America's Own Lost Decade

I figured the best way to start off Wednesday's postings was to discuss in more detail an article I simply linked to earlier in the year, which discussed the potential for the U.S. to enter its own "lost decade".

(From the NY Times): "In broad strokes, the parallels are alarming. After a long boom, the Japanese economy in the 1990s, as America’s today, was jolted by a sharp plunge in the real estate market.

In Tokyo, the government bankers and policy makers were slow to recognize the scope of the problem. Bad loans piled up. The financial troubles rippled through the economy as consumer spending and job growth fell.

The Japanese slump proved extraordinarily long-lived, ending only a few years ago, a stretch of stagnation known as Japan’s lost decade. It was a humbling and lasting setback for a nation once feared and admired as a model of economic dynamism.

The shadow of Japan hangs over the American economy these days. The United States is sliding into a housing-driven downturn, economists say, just as it also appears to be losing some of its global edge from the productivity-enhancing gains driven by the technology investments of recent decades. For Japan, experts point out, the housing bubble burst just as the rise of China as an export power hurt Japanese manufacturers.

A lengthy slowdown, they say, could alter the economic psychology of America, echoing the Japanese pattern, as the nation enters a period of diminished confidence that restrains consumer spending and business investment.

“I think there are a lot more similarities than people are willing to admit,” said Clyde V. Prestowitz, president of the Economic Strategy Institute, a Washington-based policy research organization that has long promoted American industry.

“The American economy is very fragile now,” said Mr. Prestowitz, who was a trade negotiator with Japan in the Reagan administration.

But the extreme Japanese experience, most analysts agree, stands less as a prediction of America’s fate than as a cautionary example. A Japan-style quagmire, they say, is an outcome that can be avoided in the United States with sound economic policy."

If sound economic policy is the key to avoiding Japan's fate then we might as well call it a wrap and assuming that our lost decade has already begun, Congress doesn't have a clue , the Fed is trying to fix a problem caused by cheap money with more cheap money, and most of the government's so called solutions ignore systemic problems and instead address mere symptoms.

It's hard to have much faith when the government's solutions are likely to make things worse, and the key weapons in their arsenal are taking on more debt, printing money and attempting to deflate their way to an economic recovery. Considering that we live in a time when our Congress is berating undercapitalized banks for not increasing their lending volume, it goes without saying that our policy makers may actually be a bigger problem than the systemic issues that created the crisis in the first place.

However despite the above I'm not sure that this is a crisis that you can necessarily fix with economic policy measures, as the systemic problems are so deep seated that it's going to take years to unravel them. At best all policy measures can do (in this particular instance) is mute the impact of issues, or provide a little of a "push" that helps the crisis run its course. The other thing is that even after the crisis is technically over (as far as it continuing to worsen), we could still face a multi-year period of recovery where the damage from the crisis is repaired.

Let's not forget that at the moment we're more reacting to things as they occur and trying to keep things from getting worse, more than we are spending time fixing systemic issues and laying a solid foundation for the future.

Probably a less esoteric way to look at it is to think of the economy as an individual whose personal finances are in shambles due to having lost their job, thus forcing them to have to make decisions (that while technically unwise) are necessary for their day to day survival. This individual doesn't "recover" when they receive their first paycheck from their new job, they recover when they've paid down debts, caught up on past due bills, perhaps purchased home maintenance items they neglected, etc, etc. It may also take some time before the individual feels confident in their finances again.

I.e. In order to avoid a lost decade the U.S. has to only halt the progression of the crisis, but then repair the economic & psychological damage caused by both the crisis and the tactics used to mitigate it.

Sources:

The NY Times: "From Japan's Slump in 1990s, Lessons for U.S."

You can read more here.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[happysoul77777:]

You don't have a clue. Bernanke is doing whatever he can to corret the problem. This is the only correct way to avoid a depression.

It was the change in the accounting rule (FAS 157), the repeal of the uptick rule, unregulated CDS, and the condonement of naked short selling that brought the financial markets down. It is incredible when smart people cannot see the root causes of this meltdown and deal with them directly. People are running around with the heads cut off!

<<If sound economic policy is the key to avoiding Japan's fate then we might as well call it a wrap and assuming that our lost decade has already begun, Congress doesn't have a clue , the Fed is trying to fix a problem caused by cheap money with more cheap money, and most of the government's so called solutions ignore systemic problems and instead address mere symptoms.

It's hard to have much faith when the government's solutions are likely to make things worse, and the key weapons in their arsenal are taking on more debt, printing money and attempting to deflate their way to an economic recovery. Considering that we live in a time when our Congress is berating undercapitalized banks for not increasing their lending volume, it goes without saying that our policy makers may actually be a bigger problem than the systemic issues that created the crisis in the first place.>>

2008 Dec 18 12:42 PM

[nym:]

"...the key weapons in their arsenal are taking on more debt, printing money and attempting to deflate their way to an economic recovery." The author is among those not having a clue.

2008 Dec 19 02:03 AM

[Asbytec:]

I agree with the idea we need to fix systemic problems in addition to economic stimulus.

It does seem paradoxical to fix easy money problems with more easy money problems. But, first things first. We need (and I use that word, need, loosely) the banks to start lending. And they are not going to lend when deflation is threatening and while they have toxic land mines in their books.

So, inflating and QE seems to be step 1. The banks thrive, under our current system, on inflation and when they can trust each other.

Step 2 is as happysoul says...that stuff has to be fixed. When that is done, the value of the dollar should creep up as the money supply is brought under control.

Step 3, raise interest rates, decrease the money multiplier, increase reserve requirements.

Step 4? Get those toxic debts off the Fed balance sheets and pay off some debt.

Set 5. Hell, I dunno...

2008 Dec 19 08:56 AM

[Jason Rines...:]

Disagree. Mr. Lee has a clue. Astute investors trained me in the VC community. What did they teach? Management team is #1 in determining if a company shall fulfill milestones and return profits. Who is the management team of the U.S.? Does it inspire confidence? I believe that is what Mr. Lee is saying.

Bernanke is part of government? When did that happen? Oh yeah, that happened when the U.S. decided to outsource it's money supply to private interests. I think you can outsource everything else in business except your sales force and money management. In any event, historically the citizenship does wise up four years after a financial crisis and selectively ousts those they consider did a bad job from the House of Representatives.


On Dec 18 12:42 PM happysoul77777 wrote:

> You don't have a clue. Bernanke is doing whatever he can to corret
> the problem. This is the only correct way to avoid a depression.
>
>
> It was the change in the accounting rule (FAS 157), the repeal of
> the uptick rule, unregulated CDS, and the condonement of naked short
> selling that brought the financial markets down. It is incredible
> when smart people cannot see the root causes of this meltdown and
> deal with them directly. People are running around with the heads
> cut off!
>
> <<If sound economic policy is the key to avoiding Japan's fate then
> we might as well call it a wrap and assuming that our lost decade
> has already begun, Congress doesn't have a clue , the Fed is trying
> to fix a problem caused by cheap money with more cheap money, and
> most of the government's so called solutions ignore systemic problems
> and instead address mere symptoms.
>
> It's hard to have much faith when the government's solutions are
> likely to make things worse, and the key weapons in their arsenal
> are taking on more debt, printing money and attempting to deflate
> their way to an economic recovery. Considering that we live in a
> time when our Congress is berating undercapitalized banks for not
> increasing their lending volume, it goes without saying that our
> policy makers may actually be a bigger problem than the systemic
> issues that created the crisis in the first place.>>

Jan 05 09:09 PM