David Rosenberg on America’s Turning Japanese
by Edward Harrison
The US post-bubble experience is often compared to the Japanese post-bubble experience. I have written a number of posts on the Japanese experience myself. Here are a number from 2008:
- A cautionary tale: story from 1994 Japan: The Japanese housing bubble continued to deflate long after the bubble economy first started to unravel in 1990. For example, Japanese households which bought bargain houses in 1994 found themselves quickly underwater and trapped in negative equity. This reduced labour mobility and increased structural unemployment.
- Chart of the day: Japan 1984-2004: Secular bear markets can last a very long time. In the U.S., nominal losses in the last secular bear market (1966-1982) were mitigated by inflation. But losses approached Great Depression proportions on an inflation-adjusted basis. In Japan, the nominal losses have not been mitigated by the money illusion of inflation despite quantitative easing.
- Quantitative easing: printing money like mad to ward off deflation: This policy remedy was tried in Japan – unsuccessfully. Yet, many believe it will work in the U.S. QE may reinvigorate animal spirits but the structural problems and the zombie banks still remain to re-appear in the next recession. I would expect the same for the U.S.
- Japan’s easy money policy was the trigger for the tech wreck: Excess liquidity from policy stimulus and quantitative easing in Japan created the carry trade and contributed to bubbles worldwide without reflating the Japanese economy.
- Lessons from Japan’s Bank Crisis: Regulatory forbearance and bailouts lead to zombie banks. The Japanese tried this approach to be much less satisfactory than the Swedish approach of recognizing and writing down losses more quickly.
- Turning Japanese and understanding the consequence of policy half-measures and Japan circa 1996 – forgotten already?: When recession hits, some surviving zombie institutions go from well-capitalized to undercapitalized and bankrupt as writedowns re-appear en masse in the downturn.
David Rosenberg took up this same theme today with his "Sushi with Dave" missive. Here are nine charts in support of the thesis that Japan offers important lessons for the US.
yep, all very similar … spose the man difference being that most everything that acts as an input price to production is priced in USD so FED printing far more successful in creating headline inflation. that also implies we should get some clues on where the next bubble will pop.
yep, all very similar … spose the man difference being that most everything that acts as an input price to production is priced in USD so FED printing far more successful in creating headline inflation. that also implies we should get some clues on where the next bubble will pop.
I’ve learned to pay less attention to Rosenberg other than looking cautiously for interesting data he uncovers. He relentlessly data mines to validate his existing biases (sure that’s a natural human tendency, but that doesn’t make for a good macroeconomic forecaster). For just one example, that “Rolling Recessions and Recoveries” chart is mighty misleading. Between 1990 and 2007, Japan’s real GDP only dipped (on an annual basis at least) in 1998. Yes, nominal matters when it comes to debt, but still…
Rosenberg does have a bias that colours his analysis. He has decided, as I have, that the US will follow in Japan’s path. But that doesn’t mean slow growth at all times nor does it necessarily mean double dip recession in 2010 or 2011. Rosenberg fails to separate his cyclical and secular recommendations and I suspect this has cost him and his investors.
I’ve learned to pay less attention to Rosenberg other than looking cautiously for interesting data he uncovers. He relentlessly data mines to validate his existing biases (sure that’s a natural human tendency, but that doesn’t make for a good macroeconomic forecaster). For just one example, that “Rolling Recessions and Recoveries” chart is mighty misleading. Between 1990 and 2007, Japan’s real GDP only dipped (on an annual basis at least) in 1998. Yes, nominal matters when it comes to debt, but still…
Rosenberg does have a bias that colours his analysis. He has decided, as I have, that the US will follow in Japan’s path. But that doesn’t mean slow growth at all times nor does it necessarily mean double dip recession in 2010 or 2011. Rosenberg fails to separate his cyclical and secular recommendations and I suspect this has cost him and his investors.
The US will have a long period of stagnation just like Japan, because it is going through a balance sheet recession, and they take years to work through. Unless you are brutal and write the losses off quickly like in Sweden. I saw the similarities with Japan in 2007/8 when the banks were bailed out, and the losses socialised. Even Sweden, a socialist country, was never that stupid. The reason it happened was that the US and UK political systems are so corrupted by bank funding that they will save them at all costs. Unless it becomes simply impossible.
