Recent Items

Stephen Roach: America is a Zombie Nation just like Japan

Posted on by

Cross-posted from Credit Writedowns

Stephen Roach has written an Op-Ed in today’s Financial Times that is worth reading. He outlines his version of Richard Koo’s Balance Sheet Recession theorem, opining that “the global economy is being hobbled by a new generation of zombies – the economic walking dead.”

His main points are:

  • American consumers are retrenching. In the 3 1/4 years since 2008 began, real consumption growth has averaged 0.5% on an annualised basis, the lowest since World War II. That data point certainly rhymes with the consumer deleveraging of Koo’s balance sheet recession.
  • Zombie companies remain on life support. Roach says the antecedent to this is Japan where Japanese banks extended credit to effectively insolvent companies, postponing a full recovery for two decades. Roach calls this the “Japan disease”. This data point is at odds with Richard Koo’s prescriptions.

Roach’s conclusion:

Washington policymakers are doing everything they can to forestall rational economic adjustments. The Federal Reserve has conducted two rounds of quantitative easing in an effort to get consumers to start spending the wealth effects of a policy-induced rebound in equities. Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.

The aim is to get zombie consumers to ignore their festering problems and start spending again – irrespective of the wrenching balance sheet damage they suffered in the “great recession”. The subtext is Washington condones a revival of reckless behaviour.

That “Washington policymakers are doing everything they can to forestall rational economic adjustments” is certainly the conclusion I have drawn both regarding Japan and regarding the US. I would say, however that the aim is to get zombie banks to ignore their festering problems and start lending again. See the difference? That’s my updated wording. Apologies for not pointing that out in the initial version.

First, on Japan:

If one wants to see what happens when you use stimulus to help keep zombie companies alive and to resist reform efforts, look no further than Japan.

For twenty years now, Japan has been dealing with the consequences of a burst asset bubble in shares and property. And for twenty years, the body politic has been unwilling to make the necessary reforms which would eliminate zombie companies while still helping to repair balance sheets in the private sector. Instead, the Japanese have piled government deficit upon deficit like Sisyphus trying to get consumers to reflate the economy. It has not worked…

What this illustrates is that stimulus cannot be seen as a cure-all in an economy which lacks in domestic demand or in which debt burdens are high. I see this as a cautionary tale for The Europeans and Americans looking at stimulus as some magic bullet which will make structural problems disappear.

I increasingly ask myself whether any advanced democracy has the foresight to implement a targeted monetary stimulus campaign without knee-capping efforts to induce more private sector savings – fiscal stimulus is a whole different affair. Right now, the savings rate in Japan is even lower than in the United States, a direct result of easy money.

In my view, fiscal or monetary stimulus are bridges to a sustainable economic future built on the back of deleveraging, a purge of malinvestments and industry consolidation. Right now, the stimulus in Japan is looking more like a bridge to nowhere.

-Japan: stimulus without reform leads to a policy cul de sac, Nov 2009

Second, on the US:

If the US wants job growth, it will need to reduce private sector debt levels – and that takes time. It does not follow "that the central objective of national economic policy until sustained recovery is firmly established must be increasing… borrowing and lending," as Larry Summers asserts. The government can act as a counterweight to the demand drag but I am very sceptical of claims like Summers’ that doing so would solve a jobs crisis borne out of a debt crisis.

-The jobs crisis is not just about demand, Jun 2011

Third, in general:

in theory, fiscal stimulus can cushion the downturn and hasten real recovery by preventing a spiral into a non-equilibrating economic state.  However, in practice, stimulus has been used as an excuse to maintain the status quo, prop up zombie companies and forestall the inevitable.  This only lengthens the downturn, misallocating even more resources to less efficient uses. And all of the worries I had about social unrest, populism, and protectionism are coming true nonetheless…

Rather than use the period of fiscal stimulus to promote private-sector deleveraging and saving and to purge malinvestment, politicians will simply use this period as a way to continue business as usual, making the problem even bigger down the line

What about monetary policy? Well, in a depression where the constraint is overinvestment, leverage, and debt, the question is not a monetary one.  As Marshall recently suggested, it appears Fed Chairman Bernanke doesn’t understand the basic economics of central banking. Throwing more money into the system will not make credit-worthy borrowers borrow more. Nor will it necessarily induce banks to lend when they fear that many of their prospective borrowers are not credit-worthy.

