. Steps to restore confidence and trust among corporate executives, investors, and consumers are far more important. Korea did it. The U.S. still needs to.

Korea is of course not perfect - all the world appears addicted to the US consumer... many other nations have this major problem. Their people save their money and don't spend every last penny. Hence they need the Americans to be... well, American.

• Korea has its problems, not least of which is weak domestic demand. Korea still needs to wean its $970 billion economy off the U.S. consumer.
• In the meantime, Korea is standing its ground better than wealthier Japan. Officials in Tokyo reveled in Japan’s exclusion from Asia’s meltdown, yet we see today that Asia’s biggest economy is experiencing that crisis -- just in slow motion.

Now let's look at what Japan did, and as you read this click your heels 3 times and repeat "We're Not Japan; We're Better than That" [

Feb 26, 2009: NYT - When Consumers Cut Back - An Object Lesson from Japan

] [

Feb 8, 2009: NYT - Japan's Big Works Stimulus is a Lesson

]

• Massive government spending and zero interest rates kept Japan afloat. (sounds vaguely familiar, not sure where I can place the parallel)
• They also delayed reducing overcapacity in most business sectors, raising productivity, getting a handle on public debt, opening the financial sector, attracting more foreign investment and revamping the tax system. (still trying to think where I've heard this before... which country... hmm...)
• Exports and public largess avoided disaster. Now, the lack of reform is leaving Japan uniquely vulnerable to the global recession.

Oh well, can't really place what country Japan reminds me of. [

Feb 9: FT.com's Martin Wolf - "We'll Be Lucky if Downturn is Only as Bad as Japan's

] The dogma has the name blocked. All I know is we're #1 - now I need to get to the mall....

[

Jan 11, 2009: WSJ - America's Hard Hit Families Finally Start Saving, Aggravating Nation's Economic Woes

]

[

Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?

]

[

Nov 17, 2008: Poverty, Pension Fears Drive Japan's Elderly Citizens to Crime

]

[

Oct 28, 2008: Pooring of Japan Too?

]

[

Oct 27, 2008: Japan's Lost Quarter Century

]

[

Oct 7, 2008: 2000s Stock Market Worse than 1930s

]

[

Sep 20, 2008: US News & World Report - The End of the Shopaholic Nation?

]

Comments

[Jasper M:]

I have frequently heard the phrase "dripping with sarcasm", but i don't think I've ever seen it so well demonstrated.
Good article. I tend to agree - if their crazy northern neighbor can be contained until it starves itself out (a la' the Soviets), they'll do Just Fine.

May 30 09:26 PM

[Moon Kil Woong:]

If south Korea was so strong why did they have to beg both the US and Japan for currency floats this year to keep their currency from going into a tailspin? Also, this president famous for securities fraud (similar to Bernie Madoff) is now probably less popular than the former president from the monority party. The reason nothing is being done is because actually no one has enough leadership there right now to get enough votes to do anything.

I agree with the author that tje US emulating Japan into a artificial zirp policy and associated quantitative easing is ridiculous, but to propose Korea as a blueprint for recovery is a bit far fetched. As he correctly noted Korea had to beg the IMF for money then recently had to deal with mass defaults due to credit card issuers loaning money to tons of students that couldn't pay their bills.

The only think Korea did that the US should do as well is undergo an austerity program. The odds that this will be politically palatable in the US until the country goes broke is about 0.001%. That's why no one wants to touch long term US government debt. The more the Fed has to buy the Treasuries debt the more scared purchasers get. After all, the Treasury is the one that guarantees the Fed if they go belly up. So what's the use of the Treasury raising money off the Fed? It's the same as loaning money to yourself after charging it on your credit card and then spending it.

The Treasury still needs to auction off $2 trillion more in debt this year. And now they are proposing the Fed be allowed to buy $1 trillion. That sounds like a 50% demand shortfall to me if they use it. Is this suppose to make buyers feel safer? Give me a break. Honestly, how stupid do they think everyone is?

May 30 11:48 PM

[John Galt:]

TraderMark,

I've read a number of your articles and it seems like you keep highlighting the same themes. "If the market goes up it means we are right, kick the can, politicans playing for the short term next election, printing prosperity etc." It's nice to see you comment on current events and tie in your macro themes that I generally believe are correct.

Here are some points on South Korea
- The country is geographically situated between China & Japan
- SK has the 2nd highest savings rate in the world
- Net exporter economy
- Strong Educational system
- Innovative with the most patents per GDP in the world
- Home to the world's largest ship builder
- Home to the world's 2nd largest steel company
- Low inflation, low unemployment
- Goverment debt is less than 33% of GDP

A few years ago Warren Buffet commented how he thought that South Korean equities in general are undervalued. He does own a large steak in " the world's finest Steel company, Pohang Iron and Steel Company POSCO.

That sounds like a winner. A country doing things right, improving and in a sweet spot part of the world. People talk about BRIC, but is South Korea underrated for being left off that list?

$

May 31 01:11 PM

[keithpiccir...:]

Comments above from Moon and John are good.
I have held The Korea Fund (KF) for over 20 years, but that 10-1 reverse split was really painful.

May 31 07:37 PM