WC Varones

So Japan had a demand side recession after a real estate bubble burst in 1989, while the USA is now having a demand side recession that started in 2007. At this point we can see that both Japan and USA were maxed out on their consumer credit because of housing bubble burst. Will Keynesian stimulus work the same way in both country? Are we walking on the same path as Japan? Let's explore.

In my last post, we mentioned that government printing and spending will cause inflation in commodities or imported goods. What if you are an EXPORTING country like Japan, China, or Taiwan? First, let's pull back to 1989 when Japan's real estate bubble all in a sudden popped. Japan has been an exporting country for a long time. When their central bank started to print money, and put this money in bank reserves, it did not re-inflate the housing bubble. Japan was making more USD from exporting than it was spending on raw materials with same USD. It did not trigger commodity bubble as long as government did not spend more than it earned from exporting.

Let me use a simple example to explain this. Japan couldn’t borrow anymore money because it was completely loaded with debt. When there is free money to borrow from the private bank, who can benefit from that cheap JPY? The answer is the firm that produces and exports the finished goods. They can borrow JPY with cheap money, expand the facility, buy more raw materials and then export to USA. The increased revenue in USD will pay off the cost of raw material and still have net income left. This net income may pull them out of recession as long as there are no other country compete with them in the export business and their trading partner can accept the increased output from. Unfortunately, Taiwan, China, South Korean, etc, joined the game and started to compete to devalue it's own currency by printing in order to boost their export market.

In addition to the increased competition, the strict immigration policy of Japan and aging working population also added forces to the deflationary effect of the economy. The net result is that corporations in Japan probably could not earn enough to boost everyone's income in order to increase the borrowing power of the Japanese, while more and more Japanese were heading to retirement and increasing the liabilities of their companies through pension commitments.

What about the Japanese government? Did not they also spend a lot of money? Yes, Japanese government also spent a ton of money and tried to boost up the demand. Again, with tapped out consumers who could not increase their income, government's spending is simply wasted. People may argue that Japanese government built the high speed railroad, and the economy sky rocketed, so how could you say government spending is wasting money? The answer is that there are very few infrastructure construction projects that boosted productivity. Where there are construction projects like that, government spending will successfully boost income and make the economy grow very fast. However such "SMART" spending is rare; it does not happen often. Most of the time when the government hires people to dig a pothole on the road, and fill it next day, it does not boost productivity and the money is simply wasted.

Moreover, we also need to notice that when Japan is borrowing money from the market, the central bank may not need to create JPY from thin air as the US government because with all the foreign currency they made from international trade. The JPY is backed by foreign currency; it is not some blind printing that creates JPY from thin air.
Now, with all these wasted efforts by the Japanese government, we see that their economy goes up and down further and up and down even further, and never fully recovered. I think the main reason is that their economic health is largely based on how much they can EXPORT! So when US is heading for a super depression, I think the lost two decades that Japanese currently experiencing will finally also turn into a super depression. The difference between is that America will NOT go down the same path of Japan and instead jump right into a depression, much quicker since we have not established contact with extraterrestrial life to export and save our demand recession.

See also posts #1, #2, and #3.