By lowering interest rates and expanding the money supply, central banks are not inducing more lending; they are trashing cash. You are not promoting saving with 0% rates; you are looking to re-create the asset-based status quo ante. And when there are insufficient lending opportunities, banks are either forced to sit on billions of cash earning nothing or try other ways of making money (proprietary trading, investment in Treasuries, maybe even lending to non-credit worthy borrowers).  Moreover, investors are earning next to nothing as well.  How many people have looked at their money market fund statements with the 0.00% interest staring them in the face and decided to switch into bond, equity or commodity funds? It’s what’s called liquidity seeking return – a major reason the stock market has been buoyed.

-Moving away from stimulus happy talk to focus on malinvestment, Dec 2009

Don’t be fooled by economists telling you the risks of a Japan disease are not real. They are. And when economists are honest like Janet Yellen has been, they will tell you that it is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage. Moreover, Larry Summers is quite direct in telling us that he views the purpose of fiscal policy is to promote aggregate demand via “borrowing and lending, and spending”. How is that consistent with private sector deleveraging? Doesn’t this actively promote the preconditions for the Japan disease?

Here’s how I framed it two years ago as we headed into recovery:

  1. Even if economic and monetary policy have poor longer-term consequences, it does not mean that policy won’t gain traction in the short-term. I see the potential for a cyclical upturn due to the massive stimulus campaign… Ask Alan Greenspan regarding his 2001-2003 easy money campaign. This is what happened in Japan before Yamaiichi’s demise in 1996 – and again before Daiwa and Nikko were merged out of independence.
  2. Even if economic and monetary policy have stimulative short-term consequences, it does not mean that the structural problems have disappeared. They are merely lurking underneath, waiting for the next downturn to re-assert themselves. Again, the Japanese scenario is a cautionary tale on this score.
  3. Asset prices will respond to an upturn, but that does not mean we are about to embark on a new bull market. Japan is the right precedent here again. After the upturn in the mid-1990s, property prices continued to collapse in Japan, sucking many more individuals into the deflationary spiral.

-Turning Japanese and understanding the consequence of policy half-measures, Apr 2009

Rather than adding stimulus with the aim of goosing demand by whatever means available to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously. Policy makers should aid the economy in reallocating scarce resources to areas that will sustain longer-term productivity growth while doing this. In America, that means fewer resources in finance and housing and perhaps more in technology and infrastructure.

As Stephen Roach writes:

A failure to learn the lessons of Japan – especially that of post-bubble zombie congestion – leaves the US and the global economy in a very tough place for years to come. Growth-hungry financial markets could be very disappointed.

Source: Global economy menaced by return of living dead, Stephen Roach, FT

Print Friendly
Twitter29DiggReddit0StumbleUpon4Facebook44LinkedIn4Google+0bufferEmail
This entry was posted in Banana republic, Economic fundamentals, Guest Post, Macroeconomic policy, The destruction of the middle class on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

51 comments

  1. Matt Stoller

    Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.

    I’m sorry, but WHAT?!?

    This is precisely the opposite of what they are doing.

    1. ambrit

      Mr Stoller;
      This ‘embrace’ could be the old fashioned “Kiss of Death.” Or, “Keep your friends close and your enemies closer.”
      The gentleman above might just be confusing establishing a program with implementing it.

      1. alex

        Don’t forget that Roach works for Morgan-Stanley, so to him it’s always “them” (people, non-FIRE companies) that are dangerously insolvent, not “us” (FIRE sector).

        1. lark

          It is worth noting that ten years ago Roach was prescient in identifying the ‘global labor arbitrage’ in which the West lost high wage jobs to low wage China and India. He saw the need for investment and policy to respond to savage corporate disinvestment, especially in the USA.

          What changed? Well we lost 40% of American factory jobs after China joined the WTO in 2001. So the facts on the ground didn’t change. What did change is that Roach went to China and became a China fan boy for Morgan Stanley. Now he doesn’t care a whit for the fate of Americans anymore and his ‘policy prescriptions’ should be read with that in mind.

