Can We Avoid Another Lost Decade?

Leo Kolivakis's picture

Via Pension Pulse.

Michael Darda, chief economist, chief market strategist and director of MKM Partners, wrote an op-ed in the WSJ asking, Are We Headed for a Lost Economic Decade?:

record doses of monetary and fiscal support, the U.S. recovery appears
to be stumbling. First-time claims for jobless benefits are on the
rise and economic growth estimates for the April-June quarter have
fallen to just over 1%. Many are now asking if we are on our way to a
double-dip recession or even a Japanese-style "lost decade."


concerns are not without merit. Although the Federal Reserve expanded
its balance sheet massively in 2008-2009, most of the high-powered
money (currency plus bank reserves) that it's provided has piled up as
excess bank reserves on deposit at the Fed.


Growth in commercial
bank credit and broad money (which consists of currency plus bank
reserves plus deposits in the banking system) is decidedly weak. That's
a reminder that interest-rate cuts and money printing don't have the
same traction when households are debt- and savings-constrained, and
financial institutions are uncertain about the value of the collateral
underpinning their loans.


there are key differences between where we are now and where Japan was
50 months after the 1990 peak in its real-estate market. These
differences make it less likely that we'll succumb to a deflationary
double-dip recession or a lost decade.


For example, industrial
commodity prices are about 75% above comparable levels in Japan just
over four years from the peak of its real-estate bubble, suggesting a
lower risk of a deflationary slump here. Corporate profits in the U.S.
are more than 50% above where earnings were at this point of the cycle
in Japan, despite the fact that the S&P 500 is actually lower than
the Nikkei 225 was at this point in Japan.


broad money is currently expanding slowly in the U.S., the level of
the broad money stock is 20% higher here than it was in Japan 50 months
from the peak in its real estate market. This gap owes to the more
aggressive early efforts of the Fed as compared with the Bank of Japan.


concerned about a Japanese-style lost decade occurring here will point
out that the Treasury yield-curve spread (the gap between long-term
interest rates and short-term interest rates) is actually narrower in
the U.S. now than it was in Japan 50 months from its real estate peak.
This gap not only gives us a picture of monetary policy, it also tells
us about the behavior of inflation expectations. The yield-curve spread
actually widened after the Fed announced the planned purchases of $1.75
trillion in agency, mortgage and Treasury debt in early 2009, as
deflation expectations were replaced with expectations for modest


But the yield-curve spread
peaked in February 2010—the same month the level of the monetary base
peaked—and has since narrowed sharply. Treasury Inflation Protected
Security (TIPS) spreads have compressed during this period. These
indicators suggest the need for the Fed to remain accommodative, as the
Fed statement on Tuesday suggested would be the case.


current economic situation looks like the first few years of economic
recovery following the 1990-91 U.S. recession, which were also
characterized by weak broad-money growth and a contraction in bank
lending. The M2 money supply (a measure of broad money) expanded by
only 1.4% per annum through 1994 from 1992, but the velocity of money
(the frequency with which a unit of money circulates) turned higher,
allowing real GDP growth to average 3.7% per year nonetheless.


Putting fiscal policy on a sustainable, pro-growth track may help reduce uncertainty and improve velocity now.


problem that dogged Japan during its lost decade was a stop-and-go
fiscal policy in which stimulus packages were administered in an "on
again, off again" fashion and taxes were lowered and then raised. There
is a risk that the U.S. could fall into this trap in an effort to
strike a balance between short-term fiscal support and long-term budget



This strongly suggests that congressional leaders of
both parties should embrace a pro-growth fiscal reform that would help
to create long-run fiscal stability and foster certainty about future
tax rates. With the 2001-2003 tax cuts set to expire at the end of
2010, the time is now to move ahead with broad-based reform.


good starting point would be the bipartisan Wyden-Gregg tax reform bill.
This bill is not incredibly bold, but is probably the best we could do
in the current environment and is much better than the current tax


Wyden-Gregg would be
revenue-neutral; it would simplify the tax code by reducing the number
of personal income tax brackets to three from six and would do so
without raising marginal income tax rates. The bill also would cut the
top corporate tax rate to 24% from 35% in exchange for eliminating
corporate tax loopholes.


This would surely be preferable to
raising marginal tax rates at a time of high economic anxiety. Raising
tax rates on capital, which will occur if the 2003 tax cuts expire at
the end of this year, generally has not been an effective source of
revenue for the Treasury and could do damage to the recent strong
productivity trends the U.S. has enjoyed.


most likely course for the U.S. economy from here is for a choppy
recovery cycle to continue until households have increased their
savings and reduced their financial obligations to sufficient levels
and financial institutions have more confidence that loan losses have


Avoiding policy mistakes during this period will be
critical. While the Fed is the ultimate source of liquidity and thus
"demand," congressional leaders could help reduce uncertainty and
increase confidence by embracing a bipartisan tax reform that focuses
on broadening the tax base and preserving incentives for growth.

Marion, chief economist at the National Bank of Canada, discusses
another factor which people should bear in mind before drawing too many
parallels with Japan's lost decade:

A growing
number of market watchers are beginning to draw parallels between the
hardships that the Japanese experienced in the aftermath of their
real-estate induced recession in the early 1990s and upcoming problems
for Americans. Is the U.S. about to experience a Japanese-style lost
decade? Three years after the onset of the recession, it is reassuring
to see that the timing and size of policy response in the U.S. has so
far enabled its economy to fare much better than Japan did at the same
point in the cycle on a number of fronts (production, money supply and

Even if we do not
deny that the Americans still face a period of deleveraging, we doubt
that it will be as painful as that suffered by the Japanese. That’s
because of a key difference between the two countries: demographic
It is important to keep
in mind that Japan’s deflationary problems have been exacerbated by a
decline in the population of prime-age house buyers (defined as the
number of people in the 20-to-44 age group).

Japan, the U.S. is at a positive inflection point for that specific age
cohort. According to the U.S. Bureau of Census, the population of people
aged 20-44 is expected to increase through the next twenty years (13
million people). Japan, for its part, has already experienced a decline
of 6% for that cohort (or 3.2 million people).

But while the US is not Japan, some see major problems ahead as interest
rates are kept at historic lows. The Associated Press reports, Fed official sees bigger risks in future, not now:

When it comes to the economy, Thomas Hoenig seems more worried about the future than the present.

president of the Federal Reserve Bank of Kansas City, has been sending
up flares all year that the Federal Reserve's easy-money stance could
hurt the economy down the road. His big concerns: keeping rates low
will unleash inflation and spur new speculative bubbles.

he's sticking to that stance even as the recovery has lost a lot of
momentum. Concerns are growing among private economists that the
economy could stall out, or worse, slide back into recession.

in a speech delivered Friday, suggested that those fears are
overblown. As he sees it, the economy is growing modestly and has the
"wherewithal to recover." During recoveries, economic barometers often
bounce up and down, he said.

some private economists looking at recent economic data are seeing the
glass as half empty, Hoenig views it more as half full. He points out
that private companies have created 630,000 jobs so far this year.
While that's less than hoped for, it's "positive nonetheless," he said.
He notes gains in manufacturing and Americans' incomes over the last
12 months.

"While we are not where we want to be, the
economy is recovering" and it should continue to grow over the next
several quarters, he predicted.

For now, the economy still needs
the support of ultra-low rates, he said. Interest rates have been at
record lows near zero for nearly two years.

he worries that keeping rates too low for too long could create
problems later on. For instance, low rates could spur bubbles in the
prices of commodities, bonds or other asset prices. Or, they could
encourage people and businesses to take on too much debt again and
overly leverage themselves, he suggested.

"If we again
leave rates too low, too long out of our uneasiness over the strength
of the recovery and our intense desire to avoid recession at all costs,
we are risking a repeat of past errors and the consequences they
bring," Hoenig said in a speech in Lincoln, Neb.

Critics like
Hoenig blame the Fed for keeping rates low for too long a period after
the 2001 recession. Those low rates fed a housing bubble that
eventually burst and plunged the economy into a severe recession in
late 2007, they say.

"I believe that zero rates during a period of modest growth are a dangerous gamble," Hoenig said.

why Hoenig has dissented at all five Fed meetings this year. The
latest one came Tuesday, when he broke from the Fed's decision to take
an unconventional step to strengthen the recovery by buying government

One of the many challenges of being a Fed official is
having to make decisions on interest rates and other policies actions
now - based on your best thinking of what the future will hold.

James Bullard, president of the Federal Reserve Bank of St. Louis,
looks ahead he worries that the weak recovery could push the United
States into a deflationary period, like the "lost decade" Japan suffered
through in the 1990s. Low rates help combat deflation, a widespread
and prolonged drop in prices of goods and services, values of stocks
and homes, and in wages.

Hoenig, however, said he sees "no evidence that deflation is the most serious threat to the recovery today."

differences of opinion within the Fed provide a glimpse of the
challenge Fed Chairman Ben Bernanke tries to straddle as he tries to
steer the economy into a sustained recovery.

Hoenig does acknowledge that the economy is going through "trying times" - especially with unemployment now at 9.5 percent.

Low interest rates cannot solve every problem faced by the United States, he argued.

trying to use policy as a cure-all, we will repeat the cycle of severe
recession and unemployment in a few short years by keeping rates too
low for too long," Hoenig, said. "I wish free money was really free and
that there was a painless way to move from severe recession and high
leverage to robust and sustainable economic growth, but there is no
short cut."

I happen to agree with
Hoenig that the US economic recovery is well underway, and that things
aren't half as bad as doomsayers will have you believe. But I disagree
with him is that the Fed should raise rates anytime soon.

Unlike the UK, inflation expectations remain low in the US, and some reputable fund managers are positioning their portfolios, fearing the danger of US deflation:

year ago, Pimco, the world’s second biggest bond fund manager,
assembled its financial wizards and instructed them to put a number on
the chances of deflation in the US. They came up with 10 per cent. Today, Mohamed El-Erian, who presides over Pimco’s $1,117bn in assets, puts it at 25 per cent.


are still attaching the highest probability to outcome ‘C’ – what we
call the new normal, which involves muted growth, high unemployment and
choppy markets,” says Mr El-Erian. “But we are moving toward the
‘C-minus’ camp now.” The repercussions of the sharp global recession
that followed the 2008 financial crisis are still unclear, with economic
conditions far removed from those that most people have experienced.
The Federal Reserve showed its concern this week
when it downgraded its outlook for US economic growth. It took a first
step towards further monetary easing despite near-zero official
interest rates.


