Roubini & Pesek & USA vs Japón
Is the U.S. a Japan 2? The Return of Japan’s “Free Fallin” Stag-Deflation and the Risks of a U.S.
Feb 3, 2009
William Pesek, the savvy Asia columnist for Bloomberg, reports - in his latest column (see below) - my views about the structural crisis faced by Japan that I outlined in a 1996 paper titled “Japan’s Economic Crisis”. Thirteen years later Japan is entering another severe slump that looks like even worse than that of other advanced economies: while in US, Europe and some other advanced economies and China the second derivative of growth and of other economic indicators is turning closer to becoming eventually positive rather than negative (i.e. growth is still negative but GDP may be falling at a decelerating – rather than accelerating - rate) in Japan is still highly negative (i.e. the fall is accelerating and looking like a free fall, a severe case of stag-deflation).
The sad case of Japan free fall is a cautionary tale of what happens when a high flying economy has a real estate and equity bubble that goes bust and avoids for too long doing the painful structural reforms and clean-up of the financial system that is necessary to avoid a long-term L-shaped near depression. Japan had over a decade of stagnation and deflation, then a mild sub-par growth recovery that lasted only three years and is now spinning into another severe stag-deflation. Keep alive zombie banks and zombie corporations whose balance sheets and debts are not restructured as in Japan (zombie banks and zombie insolvent households in the US today) and you end up in a L-shaped near depression.
Let me explain next in this note why the US and the global economy face the risk of an L-shaped near depression if appropriate policy actions are not undertaken…
First, note that Japan made many policy mistakes that the US should and could avoid: it cut policy rates two years after the bust of its asset bubble while the US eased monetary policy aggressively after August 2007; it went into QE (quantitative easing) reversed ZIRP (zero interest rate policy) too slowly; it waited two years after the bursting of its bubbles to do a fiscal stimulus (and reversed it too early with a consumption tax) while the US did one – albeit a failed one – last year and is doing another large one now; it created a convoy system of zombie banks and corporate that were restructured too late while the US may become more aggressive in cleaning up the financial system; it had structural rigidities – like lifetime employment – that slowed down the adjustment while the US has flexible labor markets (with workers moving fast to new sectors/regions where there are jobs once they lose one).
But in many dimensions the U.S. started its financial and economic crisis in a much worse shape than Japan. Indeed, Japan was in much better macro and financial shape than the US before and during its stagnation: high household and national savings and low leverage of the household sector, large current account deficit, net foreign asset position that allowed it to finance its large fiscal deficit during the stagnation via domestic savings. The US instead has had near zero household savings and massive leverage for years, large current account deficits and is the largest net foreign debtor in the world, thus relying on the kindness of strangers or, better, on the kindness of its strategic rivals (China, Russia) or unstable petro-states to finance its twin fiscal and current account deficits.
And the US may make some of the same mistakes as Japan and suffer of similar macro policy constraints that may limit the ability to resolve the financial crisis in a more rapid manner. First, monetary policy – however aggressive – is like pushing on a string when you have a glut of capacity and credit/insolvency rather than just illiquidity problems. Second, fiscal policy has its limits in a worlds where you are already the biggest net debtor and net borrower in the world and where you need to borrow this year $2 trillion net ($2.5 trillion gross) to finance your fiscal deficit while every other country (including your traditional lenders/creditors) are now running large fiscal deficits with the risk of a sharp back-up in long-term interest rates once the tsunami of new US Treasuries hits the market (see the back-up in Treas yields in the last 10 days and the scary signal it sends about coming dislocations in the US Treasuries market). Third, the US is taking an approach to bank recap and clean-up that looks more like Japan (convoy system and delayed true clean-up as the necessary pain to shareholders and unsecured creditors of banks is avoided/delayed) than the successful Swedish outright takeover/nationalization process. Fourth, the market friendly approach case-by-case approach to the necessary debt reduction of insolvent private non-financial agents (corporate for Japan, households for the US) will be too slow as working out one household at the time the debt overhang of 15 million insolvent households will take years when a systemic debt overhang requires an across the board debt reduction (as in Mexico and Argentina) that is not politically feasible – so far – in the US.
Thus, even if the US were to do everything right and fast enough (on the monetary, fiscal, bank cleanup and household debt reduction) we would still have a severe two year U-shaped recession until early 2010 with a weak recovery of growth (1% or so that feels like a recession even if you are technically out of it) in 2010-2011. But if the US does not do it right this severe U-shaped US and global recession may turn into a nasty multi-year L-shaped near depression like the one experienced by Japan. We don’t have to go back to the Great Depression (when output fell over 20% and unemployment peaked over 25%); even a stag-deflation and Near-Depression like the Japanese one would be most severe for the US and the global economy. And while six months ago I was putting the odds of this L-shaped near-depression at 10% or so such odds have now risen to one third. So time is of the essence and the clock is working against US and global policy makers. The time to stop dithering is well past; and the time to implement a program of forceful, coherent, credible, globally-coordinated monetary, fiscal, financial clean-up and debt-resolution is now. The US and global economy are truly risking a near-depression if the policy reaction is not bold, aggressive, sustainable and credible.
And here is Pesek’s column:
Roubini’s Gloom Gets Traction in Panicky Tokyo: William Pesek
Commentary by William Pesek
The champagne must be flowing at Toyota Motor Corp. headquarters.
It just ended General Motors Corp.’s 77-year reign as the world’s largest automaker. Toyota also is looking ahead and going full circle in terms of management: It just named the grandson of the company’s founder as president.
The celebrations and nostalgia will be short-lived, and not just because Toyota is forecasting its first operating loss in 71 years. It’s on the frontline of an economic plunge that might push Japan into another “Lost Decade.”
That’s a strong statement, and one that’s worth exploring in Japan and beyond.
Economic data coming out of Tokyo have been atrocious. Exports, for example, plummeted 35 percent in December from a year earlier. That was the sharpest decline since 1980 (there are no comparable data before then). Exports were the main driver of the recovery that now has died a very sudden death.
With nothing self-reinforcing about Japan’s expansion, Asia’s biggest economy seemed to go from 120 kilometers (75 miles) per hour to zero in all of a week. Now it’s going in reverse, and picking up speed.
Global demand for cars and electronics is drying up fast. Toyota, Sony Corp. and Honda Motor Co. are shedding thousands of workers and closing production lines as profits and sales dwindle. It’s just the beginning as the U.S. and Europe sink.
Japan Blindsided
The global crisis blindsided most Japanese executives and politicians. Much of the chatter in 2008 was about how Japan’s cash-rich banks would play a white-knight role for a Wall Street in turmoil. Mitsubishi UFJ Financial Group Inc.’s $9 billion investment in Morgan Stanley was seen as the first of many such deals.
As 2009 unfolds, the folly of that view will come into sharper focus. Yes, Japan’s government has the resources and borrowing potential to forestall a meltdown. The roughly $15 trillion of household savings is a comforting counterpoint to press reports of rising Japanese poverty and homelessness.
Yet Japan will have the same problem as China this year. Both economies can hold their ground when others are booming. With the U.S and Europe in deepening recessions, all that’s left is domestic stimulus.
That goes for Asia, too. Singapore may contract a record 5 percent this year. In South Korea, industrial production fell by the most on record in November. Officials in Indonesia, Malaysia, the Philippines, Taiwan and Thailand are struggling to boost slowing economic growth.
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