The old “Japan parallel” debate continues to obsess pundits and observers – even more so as the US gets deeper into the zombie-bank mire. How much, or how little, the 21st century US economy resembles the late-20th century Japanese economy is the subject of an interesting reader response to Paul Krugman’s lament on his Conscience of a Liberal blog on Friday:
It’s “Japan all over again”, says Krugman as he accuses Barack Obama and his Treasury secretary Tim Geithner of underestimating the problems of broken US banks, “doing too little too late, and not being open and honest in trying to assess the true cost”:
The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again. And the result will probably be a deeper, long-lasting crisis.
But, blog reader Stats Guy says the big difference is that Japan “had a way out – the US has none in sight”; he also has some radical possible solutions – among the thousands of others on offer:
No, it’s not Japan – Japan was not nearly as bad. Japanese consumers went into the ’90s with a higher savings rate and much less debt. Japan had an export focused economy, with an insatiable trading partner. Japan did not have massive debt owned by foreign countries, and a massive trade deficit.
That is, Japan had a way out – we have none in sight.
The comparison to Japan continues to focus this discussion on the overblown fear of zombie banks. This is a worldwide demand crisis that is driven a massive US debt load in combination with a world economy dependent on US consumption – and the sudden realization that this is no longer sustainable.
The US govt. is perpetuating it by borrowing even more money while floating even more loans to our trading partners, and in the process is increasing the effective valuation of existing US household debt and the national debt.
This effectuates a massive – unbelievably huge – redistribution of wealth from homeowners and 401k holders to bondholders (including holders of T-bills).
The only real solution is to devalue the dollar, and print money. The rest of the world needs to accept that the US currency and currency denominated debt it holds is not worth what they thought it was – just as our houses are not worth what we thought they were.
The ratio of debt servicing costs to US national income is crushing, and can only grow steeper as interest rates rise to borrow even more from abroad.
The ideal solution would be globally synchronized quantitative easing. (Ideally at the G20 or even earlier.) Without that, the US should lead – if the US devalues, it will force/free other countries to follow. Without the US leading, no other country can follow.
We, as the reserve currency, are litterally [sic] killing the world and ourselves – and this banking fiasco fixes nothing.
And as to fears of Latin-America-like hyperinflation – the key difference is that our debt is denominated in dollars. So when we devalue, we do not increase our debt load like poor Argentina.
Do it now, or pay a vastly worse price when the US defaults in 5 to 10 years.
Related links:
More lessons from Japan – FT Alphaville
Martin Wolf: Japan’s lessons for a world of balance-sheet deflation – FT
Rethinking the lessons of Japan’s debt unwind – NakedCapitalism
In Japan Inc’s classroom – Long Room