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The Zombie Banks Feast, Whilst the Economy Starves

Economics / Credit Crisis 2011 Dec 20, 2010 - 02:22 AM GMT

By: Gary_North

Economics

Best Financial Markets Analysis ArticleJapan, Inc. is run by the big banks for the big corporations. America, Inc. is run by the big corporations for the big banks. Take your pick.

Japan has not had hyperinflation. Neither have we. But will we? In the words of Nashville part-time singer and full-time financial advisor, Merle Hazard, "Will it be Zimbabwe or Japan?" If you have not seen Merle's video, you really should. It's here.


The columnists are divided on this issue. Today, it's the Japan scenario. Consumer prices are flat. The Federal government is running a massive deficit that is about to become a lot more massive, if the President and the Senate have their way.

The Federal Reserve System is playing the role of the official counterfeiter. It is passing the fiat money to the Treasury, or says it will. This is not Japan's scenario. The Bank of Japan did not inflate the yen sharply. This is why price inflation did not take place. Neither did price deflation. For 16 years, Japan's price level has remained close to flat.

Japan's problem has been the commercial banks' unwillingness to admit that they made bad loans in the second half of the 1980s. They refuse to write down those loans. But they also refuse to lend to small businesses. So, there has been little economic growth. This is the infamous Japan syndrome or Japan malaise. There is not enough capital to fund new, innovative businesses. Government bonds are absorbing people's savings.

The stagnation of the Japanese economy has been the result of the 1980s bubble, followed by large, paralyzed banks using any profits to pay down old loans. This has stifled innovation in Japan. It has protected the banks.

The stock market, which was at 39,000 in late 1989, is now around 10,000. It has been in the 8,000 range. Those who invested in stocks during the bubble years, 1985–1989, have lost most of their wealth. They are now two decades older. There is no way for them to recoup their losses. The past is past. They are running out of future.

NO ONE WARNED INVESTORS

Here is the grim reality. For over two decades, those leaders with real influence have not said anything like this. "Japan is now suffering from the Japanese disease. The nation's economy will not grow much. There will be few major breakthroughs. China will replace Japan as the winnovator."

Nobody said, "You should get out of Japanese stocks and stay out. This market is going nowhere. It will collapse by 75% and then bounce around for 20 years." No one said to Japanese investors that they had no chance of retiring comfortably on any dividends from Japanese stocks.

Investors who are ready to retire see that their stock market dreams in 1989 are all gone. For two decades, stock salesmen have said, "This market will recover." The have been wrong. This market did not recover. It has languished, while Asia's two largest economies have soared in the same era.

The dreams of these people have been destroyed. They believed the stock salesmen. They believed that the Japanese economy would recover from the 1990 disaster. Not only did it not recover, it was hit again in the 1998 Asian currency disaster. The decade of the "oughts" – the 2000s – turned out to be the noughts: a string of zeroes. All that older investors have to show for all this is their retirement papers.

The sad thing about this is that these people have wasted the final years of preparation for retirement. They hoped that things would turn around in time. Things didn't. They just bumped along. The investors grew gray. Now white hair is threatening, yet they have no nest eggs worth enough to sustain them. What will they do? They don't know. In any case, it is too late to do anything constructive, other than stay in the labor force or else move in with their sons. In Japanese-size houses, this is unthinkable for Americans.

WHAT CORPORATIONS WANT

Japan, Inc. has been tolerable for companies. They have survived. The economy did not collapse. Also, the absence of bank capital kept newer, innovative forms from becoming a threat to the established firms. This gave the established firms a greater lock on the market.

Japan, Inc. has been bad for workers and investors. Workers were already locked into a system of advancement by ageing. The system was bureaucratic. The new economy has forced modifications in this traditional system of career advancement, but not enough to change its fundamentals. Seniority counts in Japan.

In the USA, there was something like this in large corporations, but that has changed because of competition from Asia. Companies now show less loyalty than they did in 1970.

Small business always had less seniority. A small business could not afford to keep dead wood on the payroll. So, there was far less loyalty or predictability. The seniority system is not there to protect all workers.

The average worker in the USA has nothing like the Japanese corporate tradition to protect him. He is expendable. So, he relies far more on a pension to protect him. The trouble is, few Americans have sufficient reserves to survive a decade of retirement, let alone two decades.

Like the first wave of Americans on Omaha Beach, workers in the USA assume that they will survive. They will retire on time and live in comfort. They do not run the numbers through a retirement calculator. They really do not want to know.

Year after year, they stick with their IRAs and 401(k) plans. They follow the conventional wisdom. They put over half in American stocks. They buy few foreign stock funds. They see their deliverance in dollar-denominated assets. They see American stock funds as the safe ones. They assume that, one of these days, the U.S. stock market will look like Japan's, 1985-1989.

It has not happened for a decade. Yet American investors still dream, just as Japanese investors still dream. Japanese investors have had to learn for two decades that the stock market does not deliver. The story sounds so good. But it does not come true.

LISTENING TO CHEERLEADERS

Think of the wasted time, 2000–2010: listening to CNBC or other business news channels. "Where is the market heading today?" they ask. Who cares?

Consumer price increases took over 20% off the value of those 2000 prices. This erosion did not reduce investors' faith in stocks. The crash of 2008 did shake faith, but this is the shaken faith of a person who knows no other response than to do it again. "Next time, it will work." It did not work in Japan. "But it has to work." Why? "Because I need it to work." So did the investor in Japan, 1990–2010.

From time to time, I see a segment of the Today Show. My wife watches it in the morning while she wakes up. I peek in to see if there is anything new. I have read Google News, so I know there isn't anything new. But I like to see what the featured story is.

Occasionally, I see someone interview someone at CNBC – probably Erin Burnett. She used to be the cute young thing. Now she is the still attractive mature thing. I am waiting for her to become the visibly aging thing, the way Maria did. Anyway, she tells us that market indicators point up or down. The big story of the morning is this or that. None of it matters. It just fills time. It says, "You should be interested in this." Why? "Because that is where your future is." For most Today viewers, who have no pensions, Wall Street is not where their future is.

This is morning entertainment. But morning follows morning, and the big payoff does not come. The dream of a comfortable retirement fades, just as Miss Burnett will.

Japanese investors have never come to the realization that Japan, Inc. will not deliver the promised goods for investors. It employs people. It develops new products. It perfects old products. It invests in China. It invests in Korea. But it serves the customers, not the investors.

Every free market economy requires this. Mercantilism serves producers. Japan, Inc. is still more mercantlistic than the USA, but the customer is still crown prince, if not the king. Inherently, the customer rather than the investor is the winner.

The goal in capitalism is to become a producer who knows how to serve customers. People should spend time and money pursuing this goal. But they watch TV broadcasters instead. "Up or down today?" Who cares?

CONCLUSION

I think we are in a Japan-like scenario. The Federal Reserve's promise to inflate does point to more price inflation, but our banks are like Japan's: not lending. This keeps price inflation at bay.

At some point, we will move out of Japan's model and into price inflation. But this will not happen until bankers lose their fear. There is no sign of this yet.

The stock market's promoters still offer promise, but that promise has not come true for almost a decade. When will the promised returns arrive? How old will today's retirement preparing investors be? A lot older. But probably not much wiser.

When I want to cheer myself up, I contemplate Erin Burnett's retirement portfolio. She and I may retire at about the same time. My retirement will be a lot cheaper than hers. My real estate expenses will already be covered: no cable, no air conditioning, no air. She will face a higher cost of living, still being alive.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    http://www.lewrockwell.com

    © 2010 Copyright Gary North / LewRockwell.com - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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