Is Our Lost Decade on the Fast Track?

Is the United States economy headed for a Japan-style lost decade? Evoking our February, 2008, item "Faster Markets," Slate's Daniel Gross suggests that the deep, ongoing recession in the United States may unfold much more quickly than Japan's analogous bubble-bust of the 1990s. This is good stuff:

Why the accelerated pace? It has to do in part with changing global circumstances. Nishimura argues that both crises started because problems in the property and credit markets contributed to an adverse feedback loop between financial distress and economic activity. But information, events, and distress move much more quickly around the globe today than they did in the 1990s. With just-in-time production systems, and with 21st-century communications technology, bad news travels much more quickly--and farther. In the 1990s, much important exchange of international market information was still done by fax. In addition, traders can now act more quickly on real-time bad news. In the early 1990s, analysts had to wait several months for data. And since the level of financial integration was much less intense in the early 1990s, Japan didn't export its financial problems.

The upshot: In the current crisis, "the velocity of market dysfunction has been much faster and its contagion much more widespread than in Japan's case." And so the damage has been more devastating.

Of course, the duration of the crisis also has something to do with the mentality and action of the first responders. A lesson from both crises, he argues, is that once an adverse feedback loop is established, it's difficult and very expensive to break it and restore confidence. It took a very long time for good news to reach critical mass in Japan in the 1990s, in part due to the slowness of the policy response. But this time, it's different. The Federal Reserve--and, indeed, global central banks and governments--have responded with alacrity. Japan's central banks didn't adopt a zero-percent interest-rate policy until more than eight years after the crisis started; the Fed did so within 20 months. It took Japan nearly eight years to inject funds into troubled banks, compared again with 20 months for the United States to do so. And, Nishimura argues, efforts like the stress tests and TARP exits are bolstering confidence.

Read the whole thing. It's excellent.

Comments

[Egg:]

So I guess we can hold our breaths now and wait for the recovery since it's going to happen so fast.

You first though.

Jun 26 04:19 PM

[Dave Wrixon:]

The reason that things seem to be going faster is because market response is much more severe. However, the main reason that the market response is much more severe is that the underlying mess caused in the US is far worse than it ever was in Japan.

Jun 26 04:31 PM

[Mad Hedge F...:]

Look what has happened to Japan. It’s sad to see a once great country fall on hard times. It’s like watching a formerly leading hedge fund manager apply for food stamps. I’m talking about Japan, which in 1989 boasted the world’s most valuable stocks, largest banks, and strongest currency. Oh, how the mighty have fallen. This week the Ministry of Finance published the trade figures for May showing a 42% YOY drop, and that the cataclysmic fall in exports continues unabated, as foreigners keep their money in their pockets instead of buying high quality cars and electronics. Even exports to China fell 29.7%. I’m sure the chart below will be found in business school textbooks for decades to come as proof of the risks of running an overly export dependent economy. Although a giant fiscal stimulus package will start to hit in the second half of this year, most economist have GDP forecast for the year of minus 6.8% or worse. This would take GDP back to the 2004 level, and makes our economy look positively bubbliscious by comparison. This is all happening when the numbers of those retiring is going through the roof, causing welfare payments to skyrocket. Taking a page out of Obama’s playbook, the government is borrowing to meet these costs, so the national debt is expected to reach the certifiable nosebleed territory of 197% by next year! Prime Minister Taro Aso has so far fought off increased consumption taxes, but it is just a matter of time before those efforts are tossed out the window. Continued deflation is a no brainer. Real estate prices are still stuck at 30% of their 1990 levels. This is what an “L” shaped recovery looks like up close and ugly. In the meantime the yen strengthens, making exports ever more expensive and uncompetitive. Better to stand aside from the Land of the Rising Sun and watch with tears. Are we next?

Jun 26 04:32 PM

[anarchist:]

Maybe but seems to me as replacing Obama is a futile gesture-with whom? Since campaign finance is such a farce and the DNC and RNC can marginalize any prospective candidate that has a fresh idea and put their endorsement and money in the hands of a "more of the same" candidate nothing will change. Our Presidential Candidates will continue to give us no real choice between the issues that change our lives as Candidate A will have a plan c and Candidate B has plan c+ or c- and we will be forced to choose between two plans which are both bad.


