Planet Ponzi

by Mitch Feierstein

  And the British public has responded to this honesty with intelligence and stoicism. The Conservative Party is a little behind Labour in the polls, but less than you’d expect for a government in mid-term austerity mode. There is no popular movement against the cuts in general (though specific issues, of course, get people heated). The riots that disfigured London in the summer of 2011 had nothing to do with cuts or the austerity program; they had nothing to do with politics of any sort, in fact. What we saw then was an outbreak of criminality reconceived for the age of social media. Almost three-quarters of those charged with offences following the riots had a criminal record.14 The riots were so bad only because police struggled to adapt their tactics to the fleeting, mobile, Twitter- and BlackBerry-driven criminals of the modern age.2

  What this proves, of course, is that if politicians only dare to be honest, voters will respond with intelligence themselves. Perhaps the greatest lie on Planet Ponzi is that voters and taxpayers have only themselves to blame for the messes their governments make. That’s simply not true. Democracy is great‌—‌but if all it offers is a choice of idiot, the poor old voters aren’t in a position to get things fixed.

  For thirty years, and through administrations of both political colors, politicians allowed Ponzi-ish thinking to creep into every aspect of British economic life. Government debt stayed stubbornly high, when it should have all but disappeared. Household debt became excessive. Property became (and still is) bubblicious. The City of London came to rival Wall Street as a manufacturing center for financial WMDs. The regulators actively boasted of their ‘light touch’ regulation. That thirty-year road has now come to an end. Politics and the economy are in clear-up mode, much like London after the riots. There’s broken glass everywhere‌—‌broken glass and shattered businesses.

  But the clear-up is, in a strange way, inspirational. Tough political decisions can be made. Politicians can be honest. Voters can be trusted to understand what has to be done. The lobbying power of the banking industry can be kept at bay.

  If I’m honest, I’d like this UK government to do more, to do it faster‌—‌and ideally to throw a few bankers in jail. But I’ll settle for what’s on offer. The American (and European) public needs politicians with similar courage. It needs political parties with a similar sense of national purpose. It needs voters to reward them. These things are present in Britain right now. They could yet come to America.

  The alternative isn’t pretty. The alternative is Japanese.

  19

  A van for Fukushima

  I used to work in Japan. I loved it. I liked the politeness, the tidiness, the sense of safety. I liked the food. I liked the sense that kids respected their elders, that society had a place for the aged as well as teenagers. I even liked the kimono-clad girls who used to stand by the elevator doors and bow, covering their mouths with their hands as they giggled at me. (I never figured out why they did that, either the bowing or the giggling. Or what I was meant to do when they did.) So I like Japan and its people. I’d love to see the country succeed. Yet almost everything that’s happened since I left the country in 1988 has been detrimental to its chances of success. I would say that it’s a tragedy, except that tragedies are meant to be whizz-bang affairs: a few swift acts, then a stage slippery with blood. Japan’s agony is so much slower than that. It’s been a full generation now since the country skidded into catastrophe and there’s still no real sign of change.

  Let’s start, as ever, with some facts. In the twenty years to 2011, Japanese GDP per head has grown by just 0.7% per annum. Inflation has averaged less than 0.1%. Households and firms are not grossly indebted by any means, but their banks have distended balance sheets‌—‌in relation to national income, banking debts are twice as high as they are in the US. Worse still, gross government debt is a crazy 229% of GDP in 2011 and is forecast to rise to more than 250% of GDP by 2016. Now, it’s quite true that net debt is much less than this. Much of Japanese government debt is held by different, interlocking units of government, so that the government’s level of net debt (that is, total debt minus total financial assets) was 128% of GDP in 2011, and is projected to rise to 164% in 2016. You can find champions of the Japanese government arguing that even these lower figures overstate the true level of indebtedness because, if you look only at debt held by the public (i.e. excluding debt held by Japan Post, the Central Bank, the National Pension Fund, and so on), the figure falls even further, to around 60% of GDP.1

  But we’re not going to be so easily soothed. For one thing, we’ve already learned that the structure and gross amount of debts matter very much. Mountainous piles of borrowing combined with a weirdly convoluted system of public finance combine to form a huge problem in the making. And in any case, net debt stands well in excess of Italian levels. Worse still, that figure is projected to rise and rise. It’s extraordinary that the Japanese yen is seen as a safe haven for investors when simple mathematics show the country to be in worse shape than Italy.

