Saturday, 6 November 2021 — Komatsu, Japan

By Nick Hubble Editor, The Daily Reckoning Australia

[3 min read]

• How do you say ‘humble pie’ in Japanese?
• An Asian century or an Asian financial crisis?
• If demographics are destiny, China is doomed

Dear Reader,

Jim Rickards’ recent monthly issue for Strategic Intelligence Australia is an absolute cracker. Unless you’re Australian, in which case, it’s an absolute nightmare.

But let me begin by highlighting what makes Jim’s extreme claims and predictions so plausible. (If I don’t, you might just sigh and continue to buy the wrong stocks, despite Jim’s warnings.)

When I first showed up in Australia as a schoolboy, I was utterly mystified by the fact that my school friends had spent years learning Japanese since primary school. This seemed like a complete waste of time and resources to me. And I recall telling my European friends about it.

Of all the languages to learn…Japanese?!

I got what I deserved for this dismissiveness. My wife is Japanese and I’m writing this from Japan. (I recently connected with a school friend who used to waste time in German classes at school with me. He married a German and lives in Germany…)

In a few months’ time, I face having to survive Japan with my one-year-old daughter for two weeks, while my wife gives birth and has the usual Japanese two-week hospital stay afterwards.

This might sound a bit dramatic, but I can tell you the maternity hospital looks like a day spa. There are oil massages and food you can only dream of.

Meanwhile, at home, I’ll be mortified of having to go grocery shopping without a translator. And I’ll wish someone had taught me Japanese since primary school…

Still, the underlying point I was making back as a schoolboy was relevant. By the time I arrived in Australia, the Japanese economy was an economic has-been to the world, at least in terms of growth. Japan’s share of Australian trade declined from more than a quarter to less than 15% between 1990 and 2019.

Of all the languages to learn, that of a declining economy experiencing deflation, a slow-motion train wreck of a stock market, debt-to-GDP levels that would give Greeks nightmares, and disastrous demographics as far as the eye could see, seemed the worst possible choice.

Of course, the policies to promote Japanese language lessons across Australia coincided with the end of the Japanese bubble. This left Australian schoolchildren learning the language for decades after the boom, which had once made it seem like a good idea.

Now I’m not picking on Japan. I’m picking on Australia.

The flawed narrative of an up-and-coming nation dominating the world isn’t new. Not so long ago, economists touted the Soviet Union’s superiority. Next minute, it imploded, completely unexpectedly. At least, for those who believed the Soviet economic data…

At the same time, there was the economic bogeyman of allowing Germany to reunify. This would create too strong an economic and football-playing superpower at the heart of Europe. Indeed, the fears of an overpowerful Germany go back a long way. The nation states of Europe are shaped by this concern, literally when it comes to their borders.

A whole host of nations are stuck in what’s known as the ‘middle-income trap’, despite never-ending predictions of the economic booms they’re about to have. India is a good example of this.

I’m sure you get the underlying idea here. By the time academics are aware of an economic boom, and by the time books are written about it, and by the time economic modellers have enough data to extrapolate the trend, it all collapses.

Just as Australian Prime Minister Paul Keating was busy proposing economic alignment with Asia, the Japanese bubble collapsed, and the Asian financial crisis followed him out of power.

Now, can anyone think of an economic superpower which has a debt problem, a demographic problem, a property bubble, and a politically-controlled economy?

Can anyone think of an economy which Australia is busily aligning itself with, including promoting the teaching of its language at schools?

Hmmm…

There’s another angle which Jim Rickards describes brilliantly in his monthly issue. As he points out, nations which are booming and growing tend to want to preserve peace and economic relations. They don’t challenge an order that benefits them.

It’s when decline begins to set in, and the mood changes to one of concern over the future, that things get geopolitically messy. Nations in decline need a foreign enemy to blame and a costly cause to pursue.

Look out, Taiwan!

That’s right, I’m talking about China, of course. Australia’s economic guarantor, of 2008 at least, and out-key trading partner. Chinese economic growth is also the engine of Australian growth.

But Jim’s Rickards’ argument is that we may have reached ‘peak China’ already. Indeed, by many measures we already have.

Has Australia caught Dutch disease from China?

Dutch disease describes a situation where one part of the economy, usually natural resources, becomes dominant over other sectors, usually manufacturing.

If the dominant sector booms, then the value of the local currency surges on foreign exchange markets. That further undermines the other parts of the economy, especially the exporting parts.

The name Dutch disease comes from Holland’s experience with the Groningen Gas fields — the ones which are currently being phased out despite the gas crisis in Europe…

Now natural resources are, of course, a huge part of the Australian economy. And many would say this has stolen capital from the manufacturing sector and overvalued the Aussie dollar, further undermining manufacturing exports.

But how much of this boom is tied to China’s demand for those resources? And what would happen if the resources boom were to end?

My answer to both questions is ‘a lot’. And Australians need to be prepared.

Hopefully, we’d recover to a more balanced economy. But this takes time and is a painful readjustment. One which our currency’s crash could and likely would at least make easier.

In the meantime, be sure to start learning Hindi or Portuguese.

Until next time,

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend