Is the world emulating Japan? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 5 August 2014
Is the world emulating Japan? A  A  A

Ouzilly, France

Dear Diary,

Stocks were up yesterday - 75 on the Dow index - after a battering last week. Gold was down $6.

Where does that leave us? Well, it's too early to say that the sell-off is over. And it's too late to say that it hasn't begun.

Richard Duncan advised us that net liquidity in the markets would begin to evaporate in 3rd quarter. This, he said, would cause a big increase in volatility. We're just waiting to see how it plays out.

Long term readers will remember that for at least 10 years we have regarded Japan as a model. It is not where we want to go...but we are condemned by the gods to follow in Japan's footsteps.

Why?We don't really know. But Japan had its financial glory days in the '80s. Everybody wanted to be Japanese back then. Japan, Inc. had the world's most dynamic industries and central planning that worked!.

--- Advertisement ---
1 Small Cap Opportunity Every Month...

Small Cap might form a small portion of your total equity portfolio, but they also hold the potential to deliver some of the biggest returns over time.

The only requirement is that you should invest in the Right Stocks and at the Right Price.

And that's exactly what we've been delivering to a select group of investors for over 6 years now!

How have our recommendations performed?

How can you start receiving 1 New Small Cap Investment Opportunity right in your inbox every month?

Click here for full details...

Then, Japan, Inc. got whacked in 1990.It went into what Richard Koo calls a 'balance sheet recession.'Businesses had too much debt.They had to cut back spending to rebuild their balance sheets.This caused recession...slump...deflation...and a general economic funk that continues to this day.

The downward move in the credit cycle aggravated by two things:

  1. Demography: people in Japan were getting older...retiring...spending less money.
  2. Stupidity: policy makers went to work with counter-cyclical policies...deficits...QE...ZIRP.
You will notice that we in the US are no strangers to these things either.

The US stock market got whacked about 10 years after Japan - in 2000.That was the bubble popping.But the authorities - with the Japanese example to instruct them - responded more vigorously.

Saving the world had already become popular among economists in the '90s.Alan Greenspan, Robert Rubin, and Larry Summers had come together to rescue the globe from the Asian crisis ...and got their pictures on TIME as the "Committee to Save the World."

The rescue team swung into action after the crisis with their familiar tool - cheap money.This, of course, put the world in worse jeopardy 7 years later, as it caused a much bigger bubble in the US, centered in finance and housing.

The crisis of '08-'09 put the US more clearly on the road to Tokyo.Growth rates declined.Birth rates fell below replacement level.Using the policies pioneered by the Japanese - ZIRP, QE, deficits, bailouts -- US authorities were able to inflate yet another bubble in equities and debt, but the 'recovery' was still the weakest ever recorded...and probably not a recovery at all.

What's ahead?What now?We look to Japan to find out.

Giveth the moment...cometh the leader.After 24 years of punky, funky economic performance, the Japanese were ready to do something really stupid."What option does Japan have," asked Shinzo Abe.

What was Abe's new policy?More cheap money, of course.Simulate until you stimulate.Fake it, until you make it.

That may work in some areas of life, but not in economics.Abe got together his committee to save Japan.He had the world press behind him and the central bank in his pocket.He pumped billions into the economy...and into the stock market.(Including putting pension funds into over-priced equities!), wage growth and household income are dropping.Private sector spending is falling. Stocks are going down.Industrial production is slipping.And the latest estimates show the economy collapsing at a 6.9% rate in the second quarter.

The Japan example is not one we should emulate.But we will anyway.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Is the world emulating Japan?". Click here!


Recent Articles:
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?