It’s funny how these things work. The US and UK economies expanded rapidly on debt – it was unsustainable – but years of good times was the result. In Japan, misery was the order of the day – the economy lurched from one crisis to another – it became known as the lost decade. Yet, in some ways, Japanese businesses and consumers were doing what many argue US and UK businesses and consumers should have been doing. They were saving.
But now, everything seems to have flipped. While the UK, US, Australia, Spain and several Scandinavian economies seem hamstrung by a legacy of too much spending, Japan is sitting pretty.
According to Bloomberg, Japanese companies now have cash equating to 11 per cent of their assets. For the last few years Japanese interest rates have been zero, or close to it, yet still they saved. It was this refusal to go out spending that held the economy back. Now the economy is in a position of strength, at a time when Western assets are going cheap.
Bloomberg calculated that so far this year the value of Japanese purchases of foreign assets is already 91 per cent up on the whole of 2007. Bloomberg says Japanese companies are on course for the biggest buying spree since the 1980s. But unlike that decade of irrational Japanese exuberance, the spending spree can be funded out of savings, not debt.
It just goes to show, things really do go in circles.
Keynes famously argued that in times of a recession, the last thing you should do is save – it may make sense for individuals, but for the economy as a whole this is a disaster.
The snag is, though, there is a danger that Keynesian economics can lead to an ever growing mountain of debt, as each crisis is avoided by getting people spending.
Some say it was the New Deal, implemented by Roosevelt, following the policies of Keynes, that helped end the 1930s economic depression. Others say the New Deal didn’t go far enough and that actually it was World War II, which, from an economics point of view, represented a kind of extreme Keynesian economics by accident, which ended the depression. Critics of Keynesian economics say the depression was ending anyway, and that the New Deal was wholly unhelpful in dealing with the problems of that era.
The debate is controversial. Some say it is Keynesian economics that created the current economic crisis. Yet Alan Greenspan, who has been criticised by so many for letting US interest rates fall too low earlier this decade, and thus creating the debt pressures that have now surfaced, is himself a critic of Keynes – at least he was far from flattering about Keynes in his book Age of Turbulence.
People such as the winner of the Nobel Memorial Prize for Economics, Joseph Stiglitz, say they are at heart a Keynesian, and yet are amongst Greenspan’s biggest critics.
Greenspan relied on interest rates to steer the economy. Keynes said that in times of a debt crisis, cutting interest rates could be ineffective, akin to pushing on string, and the only solution in these circumstances would be to increase government expenditure – especially in ways aimed at the poor.
Japan has come out of a decade of misery and emerged into a position of strength. The challenge, for the West, is to somehow avoid ten years of Japanese-type woe, and at the same time a build foundation for the longer-term. Keynes said: “In the long term we are dead,” but there again, Keynes died 60 years ago. Today is Keynes long-term, and the price we are paying for short-term fiddling, is long-term wailing.
