26 september 2008

The Coming 'Lost Decade' in America? (Steve Sjuggerud)

Historically, when the government meddles in the markets, things don't turn out well...

The most recent example is Japan in the 1990s, and that ended with the "Lost Decade." Here's what happened:

• Japan had a huge real estate bubble.
• Banks overlent on a massive scale, making risky loans that were almost doomed from the start.
• The stock market and the real estate market started to fall.
• To save the economy, the Japanese Central Bank took extraordinary measures... lowering interest rates to unprecedented levels. But it wasn't enough.

Once the crisis was in full swing, the troubled banks hoarded cash instead of lending money. The economy gummed up. Asset prices went down. And people froze... They wouldn't invest in stocks or real estate. Sound familiar?

The next steps sound familiar, too...

Instead of allowing bad banks to fail... instead of allowing the system to "clear"... the government pumped in cash to prop them up. The result was hundreds of banks and businesses existing in a sort of purgatory... neither private nor public... neither alive nor dead... They were known as "zombies."

The result? Japan's Lost Decade. Real estate prices plummeted. Japan's main stock index, the Nikkei, dropped from a peak near 40,000 to a low of about 7,500 in 2003.

Japan's government, of course, was trying to help.

It's easy to say, "Let 'em fail." But when you're in the thick of things... when it comes right down to it... it's hard to do. When the public is pleading for government to "do something," then government feels compelled to, well, do something.

In hindsight, most analysts agree that if the Japanese government had simply gotten out of the way and let the bad banks and businesses fail, the country wouldn't have experienced the Lost Decade of the 1990s...

And the Lost Decade has basically morphed into the Lost Two Decades these days. Japanese residential real estate prices have fallen every year since the peak in 1990. And the Nikkei is still down 70% today – nearly 19 years later.

Like the Japanese government did in 1990, today, for better or worse, the U.S. government feels compelled to do something. In the short run, things might actually be better...

Whatever lawmakers do today will prop up the system for now. They'll save countless businesses that rely on lines of credit to function, and therefore save many jobs on "Main Street."

But then things will likely get worse...

We may dodge a major crisis... only to enter a "zombie" stage. This includes more regulation, lower returns on capital, and uncertainty about who's running what. We could end up with "zombie" financial institutions, companies that are not private but not exactly public either... owning mortgage bonds of uncertain value. In other words, like Japan's Lost Decade.

It might be better for the government to do nothing and let businesses fail. But "do something" is the cry. And something is what's happening.

So let's hope lawmakers do as much as can be done at this moment... which will then allow government to get out of the way as soon as possible.

Fed Chairman Ben Bernanke is a student of the Depression. If he has any say, he won't let the mistakes of the Depression (or Japan's Lost Decade) happen here. If the government's got to do something, his plan, undoubtedly, will be to flood the system with dollars until the gears start turning again.

If that's the plan, then holding at least some gold – the "anti-dollar" – is probably something worth doing...
Good investing,

Steve Sjuggerud


At 29/9/08 19:57, Anonymous Anoniem said...

This is a load of crap. What was the difference between the failure in Sweden and the failure in Japan? A real bailout plan for banks. All the Japanese government did was lower interest rates. Japan's recession lasted for two decades, Swedens lasted for two years, because of government intervention. No analyst says that if the government had done even less they would've been saved.


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