Investors are divided over what will happen next:
can the US economy be stopped from sliding into another recession –
the feared “double-dip”? Can the Fed prevent Japanese-style deflation,
a period of falling prices associated with economic stagnation, from
taking hold? Or might the easing lead to rampant inflation later?


El-Erian says Washington’s influence over the outcome makes
predictions tricky: “If the mindset in Washington doesn’t move from a
cyclical approach to a more structural approach to grapple with
fundamental problems, the probability of deflation increases.”


Pimco favours government bonds, with five- to 10-year US Treasuries likely to fare the best.


split among investors is acute in the hedge fund industry. John
Paulson – founder of the $33bn Paulson & Co, which profited
spectacularly from the collapse of the US subprime mortgage market –
has been consistently bullish on the US economy.


As well as
having launched a fund to take advantage of a US upswing, Mr Paulson
has denominated over a third of his entire funds under management in a
gold-linked share class, constructed specifically as an inflation


But other leading fund
managers, including Peter Thiel of Clarium Capital, Seth Klarman of
Baupost and Ray Dallio of Bridgewater, are taking a different stance
and have positioned their portfolios with deflation, not inflation, in mind. Buying US government bonds and placing bets on volatility are central to their strategies.


participants seem to be heeding their concerns. Expectations of
inflation – measurable in the so-called “breakeven” rate on 5-year US
Treasury bonds versus their inflation-linked equivalents – have been
falling sharply since a peak on April 30, hedge fund managers say.
Current prices imply an expected rate of inflation of just 1.3 per cent,
the lowest since October last year.


“Inflation proponents are
capitulating at the moment,” says Jamil Samaha, portfolio manager at
CQS, which manages $7.5bn. “It’s not necessarily that they have changed
their minds, but that the market has gone against them for longer than
they can afford it.”


Managers say markets are poised at a
critical juncture. “For several years I have believed that we will go
through a period where the markets will alternate between fearing
inflation and deflation – though unless policymakers make a huge
mistake, I don’t think either is necessarily poised to be realised,”
says Sushil Wadhwani, a former member of the Bank of England’s monetary
policy committee and founder of quantitative hedge fund Wadhwani Asset


With the economic
situation so fragile, though, the unexpected could have big
repercussions. “Markets are particularly vulnerable to event risk at
the moment; that could push the economy into brief deflation,” Mr
Wadhwani says. “The sort of events that could materialise in Europe
would make Lehman look like a garden party.”


“We’re clearly in a
deflationary episode, but so far there has been a belief that the Fed
can fight it,” says Ben Funnell, a portfolio manager at GLG Partners,
which manages $23bn. “If longer-term inflation expectations go
negative, though, equity earnings will be crushed, corporates will
scale back investment.”


David Kelly,
chief market strategist at JP Morgan Funds, which manages $400bn in the
US, does not believe there will be another US recession, even if
growth is slowing. He questions the wisdom of US investors who have
placed more money into bond funds than equity funds for 31 months in a


“Anybody who’s investing in mutual funds or stocks should
not be looking at the next six months,” he says. “People’s
psychological time horizon shrinks when they are worried. But they
should be thinking: when do they need the money? If it’s five or 10
years down the road they should be buying stocks.”


Neil Woodford,
head of investment at the UK’s Invesco Perpetual, says: “We’re in the
early phases of a long period of adjustment ... government bond markets
are clearly concerned about deflation.” But some equity valuations are compelling, he says.


Rogers, the veteran investor, does not expect deflation but is not
favouring stocks. “There is a physical shortage of many commodities. If
anything goes wrong we will see higher prices,” he says.


would rather own commodities than stocks. If the economy gets better,
more will be bought and, if it gets worse, then they are going to print
money, which is good for silver and gold.”


“I am going to sell
bonds short,” he adds. “But I’m not going to short them now because the
central banks have more money than I do.”

there you have it, even the experts are divided as to where we're
heading. One thing is for sure, markets will remain choppy until we get
some clear signs that the threat of deflation has been averted. Until
then, expect more volatility, and watch for a few potential bubbles
which are forming as all this sorts itself out.

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mkkby's picture

Leo, creative destruction would pull us out of this mess, except the gov/banks have suspended it. Remember your history? Until we have another resolution trust like auction of all the under water real estate, decades will go on being lost. Remember how we laughed at japan's "zombie" banks for refusing to recognize their losses? Now that shoe is on our foot. We have zombie banks and corporations that are loaded with bad debt, all hoping and praying their business will fix itself without the pain of taking losses. That is why we will have a second lost decade.

chindit13's picture

Japan Japan Japan.  Let's see how Japan dealt with their problem...

---Savings rate of 17% in 1989, will go below zero in 2010.  Savings bought time.  Time has run out.

