Listener 12 May, 2001.

Keywords: Macroeconomics & Money

Richard’s Brattigan’s four hour film of Hamlet included bits of the plot which are often omitted in the cut version of the play. I was particularly struck how the invasion of Denmark by Prince Fortibras of Norway, suggests that the events at Court at Elsinor were but petty politicking. I had similar feelings while reading the New Zealand media pages on the internet while I was overseas. The nation’s main concerns seemed to be the activities of various members of parliament and their spouses. Now, just as there is a problem if one suspects one’s stepfather has bumped off one’s father and taken over his job, it is important we have honest and competent politicians. But perhaps the economic storms outside the country deserved a little more attention.

I am not so concerned about the lurching down of world share prices. More significantly, the US economy seems to be in a recession, which may last longer than the conventional wisdom hopes. The situation was nicely captured by an article concluded that the recession was incipient because US unemployment had not turned up. The following day a higher unemployment statistic was announced.

The worry is not just the weakness of the US economy, although the Europeans I spoke to had some confidence that their economy would expand, albeit more slowly, and with some sectors especially suffering. (They were assuming the US recession will not be too long or too deep.) The Japanese economy looks much more structurally unsound, with many firms with appalling balance sheets.

Consider the general contractor Kugami Gumi, crippled by around one trillion yen (say $NZ20 billion) of debts. The Japanese banks have written off almost half their loans, and the company is reducing its workforce by 30 percent, closing most of its foreign offices, and selling ¥220b of assets (although it may not realise that amount because of falling asset prices). Yet the projected outcome is still ¥242b ($NZ5b) of debt, twelve years out. That is a long time (think about the period from 1989 to today). The Japanese government is talking about a ten-year period of grace for all corporate debts, but one analyst concluded that there was not a single sector of those struggling with rotten balance books (construction, retail, real estate, and financial and services) which could repay its debts in twenty years, let alone ten.

Western commentaries on the Japanese economy tend to end up with homilies about the need for liberalisation. The unpalatable truth, which they rarely draw attention to because their nostrums do not address it, is that there are ginormous amounts of debts on the business balance books (nobody knows how much, but probably about a trillion New Zealand dollars) which have no asset backing and are fundamentally valueless. Holders of those loans (directly the Japanese banks, indirectly their shareholders and depositors) are functioning on the basis that the loans are still valuable. Eventually, the valueless debt has to be written off, and its holders are going to have to accept the consequences of less wealth. The write-off can be done by the government taking the debt over itself – in which case the taxpayers suffer, or the shareholders and (perhaps) depositors of the banks taking a bath, while many shareholders in firms will lose their equity. Because it is not preordained as in what proportion wealth holders will suffer, they are all sitting there – dithering like a Hamlet – waiting for someone else to do something.

While the Japanese economy is the more worrying, the US economic debate is as interesting. I shall return to it, but monetarist ideology seems to be in retreat. Not long ago, the US reserve bank and its chairman, Alan Greenspan, seemed omniscient and omnipotent. Today there is a growing acceptance that monetary policy can do little about a recession, and that there is a need for a fiscal stimulus – advocated, among others, by US president Bush. It is a creeping return to Keynesianism in the policy rhetoric, although the theory never died academically, nor among senior policy makers such as Joe Stiglitz (ex-chief economist of the World Bank) and Larry Summers (ex-secretary of the US Treasury). Management of the internal (government) deficit is back on the policy agenda.

While the headline local news while I was away was the petty politics of a court page, I found a number of serious newspaper articles when I got back, albeit on page 93 or thereabouts (marginalised like Fortinbras in most productions). The Governor of the Reserve Bank is cautioning not to expect too much from monetary policy (Greenspan would not disagree). And the Treasury has given a gloomy warning of the prospects. In fact the New Zealand government’s balance sheet must be one of the best looking in the world, giving room to manouevre if there is depression, while the external sector is much more diversified than in the 1930s. Not that I expect a Great Depression – not yet. It is just that the politicians on all sides need to divert from their mud-slinging petty concerns, address the economic issues, and show some leadership. Otherwise, Fortinbras takes over.