RE: Re: a lesson from Japan?

["Devine, James" <jdevine@xxxxxxx>]

Gil writes:
> But let us not forget that Japan has faced some serious constraints in
> digging itself out of its deflationary spiral, constraints that the US
> doesn't necessarily face.  Among them:
>
> 1)  The link from loose monetary policy to expansion-creating
> loans has been disrupted by the high percentage of non-performing loans
held by
> Japanese banks (now 35% or so); compare that to less than 10% (I think)
for
> the US economy.

I think the point of the article is that the US hasn't gotten to the
Japanese situation _yet_ but could get there. But you're right that the US &
Japanese situations are quite different. While Japanese banks face
non-performing loans (sort of like the US in the late 1980s), the US banks
don't have this problem in a big way at this point. But the US has a lot of
corporate and personal debt that _could_ become non-performing in the
future, due to a deepening recession (or an insufficient recovery that
allows unemployment to continue to rise).

> 2)  Free trade logic says Japan should have allowed significant
devaluation
> of its currency, but this has consistently been opposed by the US, who
> doesn't want to see the resulting upswing in its trade deficit w/ Japan.
> Since the US Congress carries a big stick in the form of credible threats
> of quotas, this policy avenue has been more or less off
> limits.  The yen has only come down relative to the dollar in the last 10
> months, and that only about a 10% fall.

this is a significant difference between the two cases. Aren't there people
in Japan who oppose Yen depreciation for their own reasons, though?

Also, a US dollar depreciation would be recommended if the US got into a
Japan-type funk. But, if that happened quickly, it would represent a
stagflationary shock inside the US and a deflationary shock to the rest of
the world. Further, it would have unpleasant balance-sheet effects on those
who hold dollar-denominated assets. The latter is one reason why a "low
dollar" policy is being shunned. The problem is that this policy encourages
the US external debt to rise further relative to GDP, which makes a rapid
fall in the dollar more likely later on. With luck, the dollar will fall
slowly, but it doesn't look like that's happening.

> 3)  The current US macro situation isn't yet near Japan's deflationary
trap
> (with near-zero interest rates and falling prices)--the
> inflation rate is very small but still positive; thus so far as I know
there
> aren't reports of households or firms putting off spending due to
> expectations of lower future prices.  To the contrary, industrial
production and
> retail sales are picking up.  What additional shock could the burst bubble

> have that will  reverse these gains?

again, [Michael not Ernest] Mandel was suggesting that a Japan-type scenario
might happen in the future, not now. There have been some price decreases
(like with the advanced estimate of the GDP deflator in late 2001), but we
haven't seen true deflation, which would involve cuts in nominal wages.

> In light of the above it would have been insightful to also have
> comparative before-and-after data on deflation, unemployment, and real
> interest rates.

right. But all that Mandel was saying is that the current (somewhat anemic)
recovery may be covering up bigger problems down the line. It's also a short
article.

> On the other hand, the US has dramatically higher levels of
> household debt and bankruptcy rates.  But who knows how to factor that in
to
> the mix.

right.
JD