Japan and the U.S.: A Lost Economic Decade?

Despite record doses of monetary and fiscal support, U.S. economic recovery appears to be stumbling. First-time claims for jobless benefits are on the rise, and economic growth estimates for the 2nd quarter have fallen to just over 1%. Many are now asking if we are on our way to a double-dip recession or perhaps what is known in Japan as a ‘lost decade.’

Such concerns are not without merit. Although the Federal Reserve massively expanded its balance sheet in 2008-2009, most of the high-powered money (currency and bank reserves) that it has provided have accumulated as excess bank reserves on deposit at the Fed.

Growth in commercial bank credit and broad money (which consists of currency, bank reserves, and deposits in the banking system) is decidedly weak, a reminder that interest-rate cuts and the printing of new money don't have the same traction when households are debt and savings-constrained, all while financial institutions are uncertain about the value of the collateral underpinning their loans.

There are key differences between the states of our economy today versus Japan's economy 4 years after the 1990 peak in its respective real estate markets. Such differences make it less likely that we'll succumb to a deflationary double-dip recession or a lost decade similar to what Japan is witnessing.

For example, industrial commodity prices are about 75% above comparable levels in just over 4 years from the peak of Japan's real-estate bubble, suggesting a lower risk of a deflationary slump. Corporate profits in our domestic economy are more than 50% above where earnings were at this point during the same cycle in Japan, despite the fact that the S&P 500 is actually lower than the Nikkei 225 was during the same time period.

Those concerned about a Japanese-style lost decade occurring in the United States can observe that the Treasury yield-curve spread (the gap between long-term and short-term interest rates) is actually narrower in the U.S. now than it was in Japan 50 months from its real estate peak. This gap not only gives us a picture of monetary policy, it also informs us about the behavior of inflation expectations. We will keep you posted…

30 Day Libor	10-Year Treasury	Prime
0.26%	2.58%	3.25%

Penstar Realty Advisors can be reached at (818) 883-9609.