Re: Reengineering the Fed

[Dennis R Redmond <dredmond@xxxxxxxxxxxxxxxxxxxxx>]

On Mon, 6 Oct 1997, Basil Moore wrote regarding the Japanese bubble:
> Now although targeting a low ST or LT real rate is Good, i.e. Keynesian, it
> is not true that the real rate should be held BELOW the LT real growth rate.
> The reason is that this situation, if maintained over a period of time, will
> lead to rational bubbles.
> This is the explanation of the Japanese bubble in the late 80's. The Bank Of
> Japan lowered long term nominal rates to 2 %, while the growth of real GDP
> was 5-6 percent, and the inflation rate had been reduced to zero. The value
> of Japanese land became indefinitely high, which also pushed up stock values
> to 100x earnings.

This is dubious. The Japanese economy is a global metropole, and earns
its keep by exporting industrial products in return for raw materials and
semi-manufactured goods (partly from America, increasingly from Southeast
Asia). Rising land prices and other forms of "zaiteku" speculation were
simply a sign that Japanese firms had more capital than they knew what to
do with. Part of this surplus was reinvested in the world-system, in the
form of purchases of T-bills, buyouts of American and European firms,
auto transplants, and real estate purchases; part was thrown back into the
vortex of speculation. As returns on real investments plunged due to
overproduction and the turning of the business cycle in the late Eighties,
Japanese firms threw even more money at the bubble, in the hopes of
recouping their losses. To avoid this mess, Japan should've redistributed
that surplus to where it came from in the first place: the
factory-workers of Southeast Asia (alternately, one can envision
European Union-style welfare handouts).

> Such bubbles are dangerous, since if loans are made against such assets as
> security, when asset prices later fall, it is as if an atomic bomb went off
> in the financial industry. Many FI's become "zombies", with negative net
> worth. The Japanese have still not yet cleared away the rubble from the 89
> fallout.

Not half as dangerous as purely speculative bubbles, such as the one
presently sweeping across Wall Street. I think many American
observers are way, way naive on the fundamental strength of the Japanese
economy. In Japan, the financial sector was, is, and for the foreseeable
future will remain merely the adjunct arm of a hegemonic industrial
sector. Finance is tightly centralized into the giant keiretsu groupings
(Mitsubishi, Sumitomo, Dai-ichi Kangyo etc.), which funnel group earnings
into high-tech and manufacturing rather than speculation. In short, Japan
Incorporated had the means, the wherewithal and the capability of bailing
its financial sector out, because it was never more than a superficial
accounting gimmick to facilitate industrial hyperaccumulation. This is
probably why Japan was able to keep its rates supernegative in real
terms throughout the mid-1990s, thus bailing out the world's
second-biggest economy: when push came to shove, Toshiba came first and
Nikkei punters came last.

A related question to this list: what would that fabled unicorn, a
genuinely multinational Keynesianism, look like in East Asia, now that
Godzilla is dancing (and note the recent pirouette around the Fragrant
Harbor) with the Dragon?

-- Dennis