Zen and the art of economy repair
By
Bill Bonner Aug 27, 2010
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The summer has been quiet and pleasant. Gold, stocks, bonds – all went to the beach and forgot their cares. But this week, chilly winds race across Europe. Children go back to school in America. Traders and fund managers drift back to their desks from Martha's Vineyard and Ibiza. And so it is time for us here on the back page to take up the world's cares again. And then shirk them.
That's what the Japanese do. The Japanese have gotten good at sloughing off their worldly cares, writes Norihiro Kato in the New York Times. Japan is no longer the world's number-two economy; it was eclipsed this summer by China. But the Japanese are used to slippage.
We all know the story of their 20-year economic decline. Japan's GDP peaked out about 15 years ago. It's been sliding ever since. In terms of rice production, Japan has been downsizing for more than 40 years. Its population, too, grew by 1% a year from 1917 to 1977. It peaked in 2005. There are fewer Japanese now than five years ago. If the trend continues, eventually there will be none.
Our back page dictum: people come to think what they must think when they must think it. What do people on the road to extinction think? Ask the Japanese. Says Kato, they become less competitive and more reflective, almost zen-like, turning an eye inward, away from striving and jostling, accepting whatever the economic gods send their way. They stay at home and save their money. In the developed West, on the other hand, resignation and capitulation have not yet caught on. People still rage against the dying lights of the Bubble Epoque and count on quantitative easing (QE) to restart the generator .
Coming back to their offices and iPads at the end of summer, investors find that not much has changed. Prices are about where they left them at the end of May. But where is the recovery? It disappeared with the Japanese centenarians. In the US, for example, the latest reports show new unemployment claims were far higher than expected. Existing home sales were far lower than forecast. A half a million Americans filed for jobless benefits last week – the highest in nine months.
At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month fall since 1968. Again, the direction is all wrong. Housing led the US out of seven of the last eight recessions. Now, it's holding it back! One in every seven mortgages is delinquent or in foreclosure. The nation is set to foreclose on more than a million houses this year – a new record. So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan?
There are so many economists voicing an opinion on the subject that if you spent five minutes listening to each one you would have to be an idiot. Some think Europe and America will follow in Japan's footsteps, some that it won't. Taking no chances, this back page has firmly held both opinions at one time or another.
The US is not Japan, say many. Japan's 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current-account surplus. The US is confronted with the opposite: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will be unable to stay on the road to Tokyo. Instead, it will be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan's orderly ruination.
Those who think we are following on Japan's heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with public money. This effectively transferred the burden of debt from the private to the public sector, while holding the economy in a state of suspended animation for two decades. Japan's people were getting older, more cautious and more resigned to slippage. Neither fiscal, nor monetary stimulus roused them from their economic torpor.
This seems to be what's happening in America too. The private sector is de-leveraging. The latest report shows credit-card debt at an eight-year low. Mortgage debt is dropping sharply too due to defaults and foreclosures. Banks and private firms are stockpiling cash in anticipation of a cold winter. Households are playing it cool too.
Ben Bernanke must have got the message sometime between the 4th of July and the Assumption of the Virgin. On August 11th, the Fed announced another round of QE to fight the decline. Of course, Japan tried QE too. It failed. But who knows? Maybe the Japanese are just losers. They are the only people on earth to have nuclear bombs dropped on them. Then again, that seemed to encourage them. After 1945, the Japanese economy went from absolute ruin to become the world's most admired economy. Let us hope the authorities do not draw the obvious lesson: on the evidence, nuclear bombs pack more stimulus punch than QE.
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