          1. reslez

            It is worth noting that ten years ago Roach was prescient in identifying the ‘global labor arbitrage’ in which the West lost high wage jobs to low wage China and India.

            It’s hardly prescient to identify the intended outcome of a plan. That would be like a mugger predicting the impending loss of his victim’s wallet. Or in this case the mugger’s accomplice predicting such.

            The U.S. has been losing good jobs to other countries for decades. It didn’t take any prognostication to identify wage suppression, just a recognition of facts that had been in evidence for almost 30 years by the time academics got around to stating the obvious.

        2. Cedric Regula

          Certainly sounds like the pot calling the kettle black.

          Here’s a Japanese Zombie Company, spreading Japan Disease

          This company makes tiny, cheap radios that are marketed thru ads placed in American comic books. For some reason, the BOJ has an enormous number of these in BOJ inventory.

          The factory opens first thing in the morning and thousands of employees show up for work. The Vice President of Kanban drives to the BOJ and borrows a Radio for the day. He returns and walks the Radio thru the front door of the factory and hands it to the Vice President of Production Scheduling. He in turn hands it to the front end of the production line and each of the production employees passes it to the next while singing the company work song.

          At the end of the day the Vice President of Kanban picks up the radio at the back of the plant and drives it to the BOJ. Tomorrow is another day!

          1. craazyman

            that sounds like a pretty good place to work as long as it lasts. right now I work my ass off all day.

            too tired now to even get drunk on a Thursday like I used to. Thurs, Friday and saturday were drinking nights and woman chasing nights. In my 20s any night could be. And then again in my 30s, every night was.

            Singing all day and passing a radio. That could work off the hangover and restore the vitality for mythic exploits of body and mind, after hours. better than sitting at a desk all day trying to understand the economy, without a radio and without any song at all.

            Some people might say you could automate the radio passing. But I say you could never automate the singing or the flagrant wasting of time on the company payroll. Some things only humans can do, and if you try to automate them too much eventually all hell breaks loose.

          2. Cedric Regula

            They sold off all their pick&place robots to some company in China when they had to convince the government the company was crucial for Japanese employment. Actually the bank repo’d the robots and sold them to China as part of a government employment development program.

            But if they allow lip syncing, you may be able to get a job there, without having to learn a bunch of Japanese.

            But a word of interviewing advice….don’t talk about DNA Radios and how they can be amplified by red wine and xanax. Or even monads for that matter. They won’t know what you are talking about. Other subjects to avoid would be Pearl Harbor, WWII, American comic book movies, and of course ham radios, Sirius Satellite Radio, mp3 players and cell phones.

            Good luck! ;)

        3. sgt_doom

          Thanks for mentioning that (THE OBVIOUS, it should be said), which completely alters the context of EVERYTHING Roach says.

          Roach has a consistent record of always being the last one to the party……

    2. Jane Doe

      (a) The political system in the U.S. embraced addressing the zombie debt in the same way that the President embraces everything of this nature. That is to say half-ass attempts to give the appearance of not being in favor of plutocratic interest. . HAMP is representative of what the author of this article states, but in reality it does not work out that way. Its throwing crumbs at the masses to say “I feel your pain. I am doing something.”

      (b) The problem ultimately with HAMP is that it does reinforce everything else they are doing- namely trying to prop up the banks rather than resolve the debt issue. The real solution- if they were interested in a solution- would have involved strategies such as cram down in bankruptcy of the principle because it would have meant addressing the core debt issue. But, that would have hurt the banks. So, that became un-American. But socializing the risk of big banks is.

      (c) There are a set of solutions that would have debt with the debt, and a set of solutions that would deal with other forms of entrenched debt such as student loan debt. Those solutions are not mentioned or, if they are, denied a seat at the table because it would harm the elite. It would mean they would have to take a loss.

    3. Doug Terpstra

      Good catch, Matt. It’s pretty hard to read past a whopper like that. And there’s just no way to give Roach a pass on that one when the failure, indeed perverse damage to most homeowners burned by it, has now been well-documented as merely another Oh-bummer Trojan horse.

