Tuesday, January 6, 2009

Land of the Setting Sun

We are Japan.

(Though with nukes and military bases in about 92 countries)

Barack Obama made it more or less official today: trillion dollar deficits are here to stay.

“Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on.”

The dead hand of government will provide tax cuts, either by printing money or borrowing from the savers of the US and the globe, to "stimulate" something by someone: probably by paying down private debt and purchasing necessities at low profit margins for the vendors. This shell game is, as we used to say in the 60's and 70s, played out. Or as they say in the rural South, this dog won't hunt (any longer; he's too old). Additionally, government will print and borrow money to build and rebuild roads and buildings. Perhaps even most of this money won't be wasted or stolen, but based on Japan's experience, I wouldn't bet an economy on it.

Let's consider: Japan lost WW II and set about rebuilding. Its banking system went bust in the 1960s. We helped them put it back together in a way we should have emulated last year, and they embarked on a quarter century of unbelievable growth. After 1989, when their growth bubble popped, their economy grew in real terms, but more slowly, and they considered that slow growth to be a "Lost Decade" . Truly, we should be so lucky as to have a slow-growth no-inflation "lost decade" going forward. In 2008, Japan's stock market hit about a 25 year low. After many years of deficit spending, their debt -to-GDP ratio is almost 2:1, after starting at a very low level.

In U.S. and world history, winning wars is very important to longer-term economic dominance. Britain kept winning wars and dominating the world in the 18th and 19th Century. Victories in the two world wars were Pyrrhic. Unfortunately, the U.S. is suffering the effects of too many unsuccessful wars and has used up most of its real advantages from the big wins, to wit:

The U.S. fought to a draw in Korea (a war that technically is not over), lost the Vietnam War, fought (let us say) to a draw in an unexpectedly tough Iraq War, and is losing the Afghan-area War. The days of living off the sweeping victory in WW II have ended or are ending. The same is largely true with the Cold War victory; that party ended September 11, 2001. As with Japan, giant deficits are bipartisan policy. Massive wealth transfers to the undeserving corporate losers are also bipartisan and Fed policy. This is the zombification of America just as much as Japan did with its big banks in the 1990s. It is worse here and now for at least two reasons. One reason is that at least Japan could point to its culture and find a reason to support the zombie companies. Our zeitgeist was supposed to be 'agin that. The second reason is that we lectured Japan contemporaneously not to create zombies, and we were probably correct: but how hard it is for the doctor to diagnose and treat himself!

Americans are looking at disordered finances, economic stagnation, and political discord rising from the above. The people are dispirited and see the rot in the body politic. The October bank bailout, supported with excessive force by no good reason and/or changing rationales by the Establishment, was a defining moment. Massive wealth transfers have gone and continue to go to the worst-run giant companies in America. All this in a world of domestic peace, good harvests, abundant raw materials, a hard-working labor force, a general culture of honesty and fair dealing among the people at large (excepting the higher levels of government and many businesses), and unchallenged world dominance. This should be among the best of times.

We deserve better than it looks like we are going to get.

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