Ambrose Evans-Pritchard: Worry About Japan, Not America

“Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan.”
-Albert Edwards, a Japan-veteran at Société Générale.

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One of the major complaints I have had about the bailouts and faux regulatory reform has been that it spurned the proven solution — the Swedish model — and instead embraced the worst example on the planet: The Japanese model.

The refusal to force insolvent banking entities into bankruptcy is a large part of the reason, but its not the only one. Their savings rate has crashed — it was  15% in 1990, and now its 2% — half of America’s savings rate. Their decade plus long recession and an ongoing 70% fall from the Nikkei’s 1989 peak is an ugly foreshadowing of what could come to pass here.

Indeed, Japan has been drifting towards a deeper malaise. The world’s 2nd largest economy has more debt than the world’s largest, per capita or as a percentage of GDP.  Ambrose Evans-Pritchard notes that “For 20 years the world’s second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.”

That’s a devastatingly accurate indictment from a piece he published in the Sunday Telegraph:   It is Japan we should be worrying about, not America.

Here is an excerpt:

“No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

Mr Hatoyama inherited a country that was already hurtling into sovereign “Chapter 11”. . .

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.

Japan’s terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy.

Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.”

The plight of Japan is well worth paying attention to — they are one possible future the United States is facing.

Killer stuff . . .

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Previously:
Time to Get Swedish (January 23rd, 2009)
http://www.ritholtz.com/blog/2009/01/time-to-get-swedish/

Source:
It is Japan we should be worrying about, not America
Ambrose Evans-Pritchard
Telegraph, 01 Nov 2009
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6480289/It-is-Japan-we-should-be-worrying-about-not-America.html

See also:
Cracks Appearing Among China’s Banks
ANDREW PEAPLE
WSJ, NOVEMBER 2, 2009
http://online.wsj.com/article/SB125715792577822561.html