      FT is giving the microphone to people who should be forced to sit in the corner with taped mouths, wearing pointy hats to fit their heads. I commented the other day to similar establishment drivel from Larry Summers on FT, who wrote that to fix our economy, we need —surprise— more tax cuts and more rigged trade deals. On returning a couple of days later, I discovered my comment had disappeared, along with similar critiques from others. One new comment was another complainant whose earlier criticism had disappeared. Through such censorship, media complicity in the current crime wave is now rampant.

    4. Edward Harrison Post author

      Matt,

      That “Washington policymakers are doing everything they can to forestall rational economic adjustments” is certainly the conclusion I have drawn both regarding Japan and regarding the US. I would say, however that the aim is to get zombie banks to ignore their festering problems and start lending again. See the difference? That’s my updated wording. Apologies for not pointing that out in the initial version.

  2. ambrit

    Friends;
    All of this leads to the inescapable conclusion that we need clear sighted and progressive leadership. Looking at history a bit further back, FDR managed to set up the groundwork for the wartime economy and later post war ‘Middle Class Golden Age.’ I suggest that the guiding principle then was an unafraid acceptance of the concept of the ‘Public Good.’ Putting muzzles on the predators in our society worked very well back then. Now, those muzzles have been removed during the last thirty years or so. The evidence of the results is plain to all. I only hope it doesn’t take a complete world wide financial melt down to reteach that lesson from days gone by. The present denizen of the White House was pretty much an unknown factor just a few years before his rise to power. Who is lurking in the shadows today to take his place? Less talk and more action Mr President!

    1. alex

      “Less talk and more action Mr President!”

      Considering the actions the president has taken, I’d prefer less action from him.

      1. ambrit

        alex;
        I have to admit to succumbing to the lure of Exhortation there. Be careful what you wish for is all to true today.
        That said, who’s going to do the dirty work and oppose the present Republicrat administration in this next cycle? More importantly, how are we going to enforce fidelity to any promises made by the eventual winner of the ’12 beauty contest? I’ve been to some Town Hall Meetings, and the degree of manipulation and marginalization employed there are so blatant as to be Paternalistic in the extreme. When I bewailed the chances for “financial melt down” I implicitly included social unrest. Just look at it. Riots in Greece, riots in China, the resurgence of Maoist movements in the developing world, they all point to ‘interesting times’ ahead.

  3. alex

    I rarely agree w/ Roach, but maybe his sight is clearer when he’s not talking his book (i.e. China).

    One thing I have a problem with though is “the antecedent to this is Japan where Japanese banks extended credit to effectively insolvent companies”. As though companies other than banks are where the big insolvency problem is. Give me a break. When it comes to insolvency banks (actually FIRE in general) is where the big problems lie. But maybe it’s not polite to say so when your company is in the FIRE sector.

  4. engineer27

    If consumer deleveraging is to be accomplished in a “normal” way (by earning money to pay down debts), then monetary stimulus has a role to play in providing adequate available funds; as do other policies that can maintain employment and incomes while the deleveraging proceeds. However, this is bound to be a long process, and the minimalist, time and money limited exercises exemplified by QE2 are likely to be inadequate. A much faster way to accomplish the elimination of debt overhang is to force the creditors to recognize their losses; but this avenue is largely blocked by the political clout of the creditors themselves, partly for reasons discussed recently by Kuttner. Similar mechanisms were (are) in operation in Japan.

    A difference here is that the Zombies in Japan were industrial networks of firms that held the political power, and banks were obliged to keep them afloat due to political pressure. Whereas the American Zombies are the banks themselves (most major US corporations have plenty of cash and low debt ratios — at least, the ones that didn’t go through a LBO recently). Forcing the Zombie banks to write down their losses, admit insolvency, and liquidate in as orderly a fashion as possible is the short road to normalization of the economy, and probably the path with the lowest cost to society. Unfortunately, it is also the path that causes the greatest pain to well-connected financiers and their sponsors in government.
    (Note that the critique applies doubly in Europe.)

    1. alex

      “force the creditors to recognize their losses”

      But … but … but that’s cruel and un-American. It would be like capitalism!

      “Forcing the Zombie banks to write down their losses, admit insolvency, and liquidate in as orderly a fashion as possible”

      AFAIK it’s handled a bit differently for banks. They’re take into receivership so they can keep operating, but the shareholders get wiped out and (if it’s done properly) the bondholders take a haircut.

