Welcome to America's "Lost Decade(s)" (September 18, 2009)
Many have commented on the parallels between Japan's "Lost Decade" of 1991-2000 and the U.S. now that the housing bubble has popped.
Ushinawareta junen is the Japanese phrase for "Lost Decade." The term describes the 1991-2000 no-growth decade in which Japan attempted to defeat debt-liquidation deflationary forces with massive government borrowing and spending, and a concurrent bailout of "zombie" (insolvent) banks with government funds.
The central bank's reflation failed. By any measure, the Lost Decade is now the Lost Decades. Japan's economy enjoyed a brief spurt from America's real estate bubble and China's need for Japanese factory equipment and machine tools. But now that those two sources of demand have ebbed, Japan is returning to its deflationary malaise.
Lost Decade (Japan) (Wikipedia)
Correspondent B.C. recently provided several charts and a commentary on the parallels. It seems the key parallel is this: an asset bubble inflated with highly leveraged debt pops and the value of real estate and stocks declines. But the high levels of debt taken on to speculate in stocks and housing remain.
Rather than let the private-sector which accepted the high risks and took the enormous profits take staggering losses and writedowns, the government and central bank shift the losses from the private sector to the public balance sheet via bailouts and outright purchases of toxic/impaired private debt.
As I recently described in The Final Demise of A Speculative Housing Bubble, this is precisely what the Fed and Treasury are doing in the U.S.: increasing public (Federal government) debt by trillions of dollars to shift the private-sector "bad loans" to the public balance sheet.
It didn't work in Japan and it won't work in the U.S.
Here are B.C.'s charts:
Note how the GDP growth rates have been diminishing for decades, and the anemic growth rate of the 2002-2006 debt-fueled housing-bubble "prosperity."
B.C. provided these comments:
The WLI is the Weekly Leading Index compiled and published by the Economic Cycle Research Institute.
I asked B.C. about savings rates and deflation, and he added these observations:
The US is not savings short; rather, savings is in a different form, which is leveraged and highly overvalued versus cash flow, profits, and overall trend of economic growth hereafter. One function of debt, asset, and price deflation is to force the liquidation of the financial system to more efficiently reallocate savings and the capital stock. The most overvalued and overcapitalized assets, stocks and real estate, must be liquidated over time to bring values and allocation into equilibrium.
B.C. also offered these links:
U.S. leading Indicators: leading us on? Michael Panzner
Weak consumer spending will last for years (Credit Writedowns blog)
When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts. And the three D’s come into play: a downturn leads to debt deflation, deleveraging, and ultimately depression. The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small ‘d’ right now.
Thank you, B.C. for the charts and explanation.
Since the rest of the world is also over-indebted and transferring private-sector losses to public balance sheets via massive government borrowing, we cannot expect an export boom to offer us the temporary respite Japan enjoyed in the 2002-06 period.
If we started our Lost Decade with 2008's financial meltdown, then 2017 may well mark the first decade of a lost generation.
NOTE: I was contacted via email by ECRI representative Lakshman Achuthan who informed me the WLI components are proprietary, but the list presented above is "incorrect" and the WLI is not a "model" per se.
Nonetheless, the primary point is that the WLI, however one chooses to characterize it,
may or may not be useful predictive tool in a deflationary era. Only time
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