WORSE AND WORSER
In "The Japan Fallacy" (March/April 2009), Richard Katz argues that it is wrong to see the economic stagnation Japan suffered in the 1990s as a precedent for what is now happening in the United States. The U.S. crisis, he says, is smaller in scope and has elicited a more forceful government response; it will therefore prove significantly less damaging. But his focus on the U.S. economy is misplaced: it is not North America but rather the entire world that is on the verge of a Japanese-style disaster.
OF SAVINGS AND BUBBLES
Both Japan's "lost decade" and the current global debacle stem from a combination of excess savings and the deflation of immense asset bubbles. Japan's troubles began in the mid-1980s, when the baby-boom generation entered late middle age, the stage in life when people everywhere save a high proportion of their incomes in anticipation of retirement. The chronic elevation of the national savings rate that ensued was problematic inasmuch as savings are by definition foregone consumption, which implies weaker domestic demand and lower GDP growth. This problem was not immediately evident because a combination of loose monetary policy, innovations in financial technology (zaitech), and bad regulation led to the inflation of an asset bubble and a boom in corporate investment. Along with big trade surpluses, these developments sustained overall demand and rapid GDP growth through the end of the decade. But in 1989-91, the bubble collapsed, traumatizing the Japanese people and reinforcing their predilection to save even as corporations gradually started paying down their debts. The loss of investment caused by this deleveraging both revealed and exacerbated the underlying shortfall in consumption.
This insufficient demand was the key to Japan's lost decade. Textbook economic theory suggests that a country with too much savings should export that capital, essentially lending money to foreigners to buy the goods and services that cannot be sold in the home market. Countries such as Singapore and Switzerland have
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