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Deflation In Japan And Its Chances In The U.S.
By Wolf Richter www.testosteronepit.com
Deflation phobia has broken out again. James Bullard, president of the Federal Reserve Bank of St. Louis, grumbled in San Diego about inflation expectations being too low and threatened to print more money, while QEx mongers are once again pointing at the Japanese "deflation spiral" as a horrid event that we have to avoid at all cost.
In 1996, seven years after the Japanese bubble burst, I arrived in Tokyo for the first time and saw a shockingly expensive country (though the exchange rate was good, $1 = ¥110). It wasn't just me. One day, I was looking at Italian wines at a department store. The bottle of Chianti Classico in my hand was a global brand that sold for $8 in the U.S. In Tokyo, it was $53. I sucked in air and put it back down. As I drifted away, another gaijin wandered along and picked up the same bottle. He grunted in Italian. We started talking. Turns out, that Chianti cost less than $4 in Rome.
Item after item. Plain white T-shirts made in Japan, $30. Rent for a dingy 200 sq. ft. apartment in a lousy area, $1,500 a month (plus 3 months key money, plus 2 months deposit, plus 1 month rent up front, for a total upfront payment of $9,000). Public transportation, food, fuel, hotels (except love hotels), coffee, you name it. Everything was shockingly expensive.
There were reasons. During the bubble, pricing didn't matter. The more expensive an item was, the better it sold. The insular Japanese market was protected by insurmountable administrative barriers. When a company was actually able to import something, it wasn't to offer a better deal, but to offer a prestige product at a premium. A jungle of regulations, restrictions, knotty transportation issues, inefficiencies, and other hurdles made doing business expensive. But during the bubble, it didn't matter because everyone was making money, and everything kept going up.
In 1989, the hot air began to hiss out of real estate and equities. A lot of money went up in smoke. Buyers lost their exuberance. Attitudes changed. People began to look for cheaper alternatives. Some businesses figured out that they could gain market share by lowering prices. Price competition started. Import restrictions were softened. Certain aspects of the economy were deregulated in tiny and still incomplete micro steps. Year after year, the Japanese market became more competitive. Pressure to lower prices filtered into supply chains and made them efficient and cost conscious.
Now the $53 bottle of Chianti costs $8, and a Chinese-made T-shirt cost $5. Rents have come down, and new apartments are bigger and nicer. Food is cheaper, and so are meals at restaurants. Unemployment is under 5%. Wages have come down too, but not much. Infrastructure has improved. Subway and train lines have been added, extended, or four-tracked, and rush-hour trains are less crowded. Trees have been planted. Tokyo is cleaner and greener. Savers and bond investors haven't gotten ripped off by inflation. Reason has returned to Japanese prices.
In the U.S., too, the bubbles in equities, real estate, and credit blew up. But none of the other conditions that contributed to deflation in Japan exists in the US.
The massive U.S. trade deficit is proof that protectionism à la Japanese hasn't occurred in the U.S. (well, there are bizarre exceptions, like sugar). Price pressures from overseas have become even stronger during the process of globalization. Supply chains are highly efficient and integrated worldwide. In the US, that bottle of Chianti cannot drop from $53 to $8 because it already costs $8. Plus, China and other developing nations have begun to ship their red-hot inflation to the U.S.
Alas, in one category, the deflationistas have been right all along: real wages. Down nearly 9% since their peak in 1999. It is one of the reasons for the current economic malaise. Worse, without increases in real wages, servicing the growing mountain of debt will become ever more difficult.
Yet in its twisted way, the Fed favors deflation in real wages, inflation in goods and services, and negative real yields. Financial repression at its best. And while we may occasionally get a highly welcome quarter or two of deflation in goods and services, the conditions in the U.S. are unlike the conditions in Japan, and long-term deflation in goods and services is not in the cards.
But not everything is hunky-dory in Japan. How Long Can Japan Play The Endgame?
Wolf Richter www.testosteronepit.com
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Abel,
Correct, last figures I saw was Japans Debt to GDP ratio was well over 200%.
PayDay's coming.
Some gory details that support you concerns about Japans catastrophic financial situation are hardwired into the post, "How Long Can Japan Play The Endgame?" linked at the bottom of my post above. Here it is again: http://www.testosteronepit.com/home/2011/9/21/how-long-can-japan-play-the-endgame.html
You'll have fun with it.T: yes, really good article - I remember reading it recently! Japan has made some progress, but it has been driven by debt. As you know, most of the debt is carried by elderly Japanese (the heroes of the economy) and my concern is those are the individuals who are going to get hosed - The people who worked hard and did the right thing...
.
Asleep? You seem to be the one that's dreaming of Neverland.
