Sridhar Vembu’s Blog

Here is a NY Times article Revival in Japan Brings Widening of Economic Gap and that has a nice chart that shows just what a decade of ultra-low interest rates and ultra-cheap money has done.

Keynesians like Paul Krugman have given the usual “Print Lotsa Money” advice to Japan, which the Japanese mostly adopted. The zero interest rate policy was adopted to fight deflation, but the reason the deflation happened was the monster bubble of the 1980s in Japan (remember how the Imperial Gardens in Tokyo were supposed to be “worth” more than all the land in California?) So instead of letting the bad investments of the bubble get cleaned up, Japan chose the path of propping up and bailing out zombie companies. In the process, the government debt in Japan has reached “world-class” levels. Japan faced the ignominy of its debt being rated lower than Botswana’s.

The chart above shows one consequence of this. A substantial segment of the population say they have no savings for retirement. In a rapidly aging society, with a heaviliy indebted government, this is not a good thing.

But Japan has one thing going for it that most western countries don’t. As the NY Times articles puts it, in a somewhat negative tone:

This is consistent with most Asian societies, and I think of it as a good thing, while NY Times reports as if this were a problem. Here lies a potential solution to the problem of an aging population, without bankrupting the government; children take care of their parents post-retirement, oh, what a quaint notion. In fact, it is not some uniquely Asian phenonmenon - government social security programs have broken that inter-generational bond in the West, so much so that the practice itself looks quaint to NY Times. I hope Asia doesn’t blindly emulate the West in this.

NY Times had a story The Economics of Henry Ford May Be Passé where they provide the chart below that shows how average hourly wages for workers who are in the bottom 80% of income have stagnated in the last 30 or so years, after going up steadily for decades.

Nixon abandoned the convertibility of US dollar to gold in 1971, which matches pretty well with the stagnation seen in that graph. I am sure mainstream economists will have their complicated explanations, including rising oil prices, globalization, what have you. And I am sure gold is a barbarous relic that has nothing do with stagnating wages. After all, their equations work perfectly with any form of money, including money made from thin air. Except that in the real world, abandoning gold has had consequences. To repeat myself, the road to hell may be paved with good intentions, but it is usually paved by macro-economists.