There’s a bit of karma involved in the Group of Twenty (G-20) holding its summit in Seoul. Thirteen years ago, South Korea was at the centre of chaos. Investors who ignored troubles in Thailand and Indonesia had no choice but to confront reality once the then 11th biggest economy crashed.
South Korea had US stocks reeling and the Federal Reserve worried. Korea in the late 1990s was like Spain today, and Thailand was like present-day Greece—a canary in the financial coal mine. We feared its woes would be shared by more vital places. Today, we worry Spain, the No. 9 economy, will be the Korea-like domino that causes a chain reaction.
The G-20, along with discussing China’s currency, will focus on Japan. Namely, keeping the US and euro zone economies from experiencing their own lost decades. That’s where Korean karma comes into play. Korea offers a road map to fighting the Japanification of the global economy. Past actions have allowed it to steer around deflation and falling living standards.
Just two years ago, South Korea was on tap to become the next Iceland. The fear was that its companies didn’t learn the lessons of the Asian crisis and issued too much short-term debt in foreign currencies. To many, that meant Korea looked like a giant hedge fund. Korea confounded the sceptics and is growing at 4.5%.
Korea’s real contribution to today’s discourse is its crisis management steps in the late 1990s. It did everything Japan didn’t and the US is failing to do. Weak firms and banks were allowed to fail, often regardless of size. Interest rate policies never lost a long-term perspective. People were asked to sacrifice. Avoiding denial was a key element of the response.
Things didn’t go smoothly. One snafu was shifting bubbles from the corporate sector to households, which took on too much debt. That was later corrected. The jump in short-term debt in the late 2000s didn’t help. The role of family conglomerates remains too large for comfort.
In a world devoid of economic role models, Korea’s handiwork is worth a look. Japan’s main failing after its 1980s boom and bust was timidity. It restructured little and tossed money at the economy expecting a rebound. Twenty years on, it has the largest public debt in the industrialized world, a central bank no one respects and persistent deflation.
Stephen Roach, Morgan Stanley’s non-executive Asia chairman, is among those worried the “world economy is at risk of falling into a Japanese-like quagmire”. We need to stop debating whether the US will suffer that fate. It already has— Washington just doesn’t know it yet.
The Fed said as much last week when it announced a second round of quantitative easing. The risk is that lawmakers don’t get the memo. Last week’s election divided Congress in a way that should worry Asia. It’s great that China’s economy is growing at 9.6%. Yet it’s no substitute for the $14 trillion US economy, and an undervalued yuan may harm neighbours more than China’s growth aids them. We could be looking at two years of gridlock, making the US policy apparatus look all too Japan-like.
On some level, the US would be lucky to become Japan. Even today, Japanese households are sitting on more savings than the annual output of the US economy. That’s why Japan has been able to muddle along for 20 years without unravelling. Mass homelessness never occurred, crime rates didn’t soar and the bond market avoided crashing amid an explosion of government debt. It’s doubtful the US would fare as well if its savings-deprived economy walked in place for 10 years, never mind 20.
Japan has yet to find an exit strategy from zero rates and a debt double the size of its economy. The US’ problem may be that it didn’t spend enough to jump-start things or address the household debt imperilling its outlook.
The odds are stacked against the 11-12 November G-20 confab finding a solution. All ultra-low rates in the US and elsewhere accomplished is sending waves of hot money Asia’s way. It’s inflating bubbles in stocks and real estate.
That brings us back to the lessons from Korea. In its darkest days, it resisted the urge to slash rates to zero to avoid the so-called bubble fix. Free money boosts markets and offers a false sense that recovery is afoot. In reality, it just creates new bubbles to paper over old ones. Such actions come back to haunt you later. What the world needs is a little good karma for a change. If officials look close, they may find some in Seoul.
William Pesek is a Bloomberg columnist.
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