Japan is funded almost entirely by their own people, which means the interest rates are not priced to the reality. When the in-country funding dries up, which it is now, then the interest rates will jump. That will be the end because their debt levels are unbearable.
Not sure what you mean by Neverland?
Interesting to note that the coupon on US treasury holdings of the Japanese pays for ~1/3 of Japanese oil imports. Coincidently, the fraction of US consumption that is domestically produced is ~1/3....
Huh?
Except for the trade deficit ,how are the two countries different ?
He should cite some of his comments.
Great read. Thanks.
Nailed it.
Testosteronepit is among my leading reads now!
A+++ work, Wolf Richter.
Inflation in the USA manifest itself in asset prices and services that cannot be imported. In particular, healthcare and education are ridicuously expensive on a comparative basis.
Toured a private university that went bankrupt in Tacoma, WA back in the 90's. More of that coming. And healthcare is only expensive because the government mandates that it be so. We know the American consumer is broke which means the only one cutting the check is the Federal Government--with trillion dollar deficits methinks preventive care will take priority--if not outright government care at the VA.
Great post, thanks....it seems to me Japan's middle class, thru all this deflation, has been better off
deflation would be wonderful, too good to be true.
http://expose2.wordpress.com
That is a common misunderstanding of Deflation.
Both inflation and deflation are economic collapses. In the end the only difference is policy. ... But they both suck for the average Joe. (One big difference is that inflation is nice for bankers, while deflation rips them a new a**hole).
The Fed is attempting the impossible: A deflation of wages and an inflation in the prices of goods and services. This of course is entirely impossible. You might as well hope for flying unicorns.
Why is the Fed (serving its owners) portraying deflation as a scary monster? I'm guessing that bankers prefer inflation to deflation for a couple of reasons:
1 They would rather get paid back in debased dollars than not get paid back at all
2 They get the diluting dollars first, and get to use them before their value is fully discounted
this article doesn't paint the full picture of the US economy relative to japan's, please consider the following:
1. we have inflation and deflation going concurrently; quoted from wikipedia: During Biflation, there's a rise in the price of commodity//earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation)
2. japan runs the largest trade surplus on this planet, while we have the largest trade deficit. during times like these japanese goods and services create more value than those produced in the US
3. japanese are savers, their external debt is only 50% of japan's GDP. compare that to the US, our external debt is over 100% of GDP using the most conservative measures provided by the US government, not to mention private companies estimate this figure to be much higher than 100%. external debt is the one which really matters as it's the cost of servicing the debt paid to other countries.
4. unlike americans, the japanese is one homogeneous group. there are gaijins and a few ainu islanders but it's largely one big majority, the japanese people stand united. on the other hand, americans are polarized and divided, even more so than the eurozone
4. unlike americans, the japanese is one homogeneous group. there are gaijins and a few ainu islanders but it's largely one big majority, the japanese people stand united. on the other hand, americans are polarized and divided, even more so than the eurozone
The concept that Americans are divided is over-blown. Since the 1980s, we have lived through the greatest immigration boom ever for this country. I see it as a net positive. We have trade contacts all over the world and a labor force that is able and willing to exploit them. Furthermore, diversity is a net positive. Having easy access to people of different cultural views and languages and a relative openness to them allows the USA to cherry pick the good things and integrate them into our culture which is ever-changing. I also believe it gives us a significant leg up on our competitors. For all the talk about differences, I find it relatively easy where I work to cooperate with people from all backgrounds. Where else are you going to find that?
Germany does well with exports while having fat middle class, unions, regulations, environmental laws...so like Japan, their businesses are successful and export a lot even while their middle class is much more intact and thriving than US...see low wages not necessary for success....
But Germany is not homogenous, they have huge Turkish immigrant population that is not integrated into general population.
look ay how their businesses run, how their financial sectors are so much smaller than ours, how labor is at the table, (Germany had labor guys on all the Corp boards, which prolly makes them way smarter).
It's not the various hues of these people's skin, not the uniformity of culture, but rather a economic systems, highly educated workforces, business culture that is not just about raping the business for maximum profits next quarter, it's and economic culture that has not sold out to a parasitic FIRE sector, they manufacture useful things, they build excellent infrastructure that keeps their economy going.
appreciate your reply; there are upsides and downsides to the immigration boom. what i find is that, the most productive workers, the cream of the crop, are being kept out of the US. Who's coming in? let's take mexico for example: mexico is exporting their narco culture into the US, they bring an exodus of the poorest, most uneducated and disenfranchised people into the US, who then cultivate a culture of gangs and crimes, recruiting foot soldiers into la razas, pachucos, nortels and emes, they terrorize the people and enslave us with drugs. As a group, their education level, and medium income are behind the curve, while crime rate and birth rate soar to being the highest in the nation. the behaviors of this group of immigrants are unsustainable and create a vicious cycle which will not be broken for generations. I, for one will not bail them out with my tax dollars.