    2. Billions for me, None for you

      It truly is painful for a banker to have to buy a yacht that is 189 feet long as opposed to one that is 191 feet long.
      It’s hard for you commoners to really appreciate that sort of pain.

      If you knew just how painful it was, you would put aside your silly concerns about not being able to afford medical care and willingly sacrifice your life for your bankers yacht length.

      1. Anonymous Jones

        You jest, but it’s clear that you have never been a designer or owner of large yachts. It may seem like only 1% to you, but those two feet make a huge difference in design. I mean, you have no idea the difficulties of getting a walk-in fridge as part of galley or finding room for a his and hers sink in the fourth guest bedroom and, OMG, the difficulty of designing crew quarters so each crew member remains completely unseen and unheard except while working. The sacrifices that need to be made for only two feet…they are enormous, and I don’t appreciate your callous disregard for this.

        1. Billions for me, None for you

          I wasn’t joking at all. One of my poorer friends was telling me the other day it’s the difference between having a helipad and a hangar for your helicopter or just having a helipad on your boat. He’s a health insurance exec and he told me how many medical procedures he’d have to deny coverage for so that his bonus would be big enough to get his hangar. I promised I wouldn’t say how many.

          Since I’m not a man in trade like my friend, I tend to ignore these trifling sums.

          1. FatCat!

            Thanks — you just talked me into getting the 1000 foot yacht. The one with the in-door ski resort.

            For that I am afraid I am going to have to deny my serfs about 50,000 kidney transplants, 1,000,000 chemotherapy treatments, 500,000 bypass surgeries, and no more than 2 facelifts.

            FatCat!

  5. Sauron

    The fundamental problem is crony capitalism. Connected companies aren’t allowed to fail, rich people with access ensure trickle up policies are the norm. Given lack of real wage growth and full employment, the only way to maintain demand is to have the lower orders borrow, borrow, borrow. Now that avenue is largely exhausted.

    1. Jane Doe

      Not only are they not allowed to fail, but we waste resources, vital resources, trying to save them. Why is nationalizing the banks (receivership) un-American? Because it suits the cronies. But, again socializing the risk of the same companies is unavoidable. In other words, socialism for me, but not for thee. The core issue then is not just that Americans have a lot of debt. Or that we need more jobs. It is that the solutions are specifically designed to prevent even the pain involved in reducing debt to be distributed in a progressive manner rather than regressive one.

  6. ambrit

    Mz Smith;
    Am I stumbling about in a delusional haze, or was there another post up there right after ‘Links 6/16/11 earlier?
    Enquiring minds want to know.
    Thanks.

  7. F. Beard

    If the US wants job growth, it will need to reduce private sector debt levels – and that takes time. Stephen Roach

    Yes, it will take time if we insist that the victims of the counterfeiting cartel must earn their way out of their so-called “debt”.

    However, debt-forgiveness or better a bailout of the entire population, including savers, would rapidly fix household balance sheets.

    And don’t think a bailout of the entire population can’t be done. It CAN be done and without price inflation too.

      1. F. Beard

        A Jubilee would destroy the banks but a bailout of the population would fix them. Plus, savers deserve compensation too for years of suppressed interest rates.

        1. ambrit

          Mr Beard;
          Peoples Capitalism? Remember back in the ’70s when some bright boys figured the effects of investing the Pentagon budget in the Stock Market?

  8. Dan Kervick

    The author is right to emphasize the balance sheet problem, but flirts with the wrong lessons. We don’t need to impose an Austrian-inspired, Hoover-Mellon liquidation of everything on the backs of struggling Americans in order to “purge malinvestment”. Roche says:

    “If the US wants job growth, it will need to reduce private sector debt levels – and that takes time.”

    Reducing the debt levels is indeed vital. But it doesn’t take time. It takes a rapid and decisive redistribution of wealth.

    Roche is right to criticize Summers, but he doesn’t criticize Summers for the right reasons. Yes, consumers don’t need more debt. They need more money. And they need the money to be debt-free. We need to transfer wealth from the places where it exists in languorous and unproductive surplus into the bank accounts of millions of strapped and struggling Americans who now have a massive backlog of pent-up demand, and are eager to spend any disposable income they might come to possess – but who have no disposable income. We need to get them more income, much of which they will spend extremely rapidly, but some of which they will also use to repair their balance sheets. To do this, we can employ a combination of aggressive redistributive taxation along with new regulatory measures that provide much stronger incentives for businesses and investors to plow capital into hiring, to plow revenues into employee wages and salaries, and to more evenly share their companies’ revenues. We also need legislation aimed at directing a higher percentage of American-owned capital into investments in the United States.

