WE ARE NOT REPEATING THE MISTAKES OF JAPAN….YET

When confronted with a balance sheet recession the math regarding economic growth gets relatively simple – either the government spends in times of below trend private sector spending or the economy contracts.  For several years now I have maintained that we are in a balance sheet recession – an unusual recession caused by excessive private sector debt.  Although this balance sheet recession created the risk of prolonged weakness I have been quick to dismiss the persistent discussions that compare this to anything close to a second great depression - as I showed in 2009 the comparisons were always ridiculous.  The much closer precedent was Japan, where the economy actually expanded throughout their balance sheet recession, but a persistent malaise left a dark cloud over the private sector as they paid down debts.

Over the last year I have consistently expressed concerns that the USA was going to suffer the same fate as Japan, which consistently scared itself into recession due to austerity measures.  At the time, most pundits were comparing us to Greece and attempting to scare us into thinking that the USA was bankrupt, on the verge of hyperinflation and general doom.  I wrote several negative articles in 2009 & 2010 berating public officials who said the USA was going bankrupt and that the deficit was at risk of quickly turning us into Greece, Weimar or Zimbabwe.  Nothing could have been farther from the truth.  The inflationists, defaultistas and other fear mongerers have been wrong in nearly every aspect of their arguments about the US economy.

US government default was never on the table, the bond vigilantes were not just taking a nap and now, with the passage of the most recent stimulus bill it’s likely that we’ve (at least temporarily) sidestepped the economic decline that was likely to accompany a decline in government spending.  Richard Koo, however, believes we are repeating the mistakes of our past.  In a recent strategy note he said:

“The situation in Europe is no different from that in the US. I therefore have to conclude that the western nations have learned nothing from Japan’s lessons and are likely to repeat its mistakes.”

I have to disagree here.  The most important factor impacting economic growth in the prior year was the USA’s ability to avoid talking ourselves into austerity measures.  Unlike Japan in the 90’s, we have not convinced ourselves that recovery was here before it was truly sustainable.   This was the single most important contributing factor to Japan’s rolling lost decades.  They suffered from a persistent economic malaise as the government withdrew aid just as the private sector appeared to be gaining some traction.  And every time this occurred the economy sunk back into recession.  Thus far, the USA has avoided this trap.

Mr. Koo is unhappy with the passage of tax cuts, which he believes, will prove far less impactful in boosting the economy.  He also compares the USA to Europe, which I currently believe is inaccurate.  With regards to the tax cuts, the key during a balance sheet recession is paying down debt – not propping up the economy via government programs.  Whether this debt repayment is done through unemployment insurance, jobs programs or tax cuts is relatively semantic.  The end goal should always be the same – to fix the balance sheets.  I think the recent tax proposal is an adequate policy response given the current state of the US Congress.  It’s not nearly as large as the USA needs and it’s not nearly as well targeted as it needed to be, however, it’s one of several things I have asked for in recent years so it would be entirely unreasonable to sit here and stubbornly say that it is a waste just because it’s not exactly what I wanted.  Speaking of being reasonable, it is only fair that I admit that several of my pleas have come to fruition in recent months:

  • I have consistently pleaded with policymakers to avoid the fear mongering of the deficit hawks and ensure that we don’t repeat the mistakes of Japan and 1937.
  • I have asked for tax cuts that help reduce the strain on private sector balance sheets.
  • I have asked for a Fed Chief that would admit that monetary policy alone cannot fix our woes.

That’s 3 for 3 in terms of several of my big picture requests – not ideal, but it’s not as bad as it could be.  I think things could be far worse than Mr. Koo makes them out to be.  As for Koo’s concerns that we have not learned from the lesson of Japan and are increasingly comparable to Europe – I think that’s a bit off the mark.  Europe is forcing widespread austerity on the periphery nations and the UK has willingly implemented austerity measures.  This is far different from what the USA is doing.  The recent tax proposal all but guarantees that true austerity is not in the near future in the USA.  His argument regarding Europe’s response is exactly right, however:

“In Europe, unfortunately, both governments and the private sector seem to be focused exclusively on fiscal consolidation. Particularly for the orthodox individuals in charge of the ECB, the EU and the OECD (by “orthodox” I mean they do not understand the mechanisms of a balance sheet recession),  fiscal rectitude has become the “only game in town.” They are oblivious to the fact  that austerity is a fundamental policy mistake during a balance sheet recession.”

Austerity in periphery nations will continue to drag these countries into economic depression and create extreme risks for the global economy.  The lack of austerity in the USA has been soundly backed by recent data trends in the USA.  The most notable improvements have been consistent strength in regional manufacturing data & the ISM data.  If we look purely at a comparison of ISM Manufacturing with GDP the current levels are consistent with historical GDP growth of just under 4%.  This is still largely government/inventory driven, however, it’s a continuing positive development for a country facing economic headwinds.

