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Tag Archive: Japan

  1. There’s A Better Alternative To Cutting Social Security…

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    On Sun­day morn­ing, I woke up just in time to hear Sen­a­tor Lind­sey Gra­ham announce on a TV talk show that he isn’t going to vote to increase the U.S. debt limit unless Social Secu­rity and Medicare ben­e­fits are cut for peo­ple under 55 years old. I started lis­ten­ing care­fully to the pro­gram because if Sen­a­tor Gra­ham has his way two of the peo­ple that will have their ben­e­fits cuts are my wife and me. While we are both under 55 years old, we have paid into the sys­tem for more than 30 years and would feel cheated if the terms under which we paid our taxes for more than three decades was changed; espe­cially since we know that there is a bet­ter alternative.

    Sen­a­tor Gra­ham believes that future Social Secu­rity and Medicare ben­e­fits cost too much and if left unchecked will even­tu­ally bank­rupt Amer­ica. He feels so strongly about his posi­tion that he is will­ing to bank­rupt Amer­ica now by refus­ing to vote to increase the debt limit rather than wait for Social Secu­rity and Medicare costs to bank­rupt us later. Sen­a­tor Gra­ham knows that a fail­ure to increase the debt limit will cause a U.S. default and destroy our national econ­omy. But he seems to believe if a Social Secu­rity and Medicare are fis­cal hand grenades that are going to blow us up any­way, 2011 is as good a time as any to pull the pin.

    While Mr. Gra­ham is cor­rect in his asser­tion that Social Secu­rity and Medicare costs will be an increas­ingly dif­fi­cult bur­den for future gen­er­a­tions, his solu­tion doesn’t address the under­ly­ing cause of the prob­lem — dete­ri­o­rat­ing demo­graph­ics caused by an aging U.S. pop­u­la­tion. Sim­ply put, unless some­thing changes there will be too many older Amer­i­cans who want to receive ben­e­fits which will be paid for by too few younger Americans.

    Demo­graphic prob­lems require demo­graphic solu­tions and Sen­a­tor Gra­ham isn’t attempt­ing to deal with the under­ly­ing pop­u­la­tion prob­lem fac­ing the U.S.

    Here’s a sug­ges­tion for Sen­a­tor Gra­ham and every­one else that that thinks ham­mer­ing older Amer­i­cans is the way to fix a future demo­graphic imbal­ance; con­cen­trate on get­ting more young Amer­i­cans into the econ­omy so that the demo­graphic grenade doesn’t explode.

    There are two ways to get more Amer­i­cans into the econ­omy; increase the birth rate or allow more immi­grants to be admit­ted into the U.S. Unfor­tu­nately, both alter­na­tives have Con­gres­sional foes.

    Increas­ing the birth rate means enact­ing gov­ern­ment fam­ily friendly poli­cies that encour­age Amer­i­can women to have more kids. More often than not Con­gres­sional crit­ics label fam­ily friendly pub­lic pol­icy as an evil exer­cise in social engineering.

    The other way to fix the demo­graphic prob­lem is to have peo­ple move to the U.S. to live and work. Unfor­tu­nately, immi­gra­tion reform has been stuck in Con­gress for more than a decade and last month an attempt at encour­ag­ing young and edu­cated immi­grants to stay in the United States, the DREAM Act, was voted down.

    Right around the same time as the DREAM Act was going down in Sen­a­to­r­ial flames, the Cen­sus Bureau announced that dur­ing the last decade the U.S. pop­u­la­tion grew at the slow­est pace since the Great Depres­sion. It’s no coin­ci­dence that the econ­omy was ter­ri­ble both dur­ing the last decade and the Great Depression.

    Immi­gra­tion advo­cates on both sides of the issue need to under­stand that the size, age and com­pet­i­tive­ness of the U.S. pop­u­la­tion is the largest sin­gle deter­mi­nant of our eco­nomic wel­fare. An older, slower grow­ing and less well edu­cated pop­u­la­tion will always have less eco­nomic wealth than a younger, grow­ing and bet­ter edu­cated population.

