Stirling Newberry and I have been writing about Japanafication for years—on blogs, at least since 2004.
Those of us who are old enough remember when Japan was THE miracle economy. Technologically advanced, vibrant and rich. It was eating America’s lunch, and most other countries. For peak alarmism at this fact in a fictional form, read Michael Chrichton’s Rising Sun.
Tokyo real estate was worth more than the entire world’s real estate combined.
Then the bubble crashed. Japanese policy was to protect the banks, and to bury the bad loans on the books. They undertook literally decades of stimulative policy, mostly pouring useless concrete (exactly the wrong thing to do unless your country really lacks that sort of infrastructure, which Japan did not.)
To put in terms familiar to my readers, they extended and pretended.
Japan went into semi-permanent stagnation.
We have, now, the news of a quarter drop in GDP of 6.8% annualized for the last quarter. (This is blamed on increased sales taxes, but it was coming anyway.)
The long stagnation is over (it’s been over for a bit). Japan is actually in decline.
This is important because Japanification was always the plan for the US after the bubbles: extend and pretend, stagnate wages and employment. Pretend.
But there were significant differences between the two countries. Japan started with massive savings and a huge trade surplus. It is now in trade deficit and savings compared to debt are way down. Economic equality was relatively high, as well, spreading demand.
America came out of the financial crisis with a trade deficit, a pathetic savings rate and massive inequality. This is why I predicted that Japanification would not work in the US. It could not, because there was no saved fat to be used to create the long bright depression the Japanese had.
This brings us to stimulus and development (not just for developing countries). The money must be used not for pork projects with no follow on, but to create new industries or to bring money off the sides into the economy. Pouring concrete (and not even bothering to shore up nuclear reactors in areas which were not electorally viable) was pointless in Japan. Buying bonds is pointless and even harmful.
Likewise you cannot have real open trade flows and expect to keep whatever you are building. You build it, you make it work and once an industry is systemized, it can be moved to a low cost domiciale. It takes deliberate government policy to prevent that.
Monetary policy in Japan could never work, because the money went to the wrong things, and much of it immediately decamped overseas in the so-called carry trade—borrow low in Japan, buy securities somewhere else where they had a higher return.
All of this should be obvious and uncontroversial. It is not, it flies directly in the face of modern neo-liberal theory and it is that theory, in the face of decades of failure, that the Japanese followed.
The human capacity for ideologically driven stupidity and atrocity is endless. (Those who do not believed me are invited to study Church history and its effect on society from 1000 AD to 1900 AD or so.) People will ignore the evidence in front of their eyes, years of failure and continue doing the “safe”, “orthodox” thing no matter what the results. This is true even for well-meaning people.
Of course, in the US, Japanification has a US twist: it massively increases the wealth of the already wealthy, through unconventional monetary policy. American leaders are far too greedy to make Japanification work: any surplus, or room to lend, or room to print money, must be given away to rich people as quickly as possible.
I point out, finally, that the first sin in Japanification was buying the bad loans. This was a huge mistake in the US too, bailing out the banks and not forcing them and their share and bondholders to take their losses was the main mistake of the financial crisis. Yes, things might have been worse if the US had done so (though steps mitigating the hit on the regular economy would have been easy enough to take with the 4 TRILLION dollars used bailing out rich people), but even so, the US would have recovered better afterwards.
Instead the US has an economy in which 90% of the population has seen an actual decrease in income and wealth, while 10% has seen an increase: with the 1% and the .1% and the .01% benefiting most of all.
Japanification was the plan for America. It isn’t working, it could never work, but the policies in place are nonetheless doing what is most important to their architects: they are making the rich richer, and everyone else poorer and doing it quickly.
The Bush years were the long suck. This is the deep dive, and remember, the US isn’t in recession yet (though it is in depression). The pain when it happens (and absent nuclear war, there is always another recession), will be unbelievable.
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stirling
so noted, thank you.
Celsius 233
No conversation about Japan’s economic success in manufacturing (especially the automotive sector) is complete without credit to Dr. W. Edwards Deming.
