Cross Posted from Asia Times: "You Should Be So Lucky"

[Spengler]

Cross Posted from Asia Times: "You Should Be So Lucky" on the Spengler Blog


by David P. Goldman


Japan-Style Stagnation? You Should Be So Lucky

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.

[Michael]

And we felt some sympathy for the Tea Party types who want to march on Frankenstein’s castle and burn it down.

The story is told that, many years ago, the good folk of Auchtermuchty showed their displeasure with an unpopular banker, by collecting his notes and making a bonfire of them

[Victor]

Spengler wrote:
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.

While we're at "IT" let's make sure to have a drink in your honor tonight.

Goldman on Kudlow
Monday, August 30, 2010, 3:26 PM
Joe Carter
First Things‘ senior editor David Goldman will be on CNBC’s Kudlow Report tonight around 7:25 p.m. EST

Really! You deserve "IT" if only for puting up with me!

[Douglas Bilodeau]

.... 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. ....

Just a little nitpick from one of those guys with a doctorate in a quantitative subject: Venus can never be near the full moon, since its orbit lies inside the orbit of the earth, and the full moon is always on the opposite side of the earth from the sun. You must have been watching Jupiter with the moon. Jupiter currently is near opposition, and is visible through most of the night.

[This is one of those sorts of details which get science fiction authors in trouble with too-knowledgeable fans. It's safer to write fantasy.]

Doug

[hoosiernorm]

The link for your appearance on Kudlow is up on CNBC now.

http://www.cnbc.com/id/15840232/?video= ... 831&play=1

Opps wrong link

[cassowary]

You are right, Spengler, that Americans are complacent. I can see it from some of the people in the other Spengler forum. Tinker once said that we need not worry about the huge government debts because every generation leaves debt to the next.

I was shocked. Americans don't realise how serious the problems are. The only hope is the Tea party people. I don't know if they can win. I think the ultimate flaw lies in the one man one vote system, which I think needs to be reformed. No matter who the politician is, he needs to spend other people's money to bribe people for their votes.

If taxes are not enough, they have to borrow. That's how we got into this mess.

[tom.cuddihy]

For a minute I thought I was reading a dispatch from T. Coddington Van Vorhees IV, but then I realized Iowahawk was the other tab,

Come one, are you really going to fiddle so loudly while the embers are smoking?

Must be nice to be "already set" in life. I guess my generation will just be stuck with the tab.

[PaulR]

We have to learn how to export again–and that is not going to be easy.

Indeed it is NOT going to be easy. The ability for a country to "export" (ie. running consistent trade surpluses) actually involves complex social phenomena as much as it is simple economic choices. A People that "export" think differently and have different values: they have lower immediate standards of living, they instinctively forego present consumption, they accept a lower currency and lower purchasing power, and value education in science/engineering vs. soft liberal-arts subjects. Also, whether the Gov't imposes it, or it occurs naturally in society - an "exporting" people also accept limits on political participation of labor and other special-interest groups. I would even argue that nations that are consistent exporters and savers have different family and social structures.

Only when America's psyche and values change will the economics change, and right now, Americans are a million miles away from that kind of thinking. It will need a generation at least to "learn."

[Spengler]

.... 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. ....

Just a little nitpick from one of those guys with a doctorate in a quantitative subject: Venus can never be near the full moon, since its orbit lies inside the orbit of the earth, and the full moon is always on the opposite side of the earth from the sun. You must have been watching Jupiter with the moon. Jupiter currently is near opposition, and is visible through most of the night.

[This is one of those sorts of details which get science fiction authors in trouble with too-knowledgeable fans. It's safer to write fantasy.]

I'm happy to take your word for it. One of our company was an ex-Navy officer who claimed to know something about astronomy.

Doug

[jonrgrover]

In every company I have worked for the invention pipeline has been shut down. Without support for invention ideas, there is no new development. Without new development, there are no new products. Without new products, there is only a dwindling future for the company. Without growing companies with new products, developed based on new invention ideas, exports decline and fail. I don't know if it is the employees, the culture, the managers, the business schools, the financial incentives, government obstacles, high government spending, the sucking away of capital from R&D into some other place or what. We are not inventing and without that we will not have new exports.

