The US is not Japan, but there are some Similarities

There has been a boatload of articles arguing how the US is going the way of Japan.  I know, I have added to the crowd.  Tonight’s piece is meant to nuance my views, because there are similarities and differences between the US and Japan (20 years ago).

Similarities

  • High private debt levels leading to high government debt levels, as the government “rescues” selected areas of the private sector
  • Asset bubble deflating
  • Desire for security drives government interest rates lower
  • Intractable government deficits
  • Both have warped monetary policy to try to deal with the problem.
  • Slow to fix banking problems; reluctance to take big banks under.
  • An unwillingness to note that the problems are structural, not cyclical.
  • Failure to recognize that growth is not a birthright.  Proper policies must be maintained.
  • Slow response from legislators.
  • Low growth is anticipated, because of high private debt levels.

Differences

  • Japan’s deficit is self-funded for now.
  • Demographics in the US are far more favorable.
  • US Economy more open to global competition.
  • No Tohoku tsunami in the US.
  • Japanese politics don’t care as much about their problems.
  • Japan’s debts were debts of over-production, rather than over-consumption.

Michael Pettis argues that increases in productive capacity will be more harshly treated than over-consumption.  Quoting his most recent piece:

These – with the possible exception of the debt – are not the problems from which the US or Europe are suffering. They suffer from a typical debt-fueled overconsumption boom, whereas Japan suffered from a typical debt-fueled over-investment boom, and Japan’s period of over-investment was much, much more extreme (centralized investment booms can last much longer and go much further than decentralized consumption booms). This is why I think the Japanese experience tells us almost nothing about what Europe and the US will go through.

On the other hand, it might tell us a lot about what China will go through. In fact we can make a more general point. Command economies (Japan, the USSR, Brazil and many others during their “miracle” periods) tend to have much more rapid investment-driven growth during the good times and much more difficult and longer-lasting adjustments. Capitalist democracies are more prone to consumption-driven booms, which aren’t as extreme and don’t last as long, and their adjustments tend to be brutal but relatively quick.

This is a great generalization, of course, and every specific country departs from the generalization in very specific ways.

I think the right answer to the question of whether the US is going the route of Japan is no, but there are similarities, and significant differences.  In Japan, they entered their troubles with corporations and banks overly indebted, whereas in the US it was consumers and banks. A lot depends on how much US consumers reduce debt, making them more capable of buying goods and services in the future.

With a over-production there is no guarantee that the world will ever get up to the level where they demand all the capacity that was developed.  With over-consumption, many debts will get compromised, lenders may be in a funk for a time, but there should be cleaner ways of clearing away and paying off the overindebtedness.

In the Great Depression, the US was in the position of being the over-producer.  Other nations indebted to the US came through the experience better.  Japan was the over-producer of the 1980s.  This time, the US will probably come through the crisis better than China and other creditors of the US.  No guarantees, but foolish lenders eventually get their comeuppance.  We’ve seen that recently… if somewhat short-circuited by the government/Fed.

1 Comment

  • I-CJW says:

    Additionally, Japan took well over a decade to even start to get to grips with the issue of the banking sector’s non-performing loans. It also took them 18 months from the peak of the equity market in 1990 (in which time, it halved) to cut interest rates.

    Whether the actions of the US will ultimately prove successful or not, it won’t be for lack of timely response.