At one time America spurned Deming’s QC theories, but, Japan embraced them. It wasn’t until the 1980’s that Deming was sought by US corporate culture.
Great post and the obvious is all around for those with eyes and a functional brain.
Celsius 233
There’s another thing which nobody seems to be talking about and it’s a sure sign of decay.
Infrastructure is not being maintained for the general populace.
Specifically, New Orleans (Hurricane Katrina) , New Jersey (Hurricane Sandy), and Texas ( Hurricane Ike) have for all practical purposes been ignored but with promises to the moon to make every thing okay.
Fucking crooks and liars rule America…
Bill H
“The long stagnation is over (it’s been over for a bit). Japan is actually in decline.”
Except that Paul Krugman, Dean Baker et al are not yet admitting that. They still say that we can follow Japan’s example because Japan is doing just fine. When our debt to GDP ratio is mentioned their response is, “Sure, but look at Japan, and they’re doing fine.”
Actually debt as a ratio of GDP is absurd. It’s like me going to a bank and claiming worthiness for a loan because “my employer’s income is $xxx” without mentioning that my employer is also spending more than that income. The bank will not care. They will want to know about MY income and spending.
With a $3.9 trillion budget, our current $17.6 trillion debt is 4.5 times the government’s annual income, and notwithstanding the “full faith and credit” clause, it is essentially unsecured debt because it is secured only by the government’s promnise to pay. No sane banker would make additional loans.
Thomas
slightly off topic, what are some good sources of the Church’s affects on society for the dates mentioned. I’d research it myself but I’m currently busy with Uni studies or the foreseeable future.
Formerly T-Bear
Terra incognita is the likely outcome for the US$ and its issuer. Japan-ification is the result of massive capital movements, first inflating, then later abandoning that nation’s economy under unserviceable debts created during the period of inflation. Transferring those debts to public accounts does nothing to service the debt but instead creates greater debt obligations through central bank sales of bonds. Economically kicking the debt can down the road.
The difference between the Japanese Yen and the US$ is that the US$ carries the dual privilege and burden of being the reserve currency, which curtails most options to address the growing economic depression and the deflation devaluation of the currency. Since the economic establishment insists in believing in the present economic dogma with its demonstrated incapacity to model economic realities, it is unlikely to be of any utility whatsoever but stands in the path of alternative models being developed. The resultant collapse of (now) the world economic order will go down almost as fast as the twin towers. Maybe it should, it has gotten too big to think.
Formerly T-Bear
@ Thomas
Try wikipedia – “Reformation”
and follow the links pertaining provided.
John
Thomas,
Steven Runciman’s three volume ‘History of the Crusades’ is certainly a work that points out how “The human capacity for ideologically driven stupidity and atrocity is endless”, especially as related to the Church in western Europe. It covers the medieval glory days of that stupidity and atrocity untempered by Renaissance and Reason and reads better than Game of Thrones.
Between the Crusaders and the Mongols of that time, we are getting off relatively easy today.
Some consolation, that!
Jeff Wegerson
Japanification is a pretty good indicator that the current approach to international economics can go on indefinitely. Predictions of impending collapse do not convince me otherwise. Of itself the invention of the electronic computer during WWII makes possible the management of limitless calculations quickly enough to juggle the needed accounting to keep it going.
To date the external threats presented by better more competitive economic arrangements have been countered by military might. That reality is changing. Look at the Ian’s posts on the erosion of the U.S. military effectiveness and various comments attached. We are all watching the progress of Russian and BRICS efforts at creating alternative economic arrangements. These may not bear fruit, but in the long term others will. Perhaps not before our own personal deaths. And perhaps not before massive climate changes.
For me Krugman is an allied friend. He may be wrong about the utility of Japanification or the utility of generic stimulus. I side with Ian that correctly targeted stimulus is most often required and may not even in themselves be sufficient. But Krugman is correct in dismissing ratios of debts and GDPs as indicators of impending doom. He understands, like our other allied friends the MMTers, that it is a mistake to use household budgeting or even corporate budgeting as a model for the relationship of a sovereign government with its national economy. Simply put printing money is different than borrowing and taxing money, as are the attendant sets of consequences.
