Guest Post: JPN ? US: Japan Is Not Us
Submitted by Gonzalo Lira
JPN ≠ US: Japan Is Not Us
Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990.
Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word.
Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in.
In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades.
This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong.
Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation, deflation.
But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments.
- The balance of payments is an accounting of a country's international transactions for a particular time period.
- Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
- The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit.
As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)
Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:
Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.
(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.)
To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit.
So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending.
What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan.
In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.
Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.
This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means.
The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight.
So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.
Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote in A Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.
This is why Japan Is NOT Us.
But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.
So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?
Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.
For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.
But as we have seen, the U.S. is not Japan.
So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.
And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.
That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.
One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.
What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough.
If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window.
But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed.
Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.