[A-List] Japan Throws a Dime to American Debt Junkies

[Bill Totten]

Helping to keep America spending

by Peter Schiff

forbes.com (September 17 2010)


This week, after the Japanese yen had surged to a fifteen-year high
against the US dollar, the Japanese government decided to intervene in the
foreign exchange markets. To great fanfare, the Bank of Japan initiated a
vigorous campaign to buy US dollars, thereby stemming the rise of the yen
and pulling up the greenback. The effects were immediate, with the yen
falling an astonishing three percent on the day of the announcement.

At a time when American politicians are growing increasingly vocal about
China's currency manipulations, Washington was strangely silent on the
Japanese move. This was completely overlooked by the hawkeyed media.

While missing this blatant irony, the media spin doctors cast the Japanese
decision as an attempt by the island state to prop up its own fragile
economy. More accurately, the intervention was done to help American
consumers buy more cars and electronics from Japan. In truth, although
more American purchases would nominally benefit some Japanese exporters, a
weaker currency is a detriment to the overall Japanese economy.

The politics of currency intervention are actually quite simple. Japan's
economy is dominated by large manufacturers that export lots of goods to
Americans. The problem is that Americans can't really afford to buy in the
quantities that they did just a few years ago. So, instead of looking for
new customers with more money to spend, either in their own country or in
other productive economies, Japanese manufacturers use their political
clout to lobby their government to bail out their traditional US
customers. The bailout takes the form of a direct transfer of purchasing
power from Japanese savers to American consumers, so that Americans can
continue buying products they couldn't otherwise afford. In short, pushing
up the dollar allows Japanese exporters to postpone a necessary, but
costly, restructuring.

The tendency for governments to sacrifice the needs of the general
population in favor of entrenched corporate interests is not unique to
Japan. In the United States, we have taken similar measures on behalf of
our dominant industries. However, instead of manufacturers and exporters,
whose political clout has waned along with their economic prospects,
Washington has moved to protect the profits of the financial, retail, and
real estate industries - the true heavyweights of the American corporate
world. These industries profit when Americans borrow money to buy things
they can't afford. To keep this behavior going, the government must make
it possible for consumers to take on more debt; but, in so doing, these
policies have left us with an ailing economy in need of deep and drastic
restructuring.

In a way, what the Japanese government is doing for American consumers is
very similar to what our government is doing for American home buyers.
Rather than let home prices fall, the US government subsidizes home buyers
so they can continue overpaying for houses they cannot actually afford.
The beneficiaries of these moves are those selling, building, and
financing overpriced homes.

Unfortunately, the last thing we need as a nation is to build, buy, or
finance more homes. Our economy would improve if the resources devoted to
the real estate market could be devoted to other, more needed industries.

Japan should allow the dollar to fall, which would force their
manufacturers to adapt to a changing global market where Americans consume
less, and those in emerging markets consume more. Instead, it is vainly
trying to preserve the status quo and appease entrenched political
factions.

Just like here in the US, Japanese politicians take cover by falsely
claiming that the intervention "saves jobs". However, the jobs that are
saved come at the expense of more productive jobs that are either lost or
not created. If Americans cannot afford to buy Japanese products, it makes
no sense for the Japanese to continue selling them to us. Rather they
should devote their time, effort, savings and resources to selling
products to customers who can actually afford to pay.

Japan's bailout of American consumers is nothing more than international
vendor financing. This is the same technique used by telecom companies
during the Internet boom of the late 1990s. In order to pump up short-term
profits, manufacturers of communications gear loaned money to
cash-strapped Internet startups so they could buy switches and routers. Of
course, when the dot-coms went bankrupt, all those phony sales were
written off; then, the stocks of those companies doing the financing, like
Cisco, Lucent, and Nortel, collapsed as well (though they did not collapse
to zero like the dot-com companies). Although their performance would have
lagged during the boom, the equipment manufactures would have been in far
better shape fundamentally if the phony sales had never been made.

The same fate awaits the US and Japan. In this analogy, Japan is Cisco and
the United States is Pets.com. Sooner rather than later, both Japan and
China will realize that they have been hoodwinked by a fast-talking sock
puppet without a credible plan to pay them back. When that happens, they
will take the write down and let us fend for ourselves.

2010 Forbes.com LLC All Rights Reserved

http://blogs.forbes.com/greatspeculations/2010/09/17/japan-throws-a-dime-to-american-debt-junkies/


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