Martin Wolf’s Lessons


Martin Wolf has an excellent column in the Financial Times on the lessons Japan’s “lost decade” may have for us:

Most of the decline in Japanese private spending and borrowing in the 1990s was, argues Mr Koo, due not to the state of the banks, but to that of their borrowers. This was a situation in which, in the words of John Maynard Keynes, low interest rates – and Japan’s were, for years, as low as could be – were “pushing on a string”. Debtors kept paying down their loans.

How far, then, does this viewpoint inform us of the plight we are now in? A great deal, is the answer.

He goes on to analyze several lessons we can take from Japan’s example:

  • The current situation is completely unlike the recession of the early 1980’s.
  • Those who argue that Japan’s fiscal expansion failed are mistaken.
  • Dealing with an unwillingness to borrow is even more important than recognizing losses and recapitalizing the financial system.

And, exports, Japan’s solution to dealing with its economic woes, isn’t applicable to a worldwide slump:

Yet what is happening inside the US is far from the worst news. That is the global reach of the crisis. Japan was able to rely on exports to a buoyant world economy. This crisis is global: the bubbles and associated spending booms spread across much of the western world, as did the financial mania and purchases of bad assets. Economies directly affected account for close to half of the world economy. Economies indirectly affected, via falling external demand and collapsing finance, account for the rest. The US, it is clear, remains the core of the world economy.

As a result, we confront a balance-sheet deflation that, albeit far shallower than that in Japan in the 1990s, has a far wider reach. It is, for this reason, fanciful to imagine a swift and strong return to global growth. Where is the demand to come from? From over-indebted western consumers? Hardly. From emerging country consumers? Unlikely. From fiscal expansion? Up to a point. But this still looks too weak and too unbalanced, with much coming from the US. China is helping, but the eurozone and Japan seem paralysed, while most emerging economies cannot now risk aggressive action.

Read the whole thing.

In my view the steep increase in government borrowing illustrated in the graph above, sampled from Mr. Wolf’s column, is only a Band-aid, a stopgap measure. The solution, as I noted earlier today, is real investment and real innovation. The alternative is the precipice.

5 comments… add one
  • Larry Link

    When you say investment and innovation, what do you have in mind, really, what could we turn to..that would save us from slipping over the edge?

    Government has a role, it can, hopefully slow our slide enough so that we might be able to grab onto something..hopefully, and if we manage that feat, to stall the fall, what will the new economy look like and how quickly will we be able to get it working well enough to keep us from falling of the edge?

    Even if we manage to keep from slipping over the edge, as a nation and as a world economy, there will still be millions hurt badly from this situation. How do we handle that?

    How much time do you think we have left before we have a real national crises on our hands…people in the streets, mass migrations, food shortages, the real bad stuff?

    How close are we to falling off the precipice?

  • Drew Link

    Certainly no sane peroson would discount Mr. Wolf’s credentials. However, it seems to me that his article falls short in that he simply declares, based upon Mr. Koo’s view, that in the absence of the stimulus efforts Japan would have descended into depression. That of course, is the central debate.

    The competing view is that growing exports to China and the US, as well as the banks finally shedding their “zombie” status was the real reason for Japan’s performance.

    I certainly have no scientific poll, but based upon reading (not to mention the general discredit of fiscal stimulus among the economics profession) that the majority of Japanese economists do not share Mr. Koo’s view, and consider government stimulus as an efficient mechanism for piling up government debt.

    It would be wonderful to have more opinions from those in the policymaking sphere during the “Japanese Experience” for it may be the best lab data point we have. That said, it is clear where Mr Geithner stands, similar to the advice given to voters here in Chicago: stimulate early, stimulate often.

  • Drew Link

    As a follow up. I was curious why Mr Wolf chose to compare only 1981 and today with respect to debt. I found what I consider to be a disappointing result. Like Roland Burris, Mr Wolf failed to tell the whole truth.

    If you look at the debt service to disposable income statistics from 1945 to today you will find that the consumer in the 1958 recession had much more debt than the previous downturn, and more in 1975 compared to 1958, and more in 1981 compared to 1975…….and more today compared to 1981. Said another way, Mr Wolf could have made the same argument in each of the three previous major recessions (as well as 1991 and 2001). Yet we came out of those.

    To be fair, Mr Wolf showed a chart of actual borrowing, not debt to income. However, his assumption, that consumers won’t borrow because they are overlevered seems suspect in light of the historical leverage statistics. Current borrowing patterns must have a more complicated explanation, perhaps: bank willingness, net worth reduction, political fearmongering etc.

    But his follow on conclusion, that govt must pinch hit and borrow/spend for a permanently tapped consumer also comes into question.

  • I’ve been thinking this over and I believe there’s some anecdotal evidence in opposition to Mr. Wolf’s thesis. I don’t know about you but I haven’t heard a single complaint from lenders that nobody is trying to borrow anything but I’ve heard lots of complaints that loans are hard to come by.

    Now this may actually mean that loans are more costly than they used to be, a somewhat different proposition, but I think it makes the question even more relevant. What does Wolf mean? Does he mean just that borrowing slows? Does he mean that there’s hoarding of money by lenders? Does he mean that borrowers don’t want to borrow on the terms being offered by lenders? Or does he mean that people are preferentially paying down loans rather than borrowing more?

    I took him to mean the latter but now I’m not sure.

  • Drew Link

    From a personal, and admittedly narrow, perspective….in the leveraged lending market the issue is banks willingness. Two problems: how do you forecast given an economy in such flux? And….pricing in the secondary market is so rich that it doesn’t pay to make new loans when you can simply pick up assets in the secondary market.

    As an example: New loan: 5 or 6% closing fee. Libor plus 600 rate. A year ago?? 2.5% and L+275. You don’t want it? Fine. I’ll buy a discounted secondary.

    This is a specialized market, but I would suggest that credit selectivity is at play in C&I and consumer markets as well.

    Not to say the market is shut down. Statistics suggest otherwise. But credit is pricey.

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