Trixie
Stirling Newberry and I have been writing about Japanafication for years—on blogs, at least since 2004.
(Peeks at cards…)
(Thinking, thinking…)
(Folds.)
This joint is going to be SO hard to troll. Well played.
stirling
It is one of the best opening in the world right now, because everyone else is starved for cash.
Spinoza
@Thomas
Another good source besides the ones mentioned is “Christianity: the first 3000 years” by Diarmaid MacCulloch. Full spectrum survey of Global Christianity. The Thirty Years War, the Conquest of the Americas, and Britain’s fucked up history with China are particularly fun moments. Often times, English ships would ride over to China with missionaries on the top deck and crates of opium on the inside.
OldSkeptic
Totally random thoughts, the things you never hear about or ‘the dogs that never bark’ (this is related to my thoughts on ‘belief clusters’):
Why are no climate change denialists, against against burning fossil fuels?
I mean you can almost understand someone with no scientific knowledge whatsoever struggling to accept how huge climate changes can come from seemingly small changes in CO2 (etc).
But you could also (and should) be against burning fossil fuels because of the obvious other (and serious) pollution, their scarcity (what about the kids), the damage they cause digging them out of the ground, the deaths and so on….
But to a person they are for burning more of them and are against any alternative energy sources. Que?
In this age of everything becoming and being treated as an addiction (alcohol, drugs, gambling, sex, etc, etc), with many learned papers being written, rehab clinics abounding, no one talks about addiction to money or power.
I mean if you have a billion dollars and spend all your time and energy (sacrificing everything else, relationships, friends, spouses, children, honour, decency, etc) to turn that into 2 billion isn’t that the very definition of an addiction? And shouldn’t it be treated, compulsorily if necessary? Ditto the pursuit of power.
hoarseface
@OldSkeptic,
Re: your second question, the answer to me seems obvious
In our current culture, addiction to money is viewed as the primary virtue (job creators / makers vs takers).
Addiction to power, when it is not derived from monetary wealth but rather, say, political influence (elected representatives) is considered to be a healthy careerist ambition. Power in the form of being an authority figure (police) is power bestowed by the State and so to condemn an addiction to such also implies an attack on the State (or establishment, powers-that-be, whatever).
Those are addictions which serve the status quo. They are to be emulated, not treated.
BlizzardOfOz
OldSkeptic, I like your stuff on Russia, but this is really weak. What you laughably call “scientific knowledge” is equal parts Gaia religion and deference to credentialed authority. It’s a huge leap from “accepting how something can happen” to believing it (especially when that something is also tied to massive misappropriation of taxpayer funds), and another huge leap to actually knowing it.
Well, and I’m sure many are, if you look beyond the characters that act as mere foils for smug liberals. You can also flip the question: environmentalists, if they are sincere, should be pro nuclear energy with its low carbon footprint.
I’m not sure about this. It does not seem too hard to make money, when your government cronies will bail out your bad investments to the tune of trillions?
I get that you’re being half-facetious, but all you’re proposing here, given that the banks own the government, is that Blankfein compel himself into treatment for his own addictions.
OldSkeptic
There was a simple and cheap way for the US to deal with it. Buy all the mortgages, subprime market was only about $1.5T, the whole US mortgage market at the time about $4T.
Ban all new derivatives, CDO (CDO squared, etc), CDS, etc deals, but let the existing ones continue. Let them all unwind over time as no mortgage woulds go under, hence no losses.
Give every American mortgage holder a gift, small mortgages cut to 10% of the original value, middle one 25%, huge ones 90%.
Make it a national emergency, and hence raise taxes a bit to pay off the values over (say) 10 years. Introduce draconian laws to ensure nothing like it happens again.
Results. No one losses their house, consumer spending remains steady, no financial institution goes under. US GDP fine. Bit of an increase in Govt debt that steadily declines.
Politically the President/congress that did that would be in power forever.
Easy eh….the only economist in the world that recommended something like that was Steve Keen and the details are all my idea.
