This entry was posted on 9/16/2009 10:48 AM and is filed under uncategorized.
Western analysts always do this. They use tools devised
for fairly open rule based systems on government distorted markets of
relationship based systems.
For me the best book on the Japanese collapse is “Japan’s
Policy Trap: Dollars, Deflation and the Crises of Japanese Finance.” Mikuni and
Murphy. It came out in 2002 the same year as my Investing in China. If I may
say so, they have aged rather well.
To quote p.189 the authors attribute Japan’ problem not
to open capital accounts but to:
“A century long policy of accumulating production
capacity and claims on other countries without regard for profitability or
return has saddle Japan with a huge pile of dollar assets. Those assets can be
neither exercised nor exchanged without destroying the political and economic
base of the Japanese system, yet their sheer weight has defeated every attempt
to restart the economy”
Sound familiar?
The real problem is change. Everyone makes mistakes,
people, CEOs and governments. Most systems allow for change of leadership to
change policy and correct mistakes. Until last month, the LDP had run Japan
basically since 1955. “The ruling elite keeps trying the same old initiatives
in the hope that somehow they will work like they always used to.” p. 249 “As
we consider the various aspects of the Japanese system, we discern a basic
pattern repeating itself over and over. Anything that can be traded, anything
that can give rise to competitions is forced into what amounts to a single
system of institutions subject to bureaucratic control.” P. 258
Any country we know?
As I said in my piece about protectionism, the Chinese
are starving the private sector and using stimulus money and sovereign wealth
funds to renationalize the economy.
The lesson of Japan for China is about the need to change
and lessen government control. Instead they are doing the same thing that the
Japanese did. They are making more bad loans to same unprofitable state owned
companies to the tune of well over $1.2 trillion in the last year. They have
not even dealt with the bad debts in the Asset Management Companies from the
1999-2001 recessions!
In this financial crisis the American banking system
failed depositors, taxpayers and investors as intermediaries in their prime
mission to allocated capital to the most efficient and safest borrowers.
Fortunately, in systems with economically efficient legal infrastructures, the
banking system can correct its mistake. Both banks and companies can fail and
reallocate capital. This did not happen in Japan and is not happening in China.
“In such a system [Japan] unprofitable businesses can be
kept alive for years – even decades – beyond the point that disclosure
requirements would have automatically forced their demise. And as long as it is
up to the government to ensue the solvency of corporations and banks, they need
not transform themselves into profit seeking enterprises” p. 210
As I reread the book, the parallels pop off the page, but
not as a bubble, quite the reverse. The lesson of Japan is probably years of
subpar growth for China. Professor Michael Pettis has suggested the same thing
without invoking Japan (Brace for a decade of lower Chinese growth, http://www.ft.com/cms/s/0/50179048-779f-11de-9713-00144feabdc0.htmlFYI Pettis’s article provoked a storm of
protest. I have read that there are two types of China analysts, Bulls and
Super Bulls. Growl)
