U.S. in Worse Shape than Japan Was

Martin Sieff of UPI.com, when discussing the economic and financial crisis the United States now faces, says it is not remotely comparable to the one Japan faced nearly 20 years ago. It is potentially far worse, and the kind of decade long stagnation that Japan then suffered would be mild compared with other all too possible outcomes.

By contrast, the United States faces the current crisis after decades of remorselessly building up the worst negative trade balance of any nation in recorded history. Most of all, the Japanese government never risked destroying its financial stability or running the dangers of hyperinflation by wild spending. Bush's $700 billion bank bailout, coming after eight years of reckless spending on so much else, followed by the $800 billion Democratic wish list labeled a "stimulus package" have weakened the dollar and the international credit assessments of the US government to a degree never before experienced.

According to Benjamin Powell of the Ludwig Von Mises Institute in Austria, between 1992 and 1995, Japan tried spending programs totaling Y65.5 trillion and cut income tax rates during 1994. In January 1998 it temporarily cut taxes again by Y2 trillion. Then in April of that year the government unveiled a fiscal stimulus package worth more than Y16.7 trillion, almost half of which was for public works. Again, in November 1998 another fiscal stimulus package worth Y23.9 trillion was announced. A year later in November of 1999, yet another fiscal stimulus package of Y18 trillion was tried.

Finally, in October 2000 Japan announced another stimulus package of Y11 trillion. Overall during the 1990s Japan tried 10 fiscal stimulus packages totaling more than Y100 trillion and each failed to cure the recession.

What the spending programs have done however, is put Japan's government in poor fiscal shape. The "on-budget" government spending has caused public debt to exceed 100 percent of GDP (highest in the G7) and even more debt is apparent when the "off-budget" sector is included.

SPECIAL NOTE: A noteworthy aspect of the Japanese people during this era, was that they had one of the highest savings rates globally, when the turmoil of this decade first started! This enabled Japan to keep consumer spending at a sustainable rate throughout this trying decade! The United States on the other hand, is already in the midst of their turmoil and has no savings stockpile to fall back on, that would be earmarked for spending!

Comments

[Dave Wrixon:]

I would think that much is obvious.

Nov 04 05:04 AM

[Carlos Lam:]

Good points. Japan's GDP is not as consumer-dependent as the US's, and the Japanese people (until recently) were prodigious savers.

What Japan WILL face--which is infinitely worse than our condition--is a demographic winter. One in 5 Japanese citizens is over 65. The Japanese birthrate is only about 1.25 children per woman. In sum, the Japanese population pyramid will be helplessly inverted, with more retirees supported by fewer and fewer workers.

Nov 04 06:13 AM

[User 353732:]

The Japanese are now in their second decade of stagnation. They had and have bad Govt ,bad demographics and bad resource endowment.
They had and have good social habits: work, saving, respect for practical education and learning, exports based on excellence in manufacturing, good general health and social cohesion. They were and are most fortunate that their bad Govt does have a fiat Yen. Unfortunately, for the Japanese ,the combination of bad Govt and bad demographics means that their relative economic and strategic importance in the world is in irreversible decline. Most Japanese do not deny this any longer and understand that their challenge is the orderly and comfortable management of decline in global influence and material quality of life.

The US has egregiously bad Govt, the curse of the fiat dollar, good demographics, excellent resource endowment,increasing social fragmentation, poor general health, increasing contempt for practical education and learning, and bad social habits that manifest themselves in borrowing, consuming and importing.
Many Americans continue to deny both personal and social pathologies and view 2009 as a regrettable but transient year of decline.
Good demographics and excellent resource endowment are not nearly enough to offset the many and diverse self inflicted wounds of the US and vast greed, corruption and self obsession of its elites.

Japan faces a steady decline. Unless current trends are reversed, and reversed soon, America faces an abrupt and catastrophic fall. Japan cannot do much about its decline. America, however, still has the capacity to arrest its decay and prevent its fall. Will it?

Nov 04 08:05 AM

[Moon Kil Woong:]

Japan can rely on it's own population to finance their debt. LOL getting the US citizens to buy all the US Treasuries. For one thing you have to have positive net worth to invest and buy the bonds. This is not something a quarter of the US population has. That number will only get worse as unemployment fails to drop and more houses fall underwater.

