Thursday 8 December 2016

Recession lasting until 2018 is not to be rejected out of hand

Japan's top economist says too much debt is wreaking havoc and governments have put fiscal austerity ahead of growth

William Pesek

Published 29/12/2010 | 05:00

The US is starting to rattle bondholders with its borrowing binge. President Barack Obama's stimulus isn’t working the magic on the jobs front
The US is starting to rattle bondholders with its borrowing binge. President Barack Obama's stimulus isn’t working the magic on the jobs front

In an era where forecasts by permabears have gotten ample attention and vindication, few are as disturbing as this: a world recession until 2018.

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It comes from Eisuke Sakakibara, Japan's former top currency official. He is known as 'Mr Yen' for his ability to move markets.

Because Tokyo's revolving-door politics often sends a new face to each Group of 20 meeting, he is one of the few Japanese constants in market circles. Traders may not know the latest finance minister's name, but they know Mr Sakakibara.

Japan is the master of muddling along, decade after decade, with little growth to show for it. And Mr Sakakibara was a key player when Japan faced everything from the Asian crisis to Russia's default, to the onset of deflation and to a banking collapse that saw the demise of Yamaichi Securities Co.

So, when an economist with Mr Sakakibara's background says "the world is set for a long-term structural slump reminiscent of the 1870s" when average global annual growth was about 1pc, I can't help but listen.

The reason for the slowdown? Governments are putting fiscal austerity ahead of restoring stable growth.

Yes, there's an eye-rolling quality to a former finance ministry mandarin giving economic advice. After all, officials there did Japan's 126 million people a disservice by punting reform far down the road. They just borrowed and borrowed, leaving Japan with the largest public debt among industrialised nations and no exit strategy in sight.

Turbulence

Yet recent data in the US and Japan and financial turbulence in Europe suggest a fresh global recession is a distinct possibility in 2011.

If that happens, what levers are realistically available to revive demand? Interest rates are already at, or close to, zero. That leaves increased government spending as the only real way to stabilise things.

The trouble is, there's little support for opening the fiscal floodgates in a meaningful way. One reason is that there's already loads of public debt out there. As of June, Japan's $5 trillion economy had 904 trillion yen ($10.8 trillion) in debt outstanding. Too much debt is wreaking havoc in Europe, where Ireland was the latest domino to fall.

The US is starting to rattle bondholders with its borrowing binge. President Barack Obama's stimulus isn't working the magic economists hoped it would. Neither is the Federal Reserve, as it goes the way of Japan with quantitative easing.

1937 Again

Worse, in the US and other major economies there is a risk that it may be 1937 all over again.

It was then that President Franklin Delano Roosevelt got stingy with stimulus, assuming that the Great Depression was over. The next year saw the economy in full retreat. If Mr Sakakibara is right, the global economy is in deep trouble. He envisions a broad slowdown that might drag on for seven to eight years. China can live a couple of years without US and European growth, but eight?

To head it off, governments need to up spending. And, for the most part, they aren't. Yet the US can, and should, borrow more.

To do that, it just needs to become a bit more Japanese, says Richard Duncan, author of the 'The Corruption of Capitalism'.

There's a single reason why Japan's 10-year bond yields are

below 1.3pc and Asia's No 2 economy isn't being downgraded. Since about 95pc of Japan's debt is held domestically, there's no risk of capital flight. Japan borrows from its companies and people, an arrangement that's roughly the mirror image of the US.

That so many treasuries are held in China and elsewhere makes the US highly vulnerable. Duncan, who is also chief economist at Blackhorse Asset Management in Singapore, says the US needs another FDR-like new deal to restore growth and competitiveness.

Funding one means greater borrowing and the way to do it is by tapping private-sector cash, Japan-style.

Such suggestions are likely to fall with a mighty thud on Capitol Hill, which is moving in the opposite direction.

Monetary policy

Lawmakers calling for Ben Bernanke's head forget why the Fed chairman is taking US monetary policy into uncharted territory.

It's because Congress failed to pump enough money into the economy in the first place.

Japan is a cautionary tale. On the surface, the 4.5pc annualised increase in third-quarter gross domestic product looked promising.

The detail, however, showed that deflation is worsening no matter how many yen the Bank of Japan churns into the economy.

This is anything but a typical recession, and world leaders are too distracted to see it.

In the US, the focus is on China's currency. While a stronger yuan would be in the best interests of the global economy, it's not the answer to all the US problems.

Japan is even more obsessed with exchange rates. And Europe is linearly focused on convincing investors that the eurozone won't unravel.

In our time of currency fixation, perhaps a guy called Mr Yen is the ideal messenger.

Too bad his message is one of economic gloom as far as the eye can see. Perhaps even to 2018.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own

Irish Independent

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