We are all Japanese now

General | September 28, 2008 | 3 min read

Jason Calacanis wrote a valuable post on how start-up companies can cope with the “collapsing” economy. A few months ago, Marc Andressen called it the “oncoming nuclear winter” – and that was before the collapse of AIG, Lehman, WaMu and so on. I have shared that pessimism for a while myself; I sold my house in 2004, and chose to rent for the past 4 years, which tells you my view of the housing bubble. While I was too early, prices are well on their way to 2004 levels and lower. This kind of pessimism is not uncommon among tech geek circles. What is going on here? Why are we so pessimistic?

Many tech geeks tend towards libertarian economics or the so-called Austrian School economics – the best way to get into it is at http://mises.org.  No, don’t confuse libertarian economics with the “free market capitalism” claptrap coming out of the Wall Street financial complex; when Wall Street gunslingers touted the miracles of “capitalism”, what they really meant was their government-conferred right to borrow easy money from the Federal Reserve, leverage themselves up 20 to 1,  even 40 to 1 while speculating with that easy money, paying themselves tens of billions collectively in bonuses, finally inflicting hundreds of billions, soon to reach trillions, of losses on the taxpayer when those speculations predictably failed . The Wall Street version of financial capitalism has about as much to do with real savings and investment led capitalist wealth creation as alchemy has to do with with chemistry. The alchemy analogy is particularly appropriate: much of the Wall Street “business model” was really transmuting pools of highly risky, toxic mortgages into nearly risk-free “golden” securities.

A lot of geeks like myself got a real education on this in the last NASDAQ bubble, where the alchemy of the time was transmuting stock in unprofitable private companies into strong “currency” to be used for rewarding employees and to “pay for” acquisitions – the very words “currency” to “pay for” acquisitions, common at that time, connote the realization of the alchemist’s dream. That bubble was also aided and abetted by the Federal Reserve’s easy credit policy, as all such bubbles are. It was that bubble that led me and many other geeks to discover the Austrian School.

The predictable solution the Federal Reserve came up with to fight that bubble’s aftermath was to unleash even more easy credit, this time directed to housing and Wall Street. Even as early as 2004, it was obvious there was a bubble forming in housing, as documented by sites such as The Mess That Greeenspan Made or Prudent Bear which I have been reading for several years now. To give credit where it is due, there is one politician who has taken a strong, consistent stand against the bubble blowing policies of the Fed, warning of the dangers ahead, for several years: Congressman Ron Paul. Just as price to earnings ratios reached the stratosphere in the NASDAQ bubble, price to income, price to rent and mortgage to rent ratios reached historically unseen levels during the housing bubble. To anyone who witnessed the NASDAQ bubble and its collapse, it was a strong sense of deja vu, yet policy makers like Greenspan and Bernanke simply saw nothing wrong. Bernanke, in particular, came up with absurd excuses such as the “global savings glut” to explain the housing/Wall Street bubble, absolving the Fed of any responsibility. It is instructive to keep that track record in mind, because the same policy makers who got us in this mess are still in charge, still making decisions for all of us. No wonder there is such pervasive pessimism in tech geek circles.

Finally, Japan. Anyone in technology industry realizes quickly how important Japan is in the global tech industry. At Zoho, our first big corporate customer is from Japan. That is part of a pattern: in 1996, our first big OEM customer for our network management was Japanese. In fact, it was our Japan connection that first taught me about destructive bubbles, because Japan had its own mother-of-all-bubbles in the late 80s. The Japanese have paid for that financial bubble for nearly a generation. Cocky American economists like Paul Krugman, now a leading NY Times commentator, but at that time only a leading economist, gave the Japanese useful advise like “PRINT LOTSA MONEY” (sic), to get out of their doldrums. Krugman merely reflected the common view among American economists at that time – the Japanese were economic rubes, and if only they listened to the smart American economists their economic problems would be solved. Keep in mind that while Krugman has his issues with the Bush administration, he was cheering Greenspan on in 2003-4 to keep interest rates low and credit flowing freely, which enabled carry-trades of various kinds to run amok, worsening inequality dramatically by shifting wealth to those financially well-connected; Krugman now fully supports the Bernanke Fed and its endless series of bail-outs, while shedding progressive tears for the inequality that the easy credit policies engendered. This misbegotten government policy also has the effect of zombifying companies, freezing bad investments in place, something Japan experienced.