Nov 04 08:27 AM

[John Galt:]

Before people go off and label an entire nation as "savers", that are disciplined, and have saving in their culture, and are more moral, or make similar arguments...

While Americans are all spend thrifts, and live for the now, fools, big hat no cattle...

Look at these two other factors...
- Japan is an older country by mean age, old people spend less
- Japan was going through deflation, hoarding money is the norm

Younger countries (like Brazil) spend more money. Do you buy a car when you are 20 or 60? Are you buying a house when you are 27-35 or when you are 57-63? Do you fill that house with a washing machine and furniture in your 30's and 60's? Do you trade up on your home in mid life or near the end of your life? Do people downsize homes in old age or young age?

When money is cheap and interest rates are low, people buy things and often bid up asset prices ( inflation). Not only that but we had massive amounts of debt. That debt is borrowing future consumption, for current consumption. In effect you are consuming more now, for less later.

Nov 04 10:08 AM

[ia100:]

From Oct 30th 2009 BCA, some important differences that argue against the "Liquidity Trap" possibility in the USA. ( Although inflation is a possibility)



In Japan significant factors in Liquidity Trap:

*Erosion of underlying assets, i.e. real return on cash higher than risk adjusted return on other assets
*Falling expectations of price levels, so consumers held onto cash
*Asset price declines forced businesses and consumers to conserve cash and liquidate assets to shrink balances sheets

Key differences between US and Japan:

*Took nine years for Japan to effect Zero Interest rate policy; US did so immediately
*Half hearted stimulus applied too late; US stimulus very large
*Allowed Yen to double over this period; US seems to be following one of weak dollar policy
*Japanese companies focused on full employment rather than profitability; versus US focus on profitability and slashing employment rolls

Nov 04 11:20 AM

[bob adamson:]

Too often Japanese difficulties the past couple of decades are invoked in domestic debates in other countries but this is done without actual investigation or serious review of what factually led up to those difficulties in Japan in the first place. Arguably your article, Mr. Cassone, is open to this criticism.

There is a significant debate underway currently in the US and elsewhere and it might be summarized in the following question: Can (or even should) governments and central banks intervene effectively in a modern mature economy to forestall a major recession/depression running its ‘natural’ course? Clearly the governments and central banks of all the significant mature economies (and of the most significant emerging economy, China) have lined up decisively on the side of intervention.

The experience of Japan over the past 20 years has become a metaphor in this debate. In the most primitive form of the debate, some oversimplified cartoon picture of Japan’s economic misadventures is set up as a straw man and it is asserted emphatically that the US (if it adopts or continues down a path equated with a Japanese mistake) is destined to suffer Japan’s fate (only more so). Happily the debate can take a more genuine form.

Japan’s experience is evoked by both sides in this genuine debate; the interventionists as evidence that stimulus must be provided at decisive levels and coupled with vigorous restructuring of inefficient and ineffective financial and industrial enterprises, on the one hand, and the anti-interventionists, on the other, as evidence that necessary economic reform (and therefore the real end of the recession) can only occur if the recession is allowed to do its work of constructive destruction (which artificial fiscal or monetary stimulus measures only delayed or impeded). In other words, both sides acknowledge that Japan’s economy stalled in near deflation for a protracted period and that the efforts of its government and central bank failed to end that state of affairs but the interventionists see the Japan’s error to have been for its fiscal and monetary authorities to have done too little while the anti-interventionists see the error to have been for these authorities to have intervened against market forces at all.

Within the interventionist camp, there are important subsidiary debates about:
1. The relative merits of fiscal stimulus and various measures of monetary easing;
2. The timing, form and nature of restructuring of economic enterprises and institutions and the governance needed for these enterprises and institutions; and
3. The proper role of the fiscal and monetary authorities (both domestic and international) in addressing points 1 and 2.

In reality the division as described above between interventionists and non-interventionists and within each of these broad groupings is somewhat artificial as there are many further nuances and sub groupings. The point, however, is to form some useful picture of the forum within which the current public policy debate is being conducted without getting lost in the architecture of that foundation.

