Past lessons may inspire good karma for G-20 at Seoul

There's a bit of karma involved in the Group of 20 holding its summit in Seoul on Thursday and Friday.

Thirteen years ago, South Korea was at the centre 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.

South Korea had US 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. Today, we worry 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 United States and euro zone economies from experiencing their own lost decades.

Korea offers a good road map to fighting the Japanifaction of the global economy. Past actions allowed it to steer around deflation and falling living standards.

Just two years ago, South Korea was in line 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 which meant Korea looked like a giant hedge fund.

Korea confounded the sceptics and is growing at 4.5 per cent. Korea's real contribution to today's discourse is its crisis-management steps in the late 1990s. It did everything Japan didn't and the US 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.

One problem was shifting 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. And the role of family conglomerates remains too large for comfort.

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 industrialised world, a central bank no one respects and persistent deflation.

Count Stephen Roach, Morgan Stanley's non-executive 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 US 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 US election divided Congress in a way that should worry Asia.

It's great that China's economy is growing at 9.6 per cent. Yet it's no substitute for the US$14 trillion American economy, and an undervalued yuan may harm neighbours more than China's growth aids them. We could be looking at two years of gridlock, making the US policy apparatus look all too Japan-like.

On some level, the US would be lucky to become Japan. Even today, Japanese households are sitting on more savings than the annual output of the US economy. That's why Japan has been able to muddle along for 20 years.

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 US would fare even slightly as well if its savings-deprived economy were in place for 10 years, never mind 20 years.

Japan has yet to find an exit strategy from zero rates and a debt that's double the size of its economy. The US problem may be that it didn't spend enough to jumpstart things or address crushing household debt.

The odds are stacked against this week's G-20 confab finding a solution. All ultralow rates in the US 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.

In its darkest days Korea resisted the urge to slash rates to zero to avoid the "bubble fix". Free money has a way of offering a false sense that recovery is afoot. In reality, it just creates new bubbles to paper over old ones.

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

- BLOOMBERG