At present, capitalism and socialism are facing the heavy task of structural reform and trying to find a way to solve the income distribution gap. At this intersection of reform, there is no standard answer. In the common search for answers, there is reason to believe that humanity can triumph and that output will continue to expand and achieve more inclusive growth.
First, I want to clarify a concept – deflation. Deflation generally refers to the economic phenomenon of negative growth of the price index of a basket of goods and services within a certain period of time, and the accompanying output level, when the output level declines away from the potential level, the price and output constitute a "recession" picture; When output levels do not grow for so long that potential growth levels fall systematically (macroeconomic hysteresis effects), prices and output form a "liquidity trap" picture. In the context of negative or slow growth of the price index of a basket of goods and services, if the prices of durable goods and stocks represented by real estate also fall sharply at this time, the cost of capital flow in the economy will increase systematically (Bernanke, "Bernanke on the Great Depression"), then it is difficult for the economy to rely on market forces to reduce market real interest rates, and the policy cost of stimulating demand will increase accordingly. At this time, in the foreign exchange market, if the currency is also facing depreciation pressure, it will become more difficult to stabilize asset prices.
Now China is indeed facing the risk of "recession", the growth rate of social zero is falling too fast, and Japan's "liquidity trap" risk is still some distance away. The growth rate of continental output levels is still in the range of about 5%, far from zero. China is a very large economy with self-protection capabilities in agriculture and energy, which ensures sufficient monetary policy and exchange rate floating space.
Deflation does not go away on its own, it is a classic debt-led market failure. The evolution of deflation may bring small recessions, 23 high-income countries have experienced 166 recessions between 1960 and 2010 (Blanchard), may also trigger more serious recessions, such as the Great Depression in the 20~30s of the 20th century, the lost decade in Japan in the 90s of the 20th century, and the global financial crisis around 2008. In the process of studying these recession events, scholars have formed many economic achievements, one of which is that deflation is more of a monetary phenomenon, and the government can respond to it through gradually loose monetary policies such as interest rate cuts, quantitative easing, and modern monetary theory (fiscal deficit monetization), and other social governance problems arising outside monetary policy should be supplemented by other measures. When choosing between coping with a crisis and the cost of coping with it, it is more inclined to save people first and then treat diseases, which is a complete theoretical and philosophical system.
Below, in three parts, describe China's current economic problems in detail.
1. The origin of the Japanese story
First, let's take a panoramic look at Japan's "lost decade," "lost twenty years," and "lost thirty years." It is generally believed that Japan's defeat began with the Plaza Accord, and its logical end point and policy conclusion is that in international competition, the exchange rate cannot accept the alliance under the castle and cannot compromise in international economic negotiations, which is extremely populist. And politics is the art of compromise. Wu Jinglian has always maintained that the cause of Japan's loss of economic growth is mainly a strategic mistake in domestic policy to cope with exchange rate appreciation. Japan itself has created a huge asset-price bubble, not only in durable goods such as real estate, but also in highly liquid assets such as stocks. When the bubble disappeared, a huge debt problem brought down Japan's economy. (Wu Jinglian, "Japanese Economy and Economic Policy in the Bubble/Deflationary Period")
In the process of taking a series of measures to deal with Japan's economic quagmire, Japan's economic turmoil has spread deeper into society, and Japan's political circles have constantly changed political leaders. Without stable political leaders, it is more difficult to adopt strong government measures to carry out structural reforms and promote the process of social redistribution in the context of market failures. As a result, the Japanese stock market has been regarded as the hardest hit area by international investors, and there has been a bear market with a long time span. The same is true of the real estate market. When Shinzo Abe unified the Japanese political situation, changed the pattern of turbulent political leaders in Japan, and introduced the "three arrows" of economic reform policies: "structural reform", "active monetary policy" and "bold fiscal policy", the Japanese stock market began to gradually rise in 2012 and continues to this day. Around 2017, the Japanese economy experienced a brief sweet period of rising growth and rising stock asset prices.
After Shinzo Abe gave way to Fumio Kishida for physical reasons, he is still active in the Japanese political arena, indicating that he is still a domestic political leader. The subsequent assassination of Shinzo Abe is the result of long-term economic stagnation and accumulation of social contradictions, and from the perspective of the Japanese stock market alone, even if the stock market is rising, but Japan's fertility rate is still declining, which obviously reveals the failure of Japan's structural reform. Sadly, this is the social phenomenon that Shinzo Abe tried to change, but he ended up dying because of it. Class nature determines the limits of the LDP's party's economic reform, which, without a symmetrical response from the people, can only be a monetary phenomenon in the end, and cannot complete the task of social change.
