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Generational Dynamics Web Log for 31-Aug-2009
Political earthquake in Japan as opposition wins in landslide

Web Log - August, 2009

Political earthquake in Japan as opposition wins in landslide

Issue: 20 Years after Tokyo's stock market crash, the economy is as bad off as ever.

In fact, a major factor in the election was a jobs report on Friday that showed a big spike in unemployment, an all-time high since World War II.

With charges of corruption, combined with a crashing economy, the parliamentary balance has reversed. Prior to the election, the ruling Liberal Democratic Party (LDP) held 303 seats, while the Democratic Party of Japan (DPJ) held 112 seats. But according to exit polls from Sunday's elections, the DPJ will now hold about 315 seats, and the LDP will hold about 100 seats.

Thus, this wasn't just a political victory. It was a historic political earthquake.

When World War II ended, Japan was a basket case. They'd expended their national budget on a lost war, and much of the country was in rubble, having been bombed with both conventional fire bombs and nuclear weapons.

Japan's reconstruction era was overseen by American army General Douglas MacArthur, who had led the Pacific theatre of World War II, and who had accepted Japan's surrender on September 2, 1945.

Japan's attitude changed overnight. The people of Japan completely repudiated their imperialist past and, in cooperation with America's generosity, administered by General MacArthur, became a pacifist nation closely allied with the U.S. The idea was that they would depend on the U.S. to defend them.

The Reconstruction period ended in 1955, and Liberal Democratic Party (LDP) was created. By 1956, national income had recovered to its 1940 level, and LDP politicians promised rapid economic growth. The LDP held power ever since then, except for ten months in the early 1990s.

Thus, the victory of the Democratic Party of Japan (DPJ) over the LDP is not a simple change of party; it represents a historic political change, a repudiation of the values of the survivors of World War II, and a new uncharted direction. This is similar to the repudiation of values and change of direction indicated by the election of Barack Obama in America's 2008 election.

Japan's economic conundrum

The conundrum is this: How come Japan's economy hasn't recovered, even though 20 years have passed since its credit bubble collapsed and its stock market crashed?

Quite honestly, I thought that Japan's economy was in good shape. That's why I wrote, almost three years ago, "Japan's real estate crash may finally end after 16 years." At that time, Japan's real estate prices were finally rising, for the first time since 1990.

Japan had had huge real estate, credit, and stock market bubbles, growing throughout the 1980s. By 1989, the nominal value of just Tokyo's real estate was greater than the nominal value of all the real estate in the entire United States.

As I've discussed several times in the past, Japan's experience following its 1990 financial crash and deflationary spiral is very much part of the discussion of today's financial crisis. I've posted several discussions on presentations by Richard C. Koo, Chief Economist at Nomura Research Institute, on the experience of the 1930s Great Depression and the 1990-2005 "lost decade" in Japan. (See, for example "Fiscal stimulus programs in 1930s and today.")

Japan tried bailouts and quantitative easing for years, and seemed to be achieving success by around 2005. The thought has been that America, Europe, and other countries could try bailouts and quantitative easings that were bigger and better and faster, and prevent the current financial crisis from even occurring. Indeed, people like Hank Paulsen, Ben Bernanke and Larry Summers are currently patting themselves on the back for being so clever as to have avoided a complete meltdown.

As we've said many times, the complete meltdown, a generational panic and crash, is coming and can't be prevented. Furthermore, bailouts and quantitative easing this early in the crash will do little good, because there are tens of trillions of dollars of money being destroyed as the credit bubble leaks, and a few hundred billion dollars in quantitative easing will not have much of an effect.

But still, we might expect that all these bailouts and quantitative easings would produce some results in 5 or 10 years.

But the Japanese experience indicates that it won't produce results for a lot longer.

Why didn't the quantitative easing restore Japan's economy after almost 20 years? Why is Japan's economy now collapsing again? What I believe is that the reasons are the same as the ones I gave in the article referenced above as problems with Koo's theory. It's worthwhile reviewing them now in the current context:

The theory presented by Koo is that stimulus packages or quantitative easing have zero cost in a "balance sheet recession" (his name for a deflationary spiral). The reason is that people don't spend money; they either pay down debt, or save it in the bank, and either way, the stimulus money goes right back into the treasury.

The main problem is "leakage" -- when stimulus money is used to purchase imports, and so the money does NOT return to the treasury.

Japan had no problem with leakage, since they could sell exports to America's and China's bubble economies, thus recovering the leakage money.

Thus, Japan's stimulus money didn't build its domestic economy at all; instead, it just built up its export markets.

Now that economies in America and China are crashing as well, Japan's economy is in just as much trouble as before.

I can't prove the above, but I believe that it's the cause of Japan's current severe economic problems.

There's been a debate on for decades on how long it took the U.S. to recover from the stock market crash of 1929-32. Some people claim that it was Roosevelt's spending policies that ended the Depression, but the data doesn't really support that. It took World War II to end the Great Depression. Apparently it will take another world war to end Japan's 20 year old deflationary spiral.

