Friday, July 6, 2012


The increase of GDP in Japan has been below the norm since the early 1990s, as this graph from Thought Offerings shows:

Graph #1: GDP (Japan) Flat since the Early 1990s

The response of the monetary authority was to increase money. You can see it in M1 relative to GDP:

Graph #2: M1/GDP (Japan) Rising since the Early 1990s

The ratio starts out low, but begins to rise just as GDP growth goes flat in the early 1990s. At its high point, the ratio is greater than one: The quantity of money M1 increased until it surpassed GDP.

Lesson 1: No recovery was created by increasing the money.

Despite the manipulations of money, debt in Japan remains high:

Graph #3: GDP (red) flat, M1 (blue) rising, Debt (yellow) above all

From McKinsey, via the Thought Offerings post, a breakdown of Japanese debt by sector. As hbl notes at Thought Offerings, "public debt expansion has exceeded private debt reduction":

Graph #4: Components of Japanese Debt

The graph shows household and financial debt roughly stable since the late 1980s. It shows nonfinancial business debt stable until the late 1990s, then declining.

And it shows government debt increasing more and more since GDP went flat. As one reads in the Manifesto that I did not sign,

government debt [in Japan] now exceeds 200% of annual GDP

All of that increase in government debt has not restored the Japanese economy, even after 20 years and more.

Lesson 2: No recovery was created by replacing private debt with public.

It didn't create inflation, either. Neither the money increase nor the government debt increase created inflation.

Those changes created neither the raging inflation that many people warn of, nor the "bit" of inflation many see as a way to "erode" debt.

Graph #5: Inflation in Japan (Source: Trading Economics)

Lesson 3: There was little or no "erosion" of debt by inflation.

Lesson 4: Try debt forgiveness.


Anonymous said...

Great stuff, I like the concept of thinking about Japan policies and how that all has continued to play out. An additional point of interest might be to look at what happened to housing in Japan after their bubble, e.g., is there a relationship there between what we are seeing in America today, i.e., a large increase in rental properties. I'm interested in how the over-valued excess inventory in Japan was managed by banks. It seems as if there are many stories about rents rising on one hand, while on the other hand, fewer "normal" people are able to qualify for home loans; thus, did that type of process happen in Japan? If so, how did the concentration of wealth impact their recovery?

I need to go over all your charts, but looks fun today!


Jazzbumpa said...

I've only skimmed this, and must now go do some chores, so I don't know if you have considered this or factored it into your reasoning.

Inflation can and will erode debt - but only if there is at least an approximation of parity between price inflation and income of the general population.

I don't know about Japan, but here in the U.S. income has stagnated [or close to it] for 4 decades and absolutely stagnated [or even declined] in the most recent one.

A decade of only 2% inflation will raise prices by about 22% in a decade. With a vast swatch of the population on a de facto fixed income, or less, over that time, the result is a great deal of misery.


Jazzbumpa said...

This might be relevant.


Greg said...

I wonder if we are looking at Japan incorrectly sometimes. We tend to only see private sector debt and public sector debt and then make suggestions from there, but Cullen Roche pointed out months ago that Japan and the US were very different private sector debt problems. The Japanese private household sector was not over leveraged, it was their companies that took on too much debt. We however were the exact opposite, our households took on the debt while the corporations were in a sounder debt to income ratio. I know that, to many, corporations ARE people but Im not buying that idea.

Japan had a fine household sector and that is one reason why they havent languished as much as some of their "numbers" might suggest. They are also not voracious consumers like we are. But their companies cant get their numbers looking good so their stocks languish and they just tread water.

We need to restart our househld sector which requires different thinking than the Japan solution. Our lack of consumption will end up killing our companies if we dont reverse it soon. But we need to finance that consumption not with more bank loans but with more money, requiring a higher govt debt.

The Arthurian said...

Who is this "we" Greg??

"we need to finance that consumption not with more bank loans but with more money"

Yes. But if people don't have to pay down debt, people *have* more money, and deleverage drains less from circulation.

Jazzbumpa said...

Debt overhang is a big problem, no doubt.

Re: money, though - I wonder if there really isn't enough of it, or if the maldistribution is the actual problem.


The Arthurian said...

Re: money, though - I wonder if there really isn't enough of it, or if the maldistribution is the actual problem.

I look at M1 compared to M2; the difference between then is money in savings. (M1 is circulating. M2 is circulating plus savings.)

There is plenty of money in savings, but it does not circulate freely. So, there is not enough money in circulation.

Circulating money is what people use to complete transactions. (That's why it matters.) The lack of freely circulating money hinders transactions, hinders the economy, hinders growth.

Oh, the money is there, and you can borrow it if you want and spend it into circulation yourself, and most of us do. But there is a cost associated with that; and this cost hinders transactions, hinders the economy, hinders growth.

So yes, one could say maldistribution is the problem. Because some people have too much, and they save too much, and that creates circulation problems.

JzB, we describe the same problem two different ways. But we do not disagree except when we misunderstand or frustrate each other.