Zaitech (Financial engineering). When the Japanese yen began soaring in 1985 many Japanese companies, exporters in particular, began looking for new ways to make money and most ended up in the financial markets. They were going to apply their engineering and manufacturing prowess that had made them successful, to the financial markets to make up for lost profits because of the strong yen (endaka-heavey yen). At the time, the exporters were at their zenith, confident that their scientific know-how would help them overcome any hurdle. There was some sort of free lunch that they were about to exploit. This lead to a frenetic pace of investment and speculation in the market and away from their core businesses. Many companies issued bonds which were convertible into shares on the premise that in a rising market the bonds would be converted into shares. Unfortunately when many of the bonds came due in the early nineties they had not been converted because the stock market had nose-dived. The companies faced a triple whammy of a slowing economy, a crashing stock market which reduced the ability to go to the market to raise funds and a mountain of debt which was now due and they had never anticipated paying for. For a further discussion of some derivative swap strategies companies used see Japanese Euroderivatives, Madis Senner, Euromoney 1989.
As Michael J. Webber and David L. Rigby in The Golden Age Illusion: rethinking postwar capitalism noted there has been a surge globally in financial innovations and products and the U. S. financial community is at the forefront. The extent of financial management and engineering by corporations in the USA is difficult to quantify. There is a large derivatives market in the USA that despite the failure of Long Term Capital Management, Drysdale securities and other firms appears to be doing fine. That is, fine as long as the Federal Reserve is there to bail them out when they make a mistake. US corporations have recently begun to increase their debt levels to buy back shares, which increases company’s earnings by reducing the number of shares outstanding. There has also been an effort to pay employees with stock options. The increased level of debt should the stock market decline precipitously with a slowing economy as it did in Japan will exacerbate the problem corporation’s face.
On the surface there appears to be no debt problem in America today. In fact, the picture is so rosy that we the new Bush administration has put forth a tax cut to spend the projected Government surplus. But as The Economist, ‘The Debt Trap’, January 27,2001 points out assumptions in the USA can take a radical change as they did in Japan:
‘All said, there are enough eerie similarities between America today and Japan in 1989-90 to be worrying. Too much debt was always at the heart of Japan’s weakness. So it is alarming that America’s boom has also been fuelled by massive borrowing by companies and households. Our survey of corporate finance in this week’s issue explores how American firms’ borrowing binge has lenders exposed to some nasty risks. And, as if corporate debt is not alarming enough, consumer borrowing has been even more rampant. By borrowing against paper gains in share values, households have been able to shop until they dropped, not bothering to save.'
'Optimist’s retort that private-sector balance sheets look healthy, because the increase in debt has been more matched by increased assets. However, balance sheets also looked remarkably well in Japan in the late 1980’s—until asset prices tumbled. On most historical assumptions American share prices remain heftily overvalued. A lot of consumer and corporate debt has been incurred on the assumption of everlasting growth and rising share prices.'
The notion that America’s bubble has been smaller than Japan’s also needs qualifying. Japan’s excesses depending chiefly on crazy property prices, while American property has remained fairly sane. But the corresponding boost to debt and consumption in America has come from the stock market. At the market’s peak, American households owned shares worth 175% of their disposable income, much higher than Japanese households’ shareholdings at the Tokyo market’s 1989 peak of only 90% of their income. Just as Japan’s crash led Japanese consumers to raise their savings and cut spending, so the risk is that the same could occur in America.’
Central Bank and Treasury Hubris - Belief that financial markets as well as exchange rates could be inflated at will, as if by waving a magic wand. Policy became a panacea to policy makers. That if something goes wrong it is a policy problem. Whenever these economists are asked about the depression they talk about wrong policy choices and how they learned from the depression, as if human error is a thing of the past.
