Japan has gone through two lost decades, in and out of deflation, with nothing to show for it but increasing debt to GDP and a stock market still 70% below its peak.



Now, Richard Koo of Nomura Research Institute Ltd. says U.S. Risks Japan-Like ‘Lost Decade’ on Stimulus Exit.

U.S. officials contemplating an exit from record fiscal stimulus are in danger of repeating mistakes that plunged Japan into its lost decade of stagnant growth, according to Richard Koo of Nomura Research Institute Ltd.



“This isn’t a cold, its more like pneumonia,” said Koo, author of “Balance Sheet Recession,” a 2003 book about the malaise that hit Japan after its stock and real-estate markets crashed in 1990. “We still need more government spending,” he said, adding it could take “three to five years to get out of this mess, even under the best of circumstances.”



Koo’s comments echo the view of economists including Nobel laureate Paul Krugman, who warn that the U.S.’s likely return to growth in the second half of 2009 doesn’t mean a sustained recovery is assured. The Obama administration aims to rein in a record $1.4 trillion budget deficit as growth returns, seeking to safeguard the value of a declining dollar.



“If you learn your lesson from the Japanese experience, you don’t remove your fiscal stimulus until private sector de- leveraging is over,” Koo, 55, chief economist at the research arm of Japan’s biggest brokerage, said in an interview at his Tokyo office last week. “When we see the private sector coming to borrow again, I’ll be the loudest person on earth arguing for fiscal reform. That’s the exit.”



Koo calculates that the bursting of Japan’s asset bubble in 1990 erased 1,500 trillion yen ($16 trillion) in wealth, equivalent to three times the size of the economy. Companies focused on repaying debt rather than undertaking new projects, causing demand to plummet and triggering a cycle in which cash flows fell, asset prices dropped and balance sheets deteriorated.



This time it’s the U.S. consumer that’s inundated with debt. Household debt soared more than 10 percent each year from 2002 to 2005, when the economy expanded an average of 2.75 percent.



“We have zero interest rates and still nothing’s happening,” Koo said. Businesses and households don’t want to borrow money even at zero rates; they’re too busy rebuilding savings and paying off debt, he said.



“We had these false starts,” Koo said. “The economy would begin to improve and then we’d say ‘oh my god, the budget deficit is too large.’ Then we’d cut fiscal stimulus and collapse again. We went through this zigzag for 15 years.”

Real Lesson of Japan's Lost Decades

zero interest rates and still nothing’s happening.

Creative Destruction

Two Lost Decades







The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can't happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts.



The five month, 50% rebound in the S&P 500 was certainly spectacular. However, the more important question is where to from here?



Take a look at Japan's "Two Lost Decades" for clues.



Creative destruction in conjunction with global wage arbitrage, changing demographics, downsizing boomers fearing retirement, changing social attitudes towards debt in every economic age group, and massive debt leverage is an extremely powerful set of forces.



Bear in mind, that set of forces will not play out over days, weeks, or months. A Schumpeterian Depression will take years, perhaps even decades to play out.

Christina Romer on Impact of Stimulus on GDP

How "Something For Nothing" Ideas Become Policy

Illusions of Stimulus

I know Romer best for her misinterpretation of what happened in 1937-38. She believes that the fallback into full-scale depression from 'depression light' (as evidenced by unemployment in 1938 almost returning to the highest levels of the depression trough 32/33) is proof that it was a mistake to tighten policy (fiscal and monetary) too early.



In other words, according to her, if the Fed had continued pumping as furiously as possible, then everything would have been alright.



In reality, the entire inflationary mini-boomlet-within-the-depression was simply an illusion. 'GDP growth' that is bought with monetary pumping and feckless fiscal spending only misdirects and ultimately consumes even more scarce capital.



Fiscal stimulus may temporarily give the impression of a recovery, but it is not a genuine recovery. It makes things worse. The moment the pumping is abandoned, the true state of affairs is simply unmasked. That is what happened in 37/38 - a slight tightening of monetary policy revealed the fact that the mini-boomlet was as unsound as its predecessor boom in the years prior to the '29 crash.



It would not have been possible to hide this reality forever. There is nothing, absolutely nothing, that government intervention can achieve in terms of 'fixing' the economy. The choice was in either abandoning the unsound policy and the unsound investments it produced, or careen toward a complete destruction of the currency system.



Once again, I stand amazed at how people can look at this, and look at Japan, and look at the housing bubble/bust sequence, and still believe that monetary pumping and deficit spending are viable tools of economic policy when a bust occurs. It really boggles the mind, reminding me of Einstein's definition of insanity, 'doing the same thing over and over again and expecting a different result'.



Japan's Public Debt Nightmare

accomplished

Death of Muddle Through

Japanese Disease



John Mauldin: Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can’t we be like Japan?



In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country?



John Mauldin Quoting Hoisington: For all intents and purposes, Japan has had no growth for almost two decades. Their nominal GDP is where it was 17 years ago, and the number of employed people is at 20-years-ago levels. An aging population has masked their unemployment problems, as older citizens retire. Their savings went to government debt. Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President’s Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)

Japan Rethinks A Dam





The clatter of construction machinery still fills this forested mountain gorge, where legions of men in hard hats busily pour concrete, clear hillsides and erect a huge, unfinished bridge whose concrete supports tower over the valley floor like crucifixes in an immense graveyard.



It seems an apt analogy. Japan’s new government has suspended the $5.2 billion Yamba Dam being built here and turned this valley four hours north of Tokyo into a symbolic final resting place for the nation’s postwar order, which relied on colossal public works spending.



The Democratic Party government of Prime Minister Yukio Hatoyama has chosen this dam as the first of 48 national government-financed dams that it wants to scrap, worth tens of billions of dollars.



Japan had around 60 large dams under construction in 2005, making it the world’s fourth largest dam-building nation, according to The International Journal on Hydropower and Dams, despite having a land area smaller than California’s.



Decades of pouring concrete have been widely blamed in Japan for cluttering rural areas with needless dams and roads to nowhere. They have also saddled the country with the developed world’s largest national debt — nearly twice its $5 trillion economy. Mr. Hatoyama’s party has vowed to replace Japan’s postwar “construction state” and the jobs it created with something closer to a European-style social welfare system.



Yen Poised To Blow Up

Cause and Effect

solve