The U.S. Economy entering the Lost Decade Phase like the Japanese in the Nineties?

Posted by PITHOCRATES - January 28th, 2012

Week in Review

If you listened to the 2012 State of the Union address you heard President Obama say that America was back.  The economy was growing again.  And businesses were hiring.  But if that were true the chairman of the Federal Reserve wouldn’t pledge to hold interest rates at zero for another year.  For that would indicate a sputtering economy that they’re trying to revive.  Not the rosy picture given at the State of the Union (see Bernanke Pledges to Keep Rates Low Thru 2014: A “Very Pessimistic” Outlook, Former Fed VP by Aaron Task, Daily Ticker, posted 1/25/2012 on Yahoo! Finance).

Keeping rates low until 2014 is “good policy [only] if you believe the recovery is going to be very weak and weak globally,” says Gerald O’Driscoll, former vice president and economic adviser at the Dallas Fed and currently a senior fellow at the Cato Institute. “If they really think they can project weak growth that far out, then they’re saying…the U.S. economy is becoming like the Japanese, no growth for long period of time. That’s very pessimistic.”

Yes, this is exactly like the Japanese.  The Keynesian critics of living within your means like to point to the Japanese bond market.  They have no problem selling their bonds. Yet their debt is about 200% of GDP.  About twice the US debt (at about 100% of GDP).  But this debt had consequences.

The Bank of Japan made money cheap to borrow in the Eighties.  And people did.  Stock and real estate prices swelled into a great bubble.  Bringing on inflation.  So the Bank of Japan tapped the brakes.  And raised interest rates.  Causing a lot of that debt to go bad.  Causing a banking crisis.  Which led to a series of bailouts for banks and businesses.  Sound familiar?  Think Subprime Mortgage Crisis.

The great Japanese asset bubble deflated during the Nineties.  The Lost Decade.  And the Japanese have tried everything within their monetary powers to stimulate their economy.  Even kept interest rates at zero.  Just like the Americans are doing now.  It didn’t work for the Japanese.  And there’s little reason to believe it will work for the United States.


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