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I used to follow Japan
pretty closely, and as a result nailed the Spring 2003 bottom quite
precisely. However, it was clear to me that the government had a trend toward
higher taxes, which is problematic for the longer term. Also, the commodities
and emerging markets areas absorbed most of my attention. Thus, it ended up
on a back burner. So, it's fun to go back and see what's been going on there
the past couple years, especially as the stock market has been disappointing.
The trend towards higher taxes has indeed played out, as we looked at briefly
a few weeks ago:
Japan: WTF is Going On?!?
One of the funny things
about Japan is that most Western journalism on the country is complete crap.
There is a fictional country which they call "Japan", about which
they make up various amusing fairy tales, which is confusing because there is
a real country called "Japan" where mostly different things are
going on. The New York Times -- especially the laughable Nicholas Kristoff, when he was there -- is particularly bad in
this regard. The business publications tend to be a bit better. The Economist
ran a longish piece about Japan recently:
Economist: Why Japan Keeps Failing
These sorts of articles
amount to a distillation of conventional wisdom, and are thus useful for
getting the conventional wisdom in a nutshell. If you read it, you'll notice
that there is zero mention of the monetary problems Japan experienced in the
1990s -- what was probably the greatest monetary deflation in all of human
history. Nor is there much mention of the trend toward higher taxes over the
last few years. Even the imposition of new capital gains taxes on equities,
or the recent discussion about raising the consumption tax from 5% to 10% or
higher, barely gets a mention. Instead, there is endless chewing about
"reforms," most of which go unnamed. Because, if you were to
actually name these reforms, they would look pretty weak on paper. The
article actually makes a perfunctory list. Let's see what they say:
Japan needs a mass of
economic reforms—a more open climate to foreign investment, for
instance, lower tariffs on imported food, fewer subsidies for farmers, freer
trade, better tax treatment of foreign companies, the abolition of a welter
of business subsidies, a more flexible labour
market, greater fiscal rectitude (national debt is currently around 180% of
GDP), more accountability by pension funds and insurance companies, further privatisation of services and much more. Takatoshi Ito of Tokyo University, who sits on the Council
on Economic and Fiscal Policy, the government's advisory body that drove
structural reform during the Koizumi years, has calculated the economic
benefit of pursuing the reforms the CEFP advocates, and the costs of
abandoning them. Pursue reform, he argues, and Japan should be able to grow
at a respectable 2% a year. Abandon it, and growth will crawl along at
1-1.4%.
Ok, let's go through
these:
1)
"More open climate to foreign investment." Who do you think
the reporter -- who probably doesn't speak Japanese -- talked to when
researching this article? I would guess 80% representatives of foreign
investment banks, such as economists and strategists. Maybe a few foreign
corporations. Try to find a foreign investment bank, anywhere in the world,
that doesn't think a "more open climate for foreign investment" is
a good thing.
2)
"Lower tariffs on imported food." Huh? Japan's problems are
caused by a tariff on New Zealand apples? I personally am in support of a
more "domestic-oriented" food policy for Japan and also developed
Europe, but I'll get into that later. Of course, subsidized U.S. agribusiness
loves this. First, they get a subsidy from the U.S. government, then they get
the U.S. government to go criticize other governments about their subsidies!
Most food is already imported without tariff.
Food in Japan isn't
really subsidized. Actually, the national JA (Japan Agriculture) system,
which collects the products of many small farmers, is known for being rather
inefficient and high cost. Thus, the selling price reflects the full economic
cost of production. Certain products have a tariff barrier, which is a sort
of subsidy I suppose. Japan already imports about 70% of all its food by
calorie, which is about the highest of any large developed economy.
3)
"Freer Trade." That old chestnut. Historically, this has
meant special advantages to foreign products. Japanese businesspeople
remember quite bitterly the "voluntary quotas" imposed by the U.S.
government on Japanese exporters in the 1980s and 1990s. They know that the
"free trade" arguments are hypocritical scam. In practice, trade is
pretty free in Japan. Chinese stuff is everywhere.
4)
"Better tax treatment of foreign companies." This might be a
real issue -- although I've never heard of a problem here. Once again, isn't
there a strange focus on advantages for foreign companies?
5)
"A more flexible labor market." This has been proposed as a
solution for Europe's high unemployment. Japan has relatively low
unemployment. In practice, Japan does not have the kind of legal restrictions
on hiring and firing that France has. I don't see a problem here.
6)
"Greater fiscal rectitute."