    Even the lin­ger­ing hous­ing cri­sis is a hostage of dete­ri­o­rat­ing demo­graph­ics. If the pop­u­la­tion of the U.S. had the same growth rate from 2006 to 2010 as it did from 1995 to 2000, the over­hang of unsold and unoc­cu­pied homes would be dra­mat­i­cally smaller. New house­hold for­ma­tion dri­ves hous­ing demand and is a deriv­a­tive of pop­u­la­tion growth. Slow pop­u­la­tion growth and an aging pop­u­la­tion are ter­ri­ble for housing.

    Demo­graph­ics drive both gen­eral eco­nomic sup­ply and demand. On the sup­ply side, young and highly edu­cated work­ers are the seed corn for a pro­duc­tive work force. Younger work­ers also push up aggre­gate demand as they spend money to raise their fam­i­lies and live active lives. Dean Baker recently wrote that retirees con­sume only 70% of non-retirees.

    If any­one wants to see what really bad demo­graph­ics do to an econ­omy, just look at Japan. In the 1980s Japan had a fast grow­ing and hard work­ing labor force. The con­ven­tional wis­dom was that it was Japan’s des­tiny to dom­i­nate the global economy.

    Con­ven­tional wis­dom about Japan was wrong and when the Japan­ese pop­u­la­tion started to age, birth rates dropped and the econ­omy slowed. There was a pop­ulist back­lash caused by the eco­nomic slow­down that resulted in xeno­pho­bic poli­cies that effec­tively cut off Japan­ese immi­gra­tion. Japan even has a sort of sec­ond class res­i­dence sta­tus for chil­dren of immi­grants, even if these chil­dren were born and raised in Japan.

    Last week the Japan­ese gov­ern­ment announced that in 2010 the Japan­ese pop­u­la­tion shrank by the great­est amount ever (other than dur­ing peri­ods of war) and that the trend towards a smaller and older pop­u­la­tion will con­tinue for the fore­see­able future. Since 1993 the Japan­ese labor force hasn’t grown and demand has remained weak for more than a decade. It’s been a long time since any­one has been wor­ried about Japan dom­i­nat­ing the world economy.

    Sen­a­tor Gra­ham and Con­gres­sional anti-immigrant advo­cates are mak­ing the same mis­takes that Japan­ese lead­ers made 20 years ago. Rather than learn­ing from the expe­ri­ences of other coun­tries and his­tory, Sen­a­tor Gra­ham is read­ing from the same play­book that robbed Japan of its future and if con­tin­ued will have the same effect on the U.S.

    Before enact­ing large scale cuts in retiree ben­e­fits the U.S. needs to do every­thing it can to increase the tax base and fix its demo­graphic prob­lem. Cut­ting ben­e­fits should be the last pub­lic pol­icy option, not the first.

  2. Japan’s Demographic Time Bomb Is Imploding


    Accord­ing to Ambrose Evans-Pritchard Japan is quickly turn­ing into devel­oped world’s sick­est econ­omy and could soon tip into an uncon­trolled down­ward spi­ral. Evans-Pritchard reported last week in the Tele­graph that Japan is reach­ing the point of no return where it won’t be able to meet its oblig­a­tions and could enter a debt death spiral.

    While Evans-Pritchard is one of my favorite writ­ers, at the end of the arti­cle he comes to the wrong con­clu­sion about what the West should learn from Japan. Evans-Pritchard sug­gests that too much gov­ern­ment spend­ing result­ing in too much debt is the root cause of Japan’s prob­lems and that the West needs to take notice and get gov­ern­ment spend­ing under con­trol. While Evans-Pritchard is cor­rect that Japan’s debt habit is unsus­tain­able, the country’s debt prob­lems are the result of its pop­u­la­tion implod­ing and the fuse finally burn­ing out on its demo­graphic time bomb. The Land of the Ris­ing Sun is in trou­ble because it suf­fers from an insu­lar soci­ety that dis­cour­ages immi­gra­tion and implic­itly encour­ages low birth rates. For the last 50 Japan has been slowly com­mit­ting demo­graphic sep­puku and now the inevitable is tak­ing place, i.e., Japan’s pop­u­la­tion is crossed the tip­ping point so that its work force is both rel­a­tively old and shrink­ing and as a nation Japan can’t sus­tain its stan­dard of living.