Have you lived in cities like LA or NYC? certain neighborhoods are so segregated it makes me cringe in disgust. The living conditions are just sick, something you will never find in rio de janero which is just as diverse ethnically. The collective behaviors of such immigrant groups are diluting american values, they are polarzing the country, and it will turn america into a 3rd world country.
I welcome immigration but let's bring in people with ethics, people who produces good and services with high value, lets' take in the educated, skilled, talented and the most able workers, we have no more capacity for economic fugees.
One might have said the same thing about the Irish and Italian gangs during the last great wave of immigration. I have not lived in NYC or LA and never plan to. Combined, these cities make up less than 10% of the population and have always beared the brunt of 1st generation immigration issues because that is where the jobs are. After all, who else is going to clean your hotel room, cook your food, clean your toilet, tile your roof or mow your lawn? 2nd and 3rd generation Hispanics (like all immigrants before) have largely moved up the ladder and out of the ghetto, pay their taxes, obey the rules and are productive citizens. Heck, there are Hispanic families in the West that have been here longer than any cowboy! Having said that, I suspect that the melting pot needs a little simmering. Nothing a depression can't cure. Without jobs there won't be immigrants. If you look at the statistics, immigration is already declining.
I know very little about italian mafia and irish outfits running criminal rackets. I think they date back to the 1900's, only from what i read in books seen in movies
i'm against cheap labor exploitation, i mow my own lawn and i value hard labor. right now lots of youth are unemployed, why can't they clean hotel rooms and tile roofs? they are young they are fit. But more importantly, the income/crime rate/education lvl/birth rate disparity applies to all hispanics, not just the 1st generation immigrants. until we can close that gap, we need to close the border right now, they keep swarming in there's no stop. We can ill afford letting mexico to push its racial problems onto the US. I've been to mexico city over 10 years ago, i couldn't find any 'indian' mexicans i'm so used to seeing in the US, i saw cultured 'spaniard' mexicans dressed nicely in a beautiful Catholic city, i was shocked. The salad bowl needs some mixing, if chicano gangsters don't want to assimilate into the society they are free to pack up and leave.
Cynical sydney,
While most of what you say is true, the facts are the savings rate is gone from approx 25% over many years to near 0% for the Japanese people, (they are graying out) and need their savings to live on.This will cause,is cauing massive problems for them.
They are in as bad a shape as we are, in this regard.
As you say they have two major positives we do not, homogenous society, and the actuallly BUILD things and export.
We have forgotten that in order to maintain just status quo, there must be a balance between exports, and imports.
i see the situation in a different light, here's why
the flood of money supply released by central banksters debases fiat currency, but fiat currency removes most current account restraints. unless globalization halts completely, balance of trade matters very little. as a result the real savers are being ripped off. there is nothing wrong with 0% savings in fact it's desirable under current economic climate. in addition japan has little military expenditure, which translates to more resources going directly into their economy
there are worrisome news being covered up by japanese MSM. Fukushima disaster is worse than most people realize, more than one reactor have had full meltdowns, and it's all located in a oceanfront complex. being right next to the ocean means that soil erosion will eventually take the entire fukushima daiichi plant into the sea in perhaps a few hundred years. the blown reactors are continously releasing radioactive isotopes and other synthetic contaminants. these are elements that the ecosystem have never been exposed to and nobody knows the consequences. radioactive contaminants are going into the sea the air and into the topsoil, and they will not be broken down by the environment for at least a million years! even longer for it all to normalize to background radiation levels. ultimately japan will have to mobilize to build a containment structure then declare a zone of alienation.
But commodities have fallen, no?
Fallen from what? Their all-time highs? Every commodity I can think of is up on almost every scale from 2001 all the way up to last week.
that's exactly my point: there will be a few burps here and there, maybe some exceptions like corn going down (because we tilled the fields in the US overproducing corn to burn as gasoline), but a small number of commodities pulling back from all time highs does NOT mean commodity prices are falling. again biflation is what we have~
I don't know whether u are rejoicing over the fact tr oz of gold went from 1.9k down to 1.7, but please do not break apart my argument then ask a piecemeal question; read my post in its entirety. i am talking about how this article fails to mention that we have biflation occuring right now right here every minute each second, i'm describing how the US is no Japan and how we are in very bad shape; you are asking questions which have little bearing on the overall picture.
thanks.
ps ur name sounds disgusting