  That basic problem is compounded by three further issues. The first is that Japan has simply stopped growing. Its economy is a mere ghost of the roaring tiger of the 1980s. Very high levels of debt could be quickly demolished if the economy were growing strongly; but not only has growth been largely absent for two decades, there is not, even now, a plan for restoring it. I know that the country has a culture of consensual decisionmaking and careful planning, but twenty years?

  The second issue is that Japan hovers between very low inflation and actual deflation‌—‌that is, a situation in which prices fall year on year. You might think that since inflation is a bad thing, deflation must be a good thing, but that’s not true at all. For one thing, if consumers believe that they can buy stuff (TVs, trainers, washing machines, cars) more cheaply next year than they can this year, they’ve got every incentive to defer purchases, which holds back demand, which holds back growth. Deflation also makes it less attractive for firms to invest. So if, for example, you were a car company wondering whether to expand capacity, you’d be in the position of having to pay for your plant and equipment upfront, while knowing that the products you are intending to make will likely sell for less and less each year. That’s not a tempting prospect; so it’s no surprise that investment has fallen steadily in Japan over the past two decades.2

  The third issue is Japan’s feeble political class. Including the current prime minister, Yokishiho Noda, Japan has had six prime ministers in the past five years. There has been a change of governing party in that period, and multiple shifts of factions and power-brokers. But nothing changes. Indeed, because political factions seem somewhat more important than parties in Japan, it’s not even clear that voters have any real input into who governs them or how policy is conducted. The feebleness of the resulting governments is hard to exaggerate. Here, for example, is an account of one tiny incident arising from the Fukushima disaster:

  Immediately after the earthquake and tsunami on March 11th that crippled reactors at the Fukushima Dai-ichi nuclear power plant, all but one of the devices to measure radioactive matter in the area were knocked out. So the authorities in Tokyo sent up a vehicle stuffed with gauges to assess how dangerous the leakage was.

  Bewilderingly, says Goshi Hosono, a politician recently appointed to oversee Tokyo Electric Power (TEPCO, the utility that runs the plant), the vehicle got stuck in traffic. It then ran out of petrol at a time when the tsunami had led to a nationwide shortage of fuel. Because of this, the government abandoned the mission. Later, the government declared the Fukushima incident to be on the same level of seriousness as the accident at Chernobyl 25 years ago.3

  This is just extraordinary. You have in your country a nuclear disaster that’s as bad as or worse than Chernobyl and you can’t get some measuring equipment to the site in a timely way? If circumstances had been genuinely impossible, one would have to have sympathy, but journalists had no difficulty in getting to the scene. If they ran out of petrol, they simply bought some more. Or
borrowed a car. Or found a helicopter. Or did something else. The point is, they fixed the problem. It’s what they were paid to do. Yet the government of the country‌—‌which boasts an army, a navy, and an air force; plus a full range of civilian emergency services; plus some of the most technically advanced companies in the world; plus a large nuclear industry; plus an astonishingly stoic and hardworking population‌—‌was unable to get a van to the site. This inertness, this feebleness of action isn’t just pathetic. It’s appalling.

  And in a way, Japan’s debt problem is eerily analogous to its nuclear problem. It is now clear that TEPCO, the nuclear utility in question, has been slothfully, shamefully managed. The basic problem was not simply one of reactor generation and design. Poor management allowed problems to fester and persist. For a long time, that didn’t seem to matter. Then something went terribly, tragically wrong‌—‌and it became clear how very much it mattered.

