Are we turning Japanese?

I really think so.

This is a little bit technical, but a pretty compelling case that the last two decades in Japan is analogue to what is happening in the US today. 

http://www.csis.org/media/csis/events/081029_japan_koo.pdf

Japan’s experience in a post-bubble "balance sheet recession" indicates that monetary policy is nearly worthless, except for liquidity injections, becuase no one wants to borrow in a deflationary environment.  Monetary policy will remain ineffective until house prices return to a level that is less than or equal to fair value on a DCF basis.  (Which will likely overshoot on the downside, sadly.)

Fiscal policy becomes more effective, particularly goverment spending and bank capital injections.  We have been getting capital injections, and the country just voted for more spending, so perhaps we’ll fare better than our friends across the Pacific.

BTW, with Japanese stocks at levels last seen in the early 1980s, Japan probably offers the best long-term equity investment story among developed markets.  Germany, which has been in a similarly long stagnation, is probably also worth considering.

5 thoughts on “Are we turning Japanese?

  1. Nice deck, but needs more emphasis on 1990-1997 – i.e. the long slow release of crappy business loans, an undoing of post-WWII business+government culture. The question is how quickly we in the US can undo our culture of mortgage idolatry — can we agree that it began in 1945, and not 1998? Quit blaming Glass-Steagall repeal and the tech bubble, and start talking about the socioeconomic obligation to leverage oneself and live beyond our means? This is certainly an area were our friends across the Pacific have fared better than us. Either way allowing DCF to normalize becomes even more distasteful politically when fiscal policy is on the table – i.e. a government admitting its willingness to spend which does not spend to save foolish Neg-Am mortgage holding voters will be shortlived indeed- and we all know nothing happens until a President’s 5th year. That’s why you have to cut taxes, let bad bank policy fail, and raise interest rates.

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  2. I think the analogs to Japan in the ’90’s are many, but the aftermath could be worse for the US. It isn’t clear to me that all of the liquidity being pumped into the system (and, perish the thought sectors like autos) will be sufficient to get us to the top of the mountain so that we can then start the slow downhill slide like Japan. I think its ugly ugly for the next few years and then we’ll see.

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  3. Matt, great comment. Our whole system since the 1940s has been built around encouraging people to borrow money to buy real estate and consumer goods. I have been hitting on this theme alot, particularly here:
    http://dynamist.typepad.com/blog/2008/09/maybe-ron-paul.html
    Long term, there is no free lunch. You can’t rely on borrowing and currency inflation to build economic strength. It’s time for the pendulum to swing back to savings, investment and sound money.

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  4. Hey Tyler,
    Can you explain to me why you – as well as many others – are expecting deflation?
    Am I wrong in thinking that the $2 Trillion Plus in net bailouts is going to increase the supply of money enormously and cause massive inflation?
    I assume you know of Peter Schiff and possibly Gerald Celente. What do you think of their predictions? From what I’ve seen, they’ve been amazingly accurate so far. They are predicting near apocalyptic problems going forward with hyper-inflation. What is your take on all this?

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