Well, let’s just say God must have a delicious sense of irony. We are all Japanese now.

  1. Mohammad Zohaib Khan

    Very nice blog.
    Mohammad Zohaib Khan from Atlanta

  2. Mohammad Zohaib Khan

    Very nice blog.
    Mohammad Zohaib Khan from Atlanta

  3. Mark Robinson

    VOIは、インド専門ニュースポータルの先駆けとして、日本のマスメディアでは報じられない、インド発の最新ニュースを日本語でお届けしています。インドへの関心の高まりと、熱心な読者の皆さまのおかげで、毎日多くの方がVOIに訪問してくださっています。VOIでは、皆さまからのご意見、ご要望、アイデアをお待ちしています。インドのニュースを日本語で、という従来のスタンスは変わりませんが、今後はそれに加え、インドに興味のある皆さまの声を紹介し、もっと活発に意見交換ができる場所にしていきたいと考えています。「インド旅行記」や「インド関連イベント情報」でも構いませんし、「インド人に聞きたいこと」「インド人に言いいたいこと」など、日頃から抱いているインドに対する思い、疑問、提言などをお寄せください。日本とインドの間に情報の橋を架けるために努力していきます。皆さまのご協力をお待ちしています。 #

  4. Mark Robinson

    VOIは、インド専門ニュースポータルの先駆けとして、日本のマスメディアでは報じられない、インド発の最新ニュースを日本語でお届けしています。インドへの関心の高まりと、熱心な読者の皆さまのおかげで、毎日多くの方がVOIに訪問してくださっています。VOIでは、皆さまからのご意見、ご要望、アイデアをお待ちしています。インドのニュースを日本語で、という従来のスタンスは変わりませんが、今後はそれに加え、インドに興味のある皆さまの声を紹介し、もっと活発に意見交換ができる場所にしていきたいと考えています。「インド旅行記」や「インド関連イベント情報」でも構いませんし、「インド人に聞きたいこと」「インド人に言いいたいこと」など、日頃から抱いているインドに対する思い、疑問、提言などをお寄せください。日本とインドの間に情報の橋を架けるために努力していきます。皆さまのご協力をお待ちしています。 #

  5. christopher

    Thank you, Sridhar, for choosing a macroscopic socioeconomic focus. I have been formulating a number of hypotheses over the past many years, one of which is:all the real thinking and critical analysis today is occurring in realms wherein techies dominate. It’s not that geeks are onto anything new; a quick scan of the mises.org site will reveal principles as old as human nature. Witness: Mises’ own magnum opus was called “Human Action”.The primary reason for the concentration of rational thought and action in tech fields is due to these talents being rewarded in this sphere as in few others. There also seems to be in tech a higher percentage of directors and corporate officers with analytical backgrounds, than in other business realms. This may be in part due to the effects of the tech bubble bursting, as you noted. Any leader who was ever heard muttering the phrase “the new economy” was handed his hat.Is it not interesting that the credit rating agencies responsible for assessing the worthiness of corporate paper had given many of the firms at the center of this maelstrom top marks up until just prior to the meltdown? What does this say of the analysis being performed by “analysts” working for these firms? I would love to read interviews with some of those very analysts – find out how their analyses were performed and reported.It is most perverse that many of the very same actors responsible for this mess are the loudest mouths today in “solving” it. Eisenhower cautioned us to be wary of a military-industrial complex; today, the real enemy of both economic and personal liberty is the governmental-financial-media complex. Look at the names populating the boards of financial and media firms. Contrast these with political office-holders, their staff, and supporters. There is often a disturbing ease with which names migrate from Washington to New York and vice versa.It is the American Cosa Nostra.

