The economic collapse of Japan and the Phoenix Suns

by on February 18, 2009 at 7:30 am in Economics | Permalink

Most of you have heard about the Japanese gdp report; it implies an annualized rate of decline of almost 13 percent.  OK, they depend on exports but why is it so dire there? 

You also may have heard that the Phoenix Suns have been trying to unload All-Star players Amare Stoudemire and Shaquille O'Neal.  They are not hoping to get equal talent in return but rather they need to lower their payroll.  (Why pay $75 million a year for a fringe playoff club?)  And the New Orleans Hornets, former contenders, traded center Tyson Chandler simply to unload his salary.

I think of the Suns or Hornets as similar to a highly leveraged institution.  I don't know the debt level of their corporate structure but that is not the point.  The Suns have been spending lots in recent years toward the goal of ever-rising prices for season tickets and corporate boxes.  Does that strategy sound familiar?  If the future price hikes don't come on the main asset, they can't afford their obligations and so they will try to shed illiquid and hard-to-value assets into an unwilling market.  Sound familiar?  (As an aside, I wonder if barter is one way to jump start trading in illiquid financial assets.)

Does this sound familiar?:

"You've got a market loaded with motivated sellers and only a very
small group of buyers," one NBA executive told ESPN.com. "It's really
ugly. Owners are scared to death right now."

Institutions can have receipts and obligations which require growing revenues even if they don't have much explicit debt on their books.  I think also of the artistic non-profits which invested in expensive facilities, in the hope of ever-rising donations from their investment banker patrons.  Many other parts of the economy may be "leveraged" in this fashion, with or without high levels of debt.

Japan, of course, has high levels of government debt and also a demographic problem.  I wonder whether their future-oriented export strategies make them even more leveraged, de facto, in a manner resembling the (former) business strategy of the Phoenix Suns.

One lesson of this crisis will be how deep the concept of leverage extends.  That's another reason why this is fundamentally a crisis of sectoral shifts.

1 Andrew February 18, 2009 at 7:51 am

Leverage yes, but maybe just debt- saddling yourself with future payments based on extrapolating assumptions of past performance out forever.

Should contracts start including CPI provisions? As in, when deflation hits we owe you less?

Picking up Shaq seems like a boneheaded experiment at this point. Holding onto him would be more boneheaded. When something doesn’t work, cut your losses. His best performance has been at the All-Star game.

2 Dan Lewis February 18, 2009 at 8:31 am

Using the Suns as an example is a bit of a mistake. The ownership group is notorious for brazenly acting to benefit the bottom line over the value of the on-court product (not that there’s anything actually wrong with that). See http://www.nba.com/suns/news/thomas_trade_070720.html

“The Phoenix Suns today traded center Kurt Thomas and two future first-round draft picks to the Seattle SuperSonics for a future conditional second-round pick. In addition to salary cap relief, the trade leaves Phoenix with an $8 million trade exception for their use in future dealings.”

The Suns were $10m over the cap at the time, so this lessened their luxury tax hit significantly (I think it’s dollar for dollar over the cap, so $16m). They did not use the trade exception.

So to be clear, the Suns traded a good player AND two guaranteed #1 picks for a lot of money. At the time, the trade was universally ridiculed with a few calls to revise the NBA collective bargaining agreement, the latter group arguing that the Suns basically sold their draft picks and pocketed the difference.

3 Hugo Lindgren February 18, 2009 at 8:57 am

Tyler, this is a wonderful, provocative post, but then you leave us with that unsatisfying finish — “a crisis of sectoral shifts.” I have a sense of what you mean, and probably most of your readers have a better grasp, but how about stating it more plainly & more powerfully. “A crisis of sectoral shifts” is a fancy way of saying what? That corporations aren’t going to put money into season tickets and luxury boxes? That Japan went too hog wild on its export trade & neglected the development of domestic markets?

4 Andrew February 18, 2009 at 9:18 am

“Otherwise anyone who doesn’t lever up looks like a loser, profitswise, compared to the gamblers.”

Except of course for fractional reserve banking. 10x leverage is reasonable for low margin business like banking and surely doesn’t crowd out non-fractional lending ideas like microlending.

5 oops February 18, 2009 at 9:33 am

The LA Galaxy soccer team has refused to deal their high priced soccer star David Beckham to AC Milan. LA has two pro soccer teams (Galaxy and Chivas). Their demographic is hispanic and they seem to be doing o.k. More immigrants please!

6 oops February 18, 2009 at 9:41 am
7 Rhys K.M. February 18, 2009 at 10:05 am

I find this post to be very interesting because of how it involves both microeconomics and macroeconomics. The Japanese government tried to cut interest rates and higher government spending to save the economy from total economic collapse, but the main problem of exporting is yet to be addressed. I think the Phoenix Suns can manage to get out of debt because when compared to the economic crisis that Japan is facing, it has a high chance of getting solved.

8 Bob Murphy February 18, 2009 at 11:02 am

If Tyler or Alex recommends nationalizing the NBA, I am boycotting this site for a week. I mean business.

9 Noumenon February 18, 2009 at 11:30 am

Except of course for fractional reserve banking. 10x leverage is reasonable for low margin business like banking

If you’re saying “Don’t set the leverage cap at 2x, that’s too low,” I agree with you. I have seen several news stories where the leverage was 40x.

If you’re saying something else, I didn’t understand.

10 mobile February 18, 2009 at 1:14 pm

Nowadays it’s good to be Billy Beane.

11 Scott Sumner February 18, 2009 at 5:11 pm

Taeyoung is exactly right in the previous comment. But I would add that the rise in the yen is not as mysterious as it seems. The problem is that most people don’t know how to recognize tight money in a deflationary environment. Because tight money policies cause deflation, and deflation drives nominal interest rates down to zero, tight money is often confused with easy money. Japan since 1994 is a perfect case–so was the U.S. in the 1930s. Instead of letting the yen rise to 90/$, they could have pegged it at 110/$, by offering to sell unlimited yen at that price. BOJ policy has become effectively very tight, in the sense that the demand for yen is rising much faster than the supply in this deflationary environment. They never figured out what they did wrong in the late 1990s, and they are repeating the same mistakes now.

12 Steve Sailer February 18, 2009 at 5:25 pm

One of these days, Tyler is going to get around to admitting the “demographic problem” in the exact places that wrecked the world economy: Phoenix, Las Vegas, California, and Florida. Namely, that the human capital of the residents was too low to pay off the gigantic mortgages.

13 flash games May 10, 2009 at 1:41 am

I think the trade was universally ridiculed with a few calls to revise the NBA collective bargaining agreement, the latter group arguing that the Suns basically sold their draft picks and pocketed the difference.

14 Grow Taller 4 Idiots October 11, 2009 at 7:03 pm

“You’ve got a market loaded with motivated sellers and only a very small group of buyers,” one NBA executive told ESPN.com. “It’s really ugly. Owners are scared to death right now.”
Oh, it sure does!

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