Fears the US economy is becoming the new Japan are misplaced, argues James Pach. US policymakers have far more options at their disposal than their Japanese counterparts.
The recent S&P downgrading of US treasuries has prompted a bout of soul-searching among economic commentators in the United States. Quite how the S&P retains any credibility after its AAA-rated subprime CDO fiasco is something of a mystery, but being booted from the AAA sovereign debt club has clearly been upsetting for the United States, if not for bond investors.
One of the memes that has emerged—in fact, it first made its appearance in the wake of the Lehman Brothers collapse—is that the United States is becoming the new Japan. Finance bloggers like to buttress the argument with charts showing the recent performance of US stocks and bonds, looking ominously like Japan’s in its post-bubble days. This time, opines a recent Wall Street Journal article, maybe the United States is Japan.
No, it’s not. Certainly, it’s tempting to draw the comparison. Two rich, post-industrial countries experience massive asset bubbles, followed by crashing prices, bank bailouts, debt retrenchment, burgeoning public debt, and ultimately downgrades.
But they are not the same, for the simple reason that in Japan the economic cycle is dead. The fundamental assumption that underpins the usual tools of economics no longer applies, and Japan’s only way out of a painful decline is structural reform that goes beyond its economy and into the heart of its social fabric. These reforms will be far more painful than anything required by the United States, which still has an economic cycle, meaning monetary and fiscal policy can still be effective, and which could achieve a recovery with a dose of sensible policy and patience.
This isn’t to be sanguine about America’s problems. S&P did get one thing right: US politicians certainly aren’t inspiring much confidence these days. For as long as the country remains in thrall to the arrant nonsense spouted by cartoonish fringe characters, there’s an ongoing risk of poor policy choices that will continue to damage the economy. The recent shift in favour of the policies of Herbert Hoover, circa 1931, puts a fragile recovery at grave risk. An inability to re-regulate its financial sector (the reintroduction of Glass-Steagall would be a good first step) will encourage new asset bubbles, wreaking more havoc. Even with an economic cycle, a country can defenestrate itself. Nor is it to suggest that the United States doesn’t have some deep-seated structural issues—income equality and the evaporation of well-paying, blue-collar jobs, eviscerating the middle class, will require sustained action. But the point is, whether or not it actually chooses to exercise them, the United States still has policy options that Japan now lacks.
Let me explain. In 2009, the United States had a population of 307 million, Japan had 127 million. In 2050, the US is projected to have a population of 393 million, according to the middle series estimate of the US Bureau of the Census. Japan, by contrast, will have just 95 million people, according to its Ministry of Health. So, over the next 40 years, if these projections hold, the US population will grow by about 30 percent, while Japan’s will shrink by 25 percent.
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tst
More rich Chinese are moving to live in the US or Western countries such as Canada and Australia than rich Americans/Westerners are moving to live in China (if any – temporary moving to work do not count).
Readers, you make the call.
a_canadian_observer
@tst: You meant people are moving away from John Chan’s, Sinodefender’s, Frank’s … heaven? What a shock!
BTW, a number of those people committed a lot of crimes here in Canada.
Sinodefender
When did I say China is heaven and the West is Hell?Rich Chinese want to make business what is wrong with that?Chinese are responsible for crime in Canada,then why aren’t Chinese the top ethnic group in jail?
Charlie
@a_canadian_observer
You’re putting words in those peoples’ mouths, and yes, I have seen many posts from Sinodefender and John Chan. Also, your comment regarding crime in Canada is completely irrelevant to this article.
Kung Pao
My understanding is to replace the Fed with Mao’s system ! :-) :-)
Kung Pao
Given his “love and passion” for America; when John Chan suggests how to build a better US, do the opposite way likely we would get a good chance.
Item no. 4 is Chan’s focal point here.
John Chan
@Kung Pao:
Only people with small and narrow mind will constantly be suspicious other’s motive as well as undermine others non-stop. There are plenty of people in world working hard for the good of human beings and advancing civilization.
You need to be got educated before putting out pitiful and laughable ignorant comments to reflect your small and narrow mindedness, so that you can be a true patriot of the USA not a zombie of the international neo-con.
Here are some videos to get you started to be a true patriot of the USA, and the real deal of the Fed. Please start with the titles “End of Liberty”, “The Dollar Bubble” and “Debt Slave” at http://inflation.us/videos.html. You can always ask for more help if you want to be a true patriot of the USA.
John Chan
The solutions for USA to get out its doldrums are:
1. Switch American political system to British parliamentary system, for better or for worse, things get done in a clear direction. Or
2. Make presidency and congress term at 5 years, and all of them to be re-elected at the same time, so the new government can start anew.
3. Make public funding for all election, ban private funding for election.
4. Finally, get rid of the Fed.
So that politicians are elected to server the people and the nation, nobody else.
The only hope for Japan is to form a EU type of relationship with China, free trade and free travel between the nations.
Sinodefender
How would Japan become an EU like government with China? The wounds are still fresh from The 8 year war of resistance… With Shintaro Ishihara worshiping at the Yasukuni shrine progress is going to get no where…
Kevin
Get rid of the Fed and replace it with what? Free banking? The gold standard? A different central bank model? Simply suggesting we get rid of the Fed doesn’t answer any problems.
John Chan
@Kevin:
I think you don’t know your own history well. The Fed is a privately owned entity which is above all USA jurisdictions, and its biggest shareholder is the British Crown. American does not need to pay interest to use their own money. Many presidents tried to get rid of the Fed, but they all got killed, Lincoln, JFK, etc.
Ron Paul, Peter Schiff, NIA, etc. have been telling American the alternatives to the Fed, but nobody listens.
@Sinodefender:
EU is a highly integrated entity. For the long term peace and prosperity of Asians, China needs to deeply integrate North East Asia like EU. China should have the capacity to respect Japanese culture like all other minorities in China.