Started reading Richard Koo’s book recently. Frankly, it’s got to be one of the most important books on macroeconomics written in a long time because it tries to confront Japan’s Lost Decade head-on. The Japanese experience has confounded so many economists for so long because everything they thought would work, well, didn’t.
But what has struck me so far in the book is Koo’s perspective and tone. The assertion that the massive debt reduction Japan underwent was necessary is something I agree with wholeheartedly. His other assertion that government needed to take on the mountain of debt they took on while households and businesses – which were for all intensive purposes insolvent – reduced debt, seems far-fetched. And to call the Japanese outcome a success because the alternative was an almost never-ending deflationary spiral, again, seems a bit off the mark. I mean, would you call this a “success?”
That dotted line represented what the GDP trajectory was going to continue at in 1990. Let’s just say it’s a little off its growth path. The next chart might have something to do with the GDP issue, it looks at the size of the labor force in Japan:
Notice that the labor force in Japan started plateauing not long after the GDP plateau. This is part of a bigger demographic/societal issue Japan is facing, which is the fact the country is getting older. The birth rate is too low, and the population is aging rapidly. Yet, unemployment has seen a relatively uninterrupted bull market. Higher highs and higher lows:
It makes sense when you consider technological innovation/change provides subtext to the time series. As innovation progresses, production gets more efficient and cheaper. So fewer workers are needed in that production. With demand stagnant, unemployment will only increase in the future. Deflation and debt destruction has conditioned the Japanese to embrace austerity. Then you look at this next chart and know one thing: Koo’s conclusions not withstanding, this isn’t going to end well:
Japanese debt is almost twice as big as GDP. Federal debt is growing at an alarming rate, so the fear is that some point in the futre we will be talking about the good ol’ USA the way we talk about Japan right now.
But I don’t want to just get locked into one scenario and ponder if we’re destined to see it come true. To look at an alternative, I’ll talk about Thailand in my next post.