Keith Rankin Analysis – The ponzi financial model: Japan and United States

Analysis by Keith Rankin.

Last week (The Ponzi financial model and New Zealand’s monetary policy) I described New Zealand’s place and financial strategy within the world’s financial ecosystem; how New Zealand pursues a ponzi financial model, and how that model has played a role in offsetting the ‘mercantilist’ financial strategies of other countries (examples given were Denmark and Netherlands). (See New Zealand chart, noting the persistent inflow of foreign money.) In this kiwi case, New Zealand takes the role of ‘player’, with Denmark and Netherlands taking the ‘investor’ role.

The net effect of this monetary strategy has been East Asia (especially from 1993 to 2009, see Malaysia example) and  Northern Europe (especially this century, see Netherlands example) supplying foreign aid to New Zealand, with the beneficiaries of that ‘aid’ being New Zealand elite consumers. There has been a substantial domestic cost to New Zealand arising from the strategy; a cost which has manifested as substantial entrenched inequality and poverty.

Of course, New Zealand has not been not the only recipient of such unconditional ponzi-style ‘aid’. Other recipients have included Australia, the United Kingdom and the United States. (We may note that Australia is moving away from the ponzi model, though indications are that Canada has adopted it post-2008.) While the United Kingdom and especially the United States have been exceptional cases in other respects, they have both played key roles in balancing the world system. (The United Kingdom is exceptional because it has a financial realm which extends very much beyond its formal borders. These are essentially offshore tax havens. The financial fingerprints of Jersey, Guernsey, Isle of Man, Cayman Islands and Gibraltar almost certainly look more like that of Switzerland than that of the United Kingdom. For the United Kingdom, financial statistics must be treated as incomplete. See my Interesting Financial Fingerprints: Malaysia, Switzerland, United Kingdom, Israel, Evening Report, 30 October 2023.)

Japan

It’s time to see the role of the US, but before that to look at Japan as the truly exceptional country that shows the rest of the world how it could have been managing its public finances.

Japan Incorporated experienced a ‘balance-sheet recession’ through the 1990s, following a few years in the late 1980s and early 1990s of extraordinary exception; a short period of financial speculation run riot – fuelled by a significantly overvalued yen – and in which the lands of the imperial palace in Tokyo were said to be worth more than California.

Japan developed a way of dealing with its first-world financial problems by creating a new financial model, although it must be said that the United States has long deployed aspects of this pro-deficit approach. This new model, which consolidated in Japan as ‘Abenomics’, suits both these countries (the two largest liberal economies in the world), both of whose citizens strongly resist increases in taxation. Abenomics is characterised by what we in the west would call persistently easy monetary and fiscal policy. Japan’s interest rates have been below 1% since 1996. For half the time this century Japan’s interest rate has been zero, and since 2016 Japan’s interest rate has been negative. Japan’s interest rate is still negative. The last time Japan faced a significant financial crisis was 1998, thanks to its position in Asia; Japan weathered the 2008 global financial crisis very well.

Looking at the Japan chart, the dominant feature since 1993 has been the huge private savings being channelled directly into government spending, with the full participation of Japan’s citizens and businesses. Whereas New Zealand actively participates in a globally-oriented ponzi financial model by setting interest rates always high enough to draw in foreign savings, Japan operates a sophisticated and benevolent domestic ponzi model.

In Japan the ‘player’ is the government and the ‘investors’ are the citizens and businesses. Rather than be taxed more by the government, Japanese agree to lend large portions of their unspent incomes to the government, and with wholesale interest rates at zero percent, or less! This is truly astonishing in terms of the usual rhetoric of finance that western populations are subjected to.

It works of course because the Japanese people prefer to lend to their government instead of having that income taxed. It’s win-win. The government gets to spend the money on all sorts of public good systems and projects – as well as on World Cups and Olympic Games – while the money remains available for savers to spend should they experience ‘rainy days’ or should they want to travel or buy a car or buy a house. (It works like a cheque account; while borrowers spend the money, it remains fully available for the account holders to also spend it.)

The downside for Japan is that its cheapness (low cost of living, not low quality of goods) makes foreign travel – and imports – expensive. And then there’s having to put up with the tut-tutting from the west about Japan’s huge government debt. Nevertheless, everybody in the world who can be bothered to observe what financial success looks like understands that Japan’s government can service its debts to its own people. Japan’s government is as far from being bankrupt as any government can be. (In New Zealand’s final political debate before the 14 October election, Prime Minister Hipkins acknowledged Japan’s success by claiming that New Zealand’s economic growth was second only to Japan. Hipkins was not in fact correct; USA had higher growth in mid-2023 than either New Zealand or Japan.)

Japan’s government debt is stabilising at below 300% of GDP. It means that the Japanese government can run substantial budget deficits indefinitely. We should note that, in the 2020s, Japan’s interest rate has remained negative, and that inflation, which maximised in January 2023 at 4.3%, is now 3.0%. Japan’s very cheapness means that it cannot but help running balance of trade surpluses on an ongoing basis. Meaning that Japan becomes an ‘investor’ in New Zealand’s version of the ponzi game.

United States – USA

The final country to mention is United States, which plays both kinds of ponzi game; the New Zealand global version (USA Inc. is the player) and the Japan domestic version (US Treasury is the player). It has to. The United States financial model stabilises a world system destabilised by mercantilist ‘anti-players’ such as the European Union.

It’s just a huge pity that United States government spending is so focussed on war rather than peace. Indeed, the twentieth century wars in Iraq and Afghanistan were entirely funded from foreign savings being channelled into the United States Treasury. It is truly remarkable that the United States has been able to cut taxes while escalating foreign wars.

The United States’ ponzi economy acts as the world’s consumer of last resort; a situation necessitated by the extensive mercantilism elsewhere (especially the European Union), and by virtue of the $US being the world’s reserve currency. And the wars in Iraq and Afghanistan can be understood as ‘last resort consumption’. (We note that military consumption is easily the ‘least-green’ of all kinds of consumption. Fortunately, Japan has been constrained – by others and by itself – from indulging in military consumption. And we may note that in the early 2010s China shared the role, with the United States, of ‘consumer of last resort’. The least green type of production is probably mining; including the mining of crypto-currencies such as Bitcoin.)

The global economy’s woes have been compounded by an aggressive and totally misplaced United States monetary policy; a policy that has sought to induce a global recession by forcing other countries into believing that they also had to raise interest rates aggressively to ‘deal to’ a global ‘cost of living’ problem; a problem that transparently began with the Covid19 pandemic (especially the political ‘mission creep’ which generated a degree of economic paralysis in the world) and came to a head with the US-perpetuated Russia-Ukraine military stalemate. The trifecta of costs was completed by the raising of interest rates in most of the world. The cost-trifecta – the source of the coming stagflation crisis – has been pandemic-related paralysis in 2021 and 2022, war in 2022 and ongoing, and the US-led assault on interest rates from late 2021.

As the global system plays out at present, the United States is trapped in its role as ponzi-player-in-chief. The world will be a better place when the United States plays ponzi in a responsible way, as Japan does. Even better, the United States could be facilitating the intellectual leadership required to lead the world away from mercantilist growth economics. The mercantilist countries prioritise economic growth, and achieving that growth through export surpluses; hence the need for a consumer of last resort. It’s a global economic model that has become completely unsustainable; and which finances the cruel wars which the United States subscribes to.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.