At this stage, starting in April 2023, the Japanese stock market has sparked heated discussions among investors at a faster rate than the world. Japan's output level in the first quarter (GDP growth of 1.3% year-on-year) and the second quarter (GDP growth of 6% year-on-year) increased faster than expected, which is called "New Normal" by all walks of life in Japan, and the inflation level of about 3.5% did not cause the risk of stagflation in Japan, but stimulated Japanese wage growth and output level expansion. Under the appointment of Fumio Kishida, this undoubtedly inherits the economic and political achievements of Shinzo Abe, how to develop and evolve in the future, and whether Japan will enter the trap of bubble again. When Kuroda stepped down and Kazuo Ueda took office, he loudly announced that he was discussing YCC policy and easing the upside of long-end interest rates, which could signal that Japan will not tolerate asset price bubbles again.
There are many books written in academia that debate and describe Japanese stories. Kuznets makes an interesting point: there are four countries in the world, one is a developed country, one is a developing country, one is Japan, and one is Argentina. This visualization has been discussed to this day, and the uniqueness of Japan's economic phenomenon can be seen. Of course, the Kuznets curve does not seem to have seen the overall situation of the world economy, and it is constantly plaguing today's major economies. The core of Japan's problem should be the logic discussed in this curve. Bernanke's critique of Japan's monetary policy appears in books such as The Courage to Act (Bernanke) and The Age of Turmoil (Yoshiaki Shirakawa), whose main focus is that "prices as a monetary phenomenon should be acted decisively in the face of debt and deflation", which was also the approach Bernanke adopted in response to the global financial crisis in 2008, and his policies eventually achieved the successful return of the US stock market to the pre-financial crisis point around 2013. In terms of monetary phenomena, this is a success, but a series of events such as Occupy Wall Street and the Trump presidency have shown the powerlessness of liberals and conservatives in the face of social structural reform. The same goes for Japan. At present, the most popular in China is Gu Chaoming's balance sheet recession theory, and the focus of Gu theory is also on the currency itself. But the paradox of its theory is how a balance sheet recession can dominate an economy for three decades, and whether monetary phenomena can determine the overall economic relations of society.
The above briefly reviews the origins of the liquidity trap in the Japanese economy, the formation of bubbles under the policy system, and the response after the bubble bursts, until the Japanese stock market booms again in 2023. From the viewpoint of historical materialism, Japan, as a nation, its political leaders have not fulfilled the mission of national development, which is the result of a combination of domestic and foreign, economic and political work, and cannot be simply described by Japanese deflation. Below, we compare the similarities and differences between China and Japan.
Second, the story of China
At this stage, the biggest similarity between China and Japan is that they are both facing the historical rival of the United States. In the game between China and the United States, China can ensure the ability of the United States to destroy each other in the military, economic, financial and other fields, which Japan could not compare with in those years. International capital does not have a complete safe haven, and it will certainly not give up a certain party, so that the currency can be supported, and trade can naturally develop smoothly.
China is also facing the consequences of the bubble development of the economy in the early stage, and the price of real estate is obviously rising too fast. Unlike Japan, when real estate prices fall, there is no big bubble in China's securities asset prices, which ensures the stability of some asset prices and is a huge window of opportunity in corporate financing. The current situation should be that we have learned the lessons of the Asian financial crisis, have strict management in the external financing of enterprises and governments, and maintain external liabilities within control, while cooperating with the mainland's capital control policy. However, Japan did not have this condition at that time.
At present, for the Chinese economy, the consensus is that the first task is to stabilize the declining economic growth rate and actively deal with the risk of recession. After the level of output growth stabilizes, the price factor will adjust quickly under the influence of market forces, and prices will naturally rise after the currency returns to healthy derivation. Specific policy measures should include: bold debt divestment measures and the establishment of special relending vehicles. At the same time, a clear exit timetable for counter-cyclical regulation and control policies is proposed to stabilize the expectation that the market will play a decisive role. Enterprises should seize the historical opportunities of the green economy and digital economy, and deeply participate in supply-side structural reform and social reform to expand effective domestic demand. Using the market leverage of labor wages and price levels to leverage the enthusiasm of all parties and effectively solve the barriers of ownership financing, the private economy should also undertake major national development tasks.
