Hopefully I got your attention with the three explanation marks.
Now for my question: In the 1980s there was a big huge bubble in Japan. Then in collapsed. Then the Japanese economy entered 18 years of recession. Try as they might, the Japanese authorities were unable to inflate/reflate.
I happen to believe, like Chris, that an inflationary outcome is the most likely end result of our own collapse. But when I think about Japan, I wonder, why were they not able to inflate/reflate?
So, my question to all you inflation believers out there is: What is different about the Japan situation from the American situation? Why deflation there but inflation here?
I would not say it couldn’t happen in the US, but Japan does have structural differences which have played a big role in this. The dominant Liberal Democratic Party or LDP (which is actually extremely conservative) gets its strength from local pork barrel projects. A lot of politicians have a hereditary job as the same local business interests finance the careers of father, then son for generations. When the government spends, much of the money goes to construction projects – often unwanted and unneeded.
In addition, the Japan Post Office also operates insurance and banking (savings) functions. Looked at as a bank, it is possibly the largest in the world. The money loaned out this system goes to finance government projects. So savings do not serve to finance businesses that produce goods and services that people want, which would grow the economy, but rather to pork barrel projects which serve only to prop up unneeded construction/ "public works" businesses.
Another aspect of Japan’s long recession is that the government spent a lot of time and money to keep banks and other companies that had loads of bad debt in business rather than letting them fail. This of course only prolonged the problem.
There are other significant ways in which Japan is different. For an excellent in depth article on the topic check this out "Explaining Japan’s Recession".
Again, I’m not saying a long deflation is impossible in the USA, but drawing that conclusion based on Japan’s experience is tricky and needs careful examination of the details.
Thanks Panda, I will check out that article.
I happen to believe, like Chris, that an inflationary outcome is the
most likely end result of our own collapse. But when I think about
Japan, I wonder, why were they not able to inflate/reflate?
One key difference here is that the Japanese people refuse to borrow. They were major savers before this, and the recession has done little to sway them from the notion that ‘saving is good’.
The difference, is that now the Japanese businesses are also equally leery of borrowing. Top that off with the fact that Japan’s growth surged much the same way China’s did, by being the worlds cheapest manufacturer. A title they can no longer hold.
In other words: No borrowing = no inflated/fake GDP growth. Weaker exports = weaker GDP growth.
The United States will face similar difficulties following this. We obtained our economic power in much the same way Japan did — as the worlds manufacturer — and surged well beyond all other economic powers primarily because Europe blew itself up, twice… We, however, have some real advantages Japan doesn’t. Most importantly is vast natural resources, vast amounts of land, huge agricultural production capabilities, etc…
Thus, over a long enough period of time, these will inevitably lead to America surging to the economic forefront. Perhaps not as an economic super power (a nation much stronger economically than all others), but certainly amongst the world economic leaders.
a good read on japan can be found in the dollar crisis by richard duncan. it is in chris’s essential book list. it is a good idea at what we can expect with a difference in degree and some twists due to our huge debt, and peak oil.
Thanks for the recommendation joe2baba – I’ll order that book now.
By the way, another difference is huge savings by Japanese people as well as a distrust of banks. On average a Japanese household has about 1,666,666 yen (over $15,000) in cash stashed at home! That amounts to 30 Trillion yen for the whole country – about US$300 Billion.
This topic should be moved to the Asia and Pacific Markets & Policies section