Japan: The Evidence Mounts

The latest information out of Japan shows that the nation's economy has collapsed 15.4 year-over-year. Exports were also in the gutter, having fallen 26%, while imports were down 15%. This is the largest drop in the "world's leading economies," according to CNN.

These numbers are, simply put, depression-level drops. Japan has a very powerful economy, and if it is showing such horrible performance, then other nations - such as the United States - are hurting about as badly.

At this point, with so much evidence coming to bear, it is ridiculous for OECD and other industrialised nations to continue the mantra of 'recession.' To perpetuate such patent disinformation is to assist in further destruction of capital, skills, and productive capacity. A depression requires entirely different planning than a recession.

Unfortunately, it is probably too easy to dismiss these numbers coming from Japan. Having suffered under an on-again, off-again relationship with recession, Japan's collapsing economy can be explained away as the battered nation's inherent 'sensitivity' to economic circumstances.

Instead of dismissal, Japan's collapse should be seen with great alarm. The nation's sensitivity means that it suffers from the 2007 Depression faster than most, but it points the way that other major economies will likely take. We suspect it won't be long before even official Government statistics from, say, the United States, show a similar catastrophic fall.

Fire Up the Presses!

The Year of our Depression 2009 hasn't yet ended its second month, yet already a great sea of red ink is bathing the bailout-happy nations of the world. Japan's exports tanked 46% year-over-year in January; the Royal Bank of Scotland is haemorrhaging pounds like nothing else in British banking history; Fannie Mae put her lil' ol' hand out for more money after losing another $25.2 billion in fourth quarter of 2008.

Perhaps to top it all off, yesterday President Obama unveiled his $3.5 trillion budget, featuring $989 billion in new taxes. Oh, all these numbers are making our eyes bleed, dear Reader! We see a great tsunami of red ink barrelling down upon the economic landscape, and we hope to keep our head above all the mess.

Imagery aside, the implications of all these massive problems is severe: a great deal of pain and misery is required, if a society wants to honestly work its way back to fiscal health. That, however, isn't very popular with the average American, or Briton, for example. It's also political suicide to suggest such a thing: people do not want to work hard, to pay off the national bar tab, or all the gambling debts.

No, the only expedient way out of this mess, the one that is relied upon time and time again, is inflation. These debts will be inflated away into nothingness; President Obama's bloated budget makes this clear. He is only getting started with his spending spree, since he has to make up for the Baby Boomers and their underwater finances.

In summation, we turn to no less a sage that Ernest Hemingway:

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

The Scale of the Crash

Yesterday, Japan reported a 35 percent drop in exports from a year ago. This, coupled with the stock market crash, the housing market crash, millions around the world becoming newly unemployed each week, gives one a pretty clear sense that the world economy has fallen off a cliff.

The world has clearly not only entered a depression, but a great depression. Time will tell if it is worse than the 1929-1939 Depression. In any case, things are bad and getting worse.

In a previous post we said, "A halving of income for citizens of the 'Developed Countries' may well be baked into the cake by now." We ought not to have been so provisional. It is almost certain that incomes will be falling on this order. The question arises: will they fall further?

Unfortunately, the answer is probably Yes. It appears the whole credit-based model of economic activity is suffering a fatal, or near-fatal crisis. Remember, gentle readers, the financial architects of the global system gave us an economy that can only grow when people and organisations borrow and spend. When the borrowing stops, the growth stops.

Unfortunately for the model, at present borrowing can no longer grow. Incomes and revenues are falling, so debt burdens are becoming more onerous to households, businesses, and governments alike. Dropping interest rates to near zero is little help since the principal payments alone are the culprit.

Defaults do little to help the situation as they shock and injure the investors. It is looking more and more like gradual monetisation of debt and resultant inflation will be the only way out in the short term. That will be a frying-pan-to-fire operation, though. It will probably take a bit more time for leaders to employ that strategy effectively, as they hope against hope that the economy will fix itself (via consumer attitude adjustments perhaps?), or in response to feeble 'stimulus' programs.

In the meantime folks, prepare for the worst and hope the storm passes quickly.

The Delusion of American Exceptionalism

On occasion, when we have argued about such things as the collapse of the United States, we have been presented with an interesting rebuttal. It typically runs along the lines of "that can't happen here." When we press for why the United States won't someday fall apart, we hear merely a repetition: "This is America, that can't happen in America."

Well, we beg to differ. No country, or society, in all of history has ever proven immune to disruptive events. Never has a society forever improved without downfall. Great debates can erupt over, say, the nature of the peak of the Roman Empire, or the British Empire, or the Russian Empire... the list goes on, but each has an eerie similarity. One could argue a nation's development follows a bell-shaped curve: a nation starts from obscurity, rockets to its height of power, and then falls again to obscurity.

That's not to say a country's trajectory downwards is a one-way trip. Some countries have reached a hight of power, gotten trashed, pulled themselves out of near or utter ruin, and went on to best their previous peak. Places like Germany and Japan come to mind. These two societies have been through more than one peak-and-bust cycle, and today are considered some of the most stable and industrious countries on the planet.

The United States is a country, a society like any other. It is subject to the same possibilities of decay and collapse as any other country. It is also the longest-running experiment in democratic government, and experiments do not always result as one expects. The United States, one way or the other, will eventually end and become something else. To declare otherwise is tantamount to hubris, which was a favourite plot device of Ancient Greek tragedy. Those plays always had messy ends.