  The country’s debt is the same kind of issue. At the moment, approximately 95% of Japanese government bonds are bought domestically.4 That sounds like a strength, but it isn’t really. From the point of view of domestic savers, very low interest rates plus negative inflation have seemed to make a perfectly sane investment proposition. Yes, you get a low return on your money; but then the money itself is becoming more valuable, year on year, as prices fall. And that’s fine‌—‌until it reaches the tipping point where it’s not actually fine at all. Japanese bond yields today have effectively no premium at all for risk. Bond investors simply assume they have a 100% chance of getting their money back. That’s why interest rates in the ten-year bond are as low as 1%.5

  But remember that net debt is projected to carry on increasing‌—‌to Greek levels and beyond. Remember too that the Japanese population is aging, and as it does so it will be more inclined to draw down on its savings, thereby starting to close off a critical source of funding. As those domestic sources of funds become harder to tap, the country will need to start looking to overseas investors; yet those investors have no reason to buy Japanese bonds at their current levels. (Of the 5% of government bonds held by foreign investors, the large bulk is held by central banks. True private sector overseas investment in Japan is essentially nil.)

  And that’s the nightmare scenario. Domestic savers lose the capacity or will to fund the government. In order to lure in investors from abroad, interest rates have to rise. But as soon as they do, the sustainability of a 150% net debt ratio starts to be called into question. Which means that the days of a zero per cent risk premium are gone for ever. Which pushes interest rates up again. Which makes that debt ratio seem ever less sustainable.

  Plus, of course, these vicious circles contain spirals within spirals. If the Japanese government finds itself in a position of having to reassure foreign investors of its creditworthiness, it will have to start cutting expenditure or raising taxes. Doing so will produce a temporary improvement in government finances, but at the cost of imposing cuts on an economy that is already growth-free and prone to deflation. If consumers are unwilling to spend and investors to invest in today’s economy, they will be even less willing to do so in an economy marked by weak government finances, budgetary austerity, and sharp deflation. The country risks combining the debt levels of Greece and the growth levels of Portugal.

  If you want an even scarier spiral-within-a-spiral, try this. Japanese banks made losses solidly for ten years from 1993. They then dipped into loss again in 2008. In a low-growth, deflationary economy, their opportunities for genuinely profitable loans are restricted, with the result that (with frightening lack of imagination) they invest much of their customers’ deposits in government bonds, to such an extent that banks comprise some 45% of the total market for these bonds. Which is fine‌—‌someone needs to buy those bonds‌—‌but if your major customers are perennially loss-making firms, it won’t be too long before those customers disappear. Even in Japan, you can’t make losses for ever and expect to survive.6 And if banks fail or are forced to shrink their balance sheets, their purchases of government bonds will inevitably tumble.

  Finally, domestic investors aren’t idiots. They’re looking to safeguard their money, to create a store of wealth for old age and perhaps to turn a profit. Historically, the Japanese authorities have treated their savers as somehow ‘locked in’‌—‌but this is a lock without a key and a prison without walls. As soon as Japanese savers consider that their money might be safer elsewhere, that’s where they’ll put it. Given that the yen has risen steadily against other currencies, those savers have made prudent investments so far, but a turn in the currency could precipitate a rapid change in mood. We haven’t reached that tipping point yet, but remember: all Ponzi schemes feel OK while you’re in them. But they implode fast, and catastrophically. The ratings agencies are already starting to warn of the problem‌—‌and not only are they absolutely right, on this occasion their message is timely.7 It’s timely because there is actually scope to act before it’s too late.

  The main lines of action are utterly obvious. The government needs to throw every lever likely to restore economic growth. Japan’s manufacturers are excellent, but its service industries are feeble. There’s too much regulation, too much monopoly, and a lack of innovation quite remarkable in a country whose innovative abilities in other fields are so striking. Government bureaucrats, who have a strange habit of stifling any change that doesn’t suit them, have got to get back to doing their jobs: executing the policies decided upon by the country’s elected leaders. And those jobs need to be tackled with vigor. If a van needs to be sent to Fukushima, that van has to get to Fukushima.

