Thursday, June 20, 2013

Why the USA Can't Copy Japan

When numbskulls point to Japan and say that the US can take the Japanese route and muddle through for 20 years, please roll your eyes and mock them. Every nation is different even if the same problem arises. Even on econ + finance sites I've seen posts about the US taking the Japanese path. This is partially true in that the US has zombie banks, isn't writing down debt, is taking a ZIRP approach and hoping growth comes back. It is false for every other variable. The most important, and why the US will not last 20 years copying Japan, are the following:
1. Japan was a net creditor while the US is a net debtor
2. Japan's debt holders are mostly internal and domestic, while the US already had a sizable chunk of foreigners holding debt before the QE programs.
3. Japan is a homogeneous society while the US is a multicultural society.
4. Japan has tight control on its immigration policy, extremely low crime, and has experienced deflation for roughly to decades. The US has no control on immigration, much higher crime and has experienced significant inflation in items that are not marked in official inflation statistics.
5. Japan started the lost decade journey with a relatively high savings rate that has decreased with time as the population aged. America started the process with a savings rate that flirts with 2%.
6. Japan could weaken their currency due to the '90s US balanced budget-strong dollar policy and the European Monetary Union's need for tight budgets to prepare for the coming euro.
This is why the false choice of the Swedish model or the Japanese model of dealing with bad banks that Obama and the media discussed in late 2008 and early 2009 would not work in America. The eras and pain points were different to begin with, but we chose what policymakers called the Japanese model. Our external financing partners will only allow this to go on for so long. They have been sending signals with their gold purchases for years now. Eventually, they will send stronger signals that will bring the Rube Goldberg financing system to a halt. Our journey done Japan's path started roughly five years ago. We will be lucky to make it to one Japanese Lost Decade.


Phoenix said...

Thanks for the lesson. I wonder if the QE programs, aside from supressing rates, were an attempt to lower the percentage of the debt held by foreigners.

Son of Brock Landers said...

The more I review QE, the more it appears to be another example of the elite thinking their new technological capabilities gives them greater control to handle things. They forget human nature lies at the base of every bit of society that they think they can administer.