---The world ex-Japan grew for most of the 20 years Japan has been in a funk;  the US lacks that luxury

---No less than 150 Emergency Supplemental Budgets, which took a surplus and turned it into the G8's largest government debt/GDP; almost as many Prime Ministers over the same period

---Japan, like the US, exported some manufacturing to China

---Japan has slashed labor costs by importing Third World labor, and on many occasions, simply not paying them.  The laborers, whose passports are held by their employers, have no recourse.  Since these workers are not Yamato, and not descended from Amaterasu, no harm done

---Japan used public funds to prop up their stock market;  it failed, and now public pensions and postal savings/insurance are deeply under water, at a time when Japan is in the bottom two of G8 nations with regard to fertility rates and average age of the population

---Japan used the household balance sheet to pay for the sins of the banks (sound familiar?);  problem is, the household doesn't know it, and as they retire and try to cash out Yucho, Kampo and pensions, they are in for a rude awakening

---Due to the oddities of Japanese accounting, even the gains on JGB's over the period have already been recognized and the new book cost is near or even higher than current market;  there are no "hidden gains"

---Years of ZIRP in Japan have forced aging savers to dip into principle to make ends meet, which is why the savings rate is finally going below zero

(A week or so back ZH quoted from a recent bullish report by Byron Wien, who touted US stocks and---after his one week visit to China---also touted China.  In 1989, after another of Wien's one-week-and-I'm-an-expert trips to Japan, he noted "high Japanese corporate cash levels, an attractive PE after adjusting for cross-shareholdings, and robust growth as evidenced by both Tokyo and Osaka being ringed by construction cranes" as to why Nikkei 50,000 was in sight.  From such records lifetime employment in the financial industry is made.)

This is just a scatter-brained way of saying the US is unlikely to be Japan, and Japan will soon look fondly on its "Lost Decades" as "the good ol days".

TooBearish's picture

I, for one, really like the chart at the start of Leo's article, one glance at the lack of inputs let me know that reading any of the body of the article would be a total waste of time but reading the comments - 5x entertainment factor.

caconhma's picture

No, America will NOT have another "Japanese lost decade".

First of all, they drive on a wrong side of a road. The same as Brits do.

OK, let us be serious:

  • The USA has $0.5T annual foreign trade deficit but Japan has a huge trade surplus. Consequently, US products are not competitive on world markets but Japanese are. To have a real and sustained recovery, the USA must become once again competitive on world markets. 
  • With huge and never ending trade deficits, the USA are approaching a threshold point when the rest of world will stop taking funny money (the US$) for their products and services.
  • Japanese society is very uniform but US is very diverse. Consequently, politically and economically, Japanese capable of much more easily taking pain associated with changes than the US society can.
  • Having a population growth due to influx of poorly educated immigrants from the third world countries and US minorities with no work ethics results to more burden on already limited US productive capabilities. There are just more hungry mouths to feed. And its all.


I am shocked that presumably educated and smart people can seriously discuss a potential long-term US economic recovery based on stimulus of printing more money without undergoing profound society changes. Leaving things as they are will keep the same conditions that brought America to the present crisis in the first place.

EconomicDisconnect's picture

I for one like Leo's articles and it is always important to get more viewpoints than just the ones you agree with.  I think Bruce K highlighted the biggest problem with the US birth rate.

SteveNYC's picture

" .....important to keep in mind that Japan’s deflationary problems have been exacerbated by a decline in the population of prime-age house buyers (defined as the number of people in the 20-to-44 age group).

Unlike Japan, the U.S. is at a positive inflection point for that specific age cohort...."


Ok, for those of us that try to think critically, could it not have been that Japan's demographic "problem" is an EFFECT of, and not a CAUSE of, their lost decade(s)? People tend to have less/no kids when things are FUCKED!

InconvenientCounterParty's picture

Constantly challenge your own biases. If you don't, your views turn into a religion.

Gunther's picture

...broad money supply rising slowly...
Shadowstats' M3 shrinks at around 5% y/o/y; nowandfutures reports an even lower M3 estimate.

Demographics make a nice argument, but more important would be the comparison of people able to buy a house, stated differently compare people with secure jobs instead of counting heads.
The participation rate in the labour force is not going up either; the rate is down from 7/2009 @ 65.4%  to 7/2010 @ 64.6% (page 4)

So, this arguments are not in favour of the US. Moreover, what about the unrealized losses in the financial system?
Even if the US banks make money now, a lot of it gets paid out as bonus instead of covering losses.

A debate about real inflation and deflation will be worth it; a debate about expectations contains for my taste to much bullshit.

AnAnonymous's picture

I found the OP informative on that point.

Gives depth to the subprime 'crisis'

One engine of the US society is work and be rewarded with a home. Participate and get a home as a prize.

The dynamics show that the US needed to add to its house pool.

Achieved by the subprime 'crisis'

These coming generation of buyers might not have been able to fund the building of a house as shown by the numbers.

But thanks to the subprime 'crisis', they have now access to a whole market of houses built in the US only thanks to a housing bubble.

The US knew beforehand they could  face deep troubles in a near future with  young people working jobs not allowing to pay for a house. The bubble was implemented, attracting the construction of houses that should not be built in the US. Later, crash, deflation in home price, and the houses are built in the US, not elsewhere.

Nice management. In all cases, without the subprime 'crisis', the situation would be deadly worse.

Kayman's picture


I can't buy that line of thinking. That assumes government has a "five year" plan and was successful in their achievements.

Governments have no long term plan, constantly bounce from crisis to crisis, hand out candy like the local pedophile, and are in it for themselves not the people.

