The Japan Syndrome

I’ve observed on numerous occasions that the US is treading the same path, more or less, as Japan has in its attempt to recover from its 1990 bubble burst.

Here’s an excellent piece – “Japan is not a good example of how deflation typically plays out” – which points out that the US will have a much more difficult time than Japan.

…they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world’s largest creditor when their bubble burst in 1989. This is clearly not our situation.

Quite. The author is correct – Japan is not a good example, but it is the best one we have at this point. Too much time has gone by for the lessons of the 1930s to have any relevance to today’s more complex and globalized situation. Mr Bernanke’s supposed expertise on this period has no value today, or perhaps even a negative value to the extent that he uses it to inform his actions. We can look at the Japanese experience as being, perhaps, a best case outcome, maybe even an unattainably good outcome. We can see the same mistakes being made – such as supporting zombie banks – even though the US publicly pointed them out at the time. Ironically, the same political cronyism that caused those mistakes in Japan has caused them here.

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