Thursday, March 20, 2008

Mr. Yen Talks Sense and More

Congratulations to Bruce Wallace of the Los Angeles Times who extracts a great interview out of former Ministry of Finance Vice Minister of International Affairs Sakakibara Eisuke.

Kudos to both of them for the great takeaway metaphor:

There will be resistance from Congress and from the American people, because people, whether in Japan or the United States, simply don't like the banks. They are the institution that lends you an umbrella when the weather's fine and won't lend it to you when it's raining.
I am fairly certain that the U.S. financial system will be bailed out. The team at the Federal Reserve and the Treasury Department will take one more look at what happened here during the lost decade, what Fukui Toshihiko and the Koizumi team did to liberate the country from the cycle of no growth and decaying public finances, shudder, and then go ahead and craft an unpopular infusion of future, unborn taxpayers' dollars.

However, there is a really important part of the puzzle I think everyone ignoring--one that leaves me very pessimistic about the U.S. economy recovering even if there is a titanic infusion of public monies to bolster the tottering financial system.

The U.S. savings rate.

While the property and stocks bubble did burst in Japan, the regular economy did not contract. The government did its part--keeping keep up demand through a mix of both apt and idiotic public works spending. Japanese consumers and businesses kept up their spending, too. Prior to the bubble's bursting, Japanese citizens and companies had been stuffing yen into bank accounts and safes at absurd levels, at least in terms of economic efficiency. When the bubble burst, consumers and businesses responded by a) reducing spending, yes, but also b) by reducing the rate of their savings. In the lowest ranks of society, the savings rate fell to zero. The regular economy was able to lumber on through a mix of government largesse, lower personal spending and reduced savings.

Switch over now to the situation in the United States. Wild increases first in the value of stock and then homes and property have been supercharging private consumption for over 10 years. With the stock market stalled, and home and commercial property values plummeting, Americans can no longer finance their spending out of rising wealth.


The calamity, however, is that in the United States, the personal savings rate is already zero--there is nothing consumers and business can to do in response to a downturn in income but cut spending. The government cannot help out much--upping government spending will feed inflation and trigger a further dollar weakness at a time when the dollar is reeling from the triple debt hangover resulting from the Iraq War, the Bush tax cuts and the expansion of entitlements like the Part D drug benefit. As the dollar falls net exports will of course rise, as will tourism to the United States--but not in a manner commensurate with the fall in personal consumption and investment. Demographic change will not help in a timely or proportional fashion, either; meaning that I think Professor Alex Tabarrok, writing in The New York Times, is dead wrong.

Having done not saved for a rainy day, the U.S. economy, beset by storms, will not avoid shrinkage in the second half of this year.

But then again, this is only the view of a cynic, prone to partisan rants and irresponsible conjectures.


Anonymous said...

As usual, you're an optimist. They'll bail out only the parts of the US financial system that they can. In other words, their buddies. But a lot of the US is probably beyond repair. It resembles the late USSR more and more every day.

Comparing post-bubble Japan with the current US is like mixing apples and oranges. The next president may get to play Gorbachev.

Jun Okumura said...

Don't forget to thank Robert Frost, too.

MTC said...

Okumura-san -

Clearly I am not the narrator of "The Dangling Conversation":