Having discussed short-term monetary issues, we turn to a broader historical and social perspective. The first difference between China and Japan is that China, a super-large economy led by the Communist Party, remains at the forefront of international technological competition. China has the ability to unify the main aspects of domestic contradictions, correct deviations at a small cost, and avoid the ideological turmoil of social reform for a long time. The debate in the social trend before China is: In the process of profound adjustment of social and economic relations, does China need a loose monetary environment or a moderately tight monetary environment? This is not a new phenomenon, and this trend of thought always appears in every period of major reform, but the problem is difficult, and history does not give the only answer. China's loose monetary policy orientation around 1995 and around 2010 was accompanied by inflationary-deflationary economic ups and downs, which we don't seem to like now. Because China is a very large economy, recessions have always cycled through history. Small economies, on the other hand, have been torn apart by international finance after a debt problem.
Japan's liquidity trap is the product of the combined effect of economy and politics, it is not an inevitable historical process, the total return is a monetary phenomenon, and the deeper level is socio-economic relations, there is a corresponding prescription. The question that China needs to face and think about for a long time is, why did the Communist Party of the Soviet Union lose in the competition and confrontation with the Western camp led by the United States? How can the philosophy of China's universal harmony be integrated with the reform of the international governance system? In the 1990s, when the Soviet Union collapsed and the United States truly became the world's single superpower, any challenge to it during that period would not be fully trusted by international capital. In this era, a Japanese-American proposed the end of history, but history did not end, but it was then that the Japanese economy entered the "lost decade." When Japan's economy declined in the Western system, international capital chose to leave, and its decline had no backing force, making it difficult to stabilize. But now the international landscape has undergone fundamental changes, and Russia, Islam, emerging markets, and African countries are all playing important roles on the international stage. The conservative faction in the United States is gradually showing a decline in domestic political struggles, and the social and economic relations in the United States are also under the fierce social trend. World Capital estimates that no one believes in the end-of-history conclusion of the 1990s, and Sino-US competition is no longer an international pattern of Japan-US competition at all.
At present, the focus of the Sino-US century dispute is on technology. China's current recession risk does not prevent technology from continuing to advance, technology does not need to be deleveraged at all, technology seems to be independent of the economic cycle movement, this is the charm of scientific and technological progress. Apple and Microsoft in the United States were founded in the 1970s, when the United States was under the oil crisis. Under stagflation, technology has still made significant progress. In the current era, it will be the same.
III. Ending
Finally, I would like to summarize briefly with three points:
1. China does face the risk of "debt-domestic demand deflation". This is an economic cyclical phenomenon, and recessions are not uncommon in the history of world economic development, and there are sufficient research results to support it. The subtext of Japan's deflation is an economic phenomenon that lasts for ten, twenty, thirty years, and it is not a simple business cycle problem. Deflation has occurred in the history of the world economy, but there are few examples in Japan. China is a very large economy with self-protection capabilities in agriculture and energy, which ensures that China has sufficient monetary policy and exchange rate floating space, and output growth is still very high. The Third Plenum of the Central Committee, which is held every five years, is worth looking forward to.
2. China has a great nation, civilization, and the pursuit of standing on its own feet among the nations of the world. The history of human development is a history of brutal competition, and the survival of a civilization to this day shows the resilience of a civilization. To borrow the viewpoint of Kissinger's "On China", he believes that Li Hongzhang and other Westerners adopted a compromise method, introduced various imperialist forces, avoided China's complete degeneration into a colony, retained the vast territory of historical inheritance, did not move towards separation, preserved the identity of a great power for the rejuvenation of Chinese civilization, and jointly sought the road of salvation throughout the country in the semi-colonial and semi-feudal territory. Under such pressure in modern history, the Chinese nation can blaze a trail, and in the 21st century, there is enough civilization and self-confidence to open up a new situation.
3. Capitalism and socialism are now facing the heavy task of structural reform and trying to find a way to solve the income distribution gap. Today's capitalism is no longer a monolith under the Washington Consensus, it is divided internally, the confrontation between conservatives and reformers is sharpening, and the gulf of national interests within the camp is becoming more and more clear. This is a typical political phenomenon of the period of economic reform. China is also facing structural reforms forced by a declining birth rate. At this juncture, there is no standard answer, and capitalism has a view that calls the solution "third capitalism." In the common search for answers, there is reason to believe that humanity can triumph and that output will continue to expand and achieve more inclusive growth.
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