The ISM data can be particularly volatile and recent leading indicators have shown some marginal warning signs.  It would not be surprising to see some moderation in the ISM data in the coming quarters and GDP growth that is below trend.  While all of this is fairly good news we are not quite out of the woods yet.

The bad news is, we are Japan, but the good news is we are Japan on “fast forward”.  As I described in mid-2009 everything in the USA’s balance sheet recession appears to be occurring much more quickly than it occurred in Japan.   So, the good news is that we won’t need government aid as long as the Japanese needed it.  In the meantime we must remember that stimulus is not self sustaining recovery.  Ultimately, the USA will not be out of the woods until the private sector begins to meaningfully expand, contribute to closing the output gap and help reduce the 9.8% unemployment rate.  Based on many macro trends I have said this could be occur as early as 2012, however, any number of exogenous risks could set us back by months or years.  Thus far, there are some relatively positive signs coming from the private sector, however, we are still a long ways from sustained private sector recovery.

For now an accommodative Fed, a $1.3T deficit, a general lack of austerity and a tepid private sector recovery is likely enough to sustain economic growth, but not enough to meaningfully close the output gap.  This all continues to point to a period of very high unemployment, tepid economic growth and a recovery that feels like a recession.  As I said in early 2010 we might be in a technical recovery, but it still very much feels like a recession with a 9.8% unemployment rate.  The good news is we’re not talking ourselves off the edge of the cliff.  The bad news is the recovery remains tepid and highly susceptible to exogenous risks.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Adam

    I could just puke. I can’t say I disagree with the assessment but it’s like being happy over receiving a D instead of a D-.

  • eludog

    Great post TPC. It would be nice if all Americans read this and understood it, but of course we all know there may be .1% that does understand it.

    I’m not sure we will ever get back to full employment in this country. There is just not the need for labor like there used to be. Technology and cheaper overseas labor will continue to put pressure on the jobs market. In the past, there has always been an industry that picks up the unemployment slack. Now, I have a hard time seeing where the growth will come from.

    What I expect we will see is a similar economy to what you predict. But what I think we will see in the years ahead is the inflation that we have historically exported overseas will turn full circle and begin to be imported as the emerging world gets stronger and stronger. It will be interesting to see how the bottom 90% of our country gets by when everything costs more and wages stay stagnant. Again, this leads to a slow moving economy just like you predict.

  • boatman

    this is why you remain one of the top 5 guys to listen to…..and your short timing, when i can find it…..guess i’m gonna have to do twitter.

  • KB

    Yes, we are Japan on fast forward. What I do not understand is why you are call it “good news”. We still have not seen the final outcome of Japan situation, and it, i would say, is quite debatable. If you believe it will not be catastrophic, please, provide your rationale.

  • Orlando

    In 2009 Debt to GDP was at 350% in the US; it’s higher now. To say that we have avoided a Japan situation is premature to say the least. The Fed’s solution to this is the same approach tried during the 1930’s, monetary debasement. One can argue that without a gold standard, Bernanke will be far more successful this time around than his depression counterpart. Monetary contraction in the form of money velocity shrinkage is still strong, and despite the flow of QE going to commodity speculation, the demand is beginning to tank again. I know it, my commodity based small business is still down 18% FROM the 2007 peak. For people like me holding business debt, the future is very bleak indeed, even with my debt ratio (180% to cash flow) being far less than the precipitous national number. Small business will not lead this ‘recovery’ that’s the main problem.

  • http://www.pragcap.com TPC

    I know, it’s sad that we have come to be so bullish about an environment in which we have near double double digit unemployment. Talk about low expectations.

  • Cowpoke

    This is were I get cofused, after reading this over at the mises institue:

    “Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan’s government in poor fiscal shape. The “on-budget” government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the “off-budget” sector is included.”
    http://mises.org/daily/1099

    So if it Govt spending and lower taxes were not an imidiate elixer for Japan, why should it be one for us?

  • cswake

    Americans are exceptional? :p

  • http://www.pragcap.com TPC

    As Koo suggests, their balance sheet recession is only just ending. It took their pvt sector this long to pay down debts. And that’s in large part due to the fact that they had simultaneous twin bubbles. The price declines were also worse. I still expect RE to fall in the USA, but I would be surprised if prices fell more than 15-20% more. Our problem is at the consumer level and while the problem looks bad it’s become more manageable. De-leveraging will continue for years in all likelihood. But that doesn’t necessarily mean we’re facing another lost decade. Don’t get me wrong, I still think there are big risks out there….

