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America’s Lost Decades

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Not too long ago an industrial giant experienced one of the greatest economic booms in its history. Thanks to easy credit and low interest rates, investors in that country ran up astronomical debts and used those proceeds to bid up the price of real property and the stock market. With home values and pensions way up in value, folks were feeling very secure about their economic futures. For the average investor in that country it seemed like the good times would never end.

Then the bottom fell out. Realizing the boom was becoming unsustainable, the country’s central bank raised interest rates. Suddenly, the enormous debt built up during the boom years went bad. Banks began to fail and the government responded by bailing out the financial institutions which were “too big to fail,” in order to avert a total collapse of the economy.

Anyone who remembers the 1980s and early 1990s know the country in question is Japan. Beyond bailing out the too big to fail banks, the Japanese government also attempted to use fiscal stimulus and the Japanese central bank attempted to use low interest rates to produce an economic recovery. The result has been two decades of little or no economic growth and an unemployment rate that has hovered around two times what it was in the 1980s. This period in Japanese history has come to be known as Japan’s Lost Decades

Now, you may have guessed that the country being described in the first two paragraphs above was the United States. Obviously, you would have also been correct. During the 2000s, we experienced our own phony, central bank-induced economic boom. Easy credit and low interest rates were used by many Americans to amass huge debt while bidding up the price of housing and the stock market. New-found wealth through asset appreciation gave many a false impression that they were set for life and the good times would never end.

As in Japan, the bubble burst when interest rates rose and a heck of a lot of homeowners were holding mortgages that they could no longer afford. Banks failed and were bailed out by the federal government. Stimulus packages were passed and interest rates lowered to produce economic recovery.

As if emulating Japan were not bad enough, the really scary thing is the Federal Reserve’s Survey of Consumer Finances report released earlier this month. According to the report, the median net worth of American families dropped by 39 percent between 2007 and 2010. That means the typical American family is roughly worth what it was worth in 1992; eighteen years without any economic advancement! And it gets worse. The report indicated that the median net worth of the middle class had the biggest drop, owing mostly to declining property values. At the same time, the median net worth of America’s wealthiest families rose slightly.

So what does all this tell us? For one thing, we are in for a long period of sluggish economic performance and above average unemployment because the powers that be in America responded to the bust of 2008 in the same ineffective fashion the leaders of Japan handled their downturn in the early 1990s. Propping up failed financial institutions, stimulus spending, and below market interest rates did not produce recovery in Japan. In fact, 20 years later, the Japanese economy still has not recovered. Likewise, the same policy initiatives still have not produced recovery in America some four years out from the crisis, and if economic policy in the U.S. doesn’t change soon, economic historians may be calling the next twenty years America’s Lost Decades.

Secondly, the wealth produced in the last 20 years was phony. It was built on artificially cheap and widely available credit. This in turn produced false property values and huge consumer debt. When the crisis hit it, the floor under the economy was apparently a long way down. At least 18 years down, according to the Fed’s report.

Lastly, what can be learned from our most recent economic experience is that Washington and Wall Street have hoodwinked the country into believing prosperity is a result of everyone spending beyond their means. In reality, true prosperity comes from hard work, thrift, and saving. It comes from the formation of pools of capital made available to business to borrow in order to open or expand operations. Simply having the central bank print more money does not produce wealth. In fact, the Fed’s monetization of the government’s debt has done more to destroy the American middle class than any other factor. Devaluing the dollar diminishes disposable income and erodes savings. Conversely, the price inflation produced by the Fed enhances the assets and investments of the wealthy.

At the end of the day, there are significant similarities between Japan’s financial crisis in the early 1990s and America’s in 2008. Due to its government’s policies after the crisis, Japan has lost two decades of economic growth. According to the Fed’s Survey of Consumer Finances report, Americans have already lost two decades of economic gain. Given that Uncle Sam’s response to the financial crisis of 2008 mirrored Japan’s in the 1990s, two more are potentially on the horizon. At that point, it would be almost a lost half century.

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About Kenn Jacobine

  • Glenn Contrarian

    Kenn –

    I wonder, then, what you would say about Obama being the most fiscally-conservative president since Eisenhower? Sure, you could point to the stimulus (one-third of which was tax cuts), but the vast majority of our deficit is due to lower revenue thanks to the Bush tax cuts and due to our unpaid-for wars and Medicare Part D.

    Also, you should also be aware that the austerity measures taken in Europe are not working – austerity measures have AFAIK a zero success rate in bringing nations out of recession or depression.

