Krugman sad

D.L. boddhisatva at mindspring.com
Wed May 5 01:29:56 PDT 1999


To whom..,

The question to C.'s Liu and Redmond et al is simple: If the Japanese industrial economy is so amply able to finance growth out of its current receipts then where is the growth? Japanese corporations are doing well, the trade surplus is in excellent, eminently enviable shape, and yet there is no economic growth. Why not? Money is free, the government is running surpluses, industry is exporting far more than it's importing, so why no growth?

I say that the Japanese financial model has essentially reached the limit of its capacity for credit creation. The Japanese keiretsu banker has no more cards up his sleeve. He holds the whole credit capacity of Japan in his hands and yet with one-third of all the saved money in the world to play with he can't come up with a growth strategy. The only thing that makes sense to me, in the face of such a vast discrepancy between cash available and growth produced, is that all that cash doesn't mean a thing unless it is well-leveraged.

Japan, in its present state of capitalist financial development(and it is purely capitalist, let's not deceive ourselves), has reached a point where the economy can no longer support its own rate of capitalist accumulation. All that Japanese money in all those Japanese bank accounts is, predictably, doing nobody any good because accumulation never does. Japan is a study in capitalist complacency. What do Japanese capitalists care if the system goes belly-up? They've got theirs, after all. To blame Japanese consumers for keeping a nice cash cushion is ridiculous. It's the capitalists who should be finding profitable things to do with that money and they are apparently not interested in doing so. To trust that the Japanese capitalist mandarins have some secret, inscrutable 50-year plan is kooky at best, racist at worst. What plan includes a dramatic recession and a liquidity trap? At zero interest rates you have no lower to go. This is a limit and when systems reach limits it's because they are strained.

It may be that the Japanese can put so very much saved public money into the system it will be unable to do anything but grow - a little. Such a vast and sudden increase in the amount of public money available to banks and industry probably warrants a move up in Japanese asset prices. Yet that money, while a huge pool, is neither infinitely deep nor even as deep as it was a year or so ago. If the Japanese come to a place where they have written their capitalists an enormous check of public money and nothing happens they will be in terrible trouble. If for all those new yen made available there is not economic growth, there will be very bad news for the Japanese economy and all holders of yen-denominated assets. The LDP, like the Reagan administration, may get lucky. They may spend so much money that they can't help but grow the economy until a little spark of financial innovation in the private sector catches fire and extends the recovery. They are, however, taking a chance that will not happen.

peace



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