Bernard Hickey details 5 reasons why developed economies are sliding into a Japanese-style stagnation. Will NZ follow too? Your view?
By Bernard Hickey
Older readers will remember a catchy tune released by The Vapours in 1980 called 'Turning Japanese'. It was a one hit wonder, but it's a song many economists and central bankers are finding themselves humming at the moment.
That's because many developed economies appear to be sliding into a Japanese-style slump.
Japan's property market boomed in the late 1980s then bust spectacularly in the early 1990s. Japan's stock market has fallen around 70% since then and its total economic output is now actually lower in nominal terms than it was in early 1990s. Over the following 10 years the Bank of Japan slashed its interest rate to zero and held it there. An ageing population became increasingly worried about stocks and property so they invested more of their savings in government bonds, driving long term interest rates to 1%.
Japanese banks and some companies became zombies that either couldn't lend or invest because they did not have enough capital or were afraid to lend or invest because of slow economic growth and falling asset prices. Japan's politicians kept spending more and more on 'Bridges to Nowhere' and propping up zombie banks. Many economists believe the only reason Japan didn't slide into a full depression was the growth of its biggest neighbour China and exports to a fast growing America through the 1990s and early 2000s.
Now the developed economies of America and Europe are starting show a few Japanese symptoms with persistently slow growth and falling interest rates. New Zealand isn't quite as bad yet, but may join them if the problem can't be solved quickly.
Here's 5 reasons why they're turning Japanese:
Ageing populations
Japan's reluctance to allow in immigrants and a surge of older workers heading for retirement saw many salt away savings into term deposit accounts or bonds rather than invest their money in stocks or spend it. Similar trends are emerging, particularly in 'older' Europe and the United States. A political drive to reduce immigration because of high unemployment will worsen the demographic drag.
Zombie banks
More than US$2 trillion of cash is sitting in the term deposit accounts of American banks, many of whom are still repairing their balance sheets after the disastrous near collapses and bailouts of late 2008. This hoarding of cash is self-reinforcing, as low investment slows growth and increases the risk of future investments or lending. A refusal to let rotten banks fail allowed many to stagger on, sucking up resources, but also failing to lend or invest.
Hollowed out middle classes
An explosion of trade and outsourcing has allowed many multi-nationals to cut costs by sacking middle managers and highly paid manufacturing workers in developed economies. The benefits of that cost cutting has been shifted to shareholders in the form of higher profits and dividends. These shareholders, who tend to be richer, are less likely to spend that money, reducing the circulation of that money and in turn reducing growth as consumption and reinvestment shrivels. Much of this money is hoarded in the lowest-risk government bonds.
Financial repression
The heavily indebted nature of these developed economies has forced central banks and governments to hold down short and long term interest rates to avoid economic collapses and to avoid governments going bankrupt. Governments force pension funds and banks to buy their bonds and keep long term interest rates low, while central banks cut cash rates to near 0% in vain attempts to fire up economic growth and to keep banks on life support.
Political disunity
Divided political systems where leaders either choose or find it very difficult to change polices make it very difficult for economies to dig themselves out of the morass. Vested interests in bureaucracies or from corporate backers can often block change, even in democracies.
Can New Zealand avoid this fate?
Our population is ageing, but not as fast or as much as in Japan because we allow immigration. Its banks are not zombies and our middle classes are not as hollowed out as in America, although there are some signs it has started. We have yet to see financial repression, but it is one strategy central bankers and politicians like, because it maintains the status quo.
61 Comments
I fail to see how changing the demographics by allowing high immigration, during high unemployement will in any way solve anything.
Japanese govt is by and large run by corperations, which are mainly the old ruling families of Japan pre WW2. One difference worth noting though is that more influence is from the export/manufacturing sector and less from the banking sector, most western democracies are largely run by the finance industry, which is very parasitic. I can't see many western countries building bridges to nowhere, to create jobs! The focus is clearly on saving investors and the unemployed be dammned.
There are huge cultural differences between Japan and the west, and so while there may be some technical symmilarities I think the realities will be far different. Unless there is a paradgim shift away from the self serving interests, toward helping the whole economy, we may think we are turning japanese, but like the guy with his shoes on inside, not even close.
Vested interests in bureaucracies or from corporate backers can often block change, even in democracies.
