John Cochrane asks about Japan during the past three decades: "If massive deficits, including lots of 'infrastructure' are going to boost the US economy, why did they not do so for Japan?"

He suggests that if it didn't work in one case it is unlikely to work in the other, but there are obvious differences between the two economies that make their responses incomparable. First, Japan entered this period massively overinvested in infrastructure, whereas most...
analysts agree that the US is underinvested.

This means that while infrastructure spending in the US is likely to be productive, and so will boost GDP (and, with it, the economy's real debt-servicing capacity) by at least as much as it boosts debt, in Japan much of it...
was likely to be non-productive after 1990. The fact that debt to GDP rose so sharply in Japan is strong evidence that this was the case. Perhaps more importantly, Japan's GDP after 1990 was further harmed by the effective amortization of the malinvestment of the 1980s.
Second, Japanese household consumption, at roughly 53-55% of GDP, is extremely low compared to that of the US, which is at roughly 68-69%. This means Japan is overly-reliant on investment and trade surpluses to drive growth. I've long argued that Japan...
would never regain its previous growth rates (and from the very beginning I dismissed the possible success of Abenomics) until it had managed the difficult redistribution of income that would make consumption a bigger driver of Japanese growth.
Given the huge differences in the structures of their economies and in their recent economic histories, it seems a waste of time to compare the two countries. I know that statistical comparisons are at the heart of mainstream economic analyses, but they implicitly assume...
that the measured entities are comparable, even when they clearly are not.

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More from @michaelxpettis

11 Jun
TSF rose by 0.6%, or RMB 1.92 trillion, in May, below market expectations. In April it also grew by 0.6%. Most analysts report this as an 11% increase over May 2020, but given last year’s disruptions this is a pretty useless way of measuring it.

The headline here says that credit is growing more slowly than expected, and this seems to be the consensus, but I disagree. Why? Consider that TSF year to date is up by just over 12% on an annualized basis. If it continues to grow at roughly 0.6% a month on average...
for the rest of this year, TSF will grow 9.3% in 2021. This is roughly equal to consensus nominal GDP growth expectations, in which case we will have seen a stabilization of China’s debt-to-GDP ratio – something Beijing has promised will happen this year.
Read 6 tweets
9 Jun
The constraint depends on how an increase in debt causes businesses, consumers, producers, lenders and investors to respond. If an increase in debt undermines credibility by increasing uncertainty about how the real cost of the debt...
will be allocated – and so causes businesses to disinvest, creditors to raise the cost of funding, consumers to reduce spending, policymakers to shorten time horizons, workers to become more militant, farmers to hoard, etc. – more debt means a worsening economy.
Just because there is no legal constraint on the ability of a government to create money or debt in its own currency doesn't mean that there is also no economic constraint. If debt is used directly or indirectly to fund productive investment, there is no economic...
Read 4 tweets
8 Jun
Unlike many analysts who thought the 17+1 grouping was a major geopolitical initiative, I've always wondered what its point was beyond political showboating. In today's world of excess savings and weak demand, finding capital to fund profitable...

investments wasn't likely to be a major problem, in which case the "investment" these countries wanted from China was likely to be non-economic and something China — or anyone else — would be reluctant to provide.

Policymakers act as if we were still in the 1950s, when...
a major impediment to development is scarce capital. But capital isn't scarce and hasn't been for decades, which is why so many of these bilateral (e.g. the UK) and multilateral deals that promise cross-border investment have been so disappointing (and unnecessary).
Read 4 tweets
8 Jun
This strikes me mostly as an ideological string of empty cliches that doesn't really mean much one way or the other, although proposing that government spending must be bad because China does it is an argument even a high-school debater would probably avoid.
For one thing, we were doing it long before they were, and very successfully. He is also just flat out wrong in claiming that government support for scientific and technological research necessarily crowds out private-sector support.
This may have been true in some limited cases, but it has more often been the case that it has spurred rather than repressed a private-sector response, and some of the private sector's greatest successes in research and development — the internet, computers, airplanes, jet...
Read 4 tweets
23 May
The RMB was up 4% against the CFETS index in the past year. Regulators are considering allowing the RMB to strengthen further in order to reduce the inflationary pressure of imported commodities, but if they do, as some have already...

warned, we’re likely to see further financial inflows, which will in turn worsen domestic asset bubbles and increase the potential for financial instability. What’s more, a higher RMB could weaken exports, and while this might be partially balanced by stronger...
consumption, the net impact must be either slower GDP growth or more property/infrastructure investment, and hence a worsening debt burden.

My best guess is that we’ll see a stronger RMB and more debt. Earlier this year I argued that China could manage 6-7% GDP growth...
Read 4 tweets
21 May
"While the state-owned financial firm’s longer-term bonds are sinking toward record lows amid expectations investors will be forced to take on losses as part of an overhaul, notes maturing over the next few months trade at much higher levels.

That suggests bondholders remain confident the company will continue to repay its debts on time and any restructuring is a way off."

That's an interesting development, but except for the perpetuals, which are seen as a kind of equity, I wouldn't expect the regulators to...
decide to pay off short-term bonds at the expense of longer-term bonds. If they have decided that Huarong must restructure, it wouldn't seem to make much sense for to allow it to use its limited resources in that way. That just means rewarding one group of bondholders for...
Read 4 tweets

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