Saturday, November 23, 2013

We are on the path to "Lost Decades"

We are on the path to "Lost Decades" is a thought I found myself pondering the other day while cutting drywall. Doing manual labor has the great benefit of giving one time to think, just remember to measure twice before cutting. Manual labor is generally pure and honest. This is especially true if it is on your own project because you have skin in the game. If you mess up you have the honor of paying the piper in some way or form. Japan is the poster child and living proof that low-interest rates do not guarantee economic growth and prosperity.

Years ago before the "Bernanke has all the answers" era, many of us criticized Japan for failing to own its problems. Many people thought Japan should face up to the mess it had created and do the right thing. Broadly accepted was the concept that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead, the Government of Japan ran huge deficits and ran up massive debt. The country languished and avoided disaster only by the fact that it enjoyed a large trade surplus year after year. Today that trade surplus has vanished but the massive debt remains.

While they claim otherwise, in many ways Bernanke and the Fed have put America on a path that mirrors the same unsuccessful path taken by Japan. A path that avoids real reform and bails out the very people that caused many of our problems. Bernanke has upped the ante by setting the bailout and money printing machines on high and flooding America and the world with QE. By selling other central bankers on this solution he has taken the lead in an experiment that is losing traction. Real momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed.

Two key differences between America and Japan must be considered. First America does not enjoy a huge trade surplus to offset our deficit spending. This means we are putting ourselves deeper and deeper into the hole and our debt has ballooned. For years Japan offset the government deficit with money coming in from foreign trade. The other very important difference is the American dollar is the world's reserve currency. Changes in the value of the dollar are thus magnified in importance and do not just affect America but the whole world. All the people and countries that hold dollars can at any time greatly affect our ability to do business as usual.

As we measure the results of the Bernanke policy it seems they may not be much different than those achieved by Japan over the last few decades. In many ways, our course is very similar to the one that Japan embarked on and is now being blamed and labeled as the reason Japan remains mired in slow growth and deflation. Bernanke has endorsed and encouraged Japan to step on the gas and print more money until they lower the value of the yen and force inflation to set them on a path forward. This is akin to a doctor telling a patient to double or triple his dosage when the medicine does not work. The policymakers in Japan should be careful what they wish for as they may find they have stepped onto a very slippery slope.

 Footnote; A post outlining how this shift in policy may affect Japan is below. If correct it will have major implications.

Footnote #2; As always your comments are welcome and encouraged. In a separate post I chronicle the 10 most pressing and important problems facing our world, these are increasingly more menacing in that we live in a rapidly changing world that gives us little time and less room to react and set straight the mistakes of our past. The link can be found below,

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