Today, I am writing this post from Japan. I had a chance to speak with a Japanese colleague about the general financial crisis in the developed world, particularly as relates to Japan and the U.S.. In this post I simply would like to share that conversation.
It started out with him telling me the Japanese government is trying to take austerity measures to address the country’s budget deficit. This meant cutting back on government expenses. Europe is similarily embarking on such measures.
However, the U.S., in stark contrast, is actually printing more USD than ever as well as borrowing from around the world; no sign of cutting back on spending. The U.S. strategy is to expand the supply of USD and expand government spending in hopes of Americans spending more, which in turn supposedly spurs economic activity. Once economic activities reach the pre-crisis level, supposedly things eventually return to “normal.”
The question is why does the U.S. have such a different strategy as compared to the Europeans and the Japanese? Doesn’t the U.S. worry about the run-away national debt?
My Japanese colleage tells me that many Japanese believe that, actually, the U.S. financially is much stronger than what the Americans are lead to believe in the media. He said, “relative to Japan, U.S.’s assets are orders of magnitude larger than that of Japan’s around the globe.” They are also enjoying high growth returns from developing countries with those assets.
I have written in the past that the U.S. owned assets around the world are still larger than the national debt.
In that context, I actually think it may be beneficial for the U.S. to continue the current path of “quantitive easing.” Imagine this scenario:
There are 10 people in this world with one being the landlord and the remaining nine renting from him. The tenants put their savings into a bank. Their money is borrowed by that one landlord so he can own all the homes. If the bank savings rate of return is lower than rental income’s return (minus mortgage interest and property tax expenses), who do you think you’d prefer to be? The landlord or the tenant?
You obviously prefer to be the landlord. Now imagine you start to run out of cash. More cash printed out of thin air is more preferable, because then you won’t need to let go of any of the homes. When in the future the home prices increase or rent can be raised, you reap big rewards.
Now imagine you being the tenant and run low on cash. Your choice is more clearly to spend less. Having more cash printed won’t really help, because the price of everything else is going up at the same time.
So, we see Japan and Europe try to cut back, whereas the U.S. does the polar opposite.
(Of course there are many confounding factors. But this is an example of a big factor at play.)