Three years ago I spent an evening with a middle class family in a Tokyo suburb trying to fathom one of the great mysteries of the Japanese economy: why is it that with near-zero inflation, almost full employment and negligible interest rates, the Japanese do not spend their way to greater growth.
Many theories have been put forward for the recessionary combination of excessive supply and weak demand in Japan. They include a loss of faith in the future, the growing fear of unemployment and the lack of a social safety net, all of which encourage Japanese to save their cash rather than fritter it away.
At the home of Tatsuo Uchida, plant manager of a rayon factory, I came to realise another fundamental truth that evening: most salaried Japanese feel they already have just about everything they need in material terms; a home, a car, and all the gadgets for modern living, from TVs to PCs.
Could it be that the same thing is now happening in the United States, the land of the ultimate consumer, where debt-burdened shoppers armed with pre-approved credit cards have for a decade propelled themselves to the malls on the well-known market principle of, "I want it and I want it now"?
James Paulsen thinks this may indeed be the case. "It's a saturation problem," said the chief investment officer of Wells Capital Management and author of a 16-page report on consumer spending called Economic and Market Persepctive. American consumers are pretty much all "durabled up" is how he put it, just as the corporate sector is "all teched-up".
"It is not so much they can't afford it," he told me. "It's more they don't need it. If you and I and every other American person in the last 12 months had moved up to a bigger home and had bought a new car, a new couch and a new computer, then no matter how low the Fed takes the funds rate or how much tax cuts they give us, none of us are likely to buy a new car this year."
The Federal Reserve has cut interest rates five times this year and is likely to do so again this month to reinvigorate the economy. But while this makes it more advantageous for people to buy, the problem is "not that they don't have the money to buy, the problem is they don't have the desire", said Mr Paulsen.
This, if true, has serious implications for Fed policy makers who place great store in promoting consumer spending, which accounts for a third of final demand in the American economy. "Stronger growth in household spending is the crucial next step in the transition from unacceptably slow growth to sustainable long-term growth," said Federal Reserve Bank of Philadelphia president Anthony Santomero on Friday.
Mr Paulsen makes the seemingly contradictory argument that the slowdown in demand was there throughout the great boom of the 1990s. "The Japanese economy died in 1990 and never recovered" because demand died, he said. Demand in the developed world also withered, due to a number of factors including slower population growth and an ageing population. But in America, he contends, this weakness begot strength.
In one of those paradoxes of economic theory, such as bad economic news sometimes being good news for Wall Street (it might mean a rate cut) demand weakness was accompanied by the biggest boom in world history, because it led to persistent declines in the inflation rate, which kept recession - and therefore unemployment - at bay, while corporations were forced to cut costs ferociously to achieve profit growth, something more easily done in America's business culture than in Japan.
IN the 1990s US corporate profits in fact grew twice as much as sales, which were only maintained by dropping prices in relative terms. There was some outright deflation - computers being the obvious example - and less obvious effective deflation, as in housing, where property prices went up along with incomes while monthly payments went down, said Mr Paulsen.
Not everyone is as bearish as Mr Paulsen. James Glassman of JP Morgan says that there are no more shoes to drop in consumer outlook. "Although rising unemployment will pose constraints, rising real estate values, wage gains and the coming reductions in tax liabilities will all support modest growth in spending in the months ahead," he said in a rival consumer report on Monday.
But there is evidence of bulging personal inventories in US suburbs. At the end of the decade the proportion of American households owning their own homes had risen from 64 to 67 per cent, homes with personal computers from 22 per cent to 55 per cent and mobile phone owners from 2 to 39 per cent. The number of vehicles on the roads went up 2 per cent every year. Almost everyone who wants and can afford a house, a car, a computer and a mobile phone already has them and is not in the mood to trade up.
It was unprecedented that relative prices should fall during the longest expansion ever, said Mr Paulsen. It meant that "Americans bought a lot of things which, unlike bread or toothpaste, are good for several years in the future. We've already put out the outlay but the consumption is yet to come. That's where saturation sets in." Which sounded not unlike what Tatsuo Uchida told me three years ago as we savoured pickled plums in his home in the Tokyo suburbs. "People," he said simply, "aren't buying unnecessary things."
Judging by the latest news from Japan, which recorded negative growth for the first quarter, nothing much has changed there. US retail sales figures for May to be published this morning will be closely watched to see if they add to the fears that consumers are not spending and America is going down the same road towards a hard landing.