Sharpen up Bernard - you have glossed over the core problem - our leadership deficit - by misrepresenting it as political disunity. Wrong - our political class is very united in defending the status quo. Until that changes everyone is wasting their time, and possibly making things worse, deluding themselves that tinkering with taxation, structural reform, etc. is going to make a difference.
At least replace "even in democracies" with "especially in a modern political democracy".
Charles Hugh Smith, and equally applicable here:
The core problem with President Obama and the political class in Washington is that they think governance boils down to placating the most powerful self-interested pygmies.
http://www.oftwominds.com/blogjuly11/no-one-advocates-for-the-nation-7-…
The capitalistic swine had its days - bring on the capitalistic swine culture !
Lobby groups, governments can deflect from serious problems and make societies believe otherwise. As we know with terrible events in the near past in some countries dishonesty is evident and propaganda/ corruption daily occurrences.
http://www.youtube.com/watch?v=DcOol3KJscc&feature=share
Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.
I have it on authority that the first budget in 012 will see the govt directing the RBNZ to drive inflation down below 1%......( in an effort to change course from bailing out the indebted splurgers and from running a cheap credit policy that is only serving to strengthen the vice like grip the banks have on the whole economy).... a policy that encourages saving and discourages the use of credit.
Expect Bollard to raise the ocr and to keep raising it until the average floating rate is near 9%...forcing the hair cuts to be taken...leading to the merger of some banks to avoid collapse....bringing an end to the credit balloon economy...setting the country on course for a time when the banks will no longer dictate policy.
Expect also to see a phased end to the rent subsidy pork going to landlords through the use of the law to ensure tenants are not biffed out as the subsidy is cut back. The aim being to save $1000000000 a year post 017 and to drive down rents.
Yes, Sir Nic, that makes sense to me. Got to match the going rate of world currency devaluation or we are toast.
http://www.itulip.com/forums/showthread.php/20102-You-re-not-going-to-b…
Roger I read through that and have to say that he is pretty full of himself. Glad he can be so certain in these times, I am certainly not so confident.
Reason why I that I don't see him mention velocity in any way. You can print all the money you like, but if it doesn't get spent you will still see a contraction in the money supply.
I have read elsewhere the opinion that QE III is a certainty, they have no other choice. But my suspicion is that the US is holding off and waiting for Europe to fall over. If that happens then all bets are off as there is not real precedent for that.
If it's a Bill English type of source, Wolly, the one item I have no real handle on ( that 'he' would), that may effect our OCR upwards, would be ultimate amount of 'the earthquake figure' ( add in the leaky houses and Government Bank Guarantee figures as well if you wish!). If, as Chris_J seems to forecast, it's 'way higher' than that figure released last week, and does indeed go to = > $12 billion, then the RBNZ may have to increase the OCR to both attract more foreign funds, and retain our savings, to stay afloat. That would push asset prices down, but I'm not too sure it would alleviate CPI price inflation as well.
Some more grist for your mill, Nicholas:
"Earthquake Recovery Minister Gerry Brownlee is "unwilling" to release information relating to Canterbury land decisions – including Cabinet papers – before the general election."
I wonder why?
"Brownlee said "significant resources" would have to be diverted from land analysis to manage an information release to The Press."
Brownlee said he intended to release all relevant geotechnical information in three to six months – after November's general election – when the process was completed. "
Nicholas, whatever happens, especially considering the kind of areas in the White Zone, I think it's very probable costs will keep escallating, more than expected.
RBNZ should buy a tonne of gold a day each day the NZD is over 80 US cents. Exchange future inflation which we will have to suffer anyway for tangible stuff that takes real human effort to get.
However, what do I know? I'm just a sub optimal entrepreneur not a banker and there is probably a better way.
If the Gerry had a broader education he would know geothermal springs carry heaps of gold atoms and with a bit of govt investment we could be harvesting it. That's the reason why that private company was doing a gold survey over the central North Island regions. Fact.
Is this wishful thinking Wolly or do you have a source? I don't believe The RBNZ has the balls to kill their bubble as we have seen. They have been ignoring real inflation for a good few years now and after this recent meeting with the US Fed I doubt the plan has change based on Bernanke and others here in the US recent comments.
Bollard is a lamb to the slaughter and seems quite content with that outcome
Wolly, you are being silly....either that or your are smoking some good weed....
