President Obama has requested another round of stimulus spending with expanded unemployment benefits and additional money for infrastructure projects to jump-start economic growth and reduce unemployment. Although this stimulus package is meeting with more opposition than the first, our elected officials do not seem to have learned anything from other countries who have unsuccessfully tried similar stimulus policies in the past. Take Japan for example.
Following strong economic growth and low interest rates in the 1980’s, an asset bubble developed in the Japanese economy consisting of inflated real estate and securities prices. Recognizing that this bubble was unsustainable, the Japanese central bank raised interest rates in 1989, leading to a massive sell-off in securities and a dramatic decline in real estate values. In short, the bubble burst.
The government responded with several rounds of stimulus which consisted of massive infrastructure spending. All over Japan, roads were paved, dams were built and bridges were erected to connect numerous land masses all in an effort to stimulate the economy. In the process, Japan accumulated trillions in national debt which now totals 180% of it’s nearly $6 trillion dollar economy. So large is Japan’s debt that it now ranks number one of the developed countries in terms of leverage.
So how well did this entire stimulus program work? Well, economists generally refer to this period in Japan’s history as the “lost decade” because the policies failed. Miserably.
Between 1989 and 2003, the Nikkei Index fell by 80% and real estate declined by 50%. Homeless camps sprung up on the banks of many rivers as people abandoned their homes due to foreclosure activity of the banks. The suicide rate skyrocketed when unemployment doubled. Even today, exports still continue their downward spiral, prompting fears of a second wave of recession for the Japanese economy.
The Heritage Foundation says that no nation is sorrier than Japan for endorsing John Maynard Keynes brand of economics and for squandering vast sums of national wealth in a vain attempt to stimulate their economy.
It now appears that these policy mistakes cost Japan the chance to lead the world in economic growth. Indeed, The Japan That Can Say “No” learned the hard way that fiscal stimulus programs financed by debt won’t stop bankruptcies, declining real estate values, foreclosures, job losses or a falling stock market.
Richard Koo, the chief economist at Nomura Research Institute calls our current recession “a balance sheet recession.” In the United States, the housing and credit bubble created several trillion in assets. It also created several trillion in debt. When the bubble burst, the value of the assets declined as housing prices plummeted and mortgage backed securities became worthless. Unfortunately, the debt remains.
The only solution now is for banks to remove these assets from their balance sheet by taking the write-offs. Likewise, individuals and business have no choice but to pay down their debt. This reduction in debt takes huge sums of money out of the economy. Koo maintains that Federal Reserve Chairman Ben Bernanke and popular left-of-center economist Paul Krugman, who often writes for The New York Times, do not understand this yet as demonstrated by their vain attempts to prop this bubble up even more through massive government stimulus plans financed by equally massive increases to the national debt.
When one compares one financial indicator: The Nikkei 225 Index to the Standard and Poor’s 500 Index, there is a frightening similarity. If the United States stays on its current course, we are likely to suffer the same fate as Japan, and perhaps even more so, because while the savings rate cushion in Japan was 17%, the United States savings rate is considerably lower.
Furthermore, Japan had very little population growth during this period while the United States continues to grow from substantial immigration, both legal and illegal. Where most of the bad debts in Japan have been written off and removed from balance sheets, most banks in the U.S. have not written off their bad debts and we continue to prop up vast sums now owned or backed by Freddie Mac and Fannie Mae.
American businesses are truly beginning to see the same level of declines that the Japanese experience. Brian Dunn, the President of Best Buy, recently commented: “In 42 years, we have never seen such difficult times for the American consumer.” If the United States does not curtail its current government spending frenzy and stabilize our sovereign debt level, we are destined to suffer a period of low economic growth, historically high unemployment, stagnating living standards, all while the world around us resumes prosperous growth.
In short, we, too, will experience our own “lost decade.”
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