    The aggregate demand problem is not just due to excessive debt levels. It is also due to stagnant and declining personal incomes, a terrible socially destructive trend which is wrecking our economic life. The downward trend in wages has left the broad base of American consumers without sufficient spendable income to drive the economy forward. People are poor not just because they overleveraged in the past, but because those at the top of the economy have been permitted to loot the economy for decades, and gut the incomes and security of regular people. The key beneficiaries of this reign of foolishly unregulated avarice have destroyed the foundations of their own economy, although the spreading rot from the bottom-up has not yet reached the penthouses.

    What we need to be talking about is something like the late-capitalist equivalent of land reform. But instead of redistributing land we need to redistribute the monetary income which is the fruit of the productive pie.
    Economic equality isn’t just fairer than inequality. Economic equality works. That is the great lesson of the postwar period – a lesson that has almost been forgotten. An economy built of broadly shared wealth is more efficient, more dynamic, and more prosperous.

    1. F. Beard

      Yes, consumers don’t need more debt. They need more money. And they need the money to be debt-free. Dan Kervick

      Bingo! And here’s how to get it to them without increasing the size of the money supply:

      1) Let the government forbid any further “credit” creation. All loans would thenceforth be only of existing money.

      2) Every month, send every US citizen, including savers, an equal check of new, debt-free fiat, equal in total to the amount of credit paid off the previous month. Continue until all credit was replaced with government fiat.

      Since the size of the money supply would not change then neither price deflation nor price inflation should be expected.

      And after the debt has cleared then fundamental reform should be implemented including separate government and private money supplies.

      What are we waiting for? A lot more heat till we see the light?

      1. Cedric Regula

        That’s called tax the rich (individuals and corporations) and give to the poor. Sometimes also called income redistibution. It can be implemented by trading work for money. Like building another Hoover Dam or something useful. But Robin Hood is long dead and buried, so scratch that plan.

        1. F. Beard

          That’s called tax the rich (individuals and corporations) and give to the poor. Cedric Regula

          Not so. The banks get repaid with money whose purchasing power is equal to what was lent. Where is the tax, pray tell?

          It can be implemented by trading work for money. Like building another Hoover Dam or something useful. Cedric Regula

          Oh, so the victims must work for their release from debt-slavery? What religion or school of morality teaches you that? Deuteronomy 15 commands release from legitimate debt every 7 years. How much more then is release from a government enforced counterfeiting cartel commanded?

          But Robin Hood is long dead and buried, so scratch that plan. Cedric Regula

          One, it is not robbery; it is restitution for robbery. Two, if we do not as a society embrace justice then fearful consequences may result such as when the Great Depression led to World War II.

          1. Anonymous Jones

            “Robbery” is a pointless label. It presupposes a well-developed and agreed-upon system of property rights. This does not exist even on a consensus level, because the concept of property is misunderstood on an overwhelming scale.

            Redistribute wealth. It’s a democracy, right? [Yes, constitutional, but the constitution does not prohibit redistributive taxation]. People like money, right? Why can’t a majority vote for redistributive taxation? Why wouldn’t they? [The answer is: because they've been fooled into voting against their self-interest].

          2. F. Beard

            Why can’t a majority vote for redistributive taxation? AJ

            You muddy the waters needlessly. No new taxes are required for a bailout of the entire population. Nor is a stealth inflation tax needed either. Just:

            1) Forbid any new credit creation. This would be massively deflationary by itself.

            2) Send out monthly bailout checks equal in total to the amount of credit repaid in the previous month. The checks could easily be of debt-free fiat, United States Notes.

          3. Cedric Regula

            The tax part keeps us out of trouble on the fiscal side. (I know my understanding of it violates MMT dogma)

            I think Robin Hood was re-incarnated as FDR and elected president. But I am aware sometimes I have kooky ideas.

