The Economy: Aubie Baltin, "Japan: A History Lesson"

"Japan: A History Lesson"

by Aubie Baltin

"Heavy government stimulus spending and near-zero interest rates did little to end their "lost decade" (now quickly becoming 2 lost decades) of stagnation and mushrooming debt. More than a few economists and lawmakers are now joining me in warning that the U.S. is heading down that very same path. However, most economists and politicians who agree with me seem to ignore the basic Laws of Economics, arguing that the differences between the American and Japanese economies and business cultures make America less susceptible to a prolonged period of economic lethargy. While the debate rages, both sides agree that Japan's painful experience offers the U.S. a lesson on how attempts at stimulus can go terribly wrong.

Japan's bubble economy burst in 1990 and its tax, borrow and spend policies caused it to lapse into a lost decade. Struggling to regain its economic footing and manufacturing competitiveness, Japan is about to lose its standing as the world's second-largest economy. David Wyss, Chief Economist for Standard and Poor's, warned that a "drawn-out period of economic stagnancy like Japan's is a possibility". Stock prices bottomed in Japan in 2003 but then hit an even lower low in 2008. Japan's Nikkei Stock Index, now still stands about 80% lower than where it was 20 years ago. In the meantime, Japan has managed to amass a national debt that is nearly twice the size of its $5 trillion economy, the biggest deficit, percentage wise of any major economy and that all took place while running huge Balance of Trade Surpluses.

The U.S. National Debt of $12 trillion, by contrast is only now fast approaching the size of the overall economy ($13.6 trillion). As staggering as that is, the ratio is half that of Japan's, but for how much longer? Our own government projects that our deficit will grow to (an understated) $21 trillion within the next 10 years and that is assuming a return to 4% average, annual real growth rates. Yet we all know how understated government projected deficits are and how over stated real growth rates are. Despite early signs of recovery and a strong (in nominal terms only) U.S. stock market rally, fears persist that the failure to generate new jobs could drag the economy back into recession or result in a protracted Japan-like period of poor economic and stock market performance.

"It seems to me we are following along the exact same path that the Japanese took in their `lost decade' -- of running up huge government debts, raising taxes and restricting economic growth." I to have made similar observations as Wyss who has drawn comparisons between the stock market today and the 1930's. A furious rally following the crash of 1929 carried prices to within 18% of the pre-crash peak and investors were relieved that the worst was over for the economy and stocks - only it wasn't. Economic conditions had deteriorated and would continue to slide due to the heavy anti-business rhetoric and policies of the NEW DEAL (sound familiar) stocks then embarked on another leg down, losing an astounding 80%.

Most of the Wall Street Investors as well as the Government have a tendency to dismiss the 1929-32 climactic decline as irrational and see the current advance as the real deal and therefore a 1930's phenomenon that will not be repeated. They completely disregard the numerous economic imbalances that must be corrected and that this will be a sufficient drag on growth to produce "seven lean years" for corporate PROFITS and the stock market returns.

Major imbalances are unlikely to be quick or easy to work through. For example, we must eventually consume less, pay down debt, save more and encourage private capital Investment. That is the only way to readjust Global trade imbalances. Even J. M. Keynes recognized and warned against the anti-Business anti-Capitalist Rhetoric as the major cause of the extended Depression. Rest assured that before the end of January 2010 the market will provide the irrational with a very rational wake-up call."

- http://www.gold-eagle.com/editorials_08/baltin121909.html