Stephen King: America has no natural right to remain free from recession

The nature versus nurture debate is common enough in most studies of human behaviour. Think, for example, of the vast tomes devoted to the issue in the field of psychology. Or consider that favourite of the school English literature syllabus, Lord of the Flies. When it comes to debates on relative economic performance, however, nature seems to rule.

Japan is in trouble because, by definition, its economic system just doesn't work. We know this because Japan has been through over a decade of unpleasant deflationary adjustment. The US, on the other hand, is absolutely fine because it's been a success through much of the last decade and, therefore, must know how to get things right. It follows, therefore, that, faced with a collapse in asset prices, the US is bound to come up smelling of roses whereas Japan will continue to remind us of the local sewage farm.

Is this conclusion safe? Talk to many investors in the US and Europe and the answer is a definite "yes". According to this view, it's simply not possible that the US could have long-lasting problems. The US has a well-functioning democratic system that delivers reform when needed. Corporate governance is very good, even in the light of the Enron and WorldCom débâcles. The labour market is enviably flexible, leaving other countries in the economic dark ages. The Federal Reserve is the most enlightened central bank in the world and is culturally incapable of making lasting errors.

And Japan is exactly the opposite, failing on all four counts, a failure reflected in its decade-long economic stagnation.

All very well but this argument contains more than a sprinkling of short-termism and more than a smattering of economic imperialism. The differences I've outlined have been in place for decades – apart from, perhaps, the Fed's inner wisdom – but it's hard to argue that the US has outperformed Japan because of these differences.

For those of you that may have forgotten, Japan's economy grew a lot faster than America's in the 1980s, miles faster than America's in the 1970s and light years faster in the '50s and '60s. Admittedly, there were lots of "one-off" factors that might have contributed to Japan's initial out-performance: post-war reconstruction is the most obvious example. These "one-offs" will not see the light of day again. By the 1980s, however, most people were convinced that the economic supremacy of Japan was established on a permanent basis.

The West was short-term, Japan was long-term. The West invested little in its workers, Japan had established the certainties of lifetime employment. The West didn't understand industrial relations, Japan did. And so it became relatively easy to justify the extraordinary gains in Japanese share prices and land prices in the late 1980s.

Today, it is easy to forget that Japan's economic system had established a cultural supremacy during the 1980s. It's also easy to forget that Japan avoided recession at the beginning of the 1990s when other economies were in a state of near-collapse. Surely, this was proof that Japan was the ultimate economy, the one that was able to shrug off the effects of an asset price bubble and maintain low levels of unemployment on an apparently permanent basis. Japan, of course, has learnt from this hubris. So, too, have many other Asian countries that went through their own "mini-Japan" experience in the late 1990s. Given that all these countries eventually let the side down, failing to deliver on all of their earlier promises, it's perhaps not surprising that the US is still regarded as a relative success.

But is success guaranteed forever? I somehow doubt it. Interestingly, so do a lot of people in Asia. I've just come back from a week in the region. People there have no difficulty in understanding the change that takes place between initial success and subsequent failure. They know that success breeds confidence, that confidence breeds risk taking, that risk taking breeds speculation and that speculation delivers bubbles and subsequent busts. And they should know. After all, this is the collective life that they've lived in the 1980s and 1990s. So when you talk to people in Asia about the reality of stagnation, the threat of deflation, the problems of corporate balance sheet adjustment and the dangers of monetary and fiscal failure, they hardly bat a collective eyelid. They know what it's like to believe in miracles and they know what it's like when miracles come to an end. So, for them, it really isn't difficult to believe that the US, too, could now be entering a much more difficult phase of economic development. "Been there, done that" might be the appropriate response.

These observations are highly relevant for the year ahead. The consensus argues that there will be a reasonable recovery. The consensus believes that policy changes will provide significant economic support. The consensus believes that the current, emergency, level of interest rates will not be around for much longer and that, as the year progresses, we will be back to business as usual: equities will return to their more typical bullish trajectory, profits will expand and, once more, companies will invest.

In other words, the same set of beliefs that was held at the beginning of 2002. And the reason for this set of beliefs appears to be a case of nature triumphing over nurture. Because the US has not experienced the bursting of a bubble since 1929 and because so many people chose to believe in US economic supremacy in the late 1990s, it's very difficult to imagine that anything could go seriously wrong in the US. Yet recent history suggests that this conclusion is remarkably complacent.

In the 1980s, there certainly wasn't much complacency. Back then, the US economy was under attack, threatened by the technology of Japan and the industrial might of Germany. Laughable ideas today, perhaps, but dominant themes just 15 years ago. In the 1960s, a more devastating problem arose. The US economy's trend rate of growth began to slow. The stock market, which had been quite happily discounting economic growth of 4 per cent a year, ad infinitum, suddenly took fright and the post-war bull market evaporated, leaving investors licking their wounds for a good 15 years (adjusted for inflation, a good quarter of a century).

For those that have been nurtured, for those that have learnt not to accept the economic supremacy of one particular economic system, events of this kind are unlikely to come as a great surprise. It may simply be the case that all economic systems are inherently unstable: when they work, people become overconfident, too willing to take risk, with the inevitable result that the system becomes unstable, unable to deliver the promises made over the years.

Those, however, that rely on nature alone, who believe that countries are genetically disposed to either economic success or failure, are likely to find that economic life will constantly offer unexpected and often unwelcome surprises. America's struggle with the evils of deflation could prove to be just one more chapter in this economic Lord of the Flies.

Stephen King is managing director of economics at HSBC.

stephen.king@hsbcib.com