  6. christopher

    Thank you, Sridhar, for choosing a macroscopic socioeconomic focus. I have been formulating a number of hypotheses over the past many years, one of which is:all the real thinking and critical analysis today is occurring in realms wherein techies dominate. It’s not that geeks are onto anything new; a quick scan of the mises.org site will reveal principles as old as human nature. Witness: Mises’ own magnum opus was called “Human Action”.The primary reason for the concentration of rational thought and action in tech fields is due to these talents being rewarded in this sphere as in few others. There also seems to be in tech a higher percentage of directors and corporate officers with analytical backgrounds, than in other business realms. This may be in part due to the effects of the tech bubble bursting, as you noted. Any leader who was ever heard muttering the phrase “the new economy” was handed his hat.Is it not interesting that the credit rating agencies responsible for assessing the worthiness of corporate paper had given many of the firms at the center of this maelstrom top marks up until just prior to the meltdown? What does this say of the analysis being performed by “analysts” working for these firms? I would love to read interviews with some of those very analysts – find out how their analyses were performed and reported.It is most perverse that many of the very same actors responsible for this mess are the loudest mouths today in “solving” it. Eisenhower cautioned us to be wary of a military-industrial complex; today, the real enemy of both economic and personal liberty is the governmental-financial-media complex. Look at the names populating the boards of financial and media firms. Contrast these with political office-holders, their staff, and supporters. There is often a disturbing ease with which names migrate from Washington to New York and vice versa.It is the American Cosa Nostra.

  7. Jan Erik Paulsen

    European politicians are shooting fish in a barrel these days. Not even the far right wants to be associated with American style capitalism. Though, we don´t really understand why George Bush is receiving so much flak. You guys elected him, twice. Is the legislative and judicial branch just pretty political decoration ?Also, the whole “drill in Alaska” plan is pure comedy. The Russians are working on the Shtokman gas field and that thing will require decades of work just to run at full capacity. So 100% dumb luck, flying pigs, the tooth fairy and santa will give you cheap Alaskan petrol in the year 2030.

  8. Jan Erik Paulsen

    European politicians are shooting fish in a barrel these days. Not even the far right wants to be associated with American style capitalism. Though, we don´t really understand why George Bush is receiving so much flak. You guys elected him, twice. Is the legislative and judicial branch just pretty political decoration ?Also, the whole “drill in Alaska” plan is pure comedy. The Russians are working on the Shtokman gas field and that thing will require decades of work just to run at full capacity. So 100% dumb luck, flying pigs, the tooth fairy and santa will give you cheap Alaskan petrol in the year 2030.

  9. Brent

    Thanks for the pointer to mises.org, Sridhar. Even though you’re a few years younger than me, you sound just like my Grandpa Connolly, a kind, wise man who I miss dearly.

  10. Brent

    Thanks for the pointer to mises.org, Sridhar. Even though you’re a few years younger than me, you sound just like my Grandpa Connolly, a kind, wise man who I miss dearly.

  11. swami

    How come all these insights are almost always in hindsight??

  12. swami

    How come all these insights are almost always in hindsight??

  13. Enterprise Alley mobile editio

    […] in the startup world. But amid the gloom, Sridhar offers a glimmer of hope. A few snippets. From We’re all Japanese now: …don’t confuse libertarian economics with the “free market capitalism” claptrap coming out […]

  14. Enterprise Alley mobile editio

    […] in the startup world. But amid the gloom, Sridhar offers a glimmer of hope. A few snippets. From We’re all Japanese now: …don’t confuse libertarian economics with the “free market capitalism” claptrap coming out […]

  15. Mahesh

    More than 300 American banks are on the edge of bankruptcy. Apart from this there is large scale default in credit card repayments and they may bring even our icici bank down.India made a critical mistake in not going after manufacturing and doing IT instead it’s not diversified.

  16. Mahesh

    More than 300 American banks are on the edge of bankruptcy. Apart from this there is large scale default in credit card repayments and they may bring even our icici bank down.India made a critical mistake in not going after manufacturing and doing IT instead it’s not diversified.