Lets see this so called authority, becase it flies in the face of what all economists Ive read say, ie if you try and get inflation to that low a level you are so close to 0% and negative inflation that its very likely that you will stall your economy and cause a recession/depression. Hence a 3%+ is a safety margin only the fool hardy will discard right now IMHO because a depression is so likely. 3 or 4% inflation v a depression is by far the lesser of 2 evils.
Not only that at <1% the effect on employment is negative, ditto wages....average wage increases is +2%, if you force this down to 1% or less that means many ppl will see their wages decline...and the common way for that to happen is lose their jobs....
Bollard wont go to 6.5%~7% OCR (9% for us) he is more likely to drop....even 4 or 4.5% is very unlikely now.......expect <2%....IMHO....
Banks might well merge in a 2nd Great Depression, or go bankrupt.....thats probably 3 or so years after the drop starts though. If we get banks collaping though it means households will have taken a 50% or more haircut on the value of their houses and unemployemnt will be >20%......thats suicide for the sitting Govn....
regards
"We have yet to see financial repression"
Sorry Bernard, can't see how you can draw that conclusion. Inflation is 5%, deposit rates are 3.5%, er, but, isn't that called financial repression.
Okay, sorry, I forgot, mustn't criticise our betters, must we? After all the RBNZ are the experts aren't they? Er, aren't they?
After all they didn't create the credit bubble / housing bubble / finance company disaster through their incompetence did they? Er, ......
No it isnt because it isnt, CPI is 5% based on the GST hike, take that out and the inflation is 3.3%, take out the other volitile factors and the core /long term infaltion rate is around 2%...and very steady....
Real financial repression like seen in the Great Depression has not started yet...
RBNZ did not cause the credit bubble, or the housing bubble or the finance company disaster.....laissez faire Govn policies for the last 25 years have done that....RBNZ works within its framwwork which is set by the Govn....the Govn didnt want to upset voters and wantedthe tax income.....
Finance companies ~ There was a considerable push after the 87 crash to fix that, it was pretty starightforward to do apparantly but the ppl who didnt want it successfully lobbied against it.
The housing bubble can be attributed to the easy credit which is attributed to Greenspan....more laissez faire mis-economics.....add in NZesr fear of finance from 87 and housing was where they put their money....cant blame them.
So if you want to blame anyone, blame the voter ie yourself.......
regards
Crikey, seems I'm not alone in my thinking that the RBNZ should buy gold pdq:
http://www.zerohedge.com/news/wikileaks-discloses-reasons-behind-chinas…
"that the inflation band will be relaxed, and upped to 5%, and the OCR is pushed even lower. But we shall see"
Nicholas - the problem with that approach is that it will immediately signal to the market the Govt/RBNZs intention to let inflation rise. That will trigger an immediate rise in longer-term rates which most prudent borrower maintain a good share of. However, even if they all revert to floating, its only a short-term solution - higher inflation ALWAYS leads to still higher inflation, and still higher inflation ALWAYS leads to MUCH higher floating rates, and because long-term rates will have gone higher well before, floating borrowers will have no way out.
A short-term term tactic that kills many in the long run - wouldn't leave me sleeping very well at night.
" Australia has a lot of debt to unwind and all prices will fall - first assets (land and rents), then primary and secondary goods (including capital) and also wages" From a new contributor on Macrobusiness . I'd suggest that New Zealand will suffer a similar fate..
Yes I suspect that will be the trend Nicholas for everything we own, but the opposite for everything we need - Deflation in assets, inflation in goods and services
If someone thinks it will be deflation in both, they're showing a hell of alot of confident that Govts and Central bankers will find Jesus soon and stop printing money when the pressure comes on yet again - no doubt that will happen eventually, but in the short to medium term, no show in my opinion - theres only been about 3 months of true deflation in the past 60 years because of central banks ability to print in the absence of a gold standard, and whilst that will eventually hit the wall sometime in the next 3-5 years, don't think its this year, or next.
I think Ive said before but I will repeat, when an economy is 70% consumerism and that collapses, the amount that Govn prints is inadequate to fill the void......certainly so far...Congress is very unlikely to do another stimulus package, and in fact is going a UK with austerity...that will collpase consumer spending still further....so yes we will see a depression.....Personally i think even if the US threw 2 Trillion at it it simply isnt going to work now....
