Japanification and the end of the American Dream

Stirling Newberry and I have been writing about Japanafication for years—on blogs, at least since 2004.

Those of us who are old enough remember when Japan was THE miracle economy. Technologically advanced, vibrant and rich. It was eating America’s lunch, and most other countries. For peak alarmism at this fact in a fictional form, read Michael Chrichton’s Rising Sun.

Tokyo real estate was worth more than the entire world’s real estate combined.

Then the bubble crashed. Japanese policy was to protect the banks, and to bury the bad loans on the books. They undertook literally decades of stimulative policy, mostly pouring useless concrete (exactly the wrong thing to do unless your country really lacks that sort of infrastructure, which Japan did not.)

To put in terms familiar to my readers, they extended and pretended.

Japan went into semi-permanent stagnation.

We have, now, the news of a quarter drop in GDP of 6.8% annualized for the last quarter. (This is blamed on increased sales taxes, but it was coming anyway.)

The long stagnation is over (it’s been over for a bit). Japan is actually in decline.

This is important because Japanification was always the plan for the US after the bubbles: extend and pretend, stagnate wages and employment. Pretend.

But there were significant differences between the two countries. Japan started with massive savings and a huge trade surplus. It is now in trade deficit and savings compared to debt are way down. Economic equality was relatively high, as well, spreading demand.

America came out of the financial crisis with a trade deficit, a pathetic savings rate and massive inequality. This is why I predicted that Japanification would not work in the US. It could not, because there was no saved fat to be used to create the long bright depression the Japanese had.

This brings us to stimulus and development (not just for developing countries). The money must be used not for pork projects with no follow on, but to create new industries or to bring money off the sides into the economy. Pouring concrete (and not even bothering to shore up nuclear reactors in areas which were not electorally viable) was pointless in Japan. Buying bonds is pointless and even harmful.

Likewise you cannot have real open trade flows and expect to keep whatever you are building. You build it, you make it work and once an industry is systemized, it can be moved to a low cost domiciale. It takes deliberate government policy to prevent that.

Monetary policy in Japan could never work, because the money went to the wrong things, and much of it immediately decamped overseas in the so-called carry trade—borrow low in Japan, buy securities somewhere else where they had a higher return.

All of this should be obvious and uncontroversial. It is not, it flies directly in the face of modern neo-liberal theory and it is that theory, in the face of decades of failure, that the Japanese followed.

The human capacity for ideologically driven stupidity and atrocity is endless. (Those who do not believed me are invited to study Church history and its effect on society from 1000 AD to 1900 AD or so.) People will ignore the evidence in front of their eyes, years of failure and continue doing the “safe”, “orthodox” thing no matter what the results. This is true even for well-meaning people.

Of course, in the US, Japanification has a US twist: it massively increases the wealth of the already wealthy, through unconventional monetary policy. American leaders are far too greedy to make Japanification work: any surplus, or room to lend, or room to print money, must be given away to rich people as quickly as possible.

I point out, finally, that the first sin in Japanification was buying the bad loans. This was a huge mistake in the US too, bailing out the banks and not forcing them and their share and bondholders to take their losses was the main mistake of the financial crisis. Yes, things might have been worse if the US had done so (though steps mitigating the hit on the regular economy would have been easy enough to take with the 4 TRILLION dollars used bailing out rich people), but even so, the US would have recovered better afterwards.

Instead the US has an economy in which 90% of the population has seen an actual decrease in income and wealth, while 10% has seen an increase: with the 1% and the .1% and the .01% benefiting most of all.

Japanification was the plan for America. It isn’t working, it could never work, but the policies in place are nonetheless doing what is most important to their architects: they are making the rich richer, and everyone else poorer and doing it quickly.

The Bush years were the long suck. This is the deep dive, and remember, the US isn’t in recession yet (though it is in depression). The pain when it happens (and absent nuclear war, there is always another recession), will be unbelievable.

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