Japan Parallels Are Too Close for Comfort

We here at TPC aren’t the only ones concerned about the parallels with Japan. There appears to be an increasingly loud drumbeat over the shocking similarities between Japan in the 90’s and the U.S. This morning, Hong Kong’s leader Donald Tsang had some rather alarming comments:

“I’m scared and leaders should look out. America is doing exactly what Japan did last time.”

As opposed to dealing with our issues here at home, Tsang believes the Fed has created a dollar carry trade that is simply reflating bubbles all over the world:

“We have a U.S. dollar carry trade at the moment. Where is the money going — it’s where the problem’s going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

As we’ve previously mentioned, the parallels between the current deleveraging cycle here in the U.S. and Japan’s deleveraging cycle of the 90’s, are numerous. Credit Writedowns recently posted this excellent video from Fox Business which succinctly touches on many of these similarities. I highly recommend readers take a look (attached below).

One of the most interesting takeaways from the video is the current tax situation in the U.S. In Japan, the credit crisis was prolonged mainly because Japan attempted to bail their way out of their sinking ship. Rather than deal with the problems directly (IT’S THE DEBT STUPID!) they attempted to circumvent the problem by creating an environment where the government spent hordes of money to prop up failing institutions. Here in the U.S., we have not only bailed out failing institutions to the tune of several trillion dollars, but we have also continued to promote fiscal irresponsibility via government programs such as cash for clunkers and the first time homebuyers tax credit. Making matters worse, we have a Federal Reserve and Treasury which have agreed to double team the ailing dollar as they print money to no end and effectively punish the prudent while rewarding the speculators (the same bastards that helped create this mess to begin with). Our tax issues have not yet reared their ugly head, but trust me, they are coming.

What we haven’t quite dealt with is how the government is going to overcome their massive revenue shortfalls and ever expanding debt. As Jim Jubak recently described, they are going to come back to the consumer for another blow to the knees. No, the bailouts weren’t enough. Destroying the dollars in your pockets isn’t enough. Because of their fiscal irresponsibility they are going to raise your taxes in 2010. And don’t be fooled. The income tax may not spike, but they will get you in every other way they can. Sales tax, real estate taxes, etc etc. You are paying for their mistakes. Whether you were prudent or not.

Richard Koo is convinced that we can spend our way out of this mess. I am not so sure. There’s only one way to deal with a debt problem. Attack it head on and force those that made bad decisions to restructure and get their house in order or pay down that debt. Injecting a bloated system with more debt does nothing but kick the can down the road (no matter what the stock market does in the near-term). The video is attached:

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Comments

[Fueled By R...:]

Y, despite the assurances of policy makers that they learned from Japan's mistakes, it's obvious they did no such thing. It's analagous to the mother of the teenager who repeatedly tells her son, "Don't get hooked on heroin like your brother!" He assures her he won't but ends up in trouble anyway. She confronts him as to why he has a drug problem after all his assurances and he replies, "Ma, you told me not to get hooked on heroin, and I'm not; I'm hooked on meth!" Talk about missing the big picture.

Nov 13 03:59 PM

[Gary A:]

Larry Summers is really a dufus. This guy thinks you just create demand for credit and everything will be fine. If Bernanke is listening to him I think we are in a world of hurt. It is the debt that is the problem. Deleveraging means just that. Lets get rid of the debt and start over. If that hurts your favorite hedge fund or too big to fail bank, well, that is too bad.

Nov 13 04:51 PM

[Ricard:]

There is no silver bullet. Richard Koo advocated a system that didn't cause a shock to the system.

On the other hand, to simply have half of financial America fail in one swoop would surely be disastrous, and would probably accompany regime change of some sort. Some people may want such drastic change, but when it happens, usually the result is something totally unpredictable, and not wholly desirable.

Nov 13 04:58 PM

[LilBob:]

I actually see this article as a positive sign. For some time we've seen a lot of resistance to the notion of a long slow "L" shaped recovery; with the most ridiculous being prections of a euphoric snap-back "V" shaped "jobless" recovery (which is basically a prediction of a "W" shaped recovery with a healthy dose of denial regarding unemployment and missed earnings projections thrown in).

Entrepreneurs are needed to bring us out of our current economic malaise. And until there is a general understanding that the bearers of the status quo probably aren't the ones we should be looking to for guidance then we aren't going to see any real change or improvement. Alternative energy has the potential to bring us a good ways towards prosperity but until we start to see more (like myself) who are assembling business plans and working through those SBA tutorials and less of existing corporate entities whining to the government for corporate welfare subsidies we aren't likely to see any real or permanent improvement.