    It shouldn’t be a sur­prise to any­one that Japan is fac­ing defla­tion, falling domes­tic demand, stag­nant to shrink­ing GDP and, as of recently, a low national sav­ings rate. They are all the result of Japan’s bad demographics.

    Vir­tu­ally all eco­nom­ics stu­dents learn that when the work force of a nation shrinks it is dif­fi­cult if not impos­si­ble to sus­tain eco­nomic growth and a vibrant econ­omy. Also, retirees tend to con­sume less than fam­i­lies that are rais­ing chil­dren and as each gen­er­a­tion ages towards retire­ment it tends to con­sume less and less caus­ing domes­tic demand to shrink. Aging pop­u­la­tions also have low sav­ings rates because most retirees con­tinue to spend (par­tic­u­larly on health­care) but stop work­ing and cash out of their retire­ment nest eggs to live.

    If the Japan­ese econ­omy keeps on track­ing demo­graphic mod­els, its prob­lems will worsen until even­tu­ally a there will be an unsolv­able cri­sis. There is inevitabil­ity that Japan will con­tinue to decline and only rad­i­cal social reform will change the outcome.

    The les­son that the U.S., EU and Great Britain needs to learn from Japan is that every country’s pop­u­la­tion is the feed­stock for its econ­omy and if we don’t take care to make sure our pop­u­la­tion is dynamic, healthy and grow­ing sooner or later bad eco­nomic things will hap­pen. In Japan’s case, large struc­tural deficits are the byprod­uct of bad demo­graph­ics and not the cause of its problems.

  3. The Japanese Economic Lesson – Demographics Matter, A Lot


    The U.S. has been try­ing to learn from Japan but keeps on get­ting all of the lessons wrong. In the early 1990’s Japan’s econ­omy quickly tran­si­tioned from being an “eco­nomic mir­a­cle” to an eco­nomic “bas­ket case”. The con­ven­tional eco­nomic wis­dom is that the Japan­ese eco­nomic dis­as­ter was caused by a com­bi­na­tion of a burst­ing real estate bub­ble, a bank­ing cri­sis and inef­fec­tive gov­ern­ment pol­icy. Unfor­tu­nately, the con­ven­tional wis­dom is wrong. The rea­son that the Japan­ese econ­omy tanked was an aging and shrink­ing domes­tic work force and no amount of bank­ing reform or fis­cal stim­u­lus will cure that prob­lem. Over the long term, demo­graph­ics mat­ter more than any­thing else to eco­nomic growth and well being, and the Japan­ese demo­graphic time bomb that began to explode in the early 1990s is the pri­mary rea­son that the land of the ris­ing sun is in a national eclipse. The Japan­ese les­son that U.S. pol­icy mak­ers should learn is that demo­graphic stag­na­tion kills eco­nomic growth.

    Japan has been sit­ting on a slowly det­o­nat­ing demo­graphic bomb for sev­eral decades. 1993 was the year that the Japan­ese econ­omy lost its “mojo” and that is the year that the Japan­ese labor force stopped grow­ing. In the 18 years prior to 1993, the Japan­ese labor force grew at an aver­age rate of 1.25% per annum and only had one year of ane­mic work force growth (and that year was 1985 dur­ing an acute oil cri­sis when peo­ple vol­un­tar­ily with­drew from the labor force because of a lack of jobs). On the other hand, in the 16 years begin­ning in 1993 the Japan­ese labor force grew at an aver­age rate of 0.04% and had 7 years of neg­a­tive growth in the labor force (which didn’t hap­pen at all in the pre­vi­ous 18 years). The Japan­ese labor force in 2009 has essen­tially the same num­ber of peo­ple as in 1993.

    Fun­da­men­tally, there are only two ways for a nation to have a sus­tain­able increase in GDP. Either it has to have more peo­ple in the labor force or it must increase the pro­duc­tiv­ity of each per­son in the labor force. Because Japan’s labor force hasn’t grown in 16 years it isn’t sur­pris­ing that its GDP has stag­nated. Even worse, because Japan’s work force has grown older in the last 16 years, pro­duc­tiv­ity growth has been ane­mic at best.

