Deficit Without Tears

I’m reading a good book about Japan’s little known bad side called Dogs and Demons by Alex Kerr. It tells the story of how Japan is destroying its own country with construction subsidies, its cultural heritage with uninspired modernization programs, and its economy with corrupt bureaucracies. It’s a welcome dose of reality instead of the misleading postcard image of a Japan as an idyllic archipelago inhabited by kimono-clad beauties. Anybody who’s seen Japan recently knows that what most people think of when hearing the word “Japan” is nowhere to be found.

Mr. Kerr does a masterful job of explaining why Japan has still not recovered from the bursting of its stock market bubble. I expected a cursory overview of basic economics in this mostly cultural book, but was surprised to find a well-researched and well-presented chapter on business gone wrong. It contains a succinct summary of the dollar’s and, therefore, America’s tenuous situation. It could be pulled off, but what if it isn’t? From pages 98 and 99:

It’s sobering to realize that the supposedly “rational” United States, too, relies on an artificial system to support its economy, persistently ignoring the mountain of dollars piling up in foreign ownership — it has been called America’s “deficit without tears.” For the time being, foreigners continue to finance the U.S. economy with money earned from America’s huge trade deficits, but sooner or later they will cash in those dollars and the American economy will suffer severe pain.

Or maybe not. If Japan suddenly sold off its dollars, it would hurt the U.S. economy but damage Japan’s far more. Furthermore, Japan is not the only country to hold dollars; all of America’s trading partners do, and China, running the largest trading surplus with the United States, is building up the biggest reserves of all. In coming years, Japan may not necessarily exert the determining influence on what happens to the dollar. The very existence of so many dollars abroad is also a plus for the United States, because it makes the dollar the de facto world currency — so there is less need for foreign nations to trade their dollars in for local money. Perhaps the United States will turn out to have practiced a bit of financial magic of its own, holding those dollars hostage indefinitely — or, at least, until a time beyond the horizon when economists can make predictions.

Nicely put, wouldn’t you say? I’m especially impressed because Mr. Kerr is not a financial writer and this book is not about finances. If you’re at all interested in Japan, please add this to your list of must-reads. It will sober you up after all the glaze-eyed pap by westerners trying to pay homage to the land of Basho. He’s gone, and so is the land he wrote about. Instead of thinking about temples and Mt. Fuji and tea ceremony, a proper reflection on modern Japan centers around gray cement buildings and nests of power lines and mountains half chewed away for construction. It’s not pretty, but it’s true. That makes this book worth reading.

That said, I don’t think Japan is as bad as this book makes it out to be. I’ve found pristine areas. I’ve waded through uncemented streams. I’ve found lots of old homes and buildings that have not been bulldozed in the name of progress. As for runaway bureaucracies, show me a country that doesn’t have something to add to that chapter. I remember the “That’s Outrageous” column in Reader’s Digest I used to read as a kid that exposed government pork and other dirt in America. The situation in Japan is layered beyond belief with no-bid contracts awarded to companies run by former government officers, but we need not scratch our heads too long to think of a sports stadium in Texas built with taxpayer money but profiting a private businessman who later became president. Back-scratching and good ol’ boy networks are not unique to Japan.

Still, there are many good points in this book and it is sorely needed on the Japan shelf. If it occasionally goes too far, it’s to provide balance against years of idealistic scribbles by people who stopped in for a look around and decided that great customer service at a Tokyo restaurant meant a country dominated by grace. Believe me, there are bad things going on.

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