Everyone is in favor of this, but it was the Keynesian economists from the
U.S. who were pushing government spending throughout the 1990s. Of course,
they didn't get too much argument from the Japanese politicians, most of
which, like most politicians in the U.S., see their job as Pork For Votes. Go
look up the updated Structural Impediments Initiative, which was forced on
Japan by the U.S. government in 1995 with threats of Super 301 trade
sanctions, and which demanded 630 trillion yen (that's about $6 trillion
dollars) of government spending on public works over a period of thirteen
years. The idea was that Japan's government would be forced (via subtle
threats) to direct a large portion of this budget toward large purchases from
U.S. businesses, which is known as "free trade."
7)
"More accountability by pension funds and insurance
companies." What does this have to do with anything? Sounds like a scam
being run by the Western asset-management companies.
8)
"Further privatization of services." Also very popular among
the foreign investors. The postal service was privatized, not because it did
a bad job of delivering the mail -- that was fine -- but to break up the
postal savings bank monopoly. Nobody needs to privatize the water utility or
the toll roads, although you can be sure we'll hear arguments for this
endlessly.
This is pretty typical
coverage of Japan by the best Western media. In other words, it misses the
mark completely, and serves various Western business interests. It's
interesting to see that it hasn't changed much in ten years. Ten years ago, I
was working for the Western media in Tokyo, so I am rather
familiar, you could say, with all its usual behaviors.
Well, it seems we have
run out of space for what is really going on there, at least my preliminary
explorations, so that will have to wait until next week.
* * *
Is Consumer Finance a
Service?
Finance is generally thought to be part of the investment process. Savings
and investment are two sides of the same coin. In effect, time and effort is
allocated toward creating assets that will provide goods and services in the
future. A corporation invests capital to create a productive asset. The
benefits of this investment (cashflow and
ownership) are delivered to the investors via a variety of contracts,
including debt, preferred equity, and common equity. We can see that there is
no consumer good or service produced by finance directly -- it is a means of
creating the productive asset, which is what creates the goods or services.
We allocate 100 units of time and energy/goods and services to the creation
of an asset that produces 200 units of time and energy/goods and services.
This surplus of 100 units of time and energy is allocated to various parties
-- employees, debt, equity, government. On one side we have savings and
financial investment -- the purchase of either debt or equity securities -- and
on the other we have physical investment in productive facilities. The net
result is that the economy has greater productive capacity. The financier is
merely an intermediary of this flow of capital.
But, what when you loan
money to a consumer directly? Often, in this case, it could be considered a
type of investment. An investment in education can be considered a capital
investment, producing a productive return. An investment in a house creates
the benefit of the house itself, replacing the cashflow
from rent. Here, however, the definitions begin to get fuzzy. Some sorts of
education provide a return, but not a monetary one. Some investments in
housing could as well be considered a sort of consumption. It is conventional
consumer finance wisdom to consider debt that finances the reduction of an
existing cashflow (e.g. elimination of rent) or the
creation of greater future cashflow (e.g.
education) to be "good" debt. But what of debt that finances
spending on unnecessaries, for example a plasma TV
upgrade? This has been generally considered "bad" debt, as the
asset obtained depreciates and does not provide cashflow
or other benefit to pay off the debt.
What of this consumer
finance? It is not investment, since it does not create a productive asset,
even an intangible one like education. We see that the total productivity of
the individual, or the economy as a whole, is not increased. On a cashflow basis, we see that the borrower ultimately pays
for the thing purchased, and then diverts more cashflow
(interest and fees) to the financer. It seems to me that a service has been
provided here. The service is of course credit, which amounts to being able
to move forward in time the enjoyment of a good or service from when it would
otherwise be obtained, via regular savings for example. This is one of the
largest industries in the economy, one that has not been explored much in my
opinion. It appears nowhere on the chart of "consumer spending"
that was shown last week. It employs an enormous
number of people and has huge revenues. One can "invest" in a
finance company, as a shareholder or bondholder to a credit card company like
Capital One, for example, but this investment does not produce any goods and
services beyond the finance service previously mentioned; it results in the
diversion of other goods and services to the financiers. Now, I am not going
to get on a diatribe about the "blood sucking bankers." Did anyone
who uses credit cards, payday loans, store finance, rent-to-own etc. etc.
ever think that they weren't going to give up some blood in the process? It's
not exactly a big secret. Yet, this seems to me a particularly unproductive
form of industry, as all those many people working in the financial industry
could be doing something else, providing a different sort of good or serivce. It seems to consume capital -- on an
economy-wide basis -- rather than to multiply it. Of course, the finance
businesses seem to be accumulating capital, but what they are really doing is
accumulation obligations from others to divert some of their production to
the financiers. The financiers of the financiers -- investors in debt of a
credit card company for example -- are not enjoying cashflow
from a new productive asset, they are enjoying cashflow
from existing productive assets and existing employment labor.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset management.
Lewis has written for the Financial Times, the Wall Street Journal Asia, the
Japan Times, Pravda, and other publications. He has appeared on financial
television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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