            So Robin Hood needs to tax to redistribute wealth (destroy it in MMT parlance…no wonder they have so much trouble getting their points across) as investment in some productive and employment generating area because the private sector does not seem to do it on its own, for lots of reasons I’ll skip talking about for now.

            I’m not so sure about this debt-slavery thing. I became a mortgage debt slave when I bought my first house (with a 11% mortgage-we were fortunate enough to have high inflation back then) and remained a debt slave until I finally paid it off 17 years later.

            But I got to live in it, which almost has a poetic symmetry to it.

            Did the same thing with cars too.

            I recall hearing something in the Bible, second hand, that sloth is a bad thing (I’m wicked as hell nowadays, tho), but I’m not sure if that’s in the 1st or 2nd Testament. So I’m not sure if that’s a Jew thing or a Christian thing.

            But I think a lot of Jesus’ followers lived outdoors and traveled by foot, so maybe they were very much against debt-slavery.

          4. F. Beard

            So Robin Hood needs to tax to redistribute wealth (destroy it in MMT parlance…no wonder they have so much trouble getting their points across) Cedric Regula

            The repayment of “credit” is the same thing as destroying it so a metered bailout of the population requires no new taxes so long as the monthly bailout checks do not exceed in total the amount of credit paid off the preceding month.

            I’m not so sure about this debt-slavery thing. I became a mortgage debt slave when I bought my first house (with a 11% mortgage-we were fortunate enough to have high inflation back then) and remained a debt slave until I finally paid it off 17 years later. Cedric Regula

            The bankers have a clever scam going – by driving up prices with their so-called “credit” they create even more demand for it. It’s called “the rat race.”

            I recall hearing something in the Bible, second hand, that sloth is a bad thing Cedric Regula

            Then why do we tolerate unjust unemployment? A bailout would fix that.

  9. Doug Terpstra

    Roach, like any PhD economist, completely misses the forest amid so many trees. No comparison of Japan and the US is relevant without acknowledging such glaring differences as military spending, cultural cohesion, social safety net and unemployment rates, among others. Regarding just two of these, Japan’s military spending is about one-fifth of the US as a percentage of GDP, and its unemployment rate rose to 4.7% last month, according to Moody’s and Bloomberg (post-tsunami). While sharing Japan’s gross misallocation of resources to supply-side bankster welfare, other critical differences mean that the US Empire is in FAR WORSE condition to the point where comparisons are nearly meaningless. Almost all economists have such tight-fitting blinders, but probably none more blinding than those of a Morgan Stanley economist and former Criminal Reserve board member.

  10. Edward Harrison Post author

    What we are seeing in the U.S. is a balance sheet recession that is definitely about banks and households rather than the corporate sector as it was in Japan. So, alex I agree with you which is why I specifically mentioned ” fewer resources in finance and housing”.

    And Dan Kervick, reallocating resources away from housing and/or too big to fail banks does not have to involve a Mellonite purging if government counteracts this with policy stimulus specifically designed to promote job creation. Look at the Netherlands or Germany and their work-sharing programs. The US needs that kind of policy. And community banks can deliver the goods; they are totally different breed.

    See here:
    http://www.bloomberg.com/news/2011-06-13/small-banks-big-banks-giant-differences-robert-g-wilmers.html

    The problem is this:

    The ‘Twin Deficits” story of a US economy out of balance due to large government deficit spending is empirically false and ignores the sectoral financial balances identity. To the degree there are twin deficits, the items at issue are a lack of household savings and current account balances. If policy makers want to increase the household sector’s savings (and reduce its debt levels), then we must either increase fiscal deficits or get businesses to reinvest profits in capital spending.

    http://www.creditwritedowns.com/2010/06/stimulus-is-no-panacea.html

    Corporate balance sheets may look good but corporations are not going to reinvest in capital spending without demand – and that means you would need government spending to fill the gap.

    However, I don’t think stimulus is a magic bullet. I am concerned about the effectiveness of that stimulus in an era of the Predator State where lobbyists will try to get government to skew policy toward propping up specific economic sectors like banking or housing – that is most definitely what HAMP was all about as Matt Stoller says. So that is what we have seen. And that policy skew toward the big banks plus the fact that the initial stimulus package was too small from the start (http://www.creditwritedowns.com/2009/01/obamas-stimulus-bill-is-a-tough-sell-so-far.html) has discredited stimulus as a policy tool in many Americans’ eyes.

