We’re all turning Japanese now.
Dresdner, in a note out today, observes that it won’t be long before all the world’s big central banks are operating a Zirp: that is, a zero interest rates policy.
There’s one economy, though, for which a Japan-style recession is of particular significance to the world. And no, we’re not talking about the US.
Writes Dresdner’s Peter Tasker (HT he also, for the headline):
China’s jumbo fiscal package is eerily similar to Japan’s 1990s stimulus plans, which totalled Yen 100 trillion, 20% of GDP. Japan’s attempt to bolster already excessive levels of fixed asset investment failed. China must take radical measures to raise the consumption share of GDP or face a long and painful adjustment.
Japan was, like today’s China, an economy with a structural surplus of savings. As with China, super-easy monetary policy generated an investment-led boom and an explosion in financial asset prices. As the bubble inflated, investment rose to an unsustainably high proportion of GNP and consumption fell to historically low levels. The opposite phenomenon took place in the economies of key trading partners, which were undersaving and over-consuming.
When the inevitable happened and Japan’s financial bubble burst, the authorities understood that a rapid deflation of the fixed asset investment bubble would risk a depression. Hence the strategy of replacing corporate capex with government-led big projects.
…
Is China following the same path? It certainly looks that way.
What significance this? Well, only the fact that the world economy has grown pretty dependent on China’s fixed-asset habit. (Of course, the West has rather a history when it comes to exploiting China and addictive substances.)
As FT Alphaville observed yesterday, the stability of the US – and its ability to weather a crippling depression – is dependent on dollar inflows. Foreign buyers have already turned away from anything but Treasuries.
China – as of only last week – is now the world’s largest holder of Treasury bills. If Dresdner is right, and China will be forced to reevaluate that hard-won position, then who knows what will happen.
Related link:
China’s big-spending plans, Japan’s recession – FT Alphaville
All the Treasuries in China – FT Alphaville
_____