  • http://www.pragcap.com TPC

    I think it’s wrong to focus on the govt debt issues. This isn’t a govt debt problem. It’s a pvt sector debt problem. The govt intervention will leave behind a nasty trail of moral hazard, remorse and malinvestment. The imbalances continue which is why we can likely look forward to the next big crisis in coming 5-10 years. We’ll all look back and talk about this last crisis like it was a separate event, but it won’t really be….So in short, enjoy the economic strength. The recession is technically over, but it’s aftermath will be felt for years.

  • Dimm

    “This time is different” /s

    The problem is the debt level. Neither the tax cuts nor the stimulus will help much.
    Austerity will make it worse.
    Currency debasement and inflation are helpful since they do reduce the debt burden.

    The only positive example is Iceland. They defaulted (reduced debt burden) and are out of the woods. Ireland and Greece on the other hand are way worse.

    It is not a matter of coming up with path or solution. The answers are there, but the will to implement them is not.

  • Roger Ingalls

    Hey congrats on picking the #2 word of the year…pragmatic.

    Here’s the killer tho…number one is austerity!

    http://www.merriam-webster.com/info/10words.htm

    Happy Holidays, thanks for an excellent site!

  • Dimm

    “[Koo] also compares the USA to Europe, which I currently believe is inaccurate. ”

    In a way you may say he is correct. The US government can print and devalue the USD, but so can the ECB, right?

    The US states can receive help from the government, same is true for the EU sovereign nations.

    What I mean is it is all a matter of political will. If the US government stops supporting the states they will … cut spending, raise revenues (taxes) until they fix up the mess or default. Same as in Europe.

    If there is political will in Europe to help the struggling nations and devalue the euro, the situation will be no different than in the US.

  • http://www.sovereignmoney.com RobertM

    I rarely disagree with most of your analysis but I think the chart from the link you provide “Current Crisis vs. Great Depression” has some problems.

    First, we don’t know where we are yet. Did the people of that era know they were in a depression as it was going down? Most of the famous quotes about bottoming out were wrong and showed that people thought they were going to recover when they still had much further to fall.

    Second is unemployment. Correct me if I’m wrong but was that graph using our skewed version of unemployment or the way it was estimated back then? By some estimates, we have unemployment approaching 20%.

    Stock market decline can’t be known until it’s all over…which it’s not.

    Mortgage delinquency? I expect that to go WAY up.

    Bank failures? If we hadn’t done the insane change in accounting rules and started prosecuting the massive fraud in our system, we probably would have thousands of bank failures.

    That said, your article does tend to tone down the deflation worries and I’m thankful for that.

  • http://www.pragcap.com TPC

    Yes, but he is implying that the USA is repeating the mistakes of Japan, and while he may not be satisfied with the type of spending, this is far from austerity.

  • Dimm

    Spending equals income, but income does not equal spending.

    Tax cuts do not equal spending. It is a fact.

  • http://www.pragcap.com TPC

    Does a tax cut help alleviate balance sheet pressures?

  • Dimm

    All things considered, no.

  • http://www.pragcap.com TPC

    How do you figure?

  • pvk22000

    TPC, to echo Dimm’s statement, I think there is a gap between tax cuts and balance sheet repair. The tax cuts are predominantly being distributed to the upper end of the income spectrum. The balance sheets of the wealthy are not as strained and the wealthy will be less likely to spend all of those tax cuts. Thus, i don’t think that the particular tax cuts enacted will be beneficial in terms of balance sheet repair.

  • pvk22000

    i should have said, as beneficial as they COULD be if distributed differently

  • Dimm

    By looking at the numbers.

    Consumer debt composition:
    Mortgage: 74%
    HE Revolving: 6%
    Auto Loans: 6%
    Credit Card: 6%
    Student Loan: 5%
    Other: 3%

    Almost all of the outstanding debt is revolving. That means that even if you use all the money you get to pay down debt that will reduce your indebtedness 10 , 15 or 25 years from now. Not now.

    Lets say you have a house with 15 years left on your mortgage. Your get a tax cut and put 2-3 K toward your mortgage, or student loan , etc. What changes? Nothing but the fact that at some point in the future your payments will stop earlier. Now? No difference at all.

    Those that are poor will spent them (stimulative), but not a plus toward the argument.

    Top 10% that get 50% of the income in the country? They will put them aside.

    So if you look at the numbers, tax cuts are not stimulative and they do not reduce the debt burden at present time at all.