    Now Obama owns this economy and he will swim or sink based on how it fares. Republicans know this. Their opposition to stimulus is not just ideological. They want to see Obama fail and so they will resist any sort of kick to the economy that government could provide under the pretense of deficit reduction. That’s where we are now.

    1. reslez

      Great comment, succinctly explains where we are now.

      The question for myself and other commenters is what we can do to influence the outcome. As we saw in Wisconsin, the only U.S. experiment (so far) with Arab and European style sit-in democracy failed. Iceland seems to be the only country that saw success with direct democracy, and with a population of 300 thousand it’s not especially analogous. And so we see elites imposing policy after policy opposed by 80-90% of the population. It seems the wealthy are determined to leave no other option but violence, where they already control the board.

      And of course our tool for recognizing and communicating the truth, the Internet, is about to come under severe assault.

      Democracy failed, protest failed, change was more of the same. If all we can do is the least we can do, our path begins with non-compliance and non-participation. It is up to us to find our way.

      1. jonboinAR

        -”…And so we see elites imposing policy after policy opposed by 80-90% of the population.”-

        I would say “opposed” is too strong a word. The bulk of the population might express ambivalence, at best, to tax breaks for the rich during that few minutes of their free time they pull themselves away from Dancing with the Stars to watch some sort of news program. Our problem remains that the American people, for the most part, are detached from public issues.

        They don’t mind being led. The way to change things is to take a page from the elite playbook and organize for the purpose of messaging. That is, if we, who follow this stuff and have roughly similar views, were, using a modicum of discipline, to start putting out a message counter to the ones we don’t like, we might get somewhere. I mean discipline in 1) consistent effort, and 2) speaking with one voice.

        We’d need to brainstorm, think tank, or whatever that is, to figure out our basic messaged. We’d need to track what, I’ll say the “Right”, is doing in order to counter. We’d need to organize town-halls, demonstrations of one sort or another with gimmicks to try and get noticed.

        I have tried very slightly to get people’s attention on these boards to the need to organize, but my efforts have been extremely desultory, and have failed. It’s hard, I’ve found. I have one partner, whom you can find at our “blog”, but we’re in a lull.

        Ms Smith is a wonderful, wonderful watch-dog, but SOMEONE TAKE THE NEXT STEP ALREADY!!

  11. NOTaREALmerican

    Re: The subtext is Washington condones a revival of reckless behaviour.

    Huh, you think 50+ years of applied-socialism / crony-capitalism doesn’t have an effect on the behavior of the society and its rulers?

    What other solution COULD they propose, it’s all they know and it worked for generations.

  12. Paul Tioxon

    It is the growth hungry markets that need the Lazarus treatment, not consumers. If we can maintain a stable standard of living, not one that erodes due it being siphoned off into the capital markets but does not grow either, becoming like Japan may not be the end of the world, just the end of capitalism as we know it. Once you have built out yr infrastructure, homes, schools, hospitals etc unless your population soars due to immigration, you don’t need much “growth”. Profit taking requires growth, economic activity via mutual businesses do not.

  13. reslez

    I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously.

    Unemployment is a scourge, but it’s also a byproduct of the elite belief that the best way for citizens to spend their lives is in service to other elites in business. Unemployment is a travesty, an incredible waste of human potential. but Joblessness would be irrelevant if we productively employed ourselves as freeholders or small proprietors, or if citizens shared in their own productivity rather than saw it hoarded and squandered by sociopaths atop the pyramid.

    1. F. Beard

      or if citizens shared in their own productivity rather than saw it hoarded and squandered by sociopaths atop the pyramid. reslez

      Indeed. It is the government enforced banking cartel that allows the rich to loot the non-rich. Without it, I don’t doubt that corporations would literally be forced to “share” wealth via new common stock issuance.

  14. XRayD

    ” In the 3 1/4 years since 2008 began, real consumption growth has averaged 0.5% on an annualised basis …”

    But we are always being told that the consumer is 65-70% of the economy, which supposedly has been growing at 2-3%. How is this possible with the anemic consumption growth?

Comments are closed.