Deflation American Style
Professor Kevin Depew was writing about Deflation American Style in point number of Thursday's Five Things.
We continue to get feedback noting the sharp contrast between the way Japan's banks handled deflation and the way U.S. banks are handing the credit crunch here in the U.S. Indeed, banks today are quickly writing off bad debt in comparison to Japan's banks during that country's banking crisis.
Again, the real key here is that while the amount of writedowns by U.S. banks are enormous, they are not the driver of this crisis, but a symptom of it. Even worse, the writedowns by U.S. banks are only symptomatic of the sickness affecting loans that have already been made. From that vantage point, the sickness is merely a pre-condition to a far more serious disease where the demand for new credit by consumers shuts down.
By contrast, Japan, long known as a country of savers, saw virtually unchanged consumption levels between 1990 and the heart of their deflation. Consumption remained flat because consumers enjoyed a relatively nice cushion throughout.
Absent of that savings cushion here, the Federal Reserve must try and induce credit demand and consumption by reflating something. The question is, without real estate, what is left for the Fed to reflate?
Ah yes, what to reflate? Unless reflation creates jobs, attempts to reflate will only provide the fuel to destroy still more capital. Rising oil prices, rising gold prices, or rising wheat prices will only make problems worse for cash strapped consumers. Even if reflation did create jobs, it would not accomplish much other than to postpone the day of reckoning.
Furthermore, as professor Depew implies, it is the debt load of consumers in the US that makes US problems much worse than what happened in Japan.
Differences between Japan and the US
* Look for steeply rising unemployment in the US. One of the consequences of those debt writedowns in the US, is that US corporations will be forced to cut expenses. The biggest expense for many companies is employees. Japan had far more loyalty to its employees than US corporations ever will.
* Enormous consumer debt makes the problem the US faces far more severe than the problem Japan faced. Consumer debt that that cannot be repaid will be defaulted on. Rising unemployment, will further exacerbate mortgage related problems and credit card related problems.
* Consumption continued in Japan because of savings. The US will be forced to cut back on consumption and increase savings.
* Global wage arbitrage is a far bigger economic force now that during the bulk of Japan's deflationary years.
* Japan had the benefit of a global internet boom followed by a global housing boom to help the economy. The US is facing a global contraction of the housing boom.
* Most people in the US "own" their own home. The skew of those deep in debt is huge. 1/3 of Americans owe nothing on their homes. The debt is carried by those who can least afford to carry that debt in an economic downturn.
* Japan had a huge valuation problem in real estate. The US not only has a huge valuation problem, commercial real estate is also woefully overbuilt.
Those how argue "It's Different In Japan" need to weigh the impact of those differences. The pent up deflationary forces in the US are such that Deflation American Style figures to be far worse than Deflation Japanese Style.
Here is one similarity: Fiscal stimulus failed in Japan. Fiscal "Stimulus" Is Doomed To Fail in the US. The consequences to the US will be severe.