Much has been written about the lost decade of Japan, which has now become two decades. Now the United States has lost a decade of its own, which hopefully will not also become two decades. In the 1980s the Japanese economy became overheated: the Nikkei index reached nearly 40,000 but eventually collapsed. Today it stands at about 11,000. The low point of the Nikkei of the last 20 years was about 7,500. In spite of massive spending efforts by the government and near-zero interest rates, Japan has never recovered. Even now, the Japanese economy appears to be headed lower, and deflation seems more likely than inflation.

In the 1990s, the U.S. economy became overheated gyrating from highs to lows to highs under the Greenspan Federal Reserve. Finally, the bubble burst and the economy suffered its greatest setback since the Great Depression. The response of the Federal Reserve was to keep interest rates very low for a very long time. The Fed feared deflation, and Greenspan wanted more than anything to be renamed Federal Reserve Chairman. With interest rates low, every segment of the economy took on leverage. With a government policy that wanted everyone to be a homeowner, housing was inflated. With very little supervision, toxic financial instruments grew to enormous proportions along with spurious banking
practices.
For its part, Japanese borrowing by 2008 reached 172 percent of its GDP, according to the CIA, as the government sold bonds to finance giant stimulus programs. The borrowing percentage is even higher today. Interest rates continue to be nearly zero. These are the conditions in the U.S. today. Will we fare any better than Japan?

The decade of the […]