The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery - And How to Play it
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If you think the “Lost Decade” Japan endured during the 1990s was deep and painful, stick around: As the global financial crisis that was jump-started by the meltdown of the subprime mortgage market continues to unwind, the U.S. economy is headed for a financial Ice Age that will make Japan’s 10 wasted years seem like a single chilly night.
The two meltdowns started in much the same way - with busted stock-and-real-estate bubbles. With both the United States and Japan, the market manias were ignited by laughably loose credit policies, smoldered under a lack of oversight from government regulators, market analysts or such private-sector sentinels as credit-rating agencies, and were finally fanned into a frenzied financial conflagration by the promise of easy profits.
Americans are already getting financial frostbite. Unemployment is 20% higher than it was a year ago. Zooming meat, dairy and gasoline prices are eviscerating household budgets, meaning that the “real” rate of inflation is probably double or triple what the federal government would have us believe. Mortgage defaults are at their highest level in 30 years. Home prices have fallen so much that they’ve wiped out all the gains of the past four years. And U.S. stocks have eradicated a decade’s worth of profits.
That’s all bad, of course. In fact, it’s downright awful. But here’s the problem.
It’s going to get worse. Much worse. And here’s why.
Anatomy of a Lost Decade: Japan
Just look at what happened in Japan. Success in the export markets - coupled with a strong tariff policy that protected the home market from imports - pumped up the yen and led to a massive buildup of cash in both Japan’s corporate coffers and among its consumers. That spawned an era of easy credit, and that fueled a frenzy of stock-and-real estate speculation unrivaled since the U.S. Great Depression.
Almost overnight, the newly wealthy Japanese were viewed with fear. Americans talked about the invincible “Japanese superman,” an unstoppable juggernaut who never made mistakes. Japanese cars filled American roadways, and Japanese-owned companies treated the U.S. market like a personal rummanenited States like it was a rummage sale. Suddenly, Universal studios, Columbia Records, Rockefeller Center and the Pebble Beach golf course (with its lonely cypress tree) all had new ownership.
U.S. lawmakers sounded the alarm. And so did the news and entertainment media. Fortune magazine carried a piece entitled,
“Where Will Japan Strike Next?” And author Michael Crichton’s alarmist book, “Rising Sun,” was made into an equally alarmist - but no less fun to watch - feature film that starred Sean Connery and Wesley Snipes.
At the height of the insanity, Japan boosters regularly claimed that the land beneath the Imperial Palace in Tokyo dwarfed the value of the entire state of California - an argument that defied reason, and yet could be substantiated mathematically with actual market values. In 1989, in Tokyo’s Ginza district, prime office space was going for $139,000
a square foot.
On Dec. 29 of that year, the Nikkei 225 Index topped out at 38,957.44, before closing at 38,915.87. By the following September, it had nearly been halved - and there was still much more bloodletting to go (despite several subsequent rallies up over the 20,000 threshold, the Nikkei ultimately bottomed at 7,830 in April 2003. It closed yesterday - Wednesday - at 12,760.80, still down 67% from its trading high 19 years ago).
The fallout from that meltdown was incredible. By early 2004, houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its peak-market value. All told, an estimated $20 trillion in stock market and real-estate wealth had been vaporized (although one could easily argue that the peak values weren’t real to start with).
As horrific as the damage Japan suffered through that damage sounds, here’s the thing: The U.S. financial crisis is much, much bigger, and the resultant “Lost Decade” is arguably going to take much longer to work through.
What’s the holdup, you ask? Believe it or not, we expect any recovery to be long and needlessly drawn out largely because of the U.S. Federal Reserve, which is the very same culprit that created much of this mess in the first place.
The Lost Decade - American Style
A dangerously inflationary monetary policy by the Fed fueled two massive U.S. asset bubbles - stocks in the latter half of the last decade, and housing in the first half of this one. If you argue that the beginning of the looming Lost Decade for the United States was very different than Japan’s, we’ll counter and say that you’re wrong.
You see, both were spawned by a massive overflow of liquidity. True, Japan’s was created naturally, with a mass of cash from savings that lead to a period of easy credit. And we all know that U.S consumers are lousy savers, meaning that couldn’t be the catalyst here. But that’s okay. Under Messrs. Alan Greenspan and Ben S. Bernanke, the Fed did that for us artificially - holding rates at ridiculously low levels, even as it continued to stoke the money supply. Despite the different routes the two markets took, the result is essentially the same.
Cheap money drove the Internet boom-and-bust. Cheap money fueled the run-up in housing prices - and induced the U.S. banking system to create “subprime” mortgages so it could reach a bigger pool of potential “customers,” and boost its potential profits. All those extra customers flogged home prices, which drew in an even greater number of potential buyers, this time in a group interested in buying second homes as “an investment.” Of course, that pushed home prices up even higher.
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Tags: Ben Bernanke, BSC, credit crisis, Federal Reserve, FNM, FRE, JPM, US inflation, US Jobless Rate, US politics, William Patalon IIIAbout the Author
William (Bill) Patalon III is the Managing Editor and Senior Research Analyst for Money Morning, and is also the Managing Editor for The Money Map Report. Patalon's work has appeared in Kiplinger's personal finance magazine, USA Today, and The South China Morning Post, among other publications.
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