In Search of a Lost Decade

Japan in better days (1856) -- Picture courtesy of Wikipedia

by blogSpotter
For an American looking at 1990’s Japan, it’s a little like looking into a reflective pond, with a few minor details changed. Japan of 1989 was on a massive borrowing binge, fueled by easy credit and a powerful yen. Land speculation pumped Tokyo’s residential prices to thousands per square foot. The Nikkei index broke an all-time record in December 1989, reaching 38,957.44. Stocks and real estate were puffed into an unsustainable bubble that burst, leading to a market crash as well as a credit crisis. Does any of this sound familiar?

The events that followed created what I call a “sloth market” -- neither bull nor bear. It was (and is) more a moss-covered, sleepwalking mammal clinging to a branch. The Finance Ministry bailed out companies “too big to fail”; some of these propped-up enterprises were called “zombies” as they became the walking dead, never to regain profitability. The cautious Japanese also fell into a deflationary liquidity trap caused in part by their own frugality. There was retrenchment all around as businesses and families tightened their budgets. The Finance Ministry tried to finagle a recovery with 0% interest rates, to no avail.

Now we fast-forward to 2010 and what can we say? Japan never really recovered. The Nikkei only reached half its former height in 2007 before being knocked asunder by the same worldwide tsunami that took down Wall Street and most of Europe. As of this writing (and 21 years into Japan’s greed-induced coma), Japan is still laid low by insolvent banks that can’t issue loans while waiting for bad risks to turn around. Insolvent companies hire foreign contractors and fund any paltry improvements from their savings, not from loans.

All of this makes an American wonder if President Obama was right in suggesting that we might be headed to the same place. Japan’s crisis is not precisely a crisis -- their unemployment has never been as high as ours is now. It’s more like an Epstein-Barr virus that has given them (and us) a dull malaise that will neither kill us nor energize us. It will just take us down for an interminable nap time where factories and able-bodied men develop rusty joints and faulty wires.

I find it sad that purely capitalistic systems can only engage forward gear if someone is hitting a financial jackpot. Speaking as an unrepentant, Krugman-loving Keynesian, I can’t help but think that a Works Progress Program (a la FDR) could set us back on the right path. While Dow and Nikkei basically flatline, the Chinese are building airports, bridges and miles of new highway. Is any of China’s output pegged to a financial market index? Does it matter?

We in the USA have a Barnum and Bailey system that’s been based on gluttons who dream of getting rich quickly, be it with blue chip stocks, blue chips on a poker table or a 7-11 lottery ticket. The engine of work and progress is geared towards cranking out plasma TV’s and stainless steel appliances -- the material contrivances of the bored and the terminally uninspired. How tragic, ironic and altogether fitting it will be when somewhere down the road, the Chinese have bridges and plasma TV's to boot.

Can it be that forethought, fairness and sensible assessment might actually give you what you need? Fairness and forethought smack of socialism, it's true. I’m not recommending socialism outright -- it's possible to strike a balance between a command economy and one that's purely capitalistic. Harrah’s Casino is certainly not a model to admire. When the gamblers get wise and realize that probability and house rules don’t work to their advantage, they’ll quit placing bets.

Capitalism sputters and stalls when high rollers switch over to the slot machines. That looks like what happened in 1990's Japan and it bears an eerie resemblence to what we have here.

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