It must be remembered that the BOJ/MOF thought they could as easily deflate as they had inflated the stock market bubble in Japan. USA administration officials have gyrated the value of the dollar like a yo-yo to suit its political and policy needs. Today we find many prognosticators similarly believe that the Federal Reserve after raising interest rates to quell the economy just as easily be able to revive it, just as the Japanese felt they could prick the stock market bubble and not have it collapse. Click here to go to the Federal Reserve Links
World Stage. As previously noted many countries around the world were copying the ‘Japanese model’ in the 1980’s and today are copying the ‘American model’. But as much as countries were attempting to copy the respective models there was also a strong resentment. High profile acquisitions in America such as Pebble Beach golf course and Rockefeller center by Japanese Investors contributed to the public disdain of it of Japan Inc. Similarly in many parts of the world we are seeing protests against the product and cultural spread of multinational American corporations. Demonstrators have coined the term ‘globalization’ as a catchall to describe the aspects of American multinationals they do not like. Even worse both bubbles saw a propaganda assault of policy. With the belief that their respective economic models had triumphed came an arrogance to begin telling the world what to do. In Japan Sintaro Ishihara wrote The Japan that can say No, Why JapanWill be First Among Equals suggesting the Japan begin throwing its economic weight around. In the USA we have seen articles such as ‘Built in America’, David Hale (Financial Times, January 25, 2000) heralding the triumph of America’s capital markets for its success, the implication being ‘do as we do’. David Sanger of the New York Times in recapping the Clinton administration in ‘Economic Engine for Foreign Policy’, December 28, 2000 acknowledged how President Clinton actively used economic diplomacy in setting foreign policy;
'To deal with a world no longer dominated by nuclear rivalries, Mr. Clinton would place a brand of economic diplomacy at the core of foreign policy. The man who came to office criticizing President George Bush for putting commerce ahead of human rights ended up arguing, quite passionately, that the spread of American-style capitalism would eventually help spread American-style democracy.' (14)NotesWe have also seen a more dominant role of policy prescriptions in such organizations such as the IMF. Unfortunately it is such policy prescriptions that the IMF is dispensing that is beginning to give the USA a bad name in certain places overseas and could one day lead to a back lash, or blow back of sorts unforeseen at this time.
Rich Nation, Poor People. This is how Jon Woronoff in his book The Japanese Economic Crisis (Macmillan, 1996) describes the condition in Japan; ‘ …when you look more closely, this supposed prosperity and affluence appear too only surface phenomena. Deeper down, the Japanese are not faring so well and do not compare very favorably to others who are supposedly less endowed.
It is hard to imagine that such a condition exists in Japan. But as Patrick Smith in his book Japan A Reinterpretation (Pantheon, 1997) it has to do with what our perceptions of Japan are and what the reality is:
'Borrowing terms from Buddhist history and bending them, we call the familiar, official Japan the Japan of "the great tradition". Beneath it is the Japan of "the little tradition," the Japan we do not easily discern.
'The difference between the two is very old. In one form or another it is no doubt universal. But nowhere has it been so influential for so long as in Japan. For as long as Japan has recorded its history there has been antagonism between the great and the little, the refined"above" and the ordinary "below." The famous saying of the late feudal period was "Revere officials, despise the people." This crude notion survived into the Meiji era as a clear line drawn between kan and min, officials and commoners, and it is not absent, to put it mildly, in Japan today….
'The conflict between the great and the little is rarely explained in our mainstream accounts of Japan. Yet it is the coiled spring of Japanese history….To grasp it, at least in a general way, is essential to improving our understanding of Japan and the Japanese.'
It is time we asked ourselves--what is the impression we have of ourselves? or others have of Americans? More to the point, where does it come from? Talking heads tell us how great America is, experts of ilk tell us what we should eat, think and wear, all the while we are bombarded with economic and stock market quotes. It all smells of Orwellian double-think or a scene from the Manchurian Candidate. A better sense of who we are may come from the overseas (16)Notes. We see accolades for the American model, but at the same time we see rebellion against American corporations (17)Notes and protest against financial stringy from the IMF. The sad fact is that USA is a ‘Rich Nation, Poor people’. We are having an economic boom and a skyrocketing stock market, which is also leaving many Americans behind. This is probably the hardest pill to swallow, but the bubble economy in both country’s benefited only a handful of people.
Increased workload. We imagine the Japanese to be hard working people, almost workaholics taking limited amounts of vacation time. We assume it is because they love the company or love to work or are looking for a promotion. But as Jon Woronoff found out (Ibid page 134) the answer was none of those; ‘When asked why they worked so long, 44 percent of a Yomiuri Shimbum poll said they could not maintain their standard of living without doing overtime and 43 percent said they could not finish their work within regular working hours.’
In our new era of prosperity Elizabeth Olsen of the New York Times points out (‘Americans Lead the World in Hours Worked’, September 7, 1999) ‘Americans put in the longest hours among workers in industrialized countries, according to a report released today.’ There has also been a stealth attack on our free time as Herbert Lovelace of "The New Sweat Equity’, InformationWeek, May 8, 2000. Lovelace questions the source of all those technological advances that have created the productivity gains Federal Reserve Chairman Alan Greenspan talks about; ‘ ..maybe most of it comes from putting those microchips and fiber-optic goodies into cell phones, voice mail and notebook computers so people can work as close to 24 hours a day as possible. What happened to free time?’ And to think that American comedians use to ridicule the Japanese and all their electronic gadgets?
