14 January 2012


Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”
But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.
Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.
How can the reality and the image be so different? And can the United States learn from Japan’s experience?
It is true that Japanese housing prices have never returned to the ludicrous highs they briefly touched in the wild final stage of the boom. Neither has the Tokyo stock market.

When the talking heads speak of a decline, what they really mean is a loss of sock portfolio value.  Or, more accurately, a decline in the prices of stocks, bonds, real estate, and other forms of capital.  The wealthy abhor this potentiality because it would effectively destroy their wealth.  While this concern isn’t altogether problematic (why shouldn’t they be self-interested, just like everyone else in the world?), the proposed solutions are.

Preventing “decline” is largely contingent on keeping capital prices afloat, which is itself contingent on leverage (which, it should be noticed, will be subsidized by taxpayers in some way), debt, and/or inflation.  This is the only way.  Capital asset prices are already significantly overvalued; the only way to keep it this way is to continue the policies that enabled this in the first place.

The only alternative is to let capital asset prices crash and then recover.  This is the optimal strategy, in the sense of doing what’s best for the most people, for this strategy only requires non-intervention in the economy, which is unsurprisingly cheaper than intervention and bailouts.  The reason why the talking heads never propose this is because the timeline for recovery is fuzzy at best.

Quite simply, once the market crashes and capital prices return to their pre-malinvestment valuations, it will be some time before those prices go back up again.  This poses a problem to the wealthy employers of the talking heads, for said employers have spent their lifetime accumulating this imaginary wealth and, now that they are beginning to look at retiring, they do not want to see it simply vanish.

Therefore, the mainstream argument against decline—which is prevented only by bailouts and leverage—is entirely founded on the assumption that maintaining capital asset prices is desirable.  Given the costs of doing so, and given that the result only benefit wealthy crooks, it seems clear that the best course of action is to welcome decline with open arms.  This way, as is seen in Japan, living well will not simply be the privilege of the wealthy.


  1. All economic concerns aside, I'd say the fact that their capital city is basking in near-Pripryat levels of radiation has gotta count as SOME sort of decline.

    And that's exactly the problem with modern finance, it completely ignores reality. Our economists would calmly tell us Rome is recovering, right up until the barbarians are burning it to the ground

  2. @GFM- Spot on. The problem with reducing the world to a formula is that the world is always more complex and variant than any formula could ever hope to account for.