[CognitiveDistoibance]

In every company I have worked for the invention pipeline has been shut down. Without support for invention ideas, there is no new development. Without new development, there are no new products. Without new products, there is only a dwindling future for the company. Without growing companies with new products, developed based on new invention ideas, exports decline and fail. I don't know if it is the employees, the culture, the managers, the business schools, the financial incentives, government obstacles, high government spending, the sucking away of capital from R&D into some other place or what. We are not inventing and without that we will not have new exports.

But on the bright side, we have semi-nationalized health care.

I hear you. Welcome to the forum, BTW.

[Douglas Bilodeau]

.... 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. ....

Just a little nitpick from one of those guys with a doctorate in a quantitative subject: Venus can never be near the full moon, since its orbit lies inside the orbit of the earth, and the full moon is always on the opposite side of the earth from the sun. You must have been watching Jupiter with the moon. Jupiter currently is near opposition, and is visible through most of the night.

[This is one of those sorts of details which get science fiction authors in trouble with too-knowledgeable fans. It's safer to write fantasy.]

Doug

I'm happy to take your word for it. One of our company was an ex-Navy officer who claimed to know something about astronomy.

I guess they don't teach navigation by the stars like they used to. (OTOH, the Naval Observatory staff are an impressive lot, or at least they were when I was last there in the 70s.)

Sadly, "a nearly-full moon and a luminescent Jupiter" doesn't have the same lyrical flow as your eloquently painted scene. Maybe "resplendant Jove pursuing bright-faced Diana across the celestial sphere....."? Nah, way too 18th century. Well, then, it had to be Venus after all, since (as the poet said):

"Beauty is truth, truth beauty," - that is all
Ye know on earth, and all ye need to know.

[Douglas Bilodeau]

To buttress my utterly irrelevant astronomical point, recall that Venus is called the morning or evening star (depending on which side of the sun it's on). This is because it is only seen in the dusky sky within a few hours of sunrise or sunset. In late August this year, Venus was trailing the sun by almost as far as it ever does (the max is about 47 degrees "solar elongation") but still it set only about 3 hours after the sun. (This pattern is true, only more so, of the much dimmer planet Mercury, which leads or trails the sun by less than 2 hours.)

On a more relevant and practical topic - the decline of industrial R&D as discussed previously on this thread: The bursting of the great R&D bubble was a done deal by about 1970. Government funding of applied scientific research peaked around 1965, declined with the escalation of the Vietnam War, and sank precipitously with the economic slide of the 70s.

At its height there was no doubt much waste and funding of poor quality research. NASA had to invent the term "mission oriented" as a criterion to eliminate the more frivolous projects. I finished grad school in '73. Old-timers in the beltway company I worked for in 1977-80 told me of the golden days of the previous decade, when managers would pass out equipment catalogs to their staff and say, "Just circle whatever you want and we'll get it for you."

But industrial R&D did not rely on the government before WWII (neither did purely scientific research labs). I was sitting in a post-grad metallurgy course in the mid-70s when I heard that US Steel had closed its research lab. (It still had another lab, which did work more directly related to current products.) By now, AT&T (and/or its successors) have divested themselves of Bell Labs, the jewel of industrial R&D, where the transistor was invented and the cosmic background radiation (echo of the big bang) was discovered by accident. Research is still done by computer and pharmaceutical companies. But computer research is relatively cheap (many software enthusiasts have done important work in the past for little or no pay), and the huge expenditure on health care by individuals and public sources keeps medical research awash with money. I began to be struck in the early 90s how it seemed almost everything in well-equipped hospitals appeared to be new -- much of it used once, discarded and immediately replaced as needed.

The lead time for substantial impact of even practical research on the economy is about 20 years, maybe twice that long for pure scientific research. Faster, smaller digital devices and large 3-d TV screens aren't going to stimulate the kind of hunger for radical breakthroughs which drove the heroic efforts of 1880 to 1970. I think American culture can still produce a cadre of millions of tech heroes to spur another sci-tech boom. The main thing needed is to shake off the addiction to short-term rewards and the foggy short-term-success mentality it induces. Now that the charm and lure of the success model of the past 2 or 3 decades is fading, the real thing could take hold.

Can the cultures of China and India foster the same upstart-far-ranging-explorer-and-giant-killer attitude, curious and cocky like the Athenian parvenus of the 5th century, which is still there semi-dormant in American culture? The answer may decide the course of the 21st century.