Back in February of this year, I wrote in a policy study (co-authored by Mike Flynn and Adam Summers) that if America did not learn the lessons of the Japanese Lost Decade properly that we would suffer a similar long night of economic malaise. Even earlier this year the signs were starting to show that Washington policymakers didn't really understand what Japan did wrong, as the Fed maintained easy monetary policy and Congress prepared a stimulus package. Over a year after the start of the crisis, it's looking like we haven't deviated from our road towards more economic pain. And others are starting to ask, is the U.S. economy turning Japanese?
That is the question Christopher Wood, author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s," asks in The Wall Street Journal this morning:
With the U.S. government stepping in to keep markets from clearing, today's U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump. [...]
[In post-bubble Japan] banks took years to be cleaned up as a result of regulatory forbearance. The same kind of forbearance is preventing America's increasingly distressed commercial real-estate market from clearing. Similarly, as was the case with Japan, monetary-base growth has exploded in the U.S. over the past year courtesy of the Fed, while bank lending is declining. This is why there is every reason to fear that America is already in a Japanese-style liquidity trap.
And Wood is correct that we are facing a long period of economic decline and malaise, not a rapid takeoff in the economy. This is not the trough of a V-shaped, or even a U-shaped recession. There are still many things buried in the economic infrastructure of America that need to get sorted out before we have a full recovery. We are facing a W-shaped, double-dip recession... or worse. Consider this:
- A recovery of the stock market does not necessarily translate into recovery for the real economy. While the Dow is up 50% from its low in March 2009, other indicators, such as unemployment and consumption numbers, haven't been positive.
- The Wall Street recovery doesn't have a stable base. It is being driven by confidence in big firms, but that confidence stems largely from (and is at least dependent on) the government bailout of major financial institutions. And a recovery propped up by too big to fail is a recovery destined to fail.
- There are still significant problems in the banking industry. Toxic debt is still hanging around. The securitization markets aren't functioning. And bad business models and pay structures were left intact by the bailout process. These problems are likely to manifest in a big way in 2010 as the reality of the fauxcovery sets in.
- There are still significant problems in the housing industry. Foreclosure rates are continuing to rise. Mortgage default rates will like not peak until the end of 2010. And while the sales decline seemed to have bottomed out this year, a housing sales out West appear to be headed back down, signaling a potential nationwide re-decline, beyond the season adjustment we're going to encounter over the next few months. Housing troubles are likely to plague the economy for the next 6 to 12 months at least.
- We have still yet to see viable plans for exiting fiscal and monetary policies that are propping up the economy.
We can't have real recovery without the government out of the way. We need to clear the decks and get all the toxicity (of mortgages and otherwise) out of the system. This is what the market tries to do with recessions, but we haven't let it yet.
And thus we are starting to look like Japan. The corporate CEOs who led their companies into financial mess kept their jobs into the lost decade. Stimulus packages only yielded a doubling in unemployment. Oh, and national debt got out of control. Sound familiar?
For more, check out my study on Avoiding an American Lost Decade here.