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Edited on Tue Mar-17-09 12:31 PM by Kurt_and_Hunter
We are not Japan.
But there are three ways we can go:
Sturdy rebound Continued stair-step declines for several more years L-shaped stagnation at low levels.
For convenience people discuss those in terms of '82, Japan and '29 respectively.
And I think "Japan" is where we are headed. And that's optimistic.
I don't think the causes and events are similar, just the prognosis.
What the second two have in common is a bubble collapse. I fear '29, hope for Japan.
(How much of stock valuation depends on pricing in the possibility of a stock bubble in the next decade? If prices are at all rational, a LOT. Simply taking the dream of more bubbly goodness off the table seems to mandate stagnation going forward in all assets. Even if we returned to the same GDP and same corporate profits stocks will not return to previous prices associated with those levels because the priced-in upside is lower. Same for houses. Just my intuition.)
I suspect the role of monetary policy and bank solvency are over-stated in these things because that's what economists feel they can control. (If your only tool is a hammer...)
But all our bank problems, monetary problems etc. flow from the central fact that tens of trillions of asset valuation disappeared. And since they never represented durable value there's just no fix for that.
Our bubble was way bigger than Japan's, absolute or relative. I retain my central thesis that there was a US-led but global asset bubble 1995-2007 and whether the instruments of it were stocks, houses or baseball cards is secondary to the gross loss of capital/collateral and the psychological induced aversion to assets.
So I agree that we are not equivalent to Japan and that there are fewer speciffic policy lessons there than it may appear.
But, on the other hand, it's the only recent major economy bubble-collapse that featured real estate as a key asset in play, so there are probably some instructive broad similarities.
I do think we could use some real inflation to shift the burden from mortgage holders to mortgage lenders (who are already practically wards of the state) as a triage measure. So I find a certain columnist's writing about inflation inducement vis-a-vie Japan intriguing. But not gospel.
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