Nov 04 02:20 PM

[Chancer:]

Japan is unable to pay its debt. They can only pay interest.

Is the USA heading to same?

Nov 04 03:35 PM

[Joe_Average:]

You've missed the point completely with the Japan vs. US comparison.

Population Growth is the key. Japan's population has been stagnant since their economic collapse. Pop growth rate is 0.2% now. Very difficult to have economic growth without population growth.

Japan's fertility rate is in the 1.2 children/women range, well below the 2.1 required for population growth. And their immigration is miniscule compared to other developed nations.

The US is actually one of few developed nations whose birth rate is high enough to maintain population growth on its own. Plus they have strong immigration. This will be the foundation on which future economic growth is built in the US.

Nov 05 10:34 AM

[bottoms-up:]

"Worse" is too mild of a word for comparison..

Nov 05 11:51 AM

[Alex Filonov:]

High savings rate and low consumption is a problem for Japan, not a virtue. Japan can't export its way out of the problems anymore, so for economy to run, they need to consume what they can produce.
Economy in developed countries is consumption driven. US doesn't have problems with it, Japan does.

Nov 05 12:18 PM

[James Lewis:]

Japan and the USA share very large structural, social, demographic, power, political differences. The fact so many smart people comapre the countries surprises me greatly. It is like comparing chalk and cheese.

Due to the USA effective control on the monetary system and trading system through its ability to print the reserve currency. The USA can circumvent deflation without any trouble what so ever. They can create 15 trillion USD overnight and in the short term no one could do anything about it. China, Japan and Russia, OPEC countires are all holding so much treasury debt that in effect prisioners. They can not, will not dump USD in retailation because it would destroy their countries reserves. If they did, such a hostile move would prompt the FED and the US government to freeze these soverign countries holdings.

So unlike Japan the USA has unlimited short-term ammuntion. I am not discussing medium and long term consequences of creating 15 trillion USD. Merely giving an example that defaltion can be conquered very easily if need be. Of course creating such a huge amount of new money could cause stagflation if structural/trade balances persist. But this is not what Japan experienced and from where we stand now is the main threat facing the US.

The Japanese also had an export-led model going into their crisis, unlike the USA who have a consumption based economy. These two systems are so structurally different that it is impossible to say similar outcomes will emanate.

The Japanese were high savers, the US people spent too much.
Another huge difference. It is a lot easier to get people to spend less than to spend more.

The size of the US is different to Japan as well as natural resources. The US is the major military power, which in effect gives it the power to colonise countries in order to add net assets and net wealth to the US.

Further to this, Japan giant GNP before it collasped was compeltly and utterly fake due to the enourmous asset price bubble Japan went through. GNP was overstated around 30% due to the rediculous bubble, the USA property, asset bubble (as large as it was) really does not compare to what happend in Japan. Property in Japan feel 80% in some places. Real Estate Asset values were not even justified by sales/purchases. Just phantom fake asking prices.

The USA will face very difficult challenges:

Mainly Stagflation - the extent dependent on how it learns to protect its trade inbalances.

Nov 05 12:50 PM

[Taylor Gray:]

Interesting points of reference on both sides. I too have been wondering about the Japan analogy with the US current status. I have read many points about how the US is a debtor nation while Japan is a creditor nation at the time of their crisis. What I have not read much of is that the US is natural resource endowed while Japan is natural resource deficient. The US has an open society while Japan has a closed society. The US can stop being the world's cop and Japan will have to start to shoulder its own security burden. The US fertility rate is much better than Japans. The US has great proximity to Canada and Mexico while Japan is an island. A lot of good points have been made in this blog thread so far. In the end - with many different points of view - there is some validity in all of them - and ultimately the truth is somewhere in the middle. So far - based on the thread - the US will not crash but will evolve and survive but in the role of a world citizen and no longer as the sole hegemon.

Nov 05 01:05 PM

[JeffDB:]

On Nov 04 08:05 AM User 353732 wrote:

> They were and are most fortunate that their bad Govt does have a fiat Yen. >

Why is/was the fiat Yen so fortuitous for the Japanese?

>America, however, still has the capacity to arrest its decay and prevent its fall. Will it? >

If I were a betting man, I'd bet... no.

Nov 05 03:21 PM