  It’s truly hard to exaggerate how anti-growth and anti-openness the Japanese civil service can be. Following the Fukushima disaster, one bureaucrat chose to speak out rather than continue to collude with the cover-ups, the hostility to competition, the outright corruption. In the words of a blogger for The Economist:

  Among those who deserve honour is also a humble bureaucrat at the trade ministry. In a system that prizes remaining nameless, faceless and not rocking the boat, Shigeaki Koga chose to step forward and reveal some of Japan’s ugliest secrets.

  After [the Fukushima disaster of] 3/11, Mr Koga decided to speak out about the awful practices he had experienced while working on Japan’s energy policy. The disaster at the Fukushima nuclear plant, run by TEPCO, is symptomatic of a wider malaise. The utility companies buy the academy by sponsoring research, buy the media through mountains of public-service advertisements and junkets, buy big business by paying top-dollar for everything, buy the bureaucrats and regulators by handing them cushy post-retirement jobs.

  Talking to him one gets a chill down the spine. Often, bureaucrats are regarded as lemming-like self-interested do-nothings or devious micro-managers. But Mr Koga’s brave words and deep understanding of how energy companies pad their costs, block competition, keep energy prices high and ultimately strangle Japan is an antidote to that image.8

  It’s important to understand that what Mr Koga (who has been transferred to a meaningless job, whose views have been ignored, and whose policy recommendations have been disregarded) described is not an exception. The problems he exposes are ubiquitous across vast swathes of Japanese industry and government.

  The solutions to these problems aren’t a secret. All Western governments need to manage their energy suppliers, procure competition, ensure stable energy supply, and so on. They’ve developed policy tools to do these things, some better than others, but almost all better than Japan’s. The sad truth is that the Japanese no-growth economy is an easily fixable problem and yet no one in Japan has the guts to fix it. It’s a terrible shame.

  All of which suggests that most of all, more even than a gale of deregulation, the country needs a change of culture. It needs a change away from the culture of inertia and timidity that has developed in recent decades and back to something closer to the culture of zing, energy, and inventiveness that propelled the country into the to
p rank of industrial nations. Sony is the world’s second biggest maker of LCD televisions, but for years it has lost money on every set it’s sold. The company’s music-player business has been crushed by Apple. Its mobile phone division, Sony-Ericsson, has likewise lost its way. In America, those problems would drive investors crazy. They’d demand swift, radical, decisive action. In the case of Sony, you have a boss, the Welsh-born Sir Howard Stringer, who wanted to take that action. Who had a plan for doing it. Yet the company’s hierarchy impeded that plan at every step. Radical change wasn’t the ‘Japanese way.’ Obstruction (and death by asphyxiation) was better than bold, decisive change.

  Most bosses viewed the recession of 2008–9 as a disaster, yet Stringer welcomed it, commenting: ‘When this crisis came along, for me it was a godsend, because I could reorganise the company without having to battle the forces of the status quo.’ He’s fired staff, closed factories, and reorganized product development to eliminate the old internal company ‘silos.’9 None of that stuff is fun, of course, but it’s how capitalism works. You can’t have dynamic companies without change. You can’t get creation without destruction.

  And of course you don’t need foreign-born businesspeople to take the lead on these issues. Hiroshi Mikitani, one of Japan’s richest men and brashest, boldest entrepreneurs, recently decided to quit Keidanren, the country’s leading business association. In a symbolic gesture, he announced his departure via Twitter, before following up with a letter. He said, ‘I am doing business to drive Japan to new Japan, and they [Keidanren] want to protect old Japan. So I felt that for fundamental issues, I don’t share the values of the current Keidanren … It is a fundamental philosophical difference, I don’t think it’s right to stay there.’ As I said earlier, I’ve lived and worked in Japan and systemic cultural issues of this sort are familiar to me. The Japan I knew was a society of whispers‌—‌and too little has changed in the quarter-century since.10