Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder 　No.461

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The current plunge in global stock prices stems from the collapse of the so-called “credit bubble” – a phenomenon symbolized by the subprime housing loan fiasco in the United States. Strictly speaking, there are two types of credit, or “trust” shall we say. There is the trust of believing in things that exist, as opposed to the trust of putting your faith in things that do not exist. Trust based on belief in quantities that actually exist will not change as long as the target of that trust continues to exist. When believing in quantities that do not actually exist, however, there will be two results.

The outcome of believing in things nonexistent, for example, can result in something coming of nothing. Although this may not measure up to the famous adage of the French philosopher Descartes, “I think, therefore I am,” it refers to putting one’s faith in the belief that, “Since everyone says it is so, then so it is.” That is, when people assess something as “believed to exist” and invest funds into it, then something that did not exist previously will take on concrete form and emerge on the scene. It is this new wealth, therefore, that acts in concert with the wealth or value generated by manufacturing that acts as the foundation of the growth underpinning capitalism. The other type of trust is that in instances when something believed to have existed is at length determined to actually have been nothing at all. This is the type of trust or more accurately the sudden absence of trust that triggers the collapse of credit bubbles.

Economies, as such, are comprised of core industries and offshoot industries. The core industries consist of “manufacturing,” while the offshoot industries are known as “service sectors” (in the broad sense of the concept). Economic fundamentals must not be determined by economic scale. Regardless of how much greater the scale or business value of the information software industry may be than that of the steel industry, for example, there are financial offshoot industries that come into existence for the sake of creating steel, as well as distribution and supply sectors for the purpose of transporting steel. Where there are commodities, in other words, they coexist with service industries that come into being to support those commodities.

As I have stated numerous times in this column, the U.S. has been in recession since 2002. The world at large, however, is focused on whether America is currently or will soon fall into a recession. Where does this gap in perception come from? Well, in my case, it is because I have constantly kept my eyes on U.S. core industries. From 2002, the appreciation of the dollar caused import materials to grow cheaper resulting in the manufacturing industry losing its competitive strength in both the domestic and international markets. Although the U.S. gross domestic product (GDP) grew at an annual clip of 3% or more from 2002 through 2005, the growth of the net component when subtracting the portions from the real estate bubble and excessive credit extension – in short, the growth in manufacturing (core industries) – staggered on at a rate of 1% or less. This is why there has been a recession underway.

In my book The Japan as No. 1 Era Will Return (published by Tokuma Shoten), as well as in this column, in study groups and on other occasions, I have stated that: “The subprime loan problem will end in March.” From April on, my view has been that: “The directions of the Japanese and U.S. economies will come clear in the marketplace.” My view, in a nutshell, has been that the U.S. economy will move into a foreign demand mode and the Japanese economy will shift to domestic demand-fueled growth. In fact the current strong yen/weak dollar trend is beginning to support these directions for the economies of both nations.

To support my point, if there are any crisis conditions emerging in the financial system under the impact of the credit bubble (and its collapse) caused by investment banks, they will be limited to the offshoot industries, not affect the core industries. Capital supplied by the Fed is cascading into core industries via commercial banks. With the manufacturing industry having cut back on supply due to the recession that began in 2002, current inventory is extremely low. With the sharp rise in import commodity prices thanks to the cheap dollar, meanwhile, domestic demand is rising rapidly. Under these circumstances, the U.S. balance of international payments has also continued to improve since last year.

At present, the emergence of America’s core industries from recession, on the twin pillars of expanded domestic demand and foreign demand, is becoming a reality, with these sectors certain to at last become the locomotive driving the U.S. economy. If the key topic of interest in the market shifts from the offshoot industry financial systems to the actual state of manufacturing at the core industries from here on, the market will return to sound footing. Although there are no guarantees that the clarification of the victims of the crisis in the financial system will not cause panic, the correct view is that as of the end of March the credit crunch storm that descended the financial industry has subsided for the time being. While the offshoot bubble will quickly disappear, the real thing is far more long-winded.

We are moving into the era of core industries – the era of the real thing. The real-thing economy and the real-thing market that will not be held at the mercy of imitations are making a comeback.