Mike Mish Shedlock
Jan 18, 2008 3:45 pm
Prof. Kevin Depew was writing about Deflation American Style in point Number 4 of Thursday's Five Things:
We continue to get feedback noting the sharp contrast betweenthe way Japan's banks handled deflation and the way U.S. banks arehanding the credit crunch here in the U.S. Indeed, banks today arequickly writing off bad debt in comparison to Japan's banks during thatcountry's banking crisis.
Again, the real key here is thatwhile the amount of writedowns by U.S. banks are enormous, they are notthe driver of this crisis, but a symptom of it. Even worse, thewritedowns by U.S. banks are only symptomatic of the sickness affectingloans that have already been made. From that vantage point, thesickness is merely a pre-condition to a far more serious disease wherethe demand for new credit by consumers shuts down.
Ah yes, what to reflate? Unless reflation creates jobs, attempts toreflate will only provide the fuel to destroy still more capital.Rising oil prices, rising gold prices, or rising wheat prices will onlymake problems worse for cash-strapped consumers. Even if reflation didcreate jobs, it would not accomplish much other than to postpone theday of reckoning.
Furthermore, as professor Depew implies, it isthe debt load of consumers in the US that makes US problems much worsethan what happened in Japan.
Differences Between Japan and the US
- Look for steeply rising unemployment in the US. One ofthe consequences of those debt writedowns in the US is that UScorporations will be forced to cut expenses. The biggest expense formany companies is employees. Japan had far more loyalty to itsemployees than US corporations ever will.
- Enormousconsumer debt makes the problem the US faces far more severe than theproblem Japan faced. Consumer debt that that cannot be repaid will bedefaulted on. Rising unemployment will further exacerbatemortgage-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 than during the bulk of Japan's deflationary years.
- Japanhad the benefit of a global Internet boom followed by a global housingboom to help the economy. The US is facing a global contraction of thehousing boom.
- Most people in the US "own" theirown home. The skew of those deep in debt is huge. 1/3 of Americans owenothing on their homes. The debt is carried by those who can leastafford to carry that debt in an economic downturn.
- Japanhad a huge valuation problem in real estate. The US not only has a hugevaluation problem, commercial real estate is also woefully overbuilt.
Those who argue "it's different in Japan" need to weigh theimpact of those differences. The pent-up deflationary forces in the USare such that Deflation American Style figures to be far worse thanDeflation 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.
