Savings from the Japanese crash


Hopefully, by the time you read this, the financial crisis on Wall Street will be solved. As I type, the US administration and House leaders have reached some kind of agreement on the $700 billion bailout package.

I worry about the need for governments to backstop our personal RRSP savings. This has some historical precedent. Way back in 1991, the Japanese economy lost about $1 trillion (which is almost exactly what the US just experienced). Japan, too, had grown a housing and cheap credit bubble, largely based on corrupt practices within their banking industry.

According to the report I heard on National Public Radio, small business owners and homeowners in Japan watched their properties lose up to 85% of their value. The government stepped in quickly with new regulations to reorganize and supervise banking, and 20 years later, the Japanese are a nation of savers, not debtors, with combined personal savings in the neighbourhood of $14 trillion.

Compare that to the US. Their total consumer debt is running at $9 trillion. Put another way, that’s a debt of only about $30,000 per man, woman and child, which doesn’t seem that bad. But in Japan today, forget debt—every person has savings, on average, of $110,000. It seems as if the ordinary Japanese consumer took it on the chin, financially speaking, and learned his or her lesson back in the 1990s.

But the Japanese had a big advantage. During their crisis, they were still able to export goods to the US and the rest of the world, which weren’t affected by their credit bubble. So Japanese unemployment levels stayed under 6%, and their GDP continued to rise—in spite of their domestic financial crisis.

This time it’s the US economy doing the tumble. And the American economy is so large that it virtually overshadows any other national economy, and in fact, all other economies are tied into the US markets. So when the US gets financial heartburn, the rest of us reach for the bottle of Pepto.

On the plus side of the US equation, the combined personal net worth is estimated at about $357 trillion. So—at over $1.1 million per US citizen—there’s a lot of personal equity available. But there are two troubling sides to this. First, a massive amount of that wealth is concentrated at the top of the social pyramid. And second, a whole lot of the remaining wealth is contained in assets such as homes and cars—which are now losing value now that the credit bubble has burst. That means that personal net worth in the US is declining.

Naturally, the deflation of net worth makes US citizens a bit wary of spending. If one considers that 70% of the US economy is based on consumer spending—and a good deal of the world’s economy is driven by the US economy—we all have a lot at stake if the US consumer stops spending and goes into savings mode.

But there’s another wrinkle. Over the past 10 years, US corporations (unlike US consumers) have packed away unprecedented levels of savings. Those corporations—and Wall Street—have banked heavily on consumer spending to drive the economy since the last recession in the early 1990s. Ironically in light of the mega-billion-dollar bank bailout, American corporations have the financial wherewithal to kick-start the ailing economy—if they collectively decided to go on a spending and hiring spree. Maybe one of the presidential candidates will have some luck encouraging these cash-rich corporations to create the new “green” economy we’ve all heard them talking about.

And what about the rest of us? Well, we Canadians pride ourselves on our practicality and restraint. And according to recent media reports, most Canadians think that we’re going to fare better than our American cousins, economically. But judging from the “house porn” channel (HGTV), we’re already up to our necks in the “house-as-the-ultimate-investment” concept. We’ve spawned a whole generation of real estate junkies—with our mortgage banks as the primary enablers. Home real estate in Canada became the investment fad of the decade.

I heard Bill Clinton talking on TV this morning about the same phenomenon in the US. He correctly identified why this happened. Because interest rates were pushed artificially low by Alan Greenspan and the US Federal Reserve, most small investors weren’t making any money on their RRSPs. But the cheap credit provided lots of fuel for the real estate market. With cheap mortgages, thanks to low interest rates from the Fed, housing prices quickly escalated. The bubble grew and grew, involving the entire US (and Canadian) housing market.

Stephen Harper’s government was actually supporting the sub-prime lending boom up here by advancing legislation for 0-down, 40-year mortgages. Fortunately, only about 4% of Canadian mortgages fall into this high-risk category, as opposed to 40% of US mortgages.

Fortunately, here in our tiny corner of the world, real estate values have tended to remain stable, with the exception of St. Andrews and its steady influx of newcomers. So most of us have been somewhat insulated from the first wave of the crash. But the next wave of the crash may start to affect exports to the US, hurting our manufacturing, tourism and resource sectors. So we still might want to buckle our seatbelts.

The conventional wisdom is simple. Pay off your mortgage, or at least pay it down. Get rid of the car loan. Put away your credit cards. Cut down on necessary travel and impulse purchases. Put at least three years worth of salary into savings.

All this is, of course, easier said than done. And it’s probably not so good for the immediate economy, which as I’ve mentioned, depends on everyone spending lots of cash. So how do we start saving without disrupting the economy?

We should consider moving from non-essential work, such as administrative and consulting services, to more locally sustainable work. This could include more research and education, “green” product development, “green” energy production and environmentally-friendly construction. We could also look at local agriculture, holistic health care, in-region tourism and value-added resource-based activities such as handlaid paper production, and of course, arts-culture-and-crafts, which have been highly undervalued activities in our modern economy.

Yes, there’s a lot of good work to do. But to do it, we have to be able to think globally—and actually motivate ourselves to act locally.


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