I suspect that in ten years time we will still have sub par growth in the US and Europe because we are still carrying the huge burden of debt. So far much of the sovereign bailouts have significantly bailed out German banks. Unless of course we get the defaults. Greece and Ireland are almost 100% certain to default. Belgium looks vulnerable as do a good few east european nations. This will trigger a cascade of credit default swaps being triggered which will bring down the big US, and european banks. The german banking system could be facing decimation as well. At that point I can see politicians being forced to take over the banks, break them up and at that point start criminal investigations. I can then see an end to the universal banking model and a return to Glass-Steagall.
This will take time to ripple through and by the end of the decade things will possibly be very different.
I agree 100% with that assessment. Right now we are in a cyclical rebound but there is no indication this will be used to help repair household balance sheets. Policy makers are more concerned with goosing aggregate demand ahead of the election in 2012 in the USA. So when recession hits interest rates will be low and fiscal deficits high. I hope I am wrong.
The US economy’s rebound has been purely from reversal of recessionary business moves. Much of the boost has been from stock building after the savage cuts over the previous quarters.
Unemployment is still climbing, only “falling” because people are falling off the unemployment rolls. So long term aggregate demand will continue to suffer. The states, counties and cities are about to lay off millions of state workers. Private enterprise is not able to recruit the numbers available.
As to being able to goose demand, I seriously doubt that will happen. QE is barely having any impact on employment. The extension of the Bush tax cuts will not stimulate the economy as the GOP claim. Greenspan’s claim that the wealth effect will flow are also likely to be shown to be false.
I fully expect the US bank rates to be close to zero in 2012, and the deficit will still be high. Normally a recovery will boost tax revenues but that is not happening. It will take years for many banks tax losses to be used up, and they start paying tax again. Until then tax receipts will be low. State revenues will continue to fall as property values fall another 10 to 20%. This will lead to more foreclosures, more bank losses, more small banks will fail, and business lending to Main Street will suffer. The economy will stagnate for the next two years.
The US will have a long period of stagnation just like Japan, because it is going through a balance sheet recession, and they take years to work through. Unless you are brutal and write the losses off quickly like in Sweden. I saw the similarities with Japan in 2007/8 when the banks were bailed out, and the losses socialised. Even Sweden, a socialist country, was never that stupid. The reason it happened was that the US and UK political systems are so corrupted by bank funding that they will save them at all costs. Unless it becomes simply impossible.
I suspect that in ten years time we will still have sub par growth in the US and Europe because we are still carrying the huge burden of debt. So far much of the sovereign bailouts have significantly bailed out German banks. Unless of course we get the defaults. Greece and Ireland are almost 100% certain to default. Belgium looks vulnerable as do a good few east european nations. This will trigger a cascade of credit default swaps being triggered which will bring down the big US, and european banks. The german banking system could be facing decimation as well. At that point I can see politicians being forced to take over the banks, break them up and at that point start criminal investigations. I can then see an end to the universal banking model and a return to Glass-Steagall.
This will take time to ripple through and by the end of the decade things will possibly be very different.
I agree 100% with that assessment. Right now we are in a cyclical rebound but there is no indication this will be used to help repair household balance sheets. Policy makers are more concerned with goosing aggregate demand ahead of the election in 2012 in the USA. So when recession hits interest rates will be low and fiscal deficits high. I hope I am wrong.
The US economy’s rebound has been purely from reversal of recessionary business moves. Much of the boost has been from stock building after the savage cuts over the previous quarters.
Unemployment is still climbing, only “falling” because people are falling off the unemployment rolls. So long term aggregate demand will continue to suffer. The states, counties and cities are about to lay off millions of state workers. Private enterprise is not able to recruit the numbers available.
As to being able to goose demand, I seriously doubt that will happen. QE is barely having any impact on employment. The extension of the Bush tax cuts will not stimulate the economy as the GOP claim. Greenspan’s claim that the wealth effect will flow are also likely to be shown to be false.
I fully expect the US bank rates to be close to zero in 2012, and the deficit will still be high. Normally a recovery will boost tax revenues but that is not happening. It will take years for many banks tax losses to be used up, and they start paying tax again. Until then tax receipts will be low. State revenues will continue to fall as property values fall another 10 to 20%. This will lead to more foreclosures, more bank losses, more small banks will fail, and business lending to Main Street will suffer. The economy will stagnate for the next two years.