But you hit against a simple rule, the rule that dominates ‘neo-liberal’ thinking, the REAL ideology behind it all:
Poor/ordinary people must get nothing more because they don’t deserve it. In fact because they are ‘undeserving’ they must get less and less. And that, my friends, is the dominant ideology amongst the western economic (and hence political) elites. To a person all around the western world (and Govt Treasury depts, central banks, et al) they believe this with all their hearts.
Formerly T-Bear
@OldSkeptic 19 August 2014 #64302
Just a reminder that when those decisions were made, POTUS # 43 was in office and any thought such as you’ve written above, would be antithetical to life itself; POTUS #41 said it: “naut gonna happen”.
P.S. Your proposition is one of the best yet, where were you when the world needed those ideas? This prescription only shows how totally bankrupt the current economic theology actually is as well as how dismally dumb the world’s population actually is educated to be.
Veritea
Ian,
Are you familiar with Austrian economic theory (an by familiar, I mean having read what actual austrian-school economists have written, not just drive-by hackery of those that oppose them)? What you outline in this post is nearly identical to their take on Japan’s situation. If bondholders and banks were not bailed out then two things would happen: 1) the debt would be destroyed, not left hanging over debtors who have no ability to repay, and 2) People (and banks) who invested stupidly would no longer have money to do stupid things in the future. Stability is destabilizing, and this type of an experience would make investors and bankers more appropriately cautious in the future.
By using the extend and pretend method the same bankers and investors who made bad choices in the past maintain their power and make no corrections to their damaging and dangerous behavior. Debtors who cannot pay have no ability to gain relief through bankruptcy and are kept from returning their full productivity (which damages the overall economy). These are all austrian-school concepts.
It should also be noted that G.W. Bush allowed Lehman Brothers to fail, a proper austrian-school response to their bad investment decisions and over-leveraged position. Of course he chickened out after that and went into full bailout mode. If he had continued down that path we would probably be left with only one or perhaps two much smaller investment banks and with an economy where the FIRE industries were much less important relative to industries that build real assets.
The ability for banks investors to loose their money on poor investments is absolutely critical to a functioning market economy. Making exceptions (which only happens due to government intervening and changing the rules in the middle of the game) is what takes temporary inequalities and makes them permanent.
OldSkeptic
The fascinating thing was that it was, what I call, the ‘fake left’ that largely led the neo-liberal charge in the 80’s and 90’s. Clinton, Bliar, Hawke/Keating/Langey/etc.
Deregulation (especially the financial system), ending tariffs, de-industrialisation, thrashing labour rights. In the US it was Clinton that gutted social security. Behind the scenes public scientific research was gutted and privitised. Higher education privitised and so on.
What matters is the underlying ideology of neo-liberalism, not the phoney technical ‘economics’ they spout which is all total piffle. This was clearly espoused by Milton Freidman in his UK (I think the BBC) series of programs.
His ideal society then? UK ruled Hong Kong in the 70’s. Totalitarian society for an elite and oligarchs. 6 people (or more) to a room for the proles. No social security or pensions, everyone (inc children) having to work endlessly to survive.
And that ideological model is pretty much what our ‘elites’ want to achieve everywhere.
It doesn’t matter that the ideology is fatally flawed economically, because this is not about economics. It is a desire to re-create something like an idealised mid-19th century Britain, complete with forelock tugging peasants, which really didn’t exist as they imagine it did.
They also forget that the 19th century was for many countries a time of tremendous turmoil, with revolutions all over the place and many old elites getting the chop.
But their gamble is that the massive national security state apparatus that has been created will keep the proles down. Though none of them want to pay for it of course, the proles are expected to pay for the instruments of their own oppression.
The elites and oligarchs have, in most places, completely separated themselves from their own bases, except in so far as they loot them. There is nothing they give back, just endless taking. There is no noblesse oblige in them at all.
And they are not going to stop until they have extracted every gold filling, ripped off every piece of jewelry and stolen every bit of change from the purses of every pensioner everywhere…then sell their kidneys to someone else.
