Re­ces­sion last­ing un­til 2018 worth ex­plor­ing

Af­ter all, of­fi­cials there did Ja­pan's 126 mil­lion peo­ple a dis­ser­vice by punt­ing re­form far down the road.

The Pak Banker - - Editorial5 - Wil­liam Pe­sek

In an era where fore­casts by Per­mabears have got­ten am­ple at­ten­tion and vin­di­ca­tion, few are as dis­turb­ing as this: a world re­ces­sion un­til 2018. It comes from Eisuke Sakak­ibara, Ja­pan's for­mer top cur­rency of­fi­cial. He is known as "Mr. Yen" for his abil­ity to move mar­kets. Be­cause Tokyo's re­volv­ing-door pol­i­tics of­ten sends a new face to each Group of 20 meet­ing, he is one of the few Ja­panese con­stants in mar­ket cir­cles. Traders may not know the lat­est fi­nance min­is­ter's name, but they know Sakak­ibara.

Ja­pan is the mas­ter of mud­dling along, decade af­ter decade, with lit­tle growth to show for it. And Sakak­ibara was a key player when Ja­pan faced ev­ery­thing from the Asian cri­sis to Rus­sia's de­fault to the on­set of de­fla­tion to a bank­ing col­lapse that saw the demise of Ya­maichi Se­cu­ri­ties Co.

So, when an econ­o­mist with Sakak­ibara's back­ground says "the world is set for a long-term struc­tural slump rem­i­nis­cent of the 1870s" when av­er­age global an­nual growth was about 1 per­cent, I can't help but lis­ten. The rea­son for the slow­down? Gov­ern­ments are putting fis­cal aus­ter­ity ahead of restor­ing sta­ble growth.

Yes, there's an eye-rolling qual­ity to a for­mer Fi­nance Min­istry man­darin giv­ing eco­nomic ad­vice. Af­ter all, of­fi­cials there did Ja­pan's 126 mil­lion peo­ple a dis­ser­vice by punt­ing re­form far down the road. They just bor­rowed and bor­rowed, leav­ing Ja­pan with the largest pub­lic debt among in­dus­tri­al­ized na­tions and no exit strat­egy in sight.

Yet re­cent data in the U.S. and Ja­pan and fi­nan­cial tur­bu­lence in Europe sug­gest a fresh global re­ces­sion is a dis­tinct pos­si­bil­ity in 2011. If that hap­pens, what levers are re­al­is­ti­cally avail­able to re­vive de­mand? In­ter­est rates are al­ready at, or close to, zero. That leaves in­creased govern­ment spend­ing as the only real way to sta­bi­lize things.

The trou­ble is, there's lit­tle sup­port for open­ing the fis­cal flood­gates in a mean­ing­ful way.

One rea­son is that there's al­ready loads of pub­lic debt out there. As of June, Ja­pan's $5 tril­lion econ­omy had 904 tril­lion yen ($10.8 tril­lion) in debt out­stand­ing. Too much debt is wreak­ing havoc in Europe, where Ire­land was the lat­est domino to fall.

The U.S. is start­ing to rat­tle bond­hold­ers with its bor­row­ing binge. Pres­i­dent Barack Obama's stim­u­lus isn't work­ing the magic econ­o­mists hoped. Nei­ther is the Fed­eral Re­serve, as it goes the way of Ja­pan with quan­ti­ta­tive eas­ing.

Worse, in the U.S. and other ma­jor economies, is the risk that it may be 1937 all over again. It was then that Pres­i­dent Franklin De­lano Roo­sevelt got stingy with stim­u­lus, as­sum­ing that the Great De­pres­sion was over. The next year saw the econ­omy in full re­treat.

If Sakak­ibara is right, the global econ­omy is in deep trou­ble. He en­vi­sions a broad slow­down that might drag on for seven to eight years. China can live a cou­ple of years with­out U.S. and Euro­pean growth, but eight?

To head it off, gov­ern­ments need to up spend­ing. And, for the most part, they aren't. Yet the U.S. can, and should, bor­row more. To do that, it just needs to be­come a bit more Ja­panese, says Richard Dun­can, author of the "The Cor­rup­tion of Cap­i­tal­ism."

There's a sin­gle rea­son why Ja­pan's 10-year bond yields are be­low 1.3 per­cent and Asia's No. 2 econ­omy isn't be­ing down­graded. Since about 95 per­cent of Ja­pan's debt is held do­mes­ti­cally, there's no risk of cap­i­tal flight. Ja­pan bor­rows from its com­pa­nies and peo­ple, an ar­range­ment that's roughly the mir­ror im­age of the U.S.

That so many Trea­suries are held in China and else­where makes the U.S. highly vul­ner­a­ble. Dun­can, chief econ­o­mist at Black­horse As­set Man­age­ment Pte. in Singapore, says the U.S. needs an­other FDR-like New Deal to re­store growth and com­pet­i­tive­ness. Fund­ing one means greater bor­row­ing and the way to do it is by tap­ping pri­vate-sec­tor cash, Ja­pan-style.

Such sug­ges­tions are likely to fall with a mighty thud on Capi­tol Hill, which is mov­ing in the op­po­site di­rec­tion. Law­mak­ers call­ing for Ben Ber­nanke's head for­get why the Fed chair­man is tak­ing U.S. mon­e­tary pol­icy into un­charted ter­ri­tory. It's be­cause Congress failed to pump enough money into the econ­omy in the first place.

Ja­pan is a cau­tion­ary tale. On the sur­face, the 4.5 per­cent an­nu­al­ized in­crease in third-quar­ter gross do­mes­tic prod­uct looked promis­ing.

The de­tail, how­ever, showed that de­fla­tion is wors­en­ing no mat­ter how many yen the Bank of Ja­pan churns into the econ­omy. This is any­thing but a typ­i­cal re­ces­sion, and world lead­ers are too dis­tracted to see it.

In the U.S., the fo­cus is on China's cur­rency. While a stronger yuan would be in the best in­ter­ests of the global econ­omy, it's not the an­swer to all the U.S. prob­lems. Ja­pan is even more ob­sessed with ex­change rates.

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