The housing bubble has destroyed wealth, credit, lives and families.  It has created debt, much of it foreign, and killed any credibility of the banksters. Want to buy some AAA paper ?? No, I think I'll pass.

The housing stock left over is a disaster, not a clever ploy.

AssFire's picture

Forget lost decade.. think lost humanity if we allow the welfare skums to reproduce on our dime.

Generational welfare recipients propagating is nauseating..If you have no skills and no job, you should be sterilized and lose the right to vote.

As I watched the news feed from Atlanta it is clear the Government has some dogs that pull the sled, but a lot of mutts with votes.

The financial situation was caused by free dog houses for these mutts to go along with their free everything.

Detroit, Memphis, El Paso, Atlanta, Miami, New Orleans, New Mexico all skum holes. I will never venture to these puppy mills. Middle America will not tolerate paying for thes skumbags much more.

Any other disgusting cities to avoid??? Please list.

cbxer55's picture

Oklahoma City. Whats disgusting is the state of the roads. There are more speed bumps in the roads here than all the parking lots in the US. Potholes R Us. When they do attempt repairs, they are worse than the original condition. And truthfully, it is not just OKC, but all of Oklahoma. When entering OK from any of the border states, it is readily apparent even if you are wearing blindfolds.

We should have signs at all the borders, "May the force be with you!"

And the cars people drive, sheeze. There are more cars with cracked windows, missing bumpers and lights, missing fenders, holes in the exhaust system, etc. You would think they drove to a junk yard and drove off with the vehicles. And driving without insurance is considered the norm around these parts. Why would you pay insurance for the type of vehicle I described above, even when the law requires you to do so?

Species8472's picture

 20-to-44 age group


You think people in their early 20s realy buy that many houses?

Dismal Scientist's picture

David Kelly, Chief Market Strategist at JP Morgan Funds, which manages $400bn in the US, does not believe there will be another US recession, even if growth is slowing. He questions the wisdom of US investors who have placed more money into bond funds than equity funds for 31 months in a row.

“Anybody who’s investing in mutual funds or stocks should not be looking at the next six months,” he says. “People’s psychological time horizon shrinks when they are worried. But they should be thinking: when do they need the money? If it’s five or 10 years down the road they should be buying stocks.”

Remind me not to give these people any money to manage, since the implication of the above statement is for losses on equities bought now, until a 5 year period has passed. Absurd.

jc125d's picture

The system has to be cleared and all these bad trades have to be settled. The price should be paid now by the perps, but it will probably be paid later, by the victims, at a much greater cost to include the economic value of all the opportunities lost while the perps count the stolen money and employ it passively to support their grand lives. We just took the last exit on the road to Serfdom. Enjoy your stay.

Bruce Krasting's picture

Leo, An economy hits an economic wall when the fertility rate falls to 2.0 or lower. Essentially this means that 2 people have 2 children. No increase in total population if births = deaths.

Japan has that condition. The US does not. At least not on paper. Consider two parts of the puzzle:

The US has 12mm illegals and they produce 8% of the births.

Where is the US headed on this? In the opposite direction from where we have been is the answer. So both the 12mm number is going down (it has already fallen by 2mm in the last 18 months) and the the birth factor should not be included in our indigenous population growth.

Put these oddities of the the US economy in the proper light and you would see that the real numbers are flat. No growth. So we look more and more like Japan. And the prospects for ten years of slow growth are supported by yet another factor. Population.

Keep in mind that the demographic issue is, without doubt, the strongest influence on long term economic growth. We are going to lose a decade.

ZackAttack's picture

This one is just egregious:

 industrial commodity prices are about 75% above comparable levels in Japan just over four years from the peak of its real-estate bubble, suggesting a lower risk of a deflationary slump here.

If commodity prices rise, while real wages fall, is that really evidence that we're not in deflation?

I think his definition of inflation as price increases is utter bullshit. But, taking him on his own terms - defining inflation as an increase in general price levels for goods and services, I'd counter by arguing that wages are the price of labor, and real wages have fallen over the last 40 years:

If wages fall and other prices rise, that's not inflation but rather a relative price adjustment. Rising, say, oil prices aren't a sign of inflation if wages do not also rise commensurately. They are a sign, instead, of currency debasement, that the length of the yardstick has simply changed. 

Oswald Spengler's picture

I wouldn't worry too much about another lost decade or following Japan into the abyss. Earth is overdue for a shift of its magnetic polarity which will result in the mother of all structural problems.

Leo Kolivakis's picture


Your views would explain your avatar...if we're all fucked, just focus on getting laid! :)

snowball777's picture

More laughable rose-colored glass-wearing dufundity.

To pretend there won't be further degradation of those most expensive assets, houses, and a continuation and deepening of the debt-deflation caused thereby is well nigh criminal at this point.

Can you show us how Japan wound down $1T in MBS without causing asset prices to drop?

To pretend that the banks that are accumulating reserves aren't broke in a mark-to-market world is also criminal. Even with perfect trading quarters, they'll need another 3 years of same to mop up the second liens on their books.

Leo, please. If you don't want people to call BS, stop posting it.


tom's picture

Maybe you should try condensing your lengthy cut-and-pastes, like I do here:

Darda: The US isn't as threatened by deflation as Japan, but it needs a "sustainable pro-growth fiscal policy". The best way we can hope for is a revenue-neutral simplification of the tax system.