Rising Wealth Inequality: Wealth inequality rose during both bubbles in Japan and the USA. Most notable was the dramatic rise in wealth of the very wealthy. Jon Woronoff noted this rising wealth inequality (Ibid page 196)’…from 1980-1987, the average value of assets owned by the top 20 percent more than tripled while those held by the middle 20 percent only rose modestly and, inevitably, those of the lower quintiles shrank.’ Professor Edward N. Wolff in ‘Recent Trends in Wealth Ownership, 1983-1989’ April 2000, found a similar trend in the USA,
’Wealth inequality was greater in 1998 than in 1983… The results indicate that the richest one percent received 53 percent of the total gain marketable wealth over the period from 1983 to 1998. The next 19 percent received another 39 percent, so that the top quintile together accounted for 91 percent of the total growth in wealth, while the bottom 80 percent accounted for 9 percent.’Wolff also found that during the same period ‘mean wealth fell 76% for the poorest 40% of Americans’. Can we reasonably argue that the stock market and the American model of capitalism represent the American dream when 40% of Americans have seen their wealth decline during a period which has been called the greatest bull market of all time!
Kakusa (two tier economy). The bubbles in both economies created a two-tier economy of beneficiaries and non-beneficiaries. To quote Woronoff ;(Ibid page 204)
’[B]y the 1980’s, no matter what foreigners may pretend, the Japanese were fully aware of the existence of an economic and social gap or differential and kakusa became the latest buzzword. It was picked up by the government, it was disseminated by the media, and it was bewailed by the people, at least by those who were on the wrong side of the gap.’
With 40% of American households having seen there net worth decline between 1983 to 1998 the USA does have a kakusa of beneficiaries and not beneficiaries. The Internet technology while holding great hope for the American Dream and ending our social gap may actually be feeding the divide. In the USA there is a digital divide that appears to be growing to quote ‘Falling Through the Net: Defining the Digital Divide’ (NTIA, US Dept. of Commerce, 3rd report) ‘…found that there is still a significant "digital divide separating American information "haves" and "have nots." Indeed, in many instances, the digital divide has widened in the last year’. But the digital divide goes beyond Internet access. Many in the USA have begun to talk of a two-tier economy, the new Internet technology lead economy and the financial economy and everything else. Those that work in or are involved in the former are doing well while those that are not are not doing so well.
Sarariman (Salary man). Sublimating oneself to the corporation. The salary man best represents the image of the Japanese worker joined at the hip to the corporation by lifetime employment. The day that begins with the singing of the corporate anthem, followed by long hours followed by almost nightly entertaining of clients only to catch a bullet train home for a few hours sleep before starting again. But the life of the Sarariman was hard and few had it. Patrick Smith notes (Ibid. page 119)
‘Few Japanese –roughly one of five employees—enjoy the benefit of the genuine corporate warrior. In blue chip Japan, wages and salaries are as much 45 percent above those paid by smaller firms…And the Sarariman, like the samurai, is idealized and emulated by the great mass of ordinary people, who can only dream of becoming one.
'What was the object of this dream? The answer seems obvious. There were the pay and the prerequisites, of course, and the security. Still, why would someone wish to emulate those who strive to make themselves "inhuman"?…a dream of identity: Who does not want to make good in whatever way society defines it? But can a dream survive as the harsh reality reveals itself? Does one want to make good when making good might mean, quite literally, working oneself to death?’
'Corporate values took the place of the civic values modern Japan never developed’ (Ibid. Page 118). The same can be said of America today, but our corporate culture is not so much defined by whom we work for but what we consume. ‘We live in what may be the most consumer-oriented society in history…Shopping has become a leisure activity in own right.’ (Page 107) Juliet B. Schor, The Overworked American, Basic books, 1993. Consumption drives the economy and corporate profits. But shopping has taken a bizarre twist and gone from being our leisure activity to defining who we are. Naomi Klein in No Logo: Taking Aim at the brand bullies, (Knopf Canada, 2000) notes that corporations through their marketing efforts, image making and logos have begun branding consumers as if they were cattle: (page 30)
‘The effect, if not always the original intent, of advanced branding is to nudge the host culture into the background and make the brand the star. It is not to sponsor culture but to be the culture. And why shouldn’t it be? If brands are not products but ideas, attitudes and values and experiences, why can’t they be culture as well.’ (18)Notes
In Japan who you worked for defines who you are: in the USA, you are what you wear or what you drive. You are the logo. You consume, therefore you are.
