Good God - Look at this shit!
Why the U.S. Should Become Japan
By Mike Norman
Special to TheStreet.com
08/29/2003 11:18 AM EDT
URL: thestreet.com
I've heard these analogies of the U.S. being another Japan. Let's hope so.
After years of taking a cautious, go-slow approach, policymakers in Japan have found religion. They've aggressively boosted the level of government intervention in the economy, and it's working.
In the U.S., there is an uproar about a budget deficit that is 4% of GDP, yet we see unemployment at multiyear highs and the economy just barely moving out of its malaise.
But Japan has brought its budget deficit to 8% of GDP -- double the U.S. figure -- and it's starting to have an effect. Moreover, Japan hasn't just stopped with higher government spending; it's throwing money at its economy on virtually all fronts. It's estimated that the Bank of Japan has spent nearly $100 billion this year to keep the yen down in foreign currency markets. That's another form of deficit spending.
An Intervening Hand
And when the Japanese bond markets started to swoon in reaction to rising economic growth, what did the Bank of Japan do? It intervened directly in credit markets, buying up about $20 billion worth of bills. The operation was notable both for its scale and for the fact that the BOJ appeared to be trying to push rates down not just in overnight markets, but as far out as nine-month money.
As a result, the Japanese economy is growing again. In fact, it has grown for six consecutive quarters and output recently surged in the three months from April to June, rising at a 2.3% annual rate -- three times what forecasters expected. And a good portion of that April-to-June boost came from a rise in exports, which you can attribute to the weak yen.
The Japanese stock market is doing fine, too. The Nikkei is up 20% so far this year, compared with about a 12% rise by the Dow and a 14% gain for the S&P 500.
What has all of this deficit spending and government intervention done to Japan's economy besides make things better? Even with the country's ludicrous Zimbabwe-like sovereign credit rating (you can blame that on silly ratings agencies like Standard & Poor's and Moody's), five-year bonds in Japan yield a miniscule, 0.68%.
This is something to be studied by everyone worrying about U.S. deficits and their effect on interest rates. The short answer is, there is none, as long as the central bank remains accommodative, which is exactly what the Fed is doing.
The Brazilian Mistake
In contrast to Japan, we see a country like Brazil, which until recently had a nicely growing economy. Government spending was high, which injected much-needed demand. Brazil's bonds were some of the best-performing in the emerging markets. And Brazil's currency, the real, was strong and rising.
Then the Brazilian government started to feel guilty about the rising prosperity. Their concern: deficits. They decided to cut spending, which caused the economy to have its biggest contraction since 1998. Brazil is now in recession, and the country's currency and bond market is tumbling.
This is the risk we face in this country. Amid weak (but improving) private sector demand, we run the risk of falling back into recession if government-injected demand is removed. But so many seem to want this done. I think it's because they really don't understand the role that government demand is playing in the economy right now. I think I mentioned Thursday that without the $46 billion of defense spending in the second quarter, U.S. GDP growth would have been more like 1.5% as opposed to the much healthier, 3%.
You will not create jobs by growing the economy at 1.5%. Nor will you neutralize the pervasive deflationary forces that are embedded. The risk we run, to the economy and to the markets, is that we take Brazil's path, rather than the way of the Japanese. |