Me: Japan's problem wasn't deflation, it was miserably slow growth, and with our debt and our deficits we're actually in worse shape than Japan was. Tax simplification would be nice, but if that's the best we can hope for when we're clearly heading for a crash by trying to permanently sustain more than 10% of GDP of deficit spending, then we're screwed.

Marion: The US has a demographic advantage over 90s Japan, as our 20-44 age group, which buys most houses, is set to grow while theirs was shrinking.

Me: Good point, but again, Japan's and our problem is growth, and our debt and deficits are increasingly killing us.

Hoenig: The economic trend is better than appears, we've gained 630,000 new private sector jobs. ZIRP is good but not for much longer, lest we blow a new bubble.

Me: Most of those new jobs are theoretically modeled, not measured, and are likely to come back out in the next annual adjustment. ZIRP is re-allocating wealth from the middle class to the financial sector, which raises funds for almost free and buys Treasuries or public mortgage bonds, and thus sucks up the subsidies that Keynesian theory says should be stimulating main street demand.

Some journalistic overview article: Experts are divided.

Me: zzz


Kayman's picture


Except we have destroyed the credit of millions in the 20-44 year old bracket by beating the drum that house prices never go down, you better get in before prices go any higher, and your house is an "investment" not a home for you family.

We will be lucky, indeed, if this contraction is limited to a decade.

Mitchman's picture

The velocity of money is the key.  And although brief mention of it is made in the article, the FED is only pushing n a string so long as the velocity of money remains as subdued as it has been.  

The lack of recognition of the deleveraging cycle into which we have entered is the true fatal flaw in the article.  We face a lost decade because none of our policies are currently geared toward restructuring our economy to reflect a deleveraged reality.  Rather, the efforts of the FED and the CONgress are focused on keeping the corpse of the old economy alive.

I am afraid that we not only face at least a lost decade, but one with extreme, unnecessary pain at the hands of our dear leaders.

MarketFox's picture

Why is this so difficult ?

Just as stock prices change for whatever does the economy....

However the most overlooked basic regarding today's issues would be the view to the sum of all the parts....

It was the sum of available credit (debt) and asset valuations (accounting assets) that dramatically shifted to the downside that caused the issues....and should be viewed as what used to be available to price all goods and services....


The highest possible price of all goods and services would be the total economy (debt plus asset valuation).....

As of the moment....the largest debt supplier has been negated to the degree that the previous high numbers are not attainable.... for autos has changed downward in a major way....

It cannot be that until these numbers are replaced ....can the previous high numbers be met....

Otherwise....the end result of the removal of these numbers is DEFLATION....



So what's next ? The Fed is creating a false value on assets by trying to force valuations at artificially high levels....







A broad based consumption tax ie 15% ...and removal of the individual and corporate income taxes...WILL WORK...

What this will do is create the base of small business and innovation such that the valuations that are created ARE REAL....and sustainable....


The economy will be 10X the size of the current tax structure economy a very short period of time....


Otherwise the USA might as well change its name to Japarg...



Kayman's picture

M. Fox

A Vat tax is always lauded for its "efficiency" in plucking the goose. But invariably it just becomes another level of tax burden.

So, if you could get all levels of government to replace income taxes with a Vat tax I would be the first to join the club.

Until then, all I see is endless government, government employees, and geometric growth in all levels of taxation.

Downtoolong's picture

David Kelly, chief market strategist at JP Morgan Funds….questions the wisdom of US investors who have placed more money into bond funds than equity funds for 31 months in a row.


Dear Dave,


I think this has less to do with investor expectations of long-term economic growth and more to do with their expectations that they will continue to be robbed behind the scenes by Wall Street traders and hedge funds at the rate of about 1-2% or their portfolio values per year. As some have already commented, the last ten years were a lost decade for most equity investors. But, it was a boom period for Wall Street, which was supposedly guiding them on their investment strategies. Sorry Dave, but, it’s probably time for you to consult a lawyer. Many of your clients have just filed for divorce.

dcb's picture

To me the lost decade stems from not really looking at banks solvency and attempting to force the free market into keeping insolvent instutions running. In that respect I see a lost decade.

If banks are undercapitialized, hiding losses, but we allow 40% of the "profits" to be taken out as bonus money instead of recapitializing we are in for a long period of no lending. We are also in a long periuod of zero interest because we have to force the economy to allow that 40% to be stolen.

That's the decade.

tip e. canoe's picture

bingo...until this issue is addressed head-on, all this other abstract, theoretical, speculative discussion is one giant circle jerk spewing creative potential into empty space always missing the targets.

Assetman's picture

Despite all the cutting and pasting, I do like the balanced approach and I'll be the first to give Leo kudos for putting out something that made me think for a few minutes.  For that, the article's a solid contibution.

What I think is mypoic, and perhaps a little dangerous, is taking a look at the U.S./Japan "lost decade" parallels without deep consideration of the global economic environment at the time.

Japan certainly did have a significant demographic headwind, and that can't be overlooked.  But they did have domestic savings, and a robust growing global trade environment to at least keep the export engine chugging.  As stated above, trading partner central banks were even willing to trade currency to keep the Japanese economy competitive at a time of vulnerability.  All said, Japan should be considered "lucky" in many respects, given the policy mistakes made.