  • Kenn Jacobine

    Glenn,
    I wrote a piece a while back about the claim that Obama is the most fiscally responsible president since Ike. The fact is he isn’t. If Bush was a big spender, and he was, then so is Obama. Obama has not only kept pace with Bush’s spending but he has exceeded it. It is ridiculous to base the claim on percentage increase.

    Secondly, Europe has just begun austerity. The EU did a lot of inflating before that and I am not even sure what is happening is actually austerity. Truth be told I haven’t paid that much attention to it. The point is that in economics there are lag periods. Policies do not go into effect and then a week or month later things change. It takes a longer time and I would think that the bigger the economy the longer it takes.

    Having said that I do think the stock market reacts simultaneously to news and events. But, the stock market resembles more of a casino than an indicator of economic health or illness.

  • Igor

    Thrift and savings do not increase capital available to business. We have plenty of available capital, business doesn’t know how to invest it, since there is low demand. Consequently, cash capital (as well as inventory) lies fallow and uninvestable. We are over-capitalized, as business magazines say every month.

    The USA needs sales. Business needs more demand from consumers.

  • Glenn Contrarian

    Kenn –

    Obama has not only kept pace with Bush’s spending but he has exceeded it.

    BUT you’re rejecting out of hand the fact that he has increased spending by the lowest percentage of any president since Eisenhower. Combine that with the fact that Americans have the lowest tax burden since the beginning of the 1950’s and the fact that we’ve got the lowest corporate tax rate since 1972 (and the second-lowest EFFECTIVE corporate tax rate in the developed world), and that means Obama truly is the most fiscally-conservative president since Eisenhower.

    And the fact that you just don’t like the guy won’t change that fact.

    And btw, Europe’s been trying austerity since 2008. That’s four years, so don’t tell me that they’ve “just begun”. Besides, what’s the healthiest economy in Europe – and one of the healthiest in the world? Germany…which is VERY socialized by your standards. Same goes for Canada, for that matter. And Canada never went through the Great Recession, either. That should tell you something.

  • Kenn Jacobine

    Glenn, Spending was by far the highest it had ever been when Obama took office. What is the historical percentage for spending to GDP – 18-20 percent? I think it is around 25 percent right now?

    You can’t have it both ways. You claim austerity is not working for Europe and then you claim Germany has one of the healthiest economies around? Which is it?

  • Glenn Contrarian

    And you know very well that even though Obama’s increased spending by less than any president since Eisenhower, if the GDP goes DOWN, then even if Obama had not increased spending at all, the percentage of GDP would still have gone up.

    And you also know very well that Germany has very high taxes and very ‘big’ government compared to America – even after all austerity measures there. As for the bailouts of Greece, they were NOT stimulative in nature – all they were, were bailouts of financial institutions. And did that help Greece? Nope.

    And you didn’t address Canada at all.

  • Clav

    BUT you’re rejecting out of hand the fact that he has increased spending by the lowest percentage of any president since Eisenhower.

    Meaningless in such a context. A 1% increase on a base of $100 is $1; a 0.5% increase on a base of $1000 is $5. Which is the greater expenditure?

  • Clav

    Hate to belabor the obvious, but if i don’t, Glenn will dance all around it.

    The fact that Obama’s percentage increases are the smallest percentages in years is irrelevant because the base amount of expenditures from which those percentages are calculated are magnitudes greater than the bases of Eisenhower, Truman, et alia.

    So Obama’s percentages mean nothing; he’s still spending more than anyone who preceded him — even GWB.

  • Clav

    And the worst part of the whole thing is that all that expenditure hasn’t done a damn bit of good — we’re still mired in the worst (and now longest) recession since the depression.

  • Zingzing

    Nevermind that he got stuck with a couple of ongoing wars and a financial crisis leftover from the previous admin. Wonder what the spending would look like without all the things that were out of his control… Or at least without all the things he wouldn’t have spent money on given any other alternative.

  • Glenn Contrarian

    Clav –

    You’re comparing apples and oranges – the degree of the rise of the percentage of GDP is precisely the right measure, for if you’re looking at base dollars only, you’re not only ignoring inflation of prices and amounts since Eisenhower, but you’re also ignoring the much greater expenditures America has now than before.

    For instance, Eisenhower didn’t have to pay for Medicare, Welfare, Medicaid, and a whole host of relatively minor expenses like the EPA, the FDA, OSHA, and other federal acronyms. Or are you going to blame Obama for the existence of those programs, too?