Outsourcing (syn. globalization) workers suffer- One of the struggles for workers in the United States is the inability to compete with corporations on a global basis. In our New World order global corporations can outsource production to the lowest cost manufactures anywhere in the world. They can also reduce costs by pitting various producers against each other. Outsourcing was one of the critical features of Japan Inc. Jon Woronoff in The Japan Syndrome notes (page 78),
‘Subcontracting in Japan is not just an occasional or a secondary occurrence, it is an integral and fundamental part of the Japanese economy’. Westerners always praised the efficiency of large Japanese corporation and their ability to control costs particularly in the 1980’s during the endaka (heavy yen). But these results were achieved at the expense of workers of subcontractors.'
(Ibid. page 79) ‘…Japanese managers of large companies, those so highly appraised abroad, solve their problems by passing them on to the subcontractors. They also enhance the position of their own employees by bearing down on the subcontractors…(page 80) Given the pressure of time, and the lower prices they can charge, the subcontractor’s employees are usually forced to work much longer hours. They may have to give up weekends and vacations. Or, if work dries up, they may find themselves out on the street again. Very few enjoy such a thing as "lifetime" employment.’
Yutori (syn the quality of life) Woronoff The Japanese Economic Crisis (page 128) notes a diminishing quality of life for the Japanese people during the great bull market;
‘For the 1989 White Paper on Livelihood, the Economic Planning Agency polled Japanese men and women to see whether they enjoyed yutori. It is an intangible quality that expresses a sense of contentment. While yutori was obviously something that most Japanese sought, according to a poll less than half the men and somewhat more women attained it. The problem was not so much economic conditions, which had improved, but a lack of free time and spiritual fulfillment. Causes of inadequate yutori abound. The most visible derive from physical living conditions.’Woronoff is referring to Japanese homes, which many have called rabbit hutches and lack amenities.
The USA has ‘inadequate yutori’ as well. The central theme of a focus group findings of women put on by the Center for Policy Alternatives and Lifetime Television (‘Women’s Voices 2000’, July 2000) found; ‘The promise of the New Economy has not yet Delivered for Women and their families.’ The survey went on to find;
‘Women are entering this election season with surprising ambivalence and pessimism. Women say the current economic structure isn’t solving the problems they face: making ends meet, health care, the time crunch, education, safe communities and the future of their families. Women want education for themselves and their children, jobs that pay a living wage, and a better balance of family and work. . While women acknowledge the current economic boom, only a handful says they and their families are profiting by the good economy. They are distressed about the growing divide between the rich and the poor. Many say their own families are just getting by…Stress and lack of time dominated women’s discussions of their lives.’
Women weren’t the only ones feeling left off the prosperity bandwagon. The number of Americans of both genders who considered themselves happy declined between the years of 1972 and 1994, according to documentation presented by Robert E. Lane in The Loss of Happiness in Market Democracies (Yale university Press, 2000). Sadly, he found (page 21) 'The decline in happiness is largely an American phenomenon. For example, from 1981 to 1990 among ten European nations on which I have data, "judgements of happiness have changed little between the two surveys"’.
How did we get to such a position? Part of it may be explained by the Float , which transformed our economic system and put greater emphasis on the market as the arbitrator of all matters and made us more vulnerable to big corporations and special interests. The increase in hours worked and changes in the work force may explain part of it. Beginning in the 1970’s more women began entering the labor force. Between 1970 and 1998 there was a 50% increase in the number of married women with children working (19)Notes Certainly, not all of this activity was due to financial concerns; the new career choices afforded women were part of this trend. But was it a good thing? In 1980 Fortune magazine extolled the benefits of two-income families (‘Two-Income Families Will Reshape the Consumer Markets: In couples, the "me" generation will march through the new decade with plenty of money for the nice things in life’, Walter Kechel III, March 10, 1980):
'The American bazaar, the ongoing celebration of goods and colors, of wish and feel of ownership unsurpassed in history among so numerous a people, will hum with rhythms in the 1980’s. A new class will rise to preeminence in shaping consumer tastes…the resulting scramble should produce real increases in consumer spending averaging 3.7 percent a year over the decade to come, according to an estimate prepared for FORTUNE by Townsend-Greenspan.’But by the late 1990’s the extra cash of two-income wage earners was not worth the benefits. ‘While many married couples in which both partners are employed say they want to work less, they are being forced to work more hours than ever.’ (‘Study reveals the dilemmas of dual-career couples’, Kim A. McDonald, ‘The chronicle of Higher Education’ February 5, 1999).
