[Viewpoint] A little Korean karma would help

There’s a bit of karma involved in the G-20 holding its summit in Seoul.

Thirteen years ago, Korea was at the center of chaos that was going global in a hurry. Investors who ignored troubles in Thailand and Indonesia had no choice but to confront reality once the then-11th biggest economy crashed.

Korea had U.S. stocks reeling and the Federal Reserve worried. Korea in the late 1990s was like Spain today, and Thailand was like present-day Greece - a canary in the financial coal mine. We feared its woes would be shared by more vital places. Today, we worry that Spain, the No. 9 economy, will be the Korea-like domino that causes a chain reaction.

The G-20, along with discussing China’s currency, will focus on Japan - namely keeping the U.S. and eurozone economies from experiencing their own lost decades.

That’s where Korean karma comes into play. Korea offers a good road map to fight the Japan-ification of the global economy. Past actions put its economy on a virtuous path, allowing it to steer around deflation and falling living standards.

Just two years ago, Korea was on tap to become the next Iceland. The fear was that its companies didn’t learn the lessons of the Asian crisis and issued too much short-term debt in foreign currencies. To many, that meant Korea looked like a giant hedge fund. Korea confounded the skeptics and today is growing at a robust rate.

Korea’s real contribution to today’s discourse is its crisis-management steps in the late 1990s. It did everything Japan didn’t and that the U.S. is failing to do now. Weak companies and banks were allowed to fail, often regardless of size. Interest-rate policies never lost a long-term perspective. The nation’s people were asked to sacrifice. Avoiding denial was a key element of the response.

Things didn’t always go smoothly. One problem was to shift bubbles from the corporate sector to households, which took on too much debt. That was later corrected. The jump in short-term debt in the late 2000s didn’t help. The role of family conglomerates remains too large for comfort.

In a world devoid of economic role models, though, Korea’s handiwork is worth a look. Japan’s main failing after its 1980s boom and bust was timidity. It restructured little and tossed money at the economy expecting an eventual rebound. Twenty years on, Japan has the largest public debt in the industrialized world, a central bank no one respects and persistent deflation.

Count Stephen Roach, Morgan Stanley’s nonexecutive Asia chairman, is among those worried the “world economy is at risk of falling into a Japanese-like quagmire.” We need to stop debating whether the U.S. will suffer that fate. It already has - politicians in Washington just don’t know it yet.

The Fed said as much last week when it announced a second round of quantitative easing. The risk is that lawmakers don’t get the memo. Last week’s U.S. election divided Congress in a way that should worry Asia.

It’s great that China’s economy is growing at a rate of about 9.6 percent. Yet, it’s no substitute for the $14 trillion U.S. economy, and an undervalued yuan may harm neighbors more than China’s growth aids them. We could be looking at two years of complete gridlock, making the U.S. policy apparatus look all too Japan-like.

On some level, the U.S. would be lucky to become Japan. While this heretical view has made the rounds in recent years, it’s worth exploring anew. Even today, Japanese households are sitting on more savings than the annual output of the U.S. economy. That’s why Japan has been able to muddle along for 20 years without unraveling.

Mass homelessness never occurred, crime rates didn’t soar and the bond market avoided crashing amid an explosion of government debt. It’s doubtful the U.S. would fare even slightly as well.

Japan has yet to find an exit strategy from zero rates and a debt that’s double the size of its economy. The U.S.’s problem may be that it didn’t spend enough to jump-start things or address the crushing household debt imperiling its outlook. This is the root cause of America’s Japan-ification.

The odds are stacked against the Nov. 11-12 G-20 Summit finding a solution. All that the ultralow rates in the U.S. and elsewhere accomplished is sending waves of hot money Asia’s way. It’s inflating bubbles in stocks and real estate and complicating the jobs of officials from Beijing to Jakarta.

That brings us back to the lessons from Korea. In its darkest days it resisted the urge to slash rates to zero to avoid the so-called bubble fix. Free money has a way of boosting markets and offering a false sense that recovery is afoot. In reality, it just creates new bubbles to paper over old ones. Such actions come back to haunt you later.

What the world needs is a little good karma. If officials look close enough, they may find it in Seoul.

*The writer is a Bloomberg News columnist.

by William Pesek