I always say, half-jokingly, that I'm the gloomiest person in the world. As I began developing the Generational Dynamics methodology in 2002 and 2003, I saw that it implied that we were heading for a new 1930s style Great Depression, and a new Clash of Civilizations world war.

As the years have gone by, and as the number of articles on this web site have gone from tens to hundreds to a couple of thousand, I've been able more and more to connect the dots. A worldwide financial crisis leads to world war, because a world war is the only way to end the financial crisis. In the last seven years, the prognosis has only gotten worse.

Most people are oblivious to what's going on, and don't want to hear about it, as for example I wrote last week in "Stock markets reflect increasingly delusional Wall Street," or as I wrote last month in "China's bubble economy becomes increasingly unstable."

Ten days ago, the Obama administration announced that the May estimate of a $7 trillion deficit was being increased to $9 trillion. As I wrote last year in "One, Two, Three ... Infinity," these deficits are only going to grow uncontrollably.

Neither President Obama nor any other politician can do anything to cause or prevent or stop these growing deficits. These things are caused by powerful forces launched decades and centuries ago, and transmitted through generational waves in the way that the power of an undersea earthquake is transmitted through a tsunami.

What's been infuriating me for years is not that all this is coming, but that people like bankers have been taking advantage of the crisis by royally screwing other people. It infuriates me to see so-called "experts" on CNBC use phony "operating earnings" that are totally meaningless, in order to keep defrauding investors and protect their own 7-digit salaries. It infuriates me to see Iceland's former prime minister claim that he knew nothing about what was going on, when everyone else (including me, as reported several times on this web site) did know. It infuriates me that various Nobel-prizing winning economists state purely ideological theories, masquerading them as economics. It infuriates me to see the administration, for the most venal political reasons, eviscerate the CIA by prosecuting CIA agents for having done their job in protecting this country.

An online correspondent recently wrote the following to me:

"I've actually stopped following Wall Street as the disconnect with Main Street becomes greater and greater. Right now they seem to have nothing whatsoever to do with each other. I realize the pundits firmly believe that the economy will be good if people FEEL good about it, and bad if they feel bad about it, but Joe Lunchbox and Betty Brownbag don't have the luxury of going by their feelings, and they don't. They go by the hard, cold economic facts in front of them. Layoffs and delays in the clunker payments and what's in the bank and don't even walk into the emergency room unless you want to be charged more than you can pay ... facts.

I am taking all my data from Main Street these days, and let the big boys talk to each other in a rose-colored haze.

And, oh, yes, let's have something that WORKS (anathema to the screaming moralizers on both sides) and MAKES SENSE (a quality the screaming moralizers find irrelevant.)"

I agree with her sense of despair. It used to be that someone could invest in AT&T if they wanted something safe, or in Xerox or IBM if they wanted something a little more risky. But today, all stocks go up and down together, and it makes almost no difference which stock you buy. Everything is being run by institutional investors and computerized trading. As for the small investor, the old saying applies: When the elephants fight, the grass gets stomped. The politicians, the financiers, even ordinary people, are simply out to screw other people for their own gain.

And there's no end to it. It's not a world that existed 20-30 years ago, it's not a world that I recognize, and it's not a world that I can simply survive in. I've made big mistakes in my life, and I've hurt people unintentionally, but I can honestly say that I've never intentionally set out to screw people the way I see others do to each other. How does one deal with this? How does one trust anyone? I remember Greenspan saying how shocked he was when he realized that all the bankers had conspired to commit fraud. This is independent of ideology and politics. People in all organizations, all ideologies, are just out to screw anyone else for money. Bernie Madoff is the rule, not the exception. Ethics is never even mentioned as a consideration by anyone. Obama couldn't care less whether people starve or are homeless if he can turn it into a way to get votes. (I used to write about this phenomenon with feminists -- they would gladly see more women and children battered, beaten, raped and killed if it meant more money for feminist organizations.) It's as if everyone else in the world besides myself is a psychopath. Or it means that everyone else is sane and I'm a psychopath. What's the difference?

Well, this started out as an analysis of the Japan election, and it turned into quite a rant, didn't it. A person as gloomy as I am shouldn't write these things too late at night, because there's no telling what I'm going to say.

People voted for Obama for President last year because they were desperately grasping for a solution to their problems. Now, 8 months into Obama's presidency, they're discovering that these solutions are illusory, and the situation is as desperate as ever.

A similar thing happened on Sunday in Japan. The Japanese people see massive corruption in government, they see their economy crashing, and still have visceral fears of war with China and North Korea, for good reason. They overwhelmingly threw out the party that had governed for 50 years, and brought in a new party that they desperately hope will solve all their problems. What will they think in 8 months?

(Comments: For reader comments, questions and discussion, see the Japan thread of the Generational Dynamics forum.) (31-Aug-2009) Permanent Link
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Generational Dynamics Web Log for 31-Aug-2009 Political earthquake in Japan as opposition wins in landslide

Japan's economic conundrum

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Generational Dynamics Web Log for 31-Aug-2009
Political earthquake in Japan as opposition wins in landslide