We live in a world run by simpletons.
In this morning's paper is a front-page article describing how Japan "wasted trillions" on its various stimulus programs.
The International Herald Tribune:
"Japan's rural areas have been paved over and filled in with roads, dams, and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s."
Public spending was so aggressive, it boosted Japan's government debt to 180% of GDP - more than two times the current U.S. level. But did all that cement buy Japan out of its slump?
You be the judge. Housing prices in Japan are now back down to where they were in 1975 - nearly 90% below the late-'80s peak. And stocks? The Nikkei index is back down to where it was a quarter century ago. Stocks sell for half their book value - and they're still considered too expensive for beaten-down, hyper-fearful Japanese investors. The downturn began in 1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of '23 and the Enola Gay combined, wiping out wealth equal to three times the country's GDP. This was despite interest rates at zero...and a heroic effort at Keynesian stimulation.
If America were to follow Japan's example, it would have to leave its interest rates near zero for the next decade...and add about $10 TRILLION to its public debt. And if it got the same results, you'll be able to sell your house in 2026 for the same price you paid in 1992.
But the simpletons have no other idea.
"In a nutshell," continues the IHT report, "Japan's experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists."
Are these, perhaps, the same economists who thought America's super-consumption, eternal-debt economy would never fail? The same economists who thought the bankers were providing a public service, by offering so many people so much credit...and then planting their debt bombs all over the planet? The same economists who forecast rising stock prices in 2008?
Probably.
Bill Bonner
for The Daily Reckoning Australia.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Greg Atkinson on 9 February 2009:
Bill, The western media often makes serious errors when discussing infrastructure spending in Japan. The biggest blunder is they forget or overlook one important factors..earthquakes! Here in Japan you will often see a very solid looking bridge on a small rural road but it is not built to be impressive or because of over spending, it is built that way so in the event of a major earthquake it will hopefully remain usable and not collapse and isolate small villages etc. (hard to dig people out of rubble if you can't get equipment to site)
Having worked as an engineer for many years in Japan I gradually came to appreciate why some things seemed "over engineered" and often the reasons for this apparent over engineering is even overlooked by commentators in Japan, and almost always by western commentators who just do not bother to get past the easy Japan bashing routine. Quite simply things are built in Japan to survive in a mountainous earthquake prone nation that also gets hit by a few typhoons every year! (I bet the citizens of New Orleans wished the U.S has a similar approach)
Another example cited is often the impressive community centers in small towns. And why are they built like forts and seem overly large? Because they are also evacuation centres! In the event of a typhoon, flooding or earthquakes people are evacuated from the surrounding areas to a place where they can be safe. These centres also have supplies of food and water etc...so I guess you do not want them falling down when a major quake hits?
Food for thought hey? I wonder what long term life saving wonders the Rudd government will build?
Comment by Travis on 9 February 2009:
Greg Atkinson, you the man! Feel free to impart wisdom more often!!
You know, I cant help but feel I have stepped a loong way into the future when I go to Japan. No doubt they didnt recover quickly from the bubble. But surely, despite high debt, they have a good medium to longterm outlook given the quality of infrastructure and systems. (not just transport but across the board).
Going further, How exactly can America compete with countries like Japan and Germany (and to an increasing extent china) with their better foundations? It certainly cant compete with a outrageously strong dollar!!
Comment by Greg Atkinson on 10 February 2009:
Travis..thanks. But not much wisdom resides in my head, it is just that eventually some things sink in. Regarding the U.S and how it competes with Japan, Germany etc. the simple answer is in my view is that it cannot in many cases. I wrote some views about the U.S economy a while back in: The US Auto Industry..you might find this interesting..or not.
Simply put, the U.S gained at least a 10-15 year head start over Japan and Germany after World War 2. (and the Chinese economy was even further back) The U.S. had no major global competitors, the U.K was bankrupt, France was in worse shape and so who exactly was the mighty U.S economy up against up to say the 1960's? The USSR?