    Demo­graph­ics have thrown Japan a “dou­ble action spit ball”. In addi­tional to the sup­ply of goods and ser­vices being con­strained by the lack of work­ers and weak sus­tain­able pro­duc­tiv­ity growth, demand has stag­nated because of the large increase of older cit­i­zens rel­a­tive to younger cit­i­zens. Japan has one of the old­est pop­u­la­tions in the devel­oped world with the pro­por­tion of elderly cit­i­zens explod­ing in recent years. Older cit­i­zens tend to con­sume less than younger cit­i­zens and, as a result, Japan­ese con­sumer demand has been stag­nant. And, the growth rate of the total pop­u­la­tion in Japan has slowed to essen­tially 0.00% per annum with its pop­u­la­tion pro­jected to shrink in future years. Con­sumer demand in Japan is only going in one direc­tion and that is down.

    The U.S. has exhib­ited sim­i­lar, but less severe, demo­graphic trends as Japan since 2001. From 1981 until 2000, the aver­age annual growth rate of the U.S. civil­ian labor force was 1.439%. How­ever, from 2001 through 2008 the U.S. civil­ian labor force growth rate dropped to an aver­age of 0.989% per annum. Just like in Japan, a slow­down in the growth of the labor force is cor­re­lated with national GDP being under pressure.

    And, a fall off of pop­u­la­tion growth destroys demand in the U.S. just like it does in Japan. For exam­ple, there are cer­tain regions in the U.S. that sud­denly hit a demo­graphic wall and went from being a rapid growth region to a no-growth region. Not sur­pris­ingly, these regions have had a myr­iad of eco­nomic issues not seen since the Great Depression.

    I live in South­east Florida which is one of the U.S. regions that hit a pop­u­la­tion growth wall and I have wit­nessed first­hand the cor­ro­sive effect of pop­u­la­tion stag­na­tion. Since 2004 South­east Florida went from one of the fastest pop­u­la­tion growth regions to zero pop­u­la­tion growth. Net migra­tion into South­east Florida died after a series of hur­ri­canes pushed up prop­erty insur­ance rates to unaf­ford­able lev­els for many fam­i­lies. As a result of being unaf­ford­able pop­u­la­tion growth died and South­east Florida became “ground zero” for the real estate crisis.

    The demo­graphic data is clear. Palm Beach County’s annual pop­u­la­tion growth went from 2.5% per annum in 2004 to 0.0% per annum in 2008. For all of 2008 the num­ber of new res­i­dents for all of Palm Beach County was less than the num­ber of new res­i­dents that moved into the county in a sin­gle day in 2004.

    It isn’t sur­pris­ing, there­fore, that Palm Beach County had a real estate crash. Builders con­structed new homes for peo­ple that were sup­posed to migrate to Florida in 2005 and 2006 but never arrived. When the pop­u­la­tion stag­nated, real estate devel­op­ers dis­cov­ered that they had over­built and prices col­lapsed. If net migra­tion to Palm Beach County hadn’t died, home prices might have gone down but not nearly by the amount that actu­ally occurred. Just like in Japan, a fall off in pop­u­la­tion growth destroyed demand and pushed real estate fell into a defla­tion­ary spi­ral. And, the story of Palm Beach County played itself out through­out the state.

    Last week Pres­i­dent Obama started a national debate on immi­gra­tion. More than any­thing else, bad immi­gra­tion pol­icy is bad eco­nomic pol­icy. Immi­gra­tion reform is essen­tial to keep the U.S. econ­omy grow­ing and com­pet­i­tive. Sto­ries abound about how the U.S. is los­ing its place as the des­ti­na­tion of choice for immi­grants that want to become edu­cated, work hard and raise their fam­i­lies. Work visas are harder to obtain and even bring­ing for­eign nation­als into the U.S. for legit­i­mate busi­ness train­ing trips is a hit and miss affair. I that that the U.S.‘s post 9/11 back­lash against for­eign work­ers is cor­re­lated to work force stag­na­tion and is one of the causes of the cur­rent eco­nomic problems.