  17. Omkar

    Both the countries US and Japan has come a long way in economic development.We in India, forget Japan, we do not even match our neighbours in economic development. Had it been really this – “We are all Japanese Now” – believe me, by this time we would have seen many suicides of Indian IT professionals.Not yet, but your prediction is very true and will happen very soon for Indian IT in another recession – if the current trend continues. IT services is still treated like rock stars in India. How I wish N R Murthys or Azim Premjis of the world tell the real truth of future to their employees !!!Btw, US has agreed to give the bailout yesterday, though not at one go to the Fed Reseve. I just shudder to think what our Harvard educated ministers would have done in such a case other than showing their “intellectual supremacy” in talk!

  18. Omkar

    Both the countries US and Japan has come a long way in economic development.We in India, forget Japan, we do not even match our neighbours in economic development. Had it been really this – “We are all Japanese Now” – believe me, by this time we would have seen many suicides of Indian IT professionals.Not yet, but your prediction is very true and will happen very soon for Indian IT in another recession – if the current trend continues. IT services is still treated like rock stars in India. How I wish N R Murthys or Azim Premjis of the world tell the real truth of future to their employees !!!Btw, US has agreed to give the bailout yesterday, though not at one go to the Fed Reseve. I just shudder to think what our Harvard educated ministers would have done in such a case other than showing their “intellectual supremacy” in talk!

  19. Trevor

    Very short article on the disaster we are now seeing, and entirely correct.
    It’s not surprising that a tech person can see the truth and fiction involved in this…as a programmer, which I assume you are in some degree, we think in True and False, we get loads of requirements and desires loaded upon us, and those of us who know what we are doing are able to see what is possible or what is impossible. What wall street has been doing, and saying they are doing, is impossible, as many people have said, and as we now see.It’s so sad to watch the political and “journalistic” commentary on this subject, as its really not that complicated of a situation to understand; however, it does require a bit of concentrated thinking, mental puzzles, etc. The problem is, not many people have the proper manner of thinking (it really doesn’t even require formal education, other than pure logic) to understand it, and that largely includes formally trained economists. They say economics is both a science and an art, but what they seem to have skipped when training economists, is that certain things simply aren’t possible, they skipped the logic portion.So the people that created the mess, or were supposed to be overseers, are the ones that will create the solution. The people that predicted this long ago, very long ago, are not even asked for their opinion.If China is not the global superpower 20 years from now, it certainly wasn’t for lack of opportunity, thats for sure. But I can’t imagine they could be as stupid as out leaders, its almost like they are trying to do the wrong thing. Only someone with a formal (but incorrect) education could screw up this badly.

  20. Trevor

    Very short article on the disaster we are now seeing, and entirely correct.
    It’s not surprising that a tech person can see the truth and fiction involved in this…as a programmer, which I assume you are in some degree, we think in True and False, we get loads of requirements and desires loaded upon us, and those of us who know what we are doing are able to see what is possible or what is impossible. What wall street has been doing, and saying they are doing, is impossible, as many people have said, and as we now see.It’s so sad to watch the political and “journalistic” commentary on this subject, as its really not that complicated of a situation to understand; however, it does require a bit of concentrated thinking, mental puzzles, etc. The problem is, not many people have the proper manner of thinking (it really doesn’t even require formal education, other than pure logic) to understand it, and that largely includes formally trained economists. They say economics is both a science and an art, but what they seem to have skipped when training economists, is that certain things simply aren’t possible, they skipped the logic portion.So the people that created the mess, or were supposed to be overseers, are the ones that will create the solution. The people that predicted this long ago, very long ago, are not even asked for their opinion.If China is not the global superpower 20 years from now, it certainly wasn’t for lack of opportunity, thats for sure. But I can’t imagine they could be as stupid as out leaders, its almost like they are trying to do the wrong thing. Only someone with a formal (but incorrect) education could screw up this badly.

  21. zato

    Very good read! Thanks…

  22. zato

    Very good read! Thanks…

  23. The Palin Backfire

    […] We are all Japanese now […]

  24. The Palin Backfire

    […] We are all Japanese now […]