August 29th, 2010
By David Goldman
Last week some old comrades-in-arms from the financial industry turned up in New York from their present haunts in Europe and Asia; at the end of the week we all found ourselves on the deck of a beach house in the Hamptons, watching a nearly-full moon and a luminescent Venus migrate together slowly from left to right across the Atlantic. The question we discussed was not whether America would suffer a “Japan-style stagnation,” but whether America would be lucky enough to sustain a Japanese style stagnation.
We’ve been taking about the comparison to Japan for quite some time. During Japan’s “lost decade” of the 1990s, everyone was working, everyone kept their homes, everyone maintained their lifestyle (minus some shopping trips to Paris), and life carried on more or less the same. America enters the second decade of the millennium with un- and underemployment around 20%.
Japan went through its great retirement wave in the 1990s, just as America must during the 2010s. But the Japanese for years had saved massively, and exported massively in order to do so. If a country’s population ages rapidly, the soon-to-retire cohort will shift from consumption into savings. Japan had insufficient young people to absorb the investment requirements of the 40- and 50-year-olds, and therefore had to invest overseas. Japan’s industrial genius made it the world’s premier exporter, and Japan was able to save successfully to fund the retirement wave–even though consumption remained weak and real estate prices fell and the stock market fell to a third of late 1980s peak.
How are Americans going to save? They can’t buy home mortgages; they could buy US Treasuries at 2.5% for a 10-year maturity; they can buy the junk bonds now flooding the market; or they can leave their money in cash at a fraction of a percent. As aging American shift from consumption to saving, they must do so by reducing domestic purchases. The Japanese could save by exporting and remain close to full employment. American’s savings requirement cannot be met in the same way, because Americans have forgotten how to export. There aren’t enough soybeans and corn to make much of a difference; with a few exceptions, America has lost its edge in capital goods as well as consumer goods, excepting commercial aircraft and a few other pockets of strength.
As Reuven Brenner and I wrote in First Things in December 2009
Today, America is coming out of a decade without savings and years of borrowing from the world instead of lending to it. Rather than exporting and saving, America is vacuuming capital out of the rest of the world and going further into debt. Once we exclude the option of admitting a few million skilled, entrepreneurial young immigrants—as Israel did from Russia two decades ago—the present crisis can be solved only by opening the world to American exports and restructuring the American economy to create the necessary export capacity.
We proposed a number of measures to accomplish this, none of which has much chance of adoption. That leaves Americans fighting for a dwindling supply of available savings instruments (in effect, old people fighting for the few young people available to support them).
And that drives down the level of returns across the board. Pension funds will have umpty-zillion-dollar deficits once they recalculate their liabilities at a 3% rate of return rather than the fictional 8.5% return assumed by most of the defined-benefit plans during the 2000s. The equity risk premium will remain depressed for a generation. The banks can’t make money after the short-lived boom in distressed assets because demand for yield has flattened the curve to the point that their old trades are less economical. Hedge funds can’t make money because they are behind the banks in the queue for assets.
Perhaps the only thing that would get the US pumping again would be an infusion of 10 or 20 million Chinese or Indians with doctorates in quantitative subjects. The Chinese and Indians, though, do not need to come to America, as they did only a dozen years ago, and if they do, they do not need to stay here. And with the economy and markets in the miserable condition they appear, why should they? There are more opportunities to build wealth in Shanghai and Mumbai than in America.
We opened yet another bottle of Pinot Noir and congratulated ourselves for having been clever enough to be born in time to catch the last wave of wealth accumulation. And we laughed at the miseries of the liberal establishment. Federal Reserve Chairman Ben Bernanke seems authentically perplexed; he followed the instructions to the letter, mixing the eye of newt with the tongue of bat, and adding $2 trillion in securities to the witches’ brew–but nothing seems to have happened. He sits up night in his tower studying ancient manuscripts: was it a she-goat or a he-goat that he is supposed to sacrifice on a moonless night?
And we felt some sympathy for the Tea Party types who want to march on Frankenstein’s castle and burn it down. If they ever have the misfortune to get into power, they will discover how much of the problem stems from the sloth, complacency, ignorance and incompetence of ordinary Americans. We’ve had the financial ride of our lives during the past fifteen years courtesy of the rest of the world, and now it’s over. We have to learn how to export again–and that is not going to be easy.