    Pol­icy mak­ers need to under­stand that immi­gra­tion pol­icy is an eco­nomic tool to pro­mote everyone’s wel­fare. As an exam­ple, one way that the real estate cri­sis could be quickly resolved is to allow more immi­grants to come into the U.S.; but only if the new res­i­dents agree to pur­chase homes in the U.S. Every year the pop­u­la­tion of the U.S. grows by approx­i­mately 3 mil­lion peo­ple. Another 3 or 4 mil­lion immi­grants will suck up excess res­i­den­tial real estate could cure the real estate cri­sis quickly.

    I’m not sure what form immi­gra­tion reform should take but I do know that the les­son that we should learn from the Japan­ese expe­ri­ence is that demo­graph­ics mat­ter; and they mat­ter a lot. Bad demo­graphic trends will always lead to bad eco­nomic conditions.

  4. Sunshine Travel Log Blog – I Went Fishing And The Fed Slowed Money Supply Growth

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    Last week­end I went fish­ing in Tokyo harbor.

    The below pic­ture is my friend Masura Ono with a really big fish that he caught on his boat. Ono-san is a famous lawyer in Tokyo. He is a senior part­ner at the largest law firm in Japan as well as a law pro­fes­sor at the Uni­ver­sity of Tokyo. But, most week­ends, Ono lives his dream which is to be the best fish­er­man in Japan.


    OK…so we didn’t catch that fish when we went out last week­end. But we could have if we tried (I guess).

    Instead, we went out on Ono-san’s boat (see below) and went on an eat­ing and drink­ing extravaganza.

    Below are some pic­tures of the foods that we ate at lunch. The raw squid def­i­nitely reminded me of “Squid­ward” from Sponge Bob Square Pants.








    While I was off in Tokyo boat­ing and fish­ing, the Fed­eral Reserve was qui­etly cut­ting back on the pace of mon­e­tary stim­u­lus. The rate of increase in money sup­ply growth (as mea­sured by sea­son­ally adjusted M1 and M2) has notice­ably slowed and a rough mea­sure of the Fed­eral Reserve’s bal­ance sheet has actu­ally shown shrink­age in recent weeks. The size of the Fed­eral Reserve bal­ance sheet is a proxy for qual­i­ta­tive eas­ing while the rate of growth in money sup­ply is a proxy for quan­ti­ta­tive easing.

    It isn’t sur­pris­ing that the Fed­eral Reserve is slow­ing down given the tor­rid pace of mon­e­tary eas­ing that took place from Sep­tem­ber through Decem­ber. The Fed­eral Reserve has to walk a mon­e­tary tightrope; too lit­tle eas­ing and the US could tum­ble into uncon­trolled defla­tion and a depres­sion while too much eas­ing will result in hyper­in­fla­tion and the destruc­tion of the Dollar’s posi­tion as the world’s reserve currency.

    Set forth below are some graphs that illus­trate the slow­down in mon­e­tary eas­ing by the Fed­eral Reserve. The source for all data was the Fed­eral Reserve’s weekly reports (Fac­tors Affect­ing Reserve Bal­ances – H.4.1 and Money Stock Mea­sures – H.6).

    As the below graphs illus­trates, while I was off gal­li­vant­ing in Asia, the Fed­eral Reserve stopped increas­ing M1 and actu­ally caused the amount of money (as mea­sured by M1) to drop. M1 is the Fed­eral Reserve’s most nar­rowly defined mea­sure of money sup­ply and is basi­cally cash and near cash equivalents.


    The pace of growth of M2 (a more broadly defined mea­sure of money sup­ply that includes most types of bank deposits) slowed to a more nor­mal pace of mon­e­tary eas­ing in January.

    And, the size of the Fed­eral Reserve’s bal­ance sheet actu­ally shrank in early 2009.

    The mon­e­tary data indi­cates a pause in the fre­netic pace of Fed­eral Reserve activity.

    Such pause doesn’t indi­cate restric­tive mon­e­tary pol­icy; quite the con­trary, mon­e­tary pol­icy con­tin­ues to be extremely accom­moda­tive and expan­sion­ary. The pause prob­a­bly indi­cates that the cur­rent phase of mon­e­tary stim­u­lus ran its course and the Fed­eral Reserve needs to reassess its cur­rent posi­tion and the effect of the stim­u­lus that it injected into the finan­cial sys­tem before doing more.