But now the world is a very different place and in many areas the U.S simply cannot compete in many sectors from the auto industry to even IT. (think of all that IT outsourcing to India for example)
We are seeing I believe the long term decline (not fall)of the U.S. as the world's greatest economic power. Nobody stays on top forever, not even Ricky Pontings men
It is hard to take I guess for the Americans but so is losing cricket to the South Africans!
Comment by Travis on 10 February 2009:
Greg,
Thanks for the reply. I have the bitter-sweet condition of youth which makes it hard to appreciate things in historical context so thanks for spelling out the headstart the US had.
Assuming ethics doesn't exist, which I think is easier to argue than the existence of, why didn't the US see this coming and launch destabilising wars to weaken their competitors?
DR,
Would love to see an article on the breakdown of India's IT industry. Are they doing basic bread and butter stuff like server maintenance and call centre work or is their a lot of software/hardware design....in consumer, commercial, and miliatary applications. What is the growth like?
Also, what is the minimum education requirements for employees and thus is the education pipeline growing at the same pace as the IT sector growth?
Im starting to suspect that India and China may have to share the top dog podium in the future....
Comment by Keith on 10 February 2009:
The point is not whether infrastructure projects are well engineered or not in Japan, but the reason for undertaking such projects. I am sure a bridge to nowhere can be an engineering marvel, but it does not mean there is economic justification for it. The Japanese governemnt did use infrastructure spending as a way of boosting the economy to no avail. While this is clearly more meaningful than handing out $950, but as Bill has pointed out this strategy has not pulled Japan out of economic slump. The point is that for any country to emulate this, the result is very likely to be the same. I would however like to ask Bill what would be his solution to the current crisis? I mean we can't just abandon the fiat monetary system and going back to gold standard, or can we?
Comment by Greg Atkinson on 11 February 2009:
Keith, economic justification is not always a priority with much national infrastructure in any country. Take for example building and maintaining isolated roads in Australia? Or providing medical services to rural Australia? How about parks and national parks? The list goes on. If economists ruled the world they would simply relocate people to major cities and we would all be living in irrigated shoe boxes. In any case people assume that the Japanese spending of the 1990's was a failure...was it really? Did the country fall into social chaos after the bubble burst? Didn't the country emerge from the decline and even deal with a massive earthquake along the way? Yes there were problems with the spending done but many experts say it was not the sort of spending undertaken in Japan but the stop-go nature of the spending. Anyway regarding this subject I have written a few more thoughts here: Bridges to somewhere
Comment by Greg Atkinson on 21 February 2009:
By the way we could add a bushfire warning system to the list of infrastructure spending....that might not make economists happy but it is in the long term interests of the nation. How about a few fire spotting towers, heat sensors, refuge shelters, fire monitoring cameras and perhaps having some full time paid fire prevention staff stationed in high fire risk areas? We could create jobs and save lives..wouldn't that be better than home insulation and painting schools?
Pingback by When the Stimulus Money Stops Flowing Will the Recession Get Worse? | Financial and Economic news on 13 September 2009:
[...] Japan “Wasted Trillions” on Stimulus Programs [...]
Comment by Peter Kahlbaum on 8 May 2010:
I would just like to point out that it is not only earthquakes and typhoons that Japan has to over-engineer against. There is also the danger of a return of Godzilla. I believe primary schools there have to be able to withstand an attack by Ghidra, the three-headed flying serpent. Not to mention Mothra.
Only joking. Enjoyed your excellent comments Greg. Particularly about the bushfire warning system. One point I would disagree with is your comment about the lack of economic justification for medical services in rural Australia. Keeping workers fit and healthy in places like Roxby Downs and Port Hedland would seem to be very beneficial to our economy. Skimping on medical services in the mining and food-growing regions of our country would seem like false economy when we are essentially a resource-based economy. Would diverting these funds to hospitals servicing the financial services and real-estate industries in the large cities make our nation stronger? I doubt it. Look at England. Money spent on minimising miners' time away from the mine, or farmers time away from the farm, would seem to be very wise. I think Japan's problem might have been simply over-engineering. If a bridge works, it works. Spending more money building it twice as strong doesn't increase productivity, unless an earthquake happens.