The global environment today is vastly different.  You have major trading blocks, such as the U.S., EU/UK, and Japan all battling similar issues with aggrgate debt and employment growth.  Global trade is way down from peak levels, and not really getting much better.  And despite global interest rates being low, there is NOT one economy generating enough domestic demand that will pull the others out.  I sure wish there were, though.

But sure, the U.S. has managed recovery so far, though the evidence clearly shows its now fading.  I don't see much value in making a double dip call, but I will say the evidence points to those chances getting higher every day. 

Probably more relevant is that I think there's enough weakness already to have a high degree of confidence that corporate earnings expecations are too high and are likely to move lower in 3Q and 4Q.

So... there is some hope that we will slow to very modest growth, and muddle through.  But I see the risks on the downside entering the fall.  The gubbmint may well be able to engineer some massive market manipulation to protect outright collapses in the bond/stock markets, but at some point the marginal utility of doing so becomes negative.

I think the long term thesis you hold on U.S. economic tranformation has some merit, and I certainly hope that technology leaps in alternative energy, biotech, etc. bring in a new age of prosperity.  Our children deserve it after the mess we all helped create...

Leo Kolivakis's picture


Global trade and industrial production have fully recovered:

Yes, the global environment has shifted, and for the better. While everyone is focused ONLY on the US economy, emerging markets have been forging ahead, and for the first time in the post-war era, they're leading us out of the global slump.

Assetman's picture

As Chrisina points out, global trade has not fully recovered.  A more accurate desciption would go like this:

Global trade peaked in 2008, made a dramatic decline that troughed around May 2009, and has attempted to recover along with the U.S. economy.  By May 2010, it was still below the 2008 peak... and by June 2010, it was stalling.  WTO has all sorts of statictics on the matter.

The sad thing about the so-called recovery in trade, was that many of the deficit-ridden developed countries (like the U.S.) financed their activities with even more debt.

I will agree, though, that the emerging markets will at least keep the global markets from totally tanking, but someone in the group needs to step up and become a consumption engine. 

Until then, I see the developed markets hitting another wall.  The lastest WTO data and the Baltic Dry are at least suggesting it.

chrisina's picture

From said report :

"In May, world trade was 3% below the peak level reached in April 2008"

That means growth of -3% in 2 years, this despite ZIRP, massive QE and approx. 10% of world GDP in Govt stimulus...

How is that going to be like in the next 2 years with worldwide Govt stimulus being only a small fraction of what it was?

DavidC's picture

Some good points.

Japan's lost decade (now lost two decades) was occurring even as the US and UK et al were in a bull market, and with Gordon Brown famously proclaiming the end of boom and bust. That bull market is now OVER.

To draw comparisons in the number of 20 to 44 year olds between Japan and the US is facile. What is MUCH more important is the number of retirees who will be expected to be supported by the Government and tax payers. The West has the demographic bulge of baby boomers all getting close to retirement, the majority, I would guess, on MUCH lower savings than the Japanese had when the 'lost decade' started and who bought (if any) Government bonds, unlike the Japanese.

I could go on...

Leo, thanks as ever for making me think, but I don't agree with what I'm reading there.

Leo Kolivakis's picture


I agree with you that we have  a looming retirement crisis in the West, which is why I started my blog, but the demographics are vastly different, and will help cushion the blow. Also, expect major reforms to public and private pension plans which will include increases in contribution rates, cuts in benefits and no more indexing to inflation. Some people think pension reforms can't happen. They're already happening all over the world, and we won't escape the wrath of pension austerity.

agrotera's picture

Didn't we just have a lost decade????

July 31, 2000 through the July 31, 2010  Wilshire 5000 (Full Cap) returns: 0.24 annualized.




The 22nd Prime's picture

Mr. Kolivakis

When I first started lurking ZH about 8-9 months ago, I thought you might be the alter ego of TD just trying to piss us off. Now I tend to think that maybe Johnny Bravo might be that guy. Regardless, I like your posts. I posted once that I thought you were the toughest bitch in Fight Club. Oh, sorry, broke the first rule.

I've noticed a degradation of civility on ZH with the greater amount of posters. I can't keep up with all the posts or comments because I work an incredibly difficult work schedule (which makes me wonder how many of the prolific commentors actually work), but I gotta say when all passengers rush to one side of the boat, it's nice to know there is a life raft on the other side that might be worth considering, especially when all the men and crew are butting out the women and children on the side closest to the water.

Good evening.

Rogerwilco's picture

A "choppy recovery"? LOL -- I know a guy who specializes in choppy:

ZackAttack's picture

Yes, but Japan had a number of advantages that we do not.

- I think his argument about high commodity prices is specious for importers such as the US and Japan. Japan had a decade of <$20/bbl oil in which to attempt its recovery.  

- Japan attempted its recovery against a backdrop of broad world growth during the 90s. 

- Japan's bank balance sheet issues were primarily with commercial real estate, which had minimal impact on consumer balance sheets.

- At the start of the 90s, Japan had a massive trade surplus and budget surplus, which, of course, they pissed away on one stimulus program after another.

- Japan had 2% unemployment in June, 1992.