They honestly believe that the proles don’t deserve what they’ve got and that they should get it. That the proles are stealing from them.
Hence they would rather spend a billion on national security than a billion on ordinary people.
That is a clear ideological choice that they make.
This is obviously not a viable model for a successful and enduring economic/social system.
Ian Welsh
I’m familiar with Austrian economics. Like most schools, it’s partially correct. Bear in mind that I believe in industrial policy, stimulus, and managed trade—but they do have to be done right. I also happen to believe in basic capitalism: bankrupt companies go bankrupt and the shareholders and stockholders take their losses, and any excess debts go poof. I believe in a basic safety net, but I don’t believe in a net to stop people from losing everything but housing, food and so on. Such policies, bailouts for the rich, destroy economies.
Absent industrial policy and heavily managed trade, the Japanese miracle never happens in the first place. No country larger than a city state (except the USSR) has ever industrialized except with managed trade including the US and Britain.
Sukh Hayre
How would you account for the differences in the fact that Japan has lost its competitive advantage as an exporter of manufactured goods, and so all that they have to enable them to not have a significant fall in their standard of living is the fact that they have savings.
The U.S. has debt (but no higher than what Japan had at its peak in 1989), and that debt, at the government level, has grown exponentially since then.
BUT…
The U.S. has more natural resources per capita than virtually any other country in the world. In addition to that, they have strong institutions in place (like Japan) to get through the tough adjustments every nation will eventually have to go through.
The reality is, the U.S. can (if it must) produce everything it needs domestically. Japan never had that luxury, and for that reason they had to encourage savings, whereas in the U.S., because they were the printer of the world’s reserve currency, it actually made sense for the government to encourage consumption and debt for as long as possible (as long as other nations were willing to accept US IOU’s in exchange for manufactured goods and oil). Down the road, the U.S. dollar would weaken and that would make it easier, and cheaper, to pay back these worth-less IOU’s.
This is the price the rest of the world paid to eventually be able to “steal” U.S. intellectual property and, along with their sacrificed slave-labour, leapfrog from a 19th century economy to a 21st century economy.
Sukh Hayre
The last comment I posted was a bit confusing so let me try again:
Japan has lost its competitive advantage as an exporter (as they would have known all along was inevitable) of manufactured goods. Japan’s leaders were smart enough to therefore encourage a culture of saving as this was the only way of ensuring that they would not have a significant fall in their standard of living, and instead, it would be much more gradual.
The U.S. has debt (but no higher than what Japan had at its peak in 1989).
Japan’s debt, at the government level, has grown exponentially since then.
BUT…
The U.S. has more natural resources per capita than virtually any other country in the world (including the fact that they pretty much control Canada’s natural resource wealth).
In addition to that, they have strong institutions in place (like Japan) to get through the tough adjustments every nation will eventually have to go through.
The reality is, the U.S. can (if it must) produce everything it needs domestically. Japan never had that luxury, and for that reason they had to encourage savings, whereas in the U.S., because they were the printer of the world’s reserve currency, it actually made sense for the government to encourage consumption and debt for as long as possible (as long as other nations were willing to accept US IOU’s in exchange for manufactured goods and oil). Down the road, the U.S. dollar would weaken and that would make it easier, and cheaper, to pay back these worth-less IOU’s.
This is the price the rest of the world paid to eventually be able to “steal” U.S. intellectual property and, along with their sacrificed slave-labour, leapfrog from a 19th century economy to a 21st century economy.
Ian, your thoughts?
Ian Welsh
“Intellectual Property” is an artificial creation. And for any American to complain about other nations stealing their IP to industrialize is beyond pathetic: do you know how much IP the US stole from Europe and Britain? At one point the Brits were so upset they sent gunships off the New York coast (look it up) because of tinpan alley stealing British music.
Plus ca change. If the US wants to really try and enforce its IP, it will lose the ability to manufacture in China. Even 10 years ago that might have worked, today, probably not because the Chinese have the factories and the knowledge to manufacture most stuff. Get overly stuffy on IP and China can just break the patents. They might lose the US market, but they might not, and much of the rest of the world would rather buy cheaper goods from China than expensive goods from the US. Absent IP protection a smart phone, and a good one is, 100 dollars. A cheap one is $50. That’s a huge premium to pay to America, and people will simply not do it if China decides to break the patents.