On Jun 26 07:37 PM webworld wrote:

>
> The banks that are "too big to fail" are too risky to break apart
> or put into receivership.
> Yet, banks should not expect to receive money. Precisely as they
> have in the past - what malarky!
>
> Individuals that have loans should be accountable. But, not banks
> that get their debts paid or forgiven by the government.
>
> No regulations are proposed to break these institutions up so they're
> no longer too big to fail - just more watching them - but, wasn't
> Geithner the guy watching them before as head of the NY Fed? Doubletalk
> and lies.
>
> Obama has no intention of installing meaningful controls. He's just
> giving bankers full control. Replace Obama at the next opportunity.
>
>
> good articles: makeitbrief.com/avupq right on the money

Jun 26 09:12 PM

[nobby73:]

What people seem to forget was that Japan at the end of the Eighties was in a massive bubble. The price of stocks and property did not reflect any basis in reality, like the Nasdaq at the start of the Nineties. The "lost decade" epithet is in my view a mistake. Simply put, the Japanese did not follow the US model of trying to replace one bubble with another, but they hunkered down, tried to reduce their personal debt, carried on working and producing. Japanese industry and the economy remained powerful throughout the nineties, but the Nikkei did not return to the stratospheric levels of the Eighties because they did not attempt to inflate the bad debts away. Yes, there were lots of mistakes, especially regarding bad debts, which were hidden by low rates and obscure accounting - sound familiar?

The policy was to protect savers rather than borrowers, partly owing to the cultural habit of deferring to the rights of the elders (more likely to be net savers).

Japan has huge problems now, given the rise of the emerging industrial nations such as China, its aging population and reluctance to change, but history shows that Japan will be out muscled by China whenever China gets its act together.

Jun 27 03:43 AM

[lex:]

so what? japan is hardly in the biggest boom of their time now.

Jun 27 05:26 AM

[Ferdinand E...:]

I suppose that somehow you could dig deep enough to find some economic similarities between the U.S. and Japan, but I'm too smart to want to know anything about them.

Jun 27 09:38 AM

[Fighting Yoda:]

It is never the same - what worked and didn't work in Japan may not apply here. Japan had a lot of money to spend - savings and trade surplus, and no national debt. Japan ultimately did spend a lot and there was a worldwide boom - but it still did not work out for Japan. We advised Japan against zombie banks but we have them here now, we really do not have money to spend - we are going to borrow a lot more - debt was the root of our problems.

So no easy or obvious answers. But we have chosen the easy path - borrow a lot more to promote consumption - it does not seem like a smart or even a viable idea - the best outcome would simply be kicking the can down the road - likely a lost decade.

Jun 27 02:48 PM

[ed233:]

Don't be surprised to hear that in the not to far distant furture a new Fed Chairman is proposed by the Obama administration. It will be impossible for Ben to keep up with the administration's new expensive policies going forward. If the carbon emissions restrictions get passed along with the new health care proposals then the present Fed chairman could be history. If President Obama proposes Mr. Larry Summers then it will be a fait accompli placing for all intent purposes, a complete wall street governing business affairs. Look out main street you're about to be taxed to death. I see no other recourse than a value added tax on top of the present taxes that fail to generate sufficient revenue to cover current liabilities going forward. LOL Looking after your money.

Jun 27 07:28 PM

[christophe:]

I think a lost decade is already the case. All major US indexes are at late 90s level. The question is, will we loose another one?

Jun 28 02:16 AM

[David Roskoph:]

SImilar to Japan, yes. A deflation occurs when no amount of central bank steroids is enough to prop up a central bank abeited bubble. Japan slogged through a depression because they have little domestic consumption and, in the world economy, they are expendable.

No so for us. Therefore we did indeed experience a depression (modern) and this is a recovery. Step back and appreciate that the pace has been at internet speed. The carnage unmitigated and the reform, ten year's worth as well. All in 18 months!

The vital difference is that we consume heartily and are not expendable (at least not yet). It will be a "V" not and "L", much to the disbelief of anyone who can add up our mountain of debt because the deficit is tantamount to WWIII. Belive it or dont, profit or cower.

Jun 28 08:44 AM