How Close is USA to Japan of the 1990's?
What are the chances of America ending up similar to the Japan of the 1990's? That's the question being answered in this article from The Economist. It's a brief article but I urge everyone to check it out since it covers most of the issues. There is a very real risk of America ending up similar to Japan but things are never the same between countries, let alone across differing time periods.
The big problem faced by America is the real estate bust that is unfolding:
As can be seen in the chart above, the central bank response has been somewhat similar (at least when it comes to interest rates.) There are a number of advantages that America has and one of them is them is the following:
Japan should have started printing money when the rates were almost zero. That is one of the biggest mistakes. America, in contrast, has positive inflation so there is little need to print money. In fact, I commend the Bernanke FedRes for not printing money and letting natural inflation do its work.
In any case, I think it is unlikely for USA to end up in a situation similar to Japan for the following three reasons:
First of all, the real estate losses are spread out across the world. In fact, some European banks are taking much bigger losses than American banks. This shouldn't be a surprise because Europeans were big buyers for CDOs and CDO-squareds (arguably some of the most complicated real estate securities ever created.) So the cost of the real estate bust is being spread out across the world. I think if all the losses were taken by Americans (as Japan had to; or America had to with their S&L crisis in the early 90's) then USA would be in far worse shape. The real estate bust is still unfelt by many in America--particularly those not living in the bubble areas of California, Nevada, and Florida, among others. Although it may be revised down in the future, let's not forget that GDP growth is still positive. I mean, it's even stronger than Canada right now!
Secondly, USA does not have a stock market bubble anywhere near what Japan had. The P/E ratio on Japanese stocks were something like 40+ back in 1990 whereas S&P 500 P/E is under 20. Even if you adjust the P/E upwards to account for the low P/Es of cyclicals, it will be nowhere near the Japanese valuations. My understanding is that other measures such as price to book and dividend yield show similar results.
Lastly, although very few seem to tie this into the Japanese real estate bust, Japan had/has horrible demographics compared to USA. By this, I am referring to the low population growth in Japan versus USA. The economy, and real estate in particular, will likely perform much better if the population is growing rather than shrinking.
So, overall, I do not think USA will face anything remotely similar to what Japan faced in the 1990's. However, do note that, as pointed out in the article, America has some negatives that Japan never had (such as low savings rate) but I do not believe these to be as material as the three I focused on.
The big problem faced by America is the real estate bust that is unfolding:
(source: The Economist)
As can be seen in the chart above, the central bank response has been somewhat similar (at least when it comes to interest rates.) There are a number of advantages that America has and one of them is them is the following:
...It was from here on that Japan made its biggest policy mistakes. In 1997 the government raised its consumption tax to try to slim its budget deficit. And with interest rates close to zero, the BoJ insisted that there was nothing more it could do. Only much later did it start to print lots of money.
America’s inflation rate of above 5% is an advantage. Not only are real interest rates negative, but inflation is also helping to bring the housing market back to fair value with a smaller fall in prices than otherwise.
Japan should have started printing money when the rates were almost zero. That is one of the biggest mistakes. America, in contrast, has positive inflation so there is little need to print money. In fact, I commend the Bernanke FedRes for not printing money and letting natural inflation do its work.
In any case, I think it is unlikely for USA to end up in a situation similar to Japan for the following three reasons:
First of all, the real estate losses are spread out across the world. In fact, some European banks are taking much bigger losses than American banks. This shouldn't be a surprise because Europeans were big buyers for CDOs and CDO-squareds (arguably some of the most complicated real estate securities ever created.) So the cost of the real estate bust is being spread out across the world. I think if all the losses were taken by Americans (as Japan had to; or America had to with their S&L crisis in the early 90's) then USA would be in far worse shape. The real estate bust is still unfelt by many in America--particularly those not living in the bubble areas of California, Nevada, and Florida, among others. Although it may be revised down in the future, let's not forget that GDP growth is still positive. I mean, it's even stronger than Canada right now!
Secondly, USA does not have a stock market bubble anywhere near what Japan had. The P/E ratio on Japanese stocks were something like 40+ back in 1990 whereas S&P 500 P/E is under 20. Even if you adjust the P/E upwards to account for the low P/Es of cyclicals, it will be nowhere near the Japanese valuations. My understanding is that other measures such as price to book and dividend yield show similar results.
Lastly, although very few seem to tie this into the Japanese real estate bust, Japan had/has horrible demographics compared to USA. By this, I am referring to the low population growth in Japan versus USA. The economy, and real estate in particular, will likely perform much better if the population is growing rather than shrinking.
So, overall, I do not think USA will face anything remotely similar to what Japan faced in the 1990's. However, do note that, as pointed out in the article, America has some negatives that Japan never had (such as low savings rate) but I do not believe these to be as material as the three I focused on.
Low savings rate could be a bigger problem in terms of people's financial stamina to withstand a recession. One factor that may be worth considering: the complete, utter lack of shame of most Americans in terms of mis-managing their financial affairs. This makes debt repudiation (walking away) and filing bankrutcy easier.
ReplyDeleteAnother marker of American consumers' "last gasp" is a sudden explosion of credit card debt as the recession continues to unfold.
If I were a risk manager at a financial institution, i'd be clamping down on HELOCs and credit card debt _hard_.
The culture of debt is certainly different but filing bankruptcy is not necessarily a bad thing. Unlike Japan, where people drown in debt shamefully, bankruptcies clean out the system. It also provides certainty for the lenders (even though they might take losses.)
ReplyDeleteI think HELOCs are basically gone for borrowers with poor credit (I think it's tough for even people with good credit.) But credit card tightening hasn't occured yet and I don't know if it will deteriorate signifcantly. As I have maintained, the US economy is not doing as badly as many imagine. It's not doing well but not terrible either. Although credit card will lag the rest of the credit market, it still seems to be reasonable so far (check this chart).