So America will put up with the stealing of IP because it no longer has any choice. That ship sailed. If you didn’t want your IP sold, you shouldn’t have moved most of your production to other countries. You can’t have offshoring level profits and secure IP. Does not happen. (Same with the Brits offshoring their production to America in the late 19th century.)
America can make most things in theory, but as it increasingly loses the actual production workers by offshoring them to China and elsewhere, not in practice. If it was just about natural resources Russia would be doing even better than the US, and so would Canada (not to mention the Congo.)
Comparative advantage is a dubious metric for a variety of reasons . What matters is profitability, which is affected by an immense number of variables, many of them controlled by various government’s policies. Japanese manufacturing is not as profitable as offshoring it, and that is a choice made by the current global trade regime. The Japanese also chose not to maintain their profitability by spending trillions from their savings on stimulus which did not increase profitability or productivity. Now they pay the price for that as well as their inability to safely run nuclear reactors, forcing them to import much more energy than they should otherwise.
Corruption and technical incompetence has a price.
Sukh Hayre
Ian,
Absolutely, IP is an artificial creation, and its actual use in collecting rents for the developed world is pretty close to past its due date. For now, it has been a “win-win” with China sacrificing its labour and its environment to build up the infrastructure needed to benefit from the IP created in the developed world. That price has now been paid. This actually also helps free up the oil-exporting nations from U.S. domination.
When the rules of globalization are no longer win-win, globalization will come to an end. Then, each nation will have to rely a lot more on meeting the needs of its citizens based on the resource wealth of the nation.
Globalization will be replaced by bilateral trade agreements and will focus on high-level trade, and less for trade in exchange for IOU’s (previously needed to build up the reserves required under a U.S.$ based global economy).
Central governments (and their central banks) are going to play a much larger roll in their economies.
Ian, I’d love your thoughts on this video I’ve put together. Robert Skidelsky discusses a world in which scarcity is no longer the main driver of economic policy, as Keynes envisioned the developed world would eventually achieve.
https://www.youtube.com/watch?v=GgOhGexi1CY&list=PL6ED0A82B20435C39&index=55
Sukh Hayre
Modi’s Biggest Foes to Open India Seen With His Own Camp (Bloomberg)
“For Ashwani Mahajan, the key to reviving India mirrors the movement to kick out the British a century ago. Only this time foreign companies selling everything from insurance to genetically modified seeds are the colonizers.”
_________________________________________________________
China using antitrust law to pressure foreign businesses (MarketWatch)
“China is using its six-year-old antimonopoly law to put foreign businesses under increasing pressure, a development that experts say will intensify as Beijing seeks greater sway over the prices paid by Chinese companies and consumers.”
Sukh Hayre
The financial crisis will continue to hit us in waves. When the wave hits that pops the credit bubble in China, globalization as we know it will come to an end.
I believe, when that happens, China’s government will focus the economy on producing the goods needed to furnish and finish all the housing units that have been built (semi-built) and are sitting vacant. The focus will shift to a more balanced domestic, service-based economy. By adding this component, China will eventually stabilize its economy.
The U.S. on the other hand will finally fire the final arrow of their recovery plan, which will include fiscal stimulus, much more progressive tax rates, and a huge national infrastructure upgrade program.
Trixie
OMG Sukh, hi!
‘HaikuCharlatan’ here. You may remember me yelling at you and YouTube in the comments section on my page because it kept deleting the link to your video over and over and over again. Pretty sure my advanced troubleshooting skills finally ended with me calling someone (everyone?) a Nazi. Because YouTube.
Yeah, that’s me, what are the odds? 🙂
ps. I never did get to watch your video — since the internet hates me — but will do so now that I can actually “see” the link. Catch you on the flip-side.
Sukh Hayre
Trixie/Haiku,
What are the chances!
Too funny.
Cheers,
Sukh