Goods and services, this would seem to depend on the goods and the services.....I work in IT and talk to contractors and hardware suppliers....they tell me there is little work and little kit being bought.....Supermakets are apparantly selling less, sure some of their prices might be attempting to go up but it seems ppl dont have the money......Ive also seen this comment about the UK.....I think the person said he'd been in retailing CO-OP? for decades and had never seen less food being bought in a recession like this and its on-going....it was unique in his long experience....
Im looking at a cross cut saw...The Milwakee was $1500, the Makita LS1216 around $1600, the milwakee 12inch is now on special for $1140 and the makita $1400 as a std sticker price....want a thicknesiser first, thats subbornly sticking at $1583....I can wait....
Fridges....I walk into Bond n Bond fancy a 600l French door haier and $300 comes off the sticker price just because I went near it....free delivery gets thrown in and Interest free if I want it....and i didnt even try hard to talk them down.....
Garden centres, seeing some discounts there as well.........
So many services and goods will I think drop in price, they are showing sins of doing just that right now.....Council rates on the other hand, electricity....will be stubborn....this is because when what you own from property to shares haemorages you are to frightened to spend.....
Hit the wall, I dont think we have 3 to 5 years now....Im more sure every day that its 3 to 5 months, te EU looks so bad and teh US isnt lending them money. It will take 3 to 5 years to hit the bottom....at least I hope so, as anything faster is highly unstable politically and socially....IMHO.....
We could do a japan and stagger for 3 to 5 years but I think the forces to deflate and the lack of ability of Govns especially in Europe to counter just doesnt look like we have that long......What convinces me above all else of that is peak oil is here....we dont have 3 years before the panic starts.....oh and the Govn laying and trying to sell growth....growth....growth......and wont answer peak oil Qs.....na, they know.....
regards
In what world is any western country going to have a Japanese style stagnation? They had consistent Deflation in Japan. Power got cheaper food got cheaper clothes got cheaper, the list goes on, all the stuff that makes the working class man better off. If any western country is heading for Japan style stagnation, then I ask you this BH. What is deflating right now?
Skudiv - understand the BIG difference between Japan and the rest of the western world's highly indebted nations, the Japanese public are savers and they fund the Govt's deficit.
If that was not the case, and they were reliant upon foreign debt funding such as the US is, when their debt got to high levels that funding would have been withdrawn, their currency smashed, and inflation imported. Inflation/hyper inflation is always a currency event but I'm afraid the deflationist who compare always with Japan are just plain uninformed
Un-informed no, a different economics school it seems (for a zero bound and debt clogged system, Keynes and minsky rule). I think you are wrong....japan only devalued/deflated slowly as it had massive savings to draw on, it could also still export somewhere. The rest of the western world wont hold up so well for so long, it is broke and this is a world event, we dont have a second planet that I know of. So inflation is a fallacy on your part IMHO....you see a simplistic view of printing as equaling inflation, youare not unique. So answer me this, after 3 years, why is core inflation still at 2%? and if anything showing signs of dis-flation? With all this printing for 3 years according to you we should be seeing some clear signs of inflation in that core rate, by now, we do not.....we see the opposite...just like the deflationists/Keynesians/Minsky's predicted....
regards
Bernard says:
"Vested interests in bureaucracies or from corporate backers can often block change, even in democracies."
How true is that for New Zealand?
Anyway, see, Matt McCarten: Muckraker reveals sad truths about system http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10749281 "One of the quotes attributed to a senior government official sums up the guts of the book: "People assume that politicians make decisions, but often they're busy, ill-informed or actively excluded ... The worst decisions were made by senior officials and military officers, often without [the ministers'] knowledge."Hager insists that our senior civilian and military public servants believe they can take us into a war but only tell our politicians the things that suit them. Our democracy is a sham unless the culprits are brought under control."
Are we saying this problem isn't limited to the goverment departments McCarten highlights?
"Vested interests in bureaucracies .... " - Bernard?
Considering the government departments (eg. Tsy, RBNZ, MED, MFAT,) that have a major influence on the economy, what "Vested interests ..." might they have?
Bernard?
Anyone?
Personally I think that Treasury for one has a neo-classical view and pushes a right wing agenda.....which is interesting because IRD that appears not to, seems to be able to anticipate the tax income via what it thinks the state of the economy will be better than Treasury...
regards
Could well be Steven, and I guess one wouldn't progress far up the greasey poles of The Terrace without such a view, in the last 30 years. You could well be right. Any thoughts, other observations, on this:
Cheers, Les.
