Japan, Inc.

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Japan, 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 aging. 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.

December
20, 2010

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
.

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