  • http://www.pragcap.com TPC

    Yes, I acknowledged that the targeting was less than ideal:

    it’s not nearly as well targeted as it needed to be

  • http://www.pragcap.com TPC

    The point is not to stop the balance sheet bleeding in 30 years. The point is to alleviate the pressures NOW. The hope is that the economy will come back in due time and generate enough jobs, income growth and sustaining output that the balance sheet recession becomes a thing of the past. It’s all about fixing the balance sheets in the short-term. Tax cuts have a short-term effect. And the hope is that this tax cut buys enough time for the pvt sector to sustain growth. I’m not saying everything is all hunky dory, but given the political climate we weren’t going to do much better.

    Trust me, I’d much rather see this money go towards rebuilding the country or helping to make a long-term investment in the country, but at this point it’s the best we were going to do. Especially with Obama’s pathetic negotiating skills.

  • Dimm

    TPC:
    “the hope is that this tax cut buys enough time”

    That is the point I’m trying to make. It is not a fact. It is not based on historical precedence. It is not based on any economic model or theory that is even remotely connected with reality.
    It is wishful thinking.
    The economy might pick up, but even if it does it will not be because of the tax cuts.
    After all Obama is pretty much extending the current policies of almost 10 years. If they worked we would not be having this discussion.

    Besides that distinction I’m 100% with you. But it is an important point to make.

  • gaius marius

    i agree that it would be better if they spent instead — focused spending, like employment programs to push wages through to the marginally employed or unemployed — because tax cuts by nature will mostly be received by the wealthy (because they, in a progressive system, pay most of the tax) who don’t have widespread severe balance sheet issues to rectify. while tax cuts and spending increases are similar, the distribution of their benefit is not.

    but it’s better than nothing, to be sure.

  • Brian

    Agreed. Tax cuts at best marginally increase economic investment. What they largely do is cause higher savings for the wealthiest people who then cause bubbles by purchasing the next “hot” asset class. Is it just a coincidence that the lowest tax rates of the last 100 years directly preceded the 2 biggest economic collapses?

    Low taxes = mal-investment and speculation, the two worst things for an economy.

  • gaius marius

    right — great minds think alike, pvk!

  • gaius marius

    on the whole, though i agree with pvk’s thoughts, i have to agree with you, TPC — what the feds are doing with tax cuts is in the right vein.

    if only they were doing more of it. what they’re giving with the right hand in tax cuts, they are taking away with the left in trying to cut subsidies to state and local governments and reduce unemployment benefits.

    i don’t expect that their combined actions will be a net deficit reduction effort versus the former course — but then the former course was a pretty steep rolloff of stimulus spending. factor in that the cuts will disproportionately flow to those with less severe balance sheet strains, and the outlook for systemic income continues to be relatively bleak i think.

  • http://www.pragcap.com TPC

    I don’t disagree one bit. But again, what else were we going to do? You and I both know there was NO chance we were passing a new spending bill….

  • gaius marius

    poke, you have to understand they withstood the popping of a credit bubble in which writedowns were on the order of 3x GDP — larger than the american great depression — without suffering the debilitating sustained spiraling loss of income that has been the hallmark of every similarly-scaled bust in the historical record that i’m aware of. that was and is the major achievement of government deficit expansion in japan.

    i don’t think anyone at mises.org really understands what happened in japan, and really couldn’t given their dogma.

  • Dimm

    TPC:

    “I don’t disagree one bit. But again, what else were we going to do? You and I both know there was NO chance we were passing a new spending bill….”
    Unfortunately you are not a policy maker. I wish you were.
    You consider economics a science, not an art right? You base your conclusions on data, economic theory and logic.
    Politics are irrelevant to the quantifiable results of different economic and policy measures. Political climate changes all the time. A sound economic position should not change with the party in power.
    Tax cuts, spending and any other economic policy measure ARE positive or negative at any point in any country, DESPITE who is in power.
    If your point is to promote knowledge, your analysis and conclusions should be true as possible. Effectiveness is measurable.
    What is politically possible is I think irrelevant to most.

  • Willy2

    The US is repeating/will repeat the mistakes of Japan. But we’re currently not YET in the third (!!!!!) or fourth or fifth Worldwide Great Depression.

    The bond vigilantes ARE waking up. Didn’t you see what happened to the US muni bond market ? And rising interest rates will force the US government to implement austerity measures as well.
    We’re only in the first stage of a bond revulsion and then (!!!) the Great Depression will start.

  • http://www.pragcap.com TPC

    muni mkt is a separate mkt. There are bond vigilantes there….

  • Tom Hickey

    The US is in a balance sheet recession, like Japan, and its financial system was similarly over-leveraged although the Fed has recapitalized it (somewhat, the extent is not known) through forbearance (at the expense of increasing moral hazard), while leaving consumers heavily over-leveraged.