Japan's unemployment rate, very rarely went above 5%, which is another reason we can't hope to have a dignified Japanese deleveraging.
We should be so lucky to turn japanese. Economist's get drunk on macro figures, but forget that most people are normal and low paid, work to live, and GDP growth doesn't mean diddly squat. GDP growth doesn't mean people will have a job, and get paid enough to enjoy their life. Growth and stagnation are meaningless figures to equate to the quality of life for normal people.
Economists should focus more ensuring that we have an economy: that is the best possible use of available resources, ie. economise or economic. All economist's seem to care about is, are the rich making money. Which has nothing to do with the definition of the word, and is an entirely different subject.
If there are any similarities... in my opinion.... it is the so called liquidity trap..
This is a nice way of saying the final end -game failure of the Keynsian style of stimulating an economy out of recession thru lower interst rates and Govt spending.
With the benefit of hindsight...I think the Austrian view of economics...and in particular, their view of the business cycle and Monetary expansion... is a much better model that better reflects "reality".... ie,... recessions are actually healthy and to be welcomed.!!... part of a natural rhythm.
It is ironic that USA has always said that they would never go down the road of Japan.... BUT they have.... ( shows that decision makers can be just as much passengers in the bus ).
Until there are some meaningful strucutural changes... the bus continues on the path.
NZ is only one more cycle away from the liquidity trap.... and that will put us in the same boat as the USA..... and then we will realize that low interest rates was never the answer.... AND then the necessary changes will be cause more pain and hardship.
Reminds me of the TV programme my kids watch... "The walking Dead"..... The result of a dumb fixation on macro economic statistics.
cheers Roelof
I disagree that USA has gone down the same road as Japan. They are not building bridges to nowhere, unemployment is double that of Japan, working class people are getting poorer in every way possible. Life was fine for the average Japanese, and they are still doing fine. You never saw tent cities in Japan, at the same time as whole suburbs are vacant, covered in for sale signs. Banks in america would rather have vacant houses and people living in tent cities then help out the working class in any way.
Well.... in terms of buiding bridges to nowhere... I put the bailout of Wall street in that category.... The waste of Trillions of dollars has been utterly mindboggling.!!!!!!
I agree with u about unemployment and possibly other social issues...( I don't know much about Japan in that regard.)
Roelof you are right we are now entering the end of the Keynesian, credit bubble era the experiment has gone about as far as it can and yes NZ Inc is only one cycle away from major problems a cycle which could end very quickly
Austrian economics will prevail but before.
Unfortunately for the world economy the end game is almost certainly going to be very painful. As economic growth stalls the colossal mountain of debt as a percentage of GDP continues to grow there is not just going to be enough growth to get on top of it. As the markets come to grips with this and the reality that the Govts and Central Bankers can no longer effectively influence outcomes a nightmare scenario will unfold patience is almost already over note the increasing bouts of market panic.
This is leading to a deflationary debt spiral enviroment in whic assets values and confidence collapses.
Even if the authorities discover sound money again soon out of desperation which will certainly be too late the transition period will be very traumatic.
.
H Bernard, you may know of these writers but if not here are their websites. I particularly recommend Charles Hughes Smith to you and your readers.
Chris Martenson is at www.chrismartenson.com
Charles Hughes Smith is at www.oftwominds.com
FYI from a reader via email
Bernard
Just want to say that I enjoy the articles you write. :)
On some financial maters much of your message is similar to that of
Robert Reich, the secretary of labour under Clinton and a prof of
Public Policy at UC Berkeley.I imagine you are familiar with his blog but if not it is:
Cheers, Rob
In my opinion 'Turning Japanese' would be a positive version of what will happen if the New Zealand economy gets into further economic problems. In fact considering the state of the economy today the best that it would seem can be hoped for is a very gradual economic re-balancing (which might look like the Japanese recession).
I think that the results will look more like Ireland or Greece or Iceland than Japan. In Japan there was and still is a very large public banking system, and so the government was able to benefit from seiornage (effectively) with slowly rising government debt. To some degree this makes expanding the economy (with credit and rising debt levels) more benign, because the government is able to continue social spending on the back of profits. In NZ there is less capacity to take on additional debt (government, private, consumer, housing) and so something will have to collapse. This could be the governments credit rating, there might have to be significant tax increases (across the board), or the housing market might crash.
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