Economic Parallels Between U.S. and Japan

In the video below, Marshall Auerback gives a even-handed analysis of the parallels between the US and Japan on Fox Business with Brian Sullivan.

Demographic trends, GDP trends and deleveraging trends are all similar. But, Marshall goes further by pointing to the misallocation of fiscal resources, the emergence of crony capitalism and the likelihood of zombie banking which he saw in Japan and is seeing now in the U.S.

Another similarity is low interest rates. One issue Marshall didn’t take on when asked about low interest rates by Brian is how this policy not only reduces the cost of capital, but also decreases investment returns, encouraging the carry trade and excessive risk.

When looking at how we are avoiding the mistakes of Japan, I didn’t find the arguments as convincing because it’s early days yet. But, there is hope.

The segment runs just over 5 minutes.

Comments

[JudeJin:]

the biggest challenge facing US and Japan is how to deal with the 2 billion chinese and indians that entered the global competition since early 1980s.

special interest groups in both countries seek to dampen the impact of this increased competition on themselves by making all the other people suffer more. thus we see protected industries, like wall street, flourishing and taking home gigantic bonuses, while other ordinary citizens take on the brunt of the impact.

without any intervention and special interest groups meddling in the process, the pain would have been spread out much more evenly across all sectors and among all citizens in both countries.

misallocating resources, gains and pains, will make both countries much less competitive in dealing with this challenge.

india, especially china, will end up to be the biggest winner.

the biggest enemy is not the opponent, but always is within oneself.

Nov 13 11:24 AM

[Curious Bys...:]

I think the comparison we should be worrying about is us and Argentina. We'll be lucky if we come out as good as Japan when what the Fed and Obama have done comes full circle.

Nov 13 02:56 PM

[bob adamson:]

Too often Japanese difficulties the past couple of decades are invoked in domestic US debates but this is done without actual investigation or serious review of what factually led up to those difficulties in Japan in the first place. Happily this article is not open to this criticism.

There is a significant debate underway currently in the US 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.

In reality the division as described above between interventionists and non-interventionists is somewhat artificial; particularly at this point in time. The current challenge is to devise and implement significant reforms to the international investment banking system, particularly as represented in the US and UK, and the international balance of trade without impeding the recovery that may now be under way. Clearly re-inflation alone would, at best, merely return the global and US economies to some echo of 2005 (but with massive national debts in most of the mature economies) which would only be the harbinger of a further October of 2008 style crisis soon thereafter, but worse.

Nov 13 07:36 PM