|From go-go growth to no-no growth
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Richard Koo knows what's going on. At least, to a point. He's a fool, but not an idiot. In Bastiat's terms, he sees the effects of a debt deflation. As for the unseen consequences of the government's efforts to fix it, he doesn't even bother to look.
He's the chief economist for Nomura Research Institute in Tokyo and formerly an employee of the Fed. And for the last 22 years he's lived with an economy in what appears to be eternal sleep.
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Japan's stock market crashed in 1990. It has never come back. And the economy went from being the most dynamic in the world to one of the most un-dynamic. From go-go growth, it went into a long period of no-no growth.
Instead of being the most admired economy on the planet, it became an economy that people laughed at.
About 10 years later, we wrote a book - with Addison Wiggin - about how the US was following in Japan's footsteps. "Financial Reckoning Day," was the title. Gloom and doom was literary genre. And fairly accurate were the predictions.
At the time, however, no one took us seriously. Japan's economy was moribund. America's economy was the strongest, most flexible, most dynamic economy that ever existed.
And yet...guess what happened?
Oh, you're ahead of us, dear reader. You already know what happened. Beginning about the year 2000, the US economy hit the skids. Since then there has been little or no real growth anywhere. Household incomes are below their 2001 level. Wages are lower too. The stock market has bounced back to where it was...but if you adjust it to the price of gold...investors have lost about 80% of their money. Even adjusting only to consumer prices gives investors a substantial loss. And houses are lower too.
In almost any terms you choose - employment, real GDP, asset prices - the US has experienced a 'lost decade,' just like Japan. And if the Japanese example continues to be predictive, it will lose the next decade too.
But Koo reminds us that the Japanese experience was not all bad. Thanks to the Japanese government's counter-cyclical monetary and fiscal policies, he says, the nation's GDP has continued to grow (in fits and starts)...and unemployment has remained low.
The economy has been in a funk for 22 years. But at least it has never collapsed or gone into depression.
Well, not exactly. That's where the unseen consequences come in.
Koo refers to the US dilemma...and the Japanese one...as a 'balance sheet recession.' It happens when the private sector has too much debt. It has to pay down debt before it can begin to boogie again. Koo, in the Financial Times:
With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector.
When the whole private sector increases savings (thereby reducing net debt levels) the money has to go somewhere. The feds helpfully step in, borrow it...spend it...and that, he says, is how you keep an economy from tanking.
Japan, which also struggled with this form of balance sheet recession, managed to keep its GDP above the bubble peak of 1990 despite plunging commercial property values and rapid private sector deleveraging, because its government borrowed and spent private sector savings. The fiscal stimuli in G20 countries after the collapse of Lehman Brothers similarly averted a collapse of the global economy.
Oh, if only the real world were so neat! If only it were so simple. If only there weren't so many unseen and unforeseen consequences! Then, perhaps, economists might be able to manipulate it...to control it...and to get it to do what they wanted.
What really happens is this: the private sector gets too deeply in debt (thanks largely to the Fed's artificially low rates and EZ money policies). Then, it panics. It cuts spending. Lenders - who over-extended credit - should go broke. Instead, the feds bail them out, shifting the public's real resources to failed businesses and incompetent managers. The bad debt is transferred to the public. Then, the private sector...attempting to build up savings and improve its financial health...puts its money in the safest possible place - government bonds! Still more debt, in other words. The government takes the money and gives it to its favorite sectors...its clients...its pets...its campaign contributors and vote-getters. The public would be appalled if it realized how its savings were being thrown around. But it wants safety above all. And it believes the feds will be good for the money; they always have been. After all, if you can't trust the government, who can you trust?
But the resources have not been saved. They have not been invested. They have been wasted. They no longer exist. Now, this new government debt too has gone bad. And eventually, all those people who count on the feds to protect their savings will want their money. Then, they will be blinded by unseen consequences...and the whole flimflam will blow up.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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