Monday, March 9, 2009

We are all Japanese now ...

... even though some Japanese are more Japanese than other -- for example, as Wolfgang Munchau points out, the Germans:

In an L-shaped recession, however, recession gives way to depression, despite the fact that both countries thought they had done their "homework". If nobody can afford to run a large deficit for a long time – which is what an L recession effectively implies – the economic models of Germany and Japan will no longer work. Germany had a current-account surplus of more than 7 per cent last year. It is the world's largest exporter. Exports constitute about 41 per cent of national gross domestic product – an extraordinary number, given the size of the country.

So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradeable goods...

Unfortunately, the opposite is happening. Germany is clinging to its export model like a drug addict. An example is the debate about the future of Opel, the European car manufacturing subsidiary of General Motors. Opel is unlikely to survive without help from the government. The proponents of a state bail-out of Opel argue that the company is systemically relevant. This argument is obviously wrong. There can be systemically relevant banks, but there can be no systemically relevant carmakers. But the answer is also revealing. What it means is that Opel is systemically relevant for the country's export-oriented model.

I reiterate and refine my thesis.  The level of sustainable debt in an economy is governed by the level of trust between private actors, the level of trust between private actors and the government, and the level of trust between governments.  Rising inequality destroys every aspect of this trust and results in a drawn-out period of netting out the debt.  The is the financial analogy to the trade protectionism that made the Depression Great.  If trust is a non-zero sum game, not-trust is a negative sum.

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