    The major issues the US has to face in 2011:

    1. Falling housing prices putting pressure on underwater mortgage holders and their creditors

    2. State and local government insolvency increasing government layoffs and sparking a crisis in some state and mini bonds

    3. Consumer debt overhang threatening debt-deflation

    4. Political gridlock and opposition party obstructionism neutering the ability of government to function

    5. External shock with China and the EZ experiencing problems spilling over into the global economy

    6. Intractable unemployment and underemployment resulting in more long term unemployed/underemployed

    7. Complications from financial sector fraud widening and deepening

    8. Eruption of financial austerity inhibiting stimulus

    9. Ron Paul hamstringing Fed policy/operations with investigations

    10. Contraction in some financial asset class or classes as price adjusts to value, undermining confidence

    These are interrelated and changes in any of them can have a strong impact on the others.

  • Ryan

    One issue I have with the general discussion about taxes is that I think that “rich” is being used by many to promote their political agendas rather than the empirical reality. The issue with the tax cuts was NOT extending cuts to those over $200k: this was neither especially expensive not will it likely be saved. The issue is with extending the cuts for people making >$500k and especially those >$1mm. These extensions were very costly and will have little effect. The US needs a higher tax bracket to improve revenue and to eliminate extreme inequality. But unfortunately, the definition of “rich” is being skewed for partisan purposes.

    A family making $250k per year is likely to have a decent sized mortgage, a house underwater, is possibly dual income, and is not likely to get student aid to put their kids through college. Moreover, this class of people constitutes a large portion of small business ownership. The push to tax these people more reeks to me of class warfare rather than pragmatic policy making.

  • http://www.pragcap.com TPC

    Good point Ryan. It would have been nice to see them bump the top rate to 1MM and maintain the rate for anyone below that level. But Obama folded like a lawn chair.

  • This little piggy

    Where are the risks? I am way under-invested because I like to think I understand the risks but those risks seem to be encapsulated in the vacuum of the Fed’s balance sheet. Maybe B Ferro is right, although every synapse in my brain is screaming alert!

  • cc

    TPC, still short? Thanks!

  • http://sharronclemons.co.cc/ Sharron Clemons

    One issue I have with the general discussion about taxes is that I think that “rich” is being used by many to promote their political agendas rather than the empirical reality. The issue with the tax cuts was NOT extending cuts to those over $200k: this was neither especially expensive not will it likely be saved. The issue is with extending the cuts for people making >$500k and especially those >$1mm. These extensions were very costly and will have little effect. The US needs a higher tax bracket to improve revenue and to eliminate extreme inequality. But unfortunately, the definition of “rich” is being skewed for partisan purposes. A family making $250k per year is likely to have a decent sized mortgage, a house underwater, is possibly dual income, and is not likely to get student aid to put their kids through college. Moreover, this class of people constitutes a large portion of small business ownership. The push to tax these people more reeks to me of class warfare rather than pragmatic policy making.

  • pvk22000

    Ryan, I have really been having similar thoughts. Both ends of the political spectrum like to make the terms rich/middle class/etc very vague so that they can obscure what is really going on. I am a conservative, but i think the Repubs are getting away with some false advertising. Yes, i get a tax cut at my income level and i appreciate it. But it is more than dishonest to lump me in with the top 1% of all wage earners by calling me “rich.”

    It is well documented that the top quintile of wage earners have gotten an increasingly large percentage of the pie over the last 30 years. However, the median for the top quintile has actually moved very little. It is the top 1% that drives everything.

    I also agree with Brian’s statement about the potential for tax policy to encourage malinvestment. Basically the rich are getting more money and there are not quality places to put that money. TPC has taught me that taxes are just a way of managing demand for the currency and allocating resources across the economy. And we continue to implement policy (fiscal and monetary) that encourages the allocation of resources to bubbles.

    ps. My friends now consider me ultra-liberal because of my views on deficit spending/taxation/etc. I hold those views because of this site. Thus, TPC has caused me to be ostracized and shunned here in Texas :)

  • Willy2

    First the muni market and then the US T-bond market. More disaster up ahead.

  • The Banker

    Dimm: Almost all of the outstanding debt is revolving. That means that even if you use all the money you get to pay down debt that will reduce your indebtedness 10 , 15 or 25 years from now. Not now.

    Lets say you have a house with 15 years left on your mortgage. Your get a tax cut and put 2-3 K toward your mortgage, or student loan , etc. What changes? Nothing but the fact that at some point in the future your payments will stop earlier. Now? No difference at all.

    Banker: Is this worded correctly? Based upon your figures, most of the debt is non-revolving and long term, which can be used to make your argument but what does revolving debt have to do with it.

