US not certain of avoiding Japan-style 'lost decade'

23 & 25 January 2009

As I have posted earlier, Morgan Stanley have largely silenced their contrarian former chief economist by shipping him off to Asia (though that is obviously also a good place for this man to be). Since being exiled by his employer, his work has become very hard to find.

Stephen Roach has recently published an essay comparing the situation of the US in 2009 to Japan in the 1990s. Copies of the essay are currently circulating around the net, as Morgan Stanley no longer provides a forum for Mr. Roach's work.

In Japan, as it is well known, the implosion of an asset bubble led to the creation of a "lost decade" from which Japan has still to recover.

Many have argued that the US will avert Japan's fate due to the readiness of the Federal Reserve to pump out stimulus after stimulus. According to Mr. Roach, here is the problem... in the Japanese asset bubble, only 17% of GDP was at stake, and primarily the corporate sector was affected.

In the US, the most recent of a succession of ever-larger financial bubbles (in reality, government-sanctioned Ponzi schemes) has finally impinged on the US consumer. In the US, consumer spending constitutes 70% of the economy, and US consumers will have to retrench for years before returning to the stage as the world's "most important consumers."

That is, Mr. Roach asserts that the United States' "lost decade" will be more painful than that endured by the Japanese - not less.

Mr. Roach concludes: "Like the Japan of the 1990s, the US faces stiff headwinds. And until the rest of the world uncovers a new consumer - which is not likely during the next few years - a protracted global slowdown is distinctly possible."

Read all about it, here, on this mirror site: US not certain of avoiding Japan-style 'lost decade,'
or got to this link at FT.com.

My View
(24 January 2009)

By the way - my own take is a bit different than that of Mr. Roach.

While I agree that the debt-engorged US consumer is not about to be replicated in any other corner of the globe, I do not think that even the collapse of the "Ponzi economy" of the US, in a "Greenspan depression," can trump the entry of Asia, the Middle East, and other sectors of the former second and third worlds into the global marketplace.

My position is perhaps paradoxical on a prima facie basis, as, similarly to Mr. Roach, I believe the present US-spawned economic crisis is considerably more serious than the Japanese debacle of the 1990s. US financial institutions have truly hedged the greater part of their bets against ephemeral assets which in some cases are of literally no value. The combined international equity markets have surrendered greater than 50% of their value over the past year... and global economic conditions are sufficiently adverse to warrant this collapse in asset prices.

Yet... 1990s Japan saw nothing akin to the present phenomenon - which I would characterize as the awakening of the second and third worlds to international markets.... Nor did the 1930s depression era witness such a phenomenon. For those of us who believe in the power of the marketplace not just to exchange wealth but to create wealth - such an event as is presently occurring has never before been seen in the still brief history of our species upon this planet.

So yes - I do foresee a "Japan-style" lost decade for the United States. But I do not foresee a 1930s style depression for the remainder of the world, which is nowhere nearly so leveraged or unbalanced as is the US.

To be clear - the present economic crisis is more or less a "made in the USA" phenomenon, and that is where it will do its greatest damage.

So, while the US may undergo a comparative loss of advantage in the global marketplace over the next decade which may in fact be quite dramatic - Obama optimism or no - I do not foresee the remainder of the world following America down this particular path.

Rather, I anticipate an emerging "stagflationary" era for the balance of the world, characterized by rising inflation against a background of "first world" financial retrenchment attributable to continued but increasingly dispersed global growth in demand for raw materials, for services, and for manufactured and technological products.

This growth in demand in my view will be a consequence of the expansion in size of the marketplace itself - with a resultant re-slicing of the pie of international wealth in favour of the emerging, the labouring, the (low-cost) manufacturing and the commodity-producing nations, specifically at the expense of the United States.

Click here for a (pre-disappearance) biography of Mr. Roach.

And click here for Peter Schiff's recent Wall Street Journal critique of the present dependency of the United States on unsustainable deficits and debt (this includes the Obama administration and its current budgetary plans, as well as the previous Bush administration and its unbalanced economic policies).

Oh... this is an aside... look for robotics to become a critical component of the low-cost production of finished goods, and thus an increasingly integral component of citizen life, particularly in the Western nations....
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