It’s a painfully familiar tale but allows us to repeat it for what might be the umpteenth time. Imagine that this is being repeated to you in your favorite voice, perhaps Morgan Freeman’s or Patrick Stewart’s or Don LaFontaine’s. Just take your pick and let’s roll with it.
In a nation that has been devastated by real estate and financial crises. A recession has beset the people and put a pall of gloom over all that was good in life. But one man, one president makes promises that all will be fixed and all will be back to normal. One man, one goal. Can he make a difference?
I’m not sure that any Hollywood movie house would buy that story or that it would ever see the light of the day. But if it did I’d like to see Denzel Washington play the president. Does that story sound like a familiar one? I bet it does, but to be perfectly honest with you, I’m not talking about the disappearance of the great American dream.but i don’t like sounding like a broken record at all. I am instead talking about Japan. The parallels are that eerie. The President in reference is a charismatic one. But again it’s not Barack Obama that I’m talking about; my pointed reference is to Junichiro Koizumi instead. The year too has similarities in that the numbers need only be jumped up to form the other, for they are Japan in 2001 and America in 2010.
The similarities you are looking for, gentlemen and ladies, can be boiled down to four words; bad loans and deflation risk. Even in that the situation is a similar one. Okay, so I used five words, so what? I’m a wordsmith, not a number cruncher. I failed math in school. There, I said it, happy now? Now if you’re done laughing at me, let’s get on to more important matters. The deflation risk I speak about is a downturn in the prices of goods. Ironically, this can be brought on by many things which include monetary policies that go too far in order to avoid inflation. The financial gods do have a sense of humor!
Everyone talks about Japan’s lost decade and what it boils down to at the end of the day is that it was a pronounced economic cycle that was driven on by an asset bubble that burst (and yes, real estate does count as an asset) and the fact that the banking system was so heavily exposed to this asset meant that it was ravaged when the time came. What’s to say that the American banking system won’t be as badly ravaged now as Japan was 20 years ago? Most of the bank loans that have been given out are bad ones and deflation has meant that loan collateral values are on the wane and this makes the stark reality of under-performing loans even worse.
Indeed, banks are still running scared under the prospect of deteriorating bad loans as these outstanding loans fall further into the mire. Add to that quantitative easing measures many say are on the way and low Treasury yields . You can bet your last dollar that American banks are weighing up all deflationary measures. The parallels between the preceding conditions for Japan’s lost decade and our current situation is very alarming.
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