Measuring Success (Progress): The standards of success for both bubbles were measured in economic and financial market acumen. ‘It’s the economy stupid’, or the lofty stock market which was proof-positive that during the height of the bubbles that Japan and the USA were achieving success. But were those the correct measure?
Richard J. Estes, creator of the Weighted Index of Social Progress ("IS Life Better in Bulgaria? It’s a Matter of Perspective’, New York Times March 5, 1998) argues that life in Bulgaria is better than in the USA: ‘ 'The present social situation in Bulgaria is miserable',he said. 'But in terms of responding to basic human needs, Bulgaria enjoys the legacy of social provision that characterized all of the states and partners of the former Soviet Union, i.e., high literacy, high access to at least basic health care, guaranteed housing, guaranteed income support during old age and other periods of income loss, and so on.' By contrast, Mr. Estes said, the United States loses points because it has 37 million people in poverty and many others on the edge of poverty without adequate social benefits. He said the United States trails other industrial nations in life expectancy, infant and child mortality, childhood immunizations and school attendance.’
The Genuine Progress Indicator (Redefining Progress, rprogress.org) which looks beyond GDP (Gross Domestic Product) as a measure of well being found that the Genuine Progress Indicator in their 1999 report ‘Why Bigger Isn’t Better’ found:
'The data in our 1998 update highlight the need for an alternative measure of economic vitality. As human illness can be concealed on the surface appearance of health, economic robustness as measured by the GDP masks a fragile state of economy growth that cannot be sustained…the GPI, the measure of household well-being, continued to slide, as it has for more than two decades.’
Or consider Child poverty as another measure of our national well being; ‘Nationally, according to census data, the child poverty rate rose to 18.7 percent in 1998, the most current information available, from 16.2 percent in 1979.’ ‘U. S. Child Poverty Rate Fell as Economy Grew, But is Above 1979 Level’, New York Times August 11, 2000.
Chrysanthemum Bulb members: By letting talking heads and their corporate sponsors define America we have let them sweep inequality, unhappiness and distrust of government under the rug and we have become members of the Chrysanthemum club.
The Chrysanthemum club was named after Edwin O. Reischaeur and his circle of colleagues in the post war period that glossed over Japan’s inequities and talked more about consensus building rather than differences. Patrick Smith in Japan A Reinterpretation, Pantheon Books, 1997, notes that the Chrysanthemum club; (page 22)
‘…so named for the seal of the Japanese imperial house. The term was never meant to flatter. Chrysanthemum club members were called geisha. They were considered uncritical apologists for Japan, a role they fulfilled on many occasions. Theirs was the perspective of results. That is, they left our or glossed over the unattractive things about Japan so that ‘success’ appeared to be the sanitary consequence of altogether agreeable arrangements. In The Japanese today everything is winning, …The appearance of ‘cultural schizophrenia’ and corruption are put down to ‘the untutored Western eye’.
The chrysanthemum club mentality operates at many levels. Consider W. Michael Cox, chief of the Federal Reserve Bank of Dallas who along with Richard Alm co-authored a book Myths of Rich and Poor decrying that poverty statistics grossly inflated poverty levels. Writing in a similar vein in an article titled ‘Why Decry the Wealth Gap’, (New York Times January 24, 2000) in response to two reports out about wealth and income inequality, Cox and Alm said;
‘Our response is: So what? Few of us should be surprised-or threatened-by statistics on inequality. Some Americans believe the more equality the better, but the fact is that the distribution of income and wealth isn’t arbitrary. It emerges from trends in the economy and is a byproduct of a decade that created 17 million jobs and added 20 percent to median household net worth…'
'Inequality is not inequity. Artificial efforts to try to curb wealth gaps invariably do more harm than good. Heavier taxation might narrow the division between rich and poor, but it would be a hollow triumph if it stifled the economy. What Americans ought to care most about is maintaining our growth, not the red herring of gaps in income and wealth.’
The words speak for themselves. The sad thing is that so many Americans agree with Cox and Alm, particularly those benefiting from finance and the new economy or those influencing policy. But sadder yet is that dismissing poverty, inequality or economic injustice as nonsense has become acceptable and chic in certain circles, especially if it is done with zeal. It is as if Jonathan Swift’s ‘A Modest Proposal’ has become a real and viable policy option.