- Japan was free to devalue its currency at will, and was in fact assisted by the US in doing so.

- Japanese citizens had a 10+% savings rate.   

I will have thought of 10 more by tomorrow.

The guy that wrote this piece is being pollyannish. We are so much more fucked than Japan.

Of course, we wouldn't be having this discussion if our policymakers hadn't chosen Japan's path to start with...

chrisina's picture

Well said.

To summarize, the USA today has one big advantage over Japan 15 years ago, its demography. But as you've pointed out Japan had many more advantages over the USA today. 

I think the best case scenario for the USA (and the rest of the OECD) is that the next decade looks like the Japanese "noflation" of the last 15 years (no growth, private deleveraging equal to sovereign leveraging).

The worst case scenario is either a deflationary depression of historic proportions or a dollar crisis that ends in total chaos. 

So can we avoid another lost decade? Sure, we might get something far worse.

Kayman's picture


Japan's number one objective (like China's today) was to protect their job market. To do that they carefully managed the Yen through their own ZIRP.  What foreigner would send capital to Japan to earn 1/4 of 1 percent per year.

A ZIRP policy is a massive subsidy to your domestic industries.  When every country has a ZIRP and QE policy, then there is no comparative advantage.

America's leadership through at least the last 3 presidents have been cheerleading a job killing program through "outsourcing" for a couple of decades.

3 Nero's in a row. How blessed can this country get ? Not !

Kayman's picture

Thanks Zack- Leo ought to do a little more homework before wasting space on ZH.

Invariably he has thin premises glued together with non sequiturs.

Of course Japan of 20 years ago was not the same as the U.S. today.

20 years ago Japan was an export nation, as it is today. Our bought-and-paid-for politicians sold out to  the corporate cartel and China years ago.  We exported American Middle Class jobs, technology and capital. China, Wallymart, and corporate American leeched the blood out of the American Middle Class.

American is now a welfare state requiring the assistance of its enemies to survive.

Raising the Fed rate to 2% immediately, putting the TBTF into receivership, blocking all imports from China, and weaning the nation off from foreign oil are necessary emergency measures, without which this nation will suffer a slow agonizing death.  Oh, yeah, we already are.

Sometimes I am feeling dippy, but I never get the urge to buy Chinese solars.

ZackAttack's picture

And, don't get me wrong here... I am not bashing Leo in any way, only raising what I believe are legitimate objections to the points raised by the economists quoted in this article.

I think there's some kind of willful, self-inflicted brain damage common to economists that prevents them from following their thoughts to a logical conclusion. Every time I see Bernanke speak, I want to say "Yes, now finish that thought, professor, and you'll be able to see what's absolutely clear to the rest of us."

They seem to believe the only problem Japan had was that it didn't go big enough, soon enough. This is nonsense, too... 6 years of explicit QE, 10 stimulus programs averaging 7% of GDP, which wrecked its balance sheet and accomplished nothing. There is absolutely no reason to believe, other than a pollyannish faith, that the same thing won't happen to us.


tony bonn's picture

the experts are baffled because they are playing stupid shills for the bankster master of the universe class....if you want to see countries with increasing populations and stagnant or shrinking economies pull out your world map and darts....

knukles's picture

Are you people fucking crazy? 

We've Already Had a Lost Decade!

Stock prices have been flat.  House prices have collapsed, thereby destroying the majority of the American Citizen's wealth.  Real disposable after-tax income for 95% of the citizenry has fallen appreciably.  As Health Care prices have risen sharply.  Personal freedoms have been impinged to the point that one might as well conclude that the Magna Carta and Bill of Rights have not even considered sutable for wrapping the fish and chips, but just plain shredded.  The country is involved in the longest war in its history and no-one can even explain why, anymore that makes sense to more than 3 people at a sitting.  The political stage that was once dominated by what was  referred to as crooks should now just be renamed a criminal enterprise.  Our elected representatives respond to lobbying and campaign money ignoring the will of their constituents.  We cannot even have a conversation about he weather anymore without it devolving into political bickering. Globalists strive to move decision making further away from the people as taxes are levied at every beat of the heart.  Our government's policies of rendition, of the Patriot Act and warrant-less wiretapping have been expanded, not rectified.  Troops in Iraq are being recalssified from Combat Brigades to Aid and Assistance Brigades, so the promised withdrawl schedule, already late, is met.....  Newspeak is the message today.

And you're asking whether we're about to have a Lost Fucking Decade?  We're already entering the Second Lost Decade for Christ's Sake. 

Dirtt's picture

Yes Knuckles.  We can only hope November 2nd is the end of the end.  Those Mayans.

ZackAttack's picture

Yep, and Japan has now lost two decades.

Commander Cody's picture

Ditto, knuckles.  Leo is the fool.  I'm tired of his trash and will no longer waste my time on it.  Tyler, banish this idiot already.

traderjoe's picture

Banish? No. We want a diversity of ideas. I don't agree with Leo, but I keep looking for him to give me a decent argument. 

Ned Zeppelin's picture

Ditto - post onward Leo, chinese solars, liquidity tsunamis and all. 

tewkatz's picture

Greetings CC,

Leo is Tyler are we all.  Watch the movie again and extrapolate more than two sensory inputs.  ZH is run by TD meaningfully...