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As if the poor Japanese investor hadn't had misery enough! He's been beaten up for the last 18 years. He was whacked when Japan Inc went bust in 1990. He was smacked when stocks fell 70%-90% during the 1990s. He was racked with pain when property collapsed to as little as one-tenth of its late-1980s value. He was starved for yield when the Japanese Central Bank dropped its policy rate to zero and kept it there for six years. He was tortured over an entire decade as his government wasted $1trn trying to force him to spend and invest. And he was hung by his thumbs in four separate recessions before the year 2000. You'd think Mr. Market would have the grace not to kick him when he was down. (Here at MoneyWeek we even bet on it... no need to remind us.)
When the sun rose on 2008, the typical Japanese person was still in a foetal position, with his head down and his wallet closed up tightly. But along came the sell-off of 2008 and Japanese stocks got the boot. The Nikkei fell another 50%. The Japanese investor who bought stocks in 1982 when he was 35 years old is now 61 – and his stocks aren't worth a penny more! And today, we feel his pain – not so much because we sympathise with the Nipponese themselves, but because now we are Japanese too.
The G20 nations met in Washington over the weekend, where they expected to get a little preview of the future. They had hoped to do a little editing before the film was released to the public. But while the Japanese example was available for all to see, no one wanted to look. And so the meeting came to an end and the heads of state left town with a clear conscience; while they had done no good, at least they had done no harm. Besides, the press gave the thing a fair spin:
"Presenting a united front," the FT described the G20 meeting, leaders promised to "take whatever further actions are necessary to stabilise the financial system." What actions are necessary? No one can tell you.
Even seasoned hacks seem to have no idea what is going on. Barron's has been putting out a financial weekly since 1921. You'd think in all that time they'd get a little idea of how things worked. Nope. The best advice they could give was the same Japan got: protect the dinosaurs – and spend more public money. Curiously, the paper wants to bail out Ford and GM but let "Chrysler go under". (What does Barron's have against Chrysler? Maybe the publisher owns one of its cars...)
Since none of the pundits, ministers plenipotentiary or City pros pre-penitentiary have yet explained the crisis, it falls to us to do so. We will pass over what went wrong; everyone now knows. But we offer an important nuance: the typical, idealised business-cycle recession came about after an economy 'overheated'. Labour rates rose and the cost of living went up. This consumer price inflation caused the central bank to raise rates, causing the economy to 'cool off' again.
Today's recession in America and Britain is a credit-cycle recession; it is different. For proof, we offer exhibit A: a bond from International Paper with a yield of nearly 10%. Compare that to the yield on US Treasury paper – barely one tenth of one% on 91-day T-bills. These spreads are not just cyclically wide – they are wider than at any time since America's Great Depression.
Just a few months ago, investors reached for the highest yields they could get. Now, investors fold their arms, clutching to their breasts the lowest-yielding paper in the financial world. Once they believed in capitalism and its bonds. Now, they want nothing that doesn't have the seal of the US government on it. A few months ago, they saw no danger. Now, they see nothing else.
Investors all over the planet are taking a beating. Mr. Market has taken a cudgel to stocks, property, consumer spending and the economy – just as he did in Japan in the 'Lost Decade'.
This time, the economy didn't overheat, nor labour rates go up. And when the bubble popped, the pin wasn't higher lending rates. This bust was caused by too much credit, not too little. It is what economist Richard Koo calls a 'balance sheet recession' à la Japan in the 1990s. That is, it is a time when businesses, investors and householders realise that if they don't cut back they could go broke.
And unlike the more typical recession, this is a slump the feds can't control and can't cure. They can offer easier credit; but more debt is what people least want and least need. They can offer more props, more handouts, and more public spending too, just like Japan. But all they are doing is retarding the correction. Mistakes of the bubble era need to be fixed. Balance sheets need to be brought back into balance. There's no way around it. Japan proved it.
Years ago, driving off to the country for a weekend, we tried a diversion: "What do you want to be when you grow up?" we asked the children. To our surprise, among the yearnings of future pilots and ballerinas was one little manga-reading six-year-old with a strange itch: "I want to be Japanese," said Henry. That was 12 years ago. What seemed impossible then seems inevitable today.
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Bill Bonner
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