Is the US economy also heading for a ‘lost decade’?
Economists and political leaders are looking to the recent economic history of Japan with growing fear. Japanese share prices are today 70% lower than at their 1989 peak, while property values are about 40% lower than they were in 1990. Economic (GDP) growth in the 1990s averaged less than 1% a year, leading economists to talk of the "lost decade".
A recent report from the Swiss based Institute for Management Development draws a parallel between Japan and the situation in the US today: "Japan’s competitiveness seemed unassailable, with a strong domination in economic dynamism, industrial efficiency and innovation. Then all hell broke loose: the stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998".
The optimistic assessment of The Economist (21/8/08) is that: "By learning from Japan’s mistakes, America can avoid a dismal decade". It is more realistic to say that while the US can learn from Japan in some respects, overall the US enters its financial crisis in a far weaker state than was the case in Japan in 1989.
The Japanese recession was triggered by a build-up of bad debt in the country’s banking system. Like the US today, money had been borrowed using inflated property values as security. Also like the US, the world was assured that safeguards were in place and that any failing bank would be helped out by others, through what was known as the ‘convoy system’.
In the US debt was repackaged and liabilities spread across the credit markets using ‘securitisation’ while the credit reference agencies assured the world that these loans were secure and ‘AAA’ rated.
But neither the convoy system nor securitised debt could withstand a fall in property prices combined with a growing rate of default by borrowers. The Financial Times reported, at the beginning of this year how "Japan’s 1990s banking crisis has gone down as one of the worst in history, generating a staggering $700 billion of credit losses", adding: "And since then, Wall Street financiers’… confidence in American finance was so high that in recent years Washington officials have regularly travelled to Tokyo to "tell the Japanese what to do with their banks" (FT 1/1/08).
Now the US has its own $700 billion (and more) credit losses, which it expects US taxpayers to cover through the Paulson programme of bank bailouts. Many economists argue that the speed with which the US treasury has responded to the crisis will prevent the US entering the prolonged recession that followed Japan’s crisis.
It is also hoped that historically higher rates of consumer spending in the US compared with Japan will stimulate the economy and prevent a slide into deflation. Deflation in Japan, where prices fall over time rather than rise, encourages savings and inhibits spending as everything will be cheaper next year.
But this is clutching at straws. Throughout the recession Japan’s economy had been supported by its successful export sector, which has continued to deliver a balance of trade surplus. This means that domestic weakness has been offset by the proceeds of trade with other countries, in particular the USA.
As well as this ongoing, or ‘current’ surplus, Japan also entered the recession with colossal reserves of money. Japan had no government debt, which allowed the government to pour unprecedented sums of money into public works, creating a government debt of 190% of GDP by 2007.
Also, because of the high level of savings in Japan, consumers were able to reduce their savings ratio from 15% before the crisis to 5% a year during the 1990s. In other words, the Japanese increased spending from 85% to 95% of incomes. In the US the savings ratio is already only 2%, meaning current expenditure is reliant on the very debts that cannot now be repaid.
The USA is going into recession with a government debt of 60% of GDP but the most dramatic story is of the USA’s external debt (government and private sector) to the rest of the world, which stands at $13 trillion compared with Japan’s external debt of $1.5 trillion AFTER the ‘lost decade’. Whereas Japan could fund its own bailouts the US will have to rely on investment from abroad that will be far less forthcoming than it was during the good times.
As if this is not enough of a challenge, there is evidence that the property price bubble in the USA is even further ‘over-inflated’ than was the case in Japan.
Average US house prices rose by 90% between 2000 and 2006, compared with 51% in Japan between 1985 and early 1991. A similar, if less pronounced picture emerges of commercial property prices (The Economist, 21/8/08). This will mean that the rate of defaults on loan repayments and levels of negative equity will be more profound in the US.
The most fundamental difference between the experience of Japan and the situation unfolding in the US is the state of the global economy. Japan was mired in recession throughout the 1990s but was able to support its economy by exporting industrial products to North America and Europe.
The relocation of production into low-wage former Stalinist countries after 1989, in particular China, coincided with Japan’s banking crisis and supported profits as Japanese producers relocated. But now, the global spread of the credit crunch, will mean that there will be no easy recovery from the present crisis.
The Financial Times has joined others that are in a state of denial over the current crisis. "Consider the following. Japan suffered a collapse in equity and property prices every bit as dramatic as the 1929 (Wall Street) crash. But it did so without the subsequent hardship of the Great Depression. Certainly, growth was weak throughout the 1990s, but at a real average of more than 1% a year. Unemployment rose to post-war records. But at a peak of 5.5%".
The best hope of capitalism is that urgent action to rid the banks of ‘toxic assets’ by bailing them out with public money will prevent the ‘lost decade’ from making its way across the Pacific and into the US.
It may be that the use of colossal sums of government money may prevent the US from enduring a re-run of the Great Depression that followed the Wall Street crash, although this is not at all certain. What is certain is that the US will suffer enduring economic weakness at least as significant as Japan’s ‘lost decade’ and probably worse.
As usual, it will be working class people who will be expected to pay through higher taxes, wage cuts and unemployment. The lesson of Japan is that if the world’s most dynamic and productive economy has not been able to recover from the debt crisis of 1989 then capitalism has well and truly failed. Capitalist euphoria during the 1990s has masked this but only served to rack up yet more unsustainable debt.
If there is another key difference between Japan and the USA it will be this. The crisis in the USA will export economic hardship but also export a reaction on the part of the organised working class, on a global scale.