Nov 13 07:03 PM

[Graham and ...:]

U.S. has a version of the Japan disease. No kidding. Donald Tsang, in Hong Kong, is someone who would understand these things.

Nov 13 07:27 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 by The Pragmatic Capitalist is only partially 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 07:29 PM

[Mad Hedge F...:]

Look at the world’s worst population pyramid, that for Japan. These graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your model high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why. By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every two wage earners will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, and a terrible stock and housing markets. Dodge the bullet.

Nov 13 10:39 PM

[E Nuff Sed:]

Mad Hedge Trader is the only commentator talking sense. It is the demographics stupid!

Nov 13 11:08 PM

[dingding:]

I beg to differ. The same Donald Tsang who presumably made the quoted remarks in this article told his Hong Kong citizens last month that the real estate market in Hong Kong is far from being a bubble, and that 'there are still plenty of properties available for HK$4,000(roughly US$500) per square foot(mostly in the outer fringes in the city). The only one from Hong Kong qualified to make those remarks is Joseph Yam, who has just been forced into retirement from the Monetary Authority of Hong Kong by Tsang.


On Nov 13 07:27 PM Graham and Dodd Investor wrote:

> U.S. has a version of the Japan disease. No kidding. Donald Tsang,
> in Hong Kong, is someone who would understand these things.

Nov 14 03:06 AM

[Moon Kil Woong:]

Dear E-cup. This is a an economics and financial blog not a money making endeavor. If you make so much money rather than lambasting those on SA for being unproductive wouldn't it be more productive for you to be working?

Usually those who make money in the market don't tell everyone. Those who try to bandwagon people into positions you already took are usually trying to unload. If you are unhappy with your short positions I certainly understand. Just don't try to sell me on them.

Those on SA want to have constructive fundamental discussions. If you want a bunch of people ranting and raving about buys and sells watch CNN or blog on Yahoo finance or the 100 other sites stock promoters have ruined.

Nov 14 07:05 AM

[enigmaman:]

Agreed, the world population pyramid has been reversing, that is plainly obvious, the burden you speak of is quite evident when you look right here in the USA at at SS. Another major point is to see where the worlds population growth is coming from, and what will be the long term ramifications, to play out the scenarios is quite troubling because in the end its all just comes down to a numbers (birth rate) game. If you look at the EU countries with the biggest potentially radical immigrant populations you find countries whose birth rate falls short of whats needed to replace aging workers so immigration legal or not is required to fill the void. In the end what will change the entire dynamics of the world governments, economies and life style will not sprout out of violence but from the worlds growing population of government supported poor and immigrant populations casting of their ballots. In time Israel will become Palestine for the same reason.

But back to your point "Dodge the bullet" How? What is the opportunity?

On Nov 13 10:39 PM Mad Hedge Fund Trader wrote:

> Look at the world’s worst population pyramid, that for Japan. These
> graphs show that a nearly perfect pyramid drove a miracle stock market
> during the fifties and sixties which I remember well, when Japan
> had your model high growth emerging market economy. That changed
> dramatically when the population started to age rapidly during the
> nineties. The 2007 graph is shouting at you not to go near the Land
> of the Rising Sun, and the 2050 projection tells you why. By then,
> a small young population of consumers with a very low birth rate
> will be supporting the backbreaking burden of a huge population of
> old age pensioners. Every two wage earners will be supporting one
> retiree. Think low GDP growth, huge government borrowing, deflation,
> and a terrible stock and housing markets. Dodge the bullet.

Nov 14 07:18 AM

[Jimbo:]

I agree we may be making the same errors that Japan has made. True, our demographics are not as bad. But the Japanese had a vibrant export economy and a high savings rate. We have neither. I think we are trying to improve on what Herbert Hoover did but maybe we should be trying to improve on what Calvin Coolidge did.

Nov 14 11:07 AM

[Gary A:]

The big banks are doing nothing but pumping up the stock market bubble and buying overpriced treasuries. I want them to fail and leave. They are sucking the life out of the average guy, who will not spend to bail them out!


On Nov 13 04:58 PM Ricard wrote:

> There is no silver bullet. Richard Koo advocated a system that didn't
> cause a shock to the system.
>
> On the other hand, to simply have half of financial America fail
> in one swoop would surely be disastrous, and would probably accompany
> regime change of some sort. Some people may want such drastic change,
> but when it happens, usually the result is something totally unpredictable,
> and not wholly desirable.

Nov 14 08:43 PM