  • Kenn Jacobine

    Clav is correct – the claim that Obama is not a big spender percentage increase wise is a distraction. I hardly think the 15 million Americans still counted as unemployed and all the countless others who got discouraged and dropped off the rolls could care less. Keynesianism is a failed and bankrupt philosophy.

  • Glenn Contrarian

    Really?

    Would you care to show me even ONE significant First-World nation that has operated long-term on Austrian-school economics? Would you care to show me even ONE significant example of a nation that pulled itself out of a severe recession or depression by applying austerity measures?

    No, you can’t. Not even one. Why is that, Kenn?

    I can show you lots of such nations that DO operate using Austrian-school economic theory – and they’re ALL third-world nations.

    Why is that, Kenn?

  • Igor

    @12-Kenn: the problem is that you have no idea what Keynesianism is. Simply put, Keynes policies are counter-cyclical: when times are good you pay off debts and put money away; when times are bad you borrow to finance expansion. Counter cyclical. What GWB did in 2000 when we were flush was pro-cyclical: he increased spending with huge tax cuts and two expensive wars.

    Pro-cyclical policy is very bad in capitalism because it increases the intrinsic instability of capital systems.

    Kenn: you really should apply yourself and learn from sources other than political diatribes such as are common in the rightist press.

  • Glenn Contrarian

    Igor –

    Simply put, Keynes policies are counter-cyclical: when times are good you pay off debts and put money away; when times are bad you borrow to finance expansion. Counter cyclical. What GWB did in 2000 when we were flush was pro-cyclical: he increased spending with huge tax cuts and two expensive wars.

    Well said!

  • Igor

    Our bad experience with GWBush, an MBA from Harvard, should warn us about hiring another “CEO President” like Romney. Business experience simply doesn’t apply to government service.

  • Kenn Jacobine

    Glenn,

    You have a short memory or you just like to engage in the same old arguments. The United States before the Hoover-Roosevelt Great Depression had a liquidationist (Austrian) approach to depressions and you know what most ended in a hurry and none were as long as the GD or current GR. The 1921 Recession is the best example because Hoover who was Commerce Secretary under Harding wanted to do all sorts of government interventions, but Harding resisted and the deep depression healed itself in about a year.

  • Kenn Jacobine

    Igor,

    Dubya is just dumb and a bad example. Romney is just a corporate puppet. A businessperson could be an effective leader. There are a lot that have moral courage, vision, honesty, and intelligence – adjectives that by definition do not apply to politicians.

  • Glenn Contrarian

    Kenn –

    There are a lot [of businessmen] that have moral courage, vision, honesty, and intelligence – adjectives that by definition do not apply to politicians.

    Really? Someone should go tell the family of the guy that JFK saved from drowning when PT 109 was sunk. Someone should tell WWII figher pilot George H.W. Bush. Someone should tell all the Founding Fathers, too.

    And someone should tell Cory Booker, too.

    Kenn, sweeping broad-brush statements (like yours) are considered logical fallacies for a REASON. The only “by definition” that applies is the one in your own mind (and in the mind of millions of Fox News viewers).

  • Glenn Contrarian

    And Kenn –

    >Concerning the 1920-21 recession:

    …there’s a big difference between inflation-fighting recessions [like the 1920-21 recession], in which the Fed squeezes to bring inflation down, then relaxes – and recessions brought on by overstretch in debt and investment [which is what we have now]. The former tend to be V-shaped, with a rapid recovery once the Fed relents; the latter tend to be slow, because it’s much harder to push private spending higher than to stop holding it down. And the 1920-21 recession was basically an inflation-fighting recession – although the Fed was trying to bring the level of prices, rather than the rate of change, down. What you had was a postwar bulge in prices, which was then reversed:

    I’ll give you this much, Kenn – you showed that my own sweeping statement that austerity never works for any recessions was wrong. But as your favorite Keynesian Paul Krugman (whom you probably reject out-of-hand because he says things you don’t like) says, there’s more than one kind of recession, and the 1920-21 recession was a completely different animal from the one we went into in 2008.

  • Kenn Jacobine

    I would consider JFK a statesman not a politician – there is a big difference.

    As to the 1921 depression – it was caused primarily by the money printing to finance WWI. Whether central bank manipulation of the money supply goes into armaments, houses, or whatever it still results in mal-investment in the economy. When the government does nothing and let’s the mal-investment liquidate, history informs us that depressions correct themselves quicker. The Wiemar Republic, which experienced a similar economic downturn at about the same time, printed marks and brought on hypeinflation and eventually Adolph Hitler.

