Is the Treasury's Plan to 'Go Japanese' Doomed to Fail?
/PRNewswire/ -- In the latest issue of The Casey Report, the flagship publication of Casey Research, Managing Director David Galland and Chief Economist Bud Conrad have examined the decline of the Japanese economy since 1990 and note the many similarities, and a few key dissimilarities, to the United States' current crisis.
"Statements made by Treasury Secretary Tim Geithner suggest that he views the Japanese crisis as a useful comparison to the current situation in the U.S., except that Japan did not apply enough monetary stimulus early enough," says David Galland. "Our analysis suggests critical differences which could cause efforts to stimulate the economy back to life to fail."
Similar to the U.S., in the years leading up to its "Lost Decade" per-capita debt in Japan soared, by seven-fold. Also similarly, the debt bubble in Japan collapsed, dealing a crushing blow to equities and real estate markets. The Japanese government responded to its financial crunch by going on a fiscal stimulus spree. The Japanese government debt grew to 160% of the GDP. The United States' debt is currently 75% of the GDP but expected to climb significantly as further stimulus is applied.
Japan also cut its lending rate to zero percent, just as the United States has done. The Bank of Japan, similar to our Federal Reserve, acquired Japanese government bonds and providing more liquidity to weak banks. That this approach did not provide the desired results and did not revive the Japanese stock market, Treasury Secretary Geithner attributes to Japan's hesitant approach, indicating a willingness to act more forcefully, and to continue applying stimulus, in order to restart the economy.
"The Treasury secretary's words and the plans so far revealed seem to us to misunderstand some key differences between the U.S. economy now, and Japan's then," says David Galland:
-- Japan had a current account surplus throughout its crisis which
provided support to the yen, whereas going into its crisis the U.S.
has a record current account deficit and is the world's largest debtor
-- The Japanese are savers by nature. Americans are big spenders and are
entering the crisis with little or no savings.
-- The work ethic and the quality of primary education in the United
States have declined more than in Asia.
-- There are record amounts of U.S. dollars in the hands of foreigners
who are paying close attention to actions by our Treasury department.
Excessive stimulus could trigger a devastating exit from the dollar,
creating a vicious circle of a weakening dollar and soaring interest
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