Saturday, December 27, 2008

Japanese America

The big talk around the news media is the comparison of the current actions of the American leaders/policy makers with the Japanese decisions of the early 1990's.

Back in the late 80's, Japan was entering the final stages of a massive bubble in both their real estate and stock markets. The bubble burst in 1990, and it has been widely reported that the actions the government took led to what has been called, "The Lost Decade." The government did not allow their banks to fail and the bad debts exit off the banks balance sheets. (Sound familiar)

This lead to a period of deflation in Japan, and is one of the primary reasons many economists believe we are now entering a period of deflation in America. However, a brief look back at history paints a very different picture between the two nations.

The Japanese public during the late 80's saved their money at an incredible rate, just like many Asian countries do to this day. The country itself was a very wealthy nation, running a huge trade surplus every year leading to an enormous amount of excess savings within their borders. The government's poor decisions at the time were very costly, however, they were paid with the countries OWN savings. Essentially, they could afford to make the mistake.

Compare that with our America today. We are the world's largest debtor nation. We run a huge trade deficit every month. Our public has no savings and is deeply in debt. We are making the same policy errors of the Japanese with one major difference. We are broke. Bankrupt. The money to pay for these mistakes is coming from an ever increasing amount of debt and printed dollars. The latter of the two is the difference between the previous Japanese deflation, and the coming American hyperinflation.

The Japanese mistakes led to a major slowdown in the economy that they are still recovering from today. Our mistakes are going to lead to the disintegration of our economy that we may never recover from.

Think of it this way. There are two businesses being run right now that sell paper:

1. The first business was inherited by a young man at the age of 23. The father built a strong business with a large cash position in reserve and every month ran at a tremendous profit. However, the young man who is new into the business world made some terrible decisions and squandered all the cash reserves the company had available. The company still runs every month at a profit, however, it is now in some debt and is still trying to recover from the early learning years.

2. The second company was also started by a young man 23 years of age. Instead of inheriting a company, he borrowed $10 million dollars from private investors to get it started. Instead of taking in a profit every month, he runs at a huge loss. In order to keep the company going every month he must continue to find new investors to borrow from to cover his losses and keep the doors open. What would happen if he now made a tremendous business error? Would he be able to recover?

The second example may sound familiar due to the recent Bernie Madoff catastrophe. It is called a Ponzi Scheme, and it is the blueprint for the American economy.

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