    Regardless, I just received a year end bonus and I used it to pay down debt and help my personal balance sheet. I have a mortgage, an equity loan, a car loan and several credit cards. I paid off my car loan and credit cards and now my cash flow is much improved. No one who understands cash flows would pay down their mortgage unless the mortgage rate was significantly higher than the rate on all their other debt. I’m not sure what your driving at Dimm.

  • Willy2

    Yes, both the US government and the FED inject stimulus into the economy but it can not control where that money is going to. The FED can increase bankreserves but it can not FORCE the banks to invest in a losing game (like US housing, tanking T-bonds, tanking muni bonds). And that’s – IMO – what our TPC is overlooking.

  • Willy2

    The US budget deficit is NOT $ 1.3 Trillion but some $ 1.9 Trillion. The wars in Iraq and Afghanistan are being financed off budget. So, when the FED monetizes some $ 600 billion in 8 months, that’s woefully too little.

    For the deficit figures one shouldn’t look at the official figures but take a look by what amount the federal debt has increased. (Keywords: Congressional Budget office ?? G.A.O. ??). Search and thy will find !!!

  • http://www.pragcap.com TPC

    The low taxes argument should go a long way in Texas!

  • Dimm

    First bonus is not a tax cut. But for the sake of the argument,
    what are you going to do with your next bonus?

  • dirt farmer

    My guess is anyone over 60 will not live to see the correct answer.
    It is quite interesting to see the (currently 3) diverse opinions.
    Japan- bail and rebail, 20 years and counting
    England- austerity and hope
    EU- hamstrung and hopeless

  • RSDallas

    Mr. Koo is the Keynes in Keynesianism and the Krug in Krugman. The man’s only suggestion, like Krugman is that Japan government hasn’t spent enough. Japan is in the situation they are because they never allowed the busted assets (primarily Real Estate) to find and TRADE at its market rate. The size of the bust in Japan was huge in both size and dollar amount. Japan has had 19 straight years of declining Real Estate values. What does this tell you? Come on TPC. The mispriced assets have acted like glue for the last 30 years in Japan and the same thing will happen here. One person’s loss is another person’s gain. It’s simple, but if one person is shielded from a loss than nobody else wins.

  • RSDallas

    Agreed. All because of Socialist government policies and too much debt.

  • RSDallas

    See I just don’t get it. Tax the rich so the government can spend more??? That is just plain nonsence. Why not eliminate more government thus lowering the need for higher taxes on anyone?

  • Dimm

    That would be contractionary. It will make matters worse, not better.

  • Dimm

    utter nonsense

  • EMP

    Does a tax cut help alleviate balance sheet pressures?

    Does it ever. And it is reasonable that 80% of the Tax Cut Extensions plus the SS Tax Cuts will end up right back in US Treasury paper. None of it will directly help RE, and that is STILL the elephant in the room.

    What you say is very reasonable, likely and well stated.

    But the economy going forward is going to feel like one is walking after a nice trip in a fast sports car (that ended up in a ditch).

  • EMP

    One of the most common comments late in the Great Depression was “Just when we thought it was over – it was really just beginning!”

  • Gerald P

    Your phrase,”given the current state of the US Congress”, aims at the most potent factor in limiting our proper response. Please tell us your thoughts on where the new Congress is likely to act and the consequences of such acts.

  • Jim Baird

    There are no “bond vigilantes” in the T-bond market. Bonds move where the Fed wants them to be, or (for those parts of the yield curve the Fed mistakenly allows to float) where the market decides the Fed will want them in the future. Deficits have nothing to do with it.

  • Gerald P

    “Politics is irelevent”? Yeah, amd so is China!

  • Dimm

    In his book he states that the premature austerity prolonged the balance sheet recession and added 100 trillion yen to their debt. He also attacks Keynes and Krugman on multiple occasions. If I remember correctly he also says that Japan’s GDP never fell. The economy never contracted thanks to the government spending, so please elaborate on the “size of the bust” and its source in Japan. The fact that Japan’s RE is declining for 19 years means that it was way overpriced. It has no implications to the correctness of their response.

  • Adam

    You need to read up on how the monetary system really works -see Modern Money Theory or Chartalism. You will then understand that the deficit is still too small. That’s why unemployment is at 9.8%.

  • Paul Hanly

    While I agree with much of what you say here and about MMT I think you need to reconsider this post. Tax cuts are just another form of public deficit transfer to the private sector. Each of these types of transfers favours some groups over others and generally doesn’t go solely to fixing the principal underlying problem you identify (rapid increase in private debt levels since say 1990 (after interest rates fell after the fight against inflation was won) and current levels).

    The real problem is that none of the transfers to the private sector have so far done anything substantial to reduce the private sector indebtedness (other than maybe for some banks and car manufacturers) that you identify as the underlying problem. The additional money can be spent on consumption of imported goods, doing little for US employment or productive capacity or infrastructure or reduction of indebtedness. Most reduction in private sector debt has been through default and write off, not deleveraging.

    Unless the losses are allowed to fall where they naturally belong, or the government ensures that the transfers to the private sector only either maintain the lives of the unemployed at the most basic level or improve productive capacity (infrastructure or plant modernisation and primary and secondary education and university education on a merit basis) the crisis is just being kicked down the road/ameliorated and the moral hazard and benefits to rent seekers increased.

    Bond holders in banks and shareholders have been some of the greatest beneficiaries of the recent strategies. Mortgaged homeowners who refinanced to low fixed interest rates have also benefited.

    If there is to be real deleveraging of the economy, there must be recession as the credit based and deficit driven based is withdrawn from the economy. If there is private sector deleveraging only then under MMT the government can maintain fullish employment at the cost of increased deficits but should do so in a way which adds to or renews productive capacity of the economy. This means that the economy as a whole does not deleverage, rather leverage is transferred from private to public sector.

  • Joe

    Great comments, TPC.

    I would only add that there are important cultural and demographic differences between us and Japan which would lead the US to a more prosperous outcome.

    The average Japanese is depressed and dissatisfied with their lives, this is evidenced by their negative birthrate and growing trend of male asexuality. Japanese hostility towards immigration only exacerbates this problem.

    Their export-driven economy disproportionately benefits the wealthy industrialists at the expense of everyone else.

    I had an instructor who once remark that if Japan maintains its current negative pop growth rate, a statistical analysis can project the death of the last Japanese some decades into the future. Scary thought if youre Japanese.

  • Adam

    Historically debts are not paid off in a balance sheet recession (for the most part) they are defaulted on. They are loans that never should have been made to begin with. What MMT offers is a way to restore aggregate demand while the debts are cleared (by paying them off but mostly through default) and the main street economy returns to growth. Beyond that is a whole other mess of internal and external imbalances that need to be sorted out too and that’s really where the tax cuts are a mess.

  • http://blogfirstrider.blogspot.com/ first

    Engineering strong growth in japan or the US as virtually been impossible for any
    length of time.Japan also as modern money.I wonder if Japan had face reality and go bankrupt in 1990 and start from scratch with good hold convertible reality money if they would not be better of to day ?

  • Pvk22000&yahoo.com

    Very well stated

  • Pvk22000

    RS, as a thought experiment, consider the govt as a highly inefficient private institution. They provide services to the economy and are a supporter of economic activity. The real cost to other private institutions is that the govt soaks up resources that could be used for other productive purposes. The big difference is that the govt is not revenue constrained in the way that other institutions are. Thus they can continue to soak ip resources indefinitely.

    Long term govt either needs to be smaller or provide MUCH more efficient service. But short term, we have underemployment and the private sector doesn’t need the people that are being soaked up by the govt anyway.

    Taxes and money are just keeping score. It is the resources that really explain how our economy functions. Obviously we need a stable money supply, but that is a means to an end, not an end in itself.

    I’m rambling. My bad.

  • http://shahid@igcpk.com Shahid Amin

    The current fiscal policy of monetary easing has created a temporary illusion of improvement whereas it is just helping the funds to make big bets in commodity markets. This has resulted in increasing the prices of commodities which in turn are driving the cost of low tech manufactured goods. The consumer resistence is emerging and next year the quantitative demand will drop resulting in drop in manufacturing and will cause recession in future.

  • http://www.pragcap.com TPC

    Paul, I fully agree. This is why, in 2008, I argued for a resolution trust for the banks and direct aid to Main Street. The policies of the last several years have not resolved our structural imbalances. They have merely resurrected them. Anyone who thinks these issues won’t reemerge in some form in the coming years is simply not paying attention. But for now I guess we have to play along with the cards we’ve been dealt…..

  • tradeking13

    Ultimately, the USA will not be out of the woods until the private sector begins to meaningfully expand, contribute to closing the output gap and help reduce the 9.8% unemployment rate.

    I don’t see how this can happen when a worker in India or China will work for a fraction of the pay of an American worker.

  • http://latoyabridges.co.cc/ Latoya Bridges

    RS, as a thought experiment, consider the govt as a highly inefficient private institution. They provide services to the economy and are a supporter of economic activity. The real cost to other private institutions is that the govt soaks up resources that could be used for other productive purposes. The big difference is that the govt is not revenue constrained in the way that other institutions are. Thus they can continue to soak ip resources indefinitely. Long term govt either needs to be smaller or provide MUCH more efficient service. But short term, we have underemployment and the private sector doesn’t need the people that are being soaked up by the govt anyway. Taxes and money are just keeping score. It is the resources that really explain how our economy functions. Obviously we need a stable money supply, but that is a means to an end, not an end in itself. I’m rambling. My bad.

  • ASHOK SINGHANIA

    ONLY WAY US CAN COME OUT OF THIS IS THROUGH AYURVEDIC REFORMS.INDIAS ANCIENT HEALTH CARE SYSTEM. THIS WILL REDUCE HEALTH CARE EXPENDITUREBY 500BILLION DOLLARSANUALLY IF IMPLEMENTED ON MASS LEVEL. WILL RAISE PRODUCTIVITYAND WELLBEING OF AMERICAN POPULATION.BOTH HOUSE HOLD AND BUSSINESS BALANCESHEET WILL START SHOWING MASS IMPROVEMENT. THERE WILLNO NEED TO DEVAULE AND INFLATE. WHAT IMAKE OUT FROM LONG TERM LIBALITIES THAT MEDCLAIM WILLBE AS HIGH AS99TRILLION DOLLARS. YOU CAN JUST UNDERSTAND THE POTENTAIL. AFTERALL THE YOUNGEST NATION ON EARTHSHOULD LEARN FROM ANCIENT CIVILIZATION.INDIA. AYURVEDIC HEALTH CARE SYSTEMHAS SEEN GENERAL REVIVALIN INDIA DUE TO TREMENDOUS EFFORT TAKENBY BABA RAM DEV. ASFAR AS FINANCIAL SYSTEM IS CONCERN YYREDDY EX GOVERNOR HAS RECENTLY POINTED OUT THATCHINA REAL ECONOMMY HAS GROWN MUCH FASTERTHAN FINANCIAL ECONOMY THERE WILL REELOOK ON THE FINANCIAL SYSTEMAS WELL ININDIA. ONCE WE REALIZETHIS WE WILLBE REAL COUNTRYTO WATCH FOR. IN COMBUSTION ENGINE TECHNNOLOGY ONE IITAIN HAS ALREADY MADE REVOLUTION.GASOLINE AVERAGE WILLMORE THAN DOUBLE AND EMMISION WILLCOMEDOWN. IF AMERICAN WANT TO COME OUT OF PROBLEM ONLY COUNTRY TO WATCHOUT INDIA. AFTERALL 21ST CENTURY WILLBE INDIAS

  • http://www.lisastewartlaw.com Elder

    If someone told you that taxes will stay the same for the next 2 years but will likely go up dramatically after that, how much capital would you commit to a 5 year project? The “temporary” nature of the tax cuts complicates capital allocation decisions. Pass tax cuts without an expiration date and more projects will get approved.

  • http://blogfirstrider.blogspot.com/ first

    America as had a fantastic free economic system that allowed millions of ambitious and motivated individuals that work hard to make it for them self and there families. It was not perfect,nothing is, but compare to the rest of the world if you had imagination and ambition it was unbeatable.It’s most important characteristic was that it was exceptionally free for its participants.

    Unfortunately the US was politically influence by the same counties from where most of its original immigration came from. To day a large part of the population and the economy is dependent instead of self reliant. The welfare state is not just a word its real and very costly, Its not simply for the addicted and the poor its for the zombie banks, ethanol, farmers, medicine its every where.

    It’s not possible to spend billions and billions of dollars to stimulate an economy by maintaining artificially what free consumers do not want to pay for and offsetting it by penalizing what works. Long term its suicidal.

    As long as the Government maintains the idea and the illusion that it can solve economic problems this will continue.

    In a free economy the Government is suppose to be the referee not the participant.

  • RSDallas

    Dimm,
    What do they have to show for their efforts? Nothing other than that they now have the highest debt to GDP than any other country. Mathematically, they are going to explode. It’s not a matter of if, but when. There is nothing good happening in Japan. I respect your views, but you seem to turn your head to the debt issues and instead fall back on how our system works. It doesn’t matter how our system works TPC & Dimm, the problem is debt, debt, debt. Debt is rarely a good thing and it destroys more than it creates. I’m not saying there isn’t a place for it, but rather there should be a limited place for it in our economy. As far as the government goes you stated that they were an inefficient business. Well what happens to inefficient independent businesses when they are operated inefficiently. They either go bankrupt and go away or eventually restructure.

  • RSDallas

    Yes Yes Yes Well Said!

  • Willy2

    The FED can not even manipulate the T-bond market if investors/speculators don’t want to cooperate.

  • maoliu3

    The great changes in China’s economy and the global economy are undergoing major changes, but the global economy must be united together, not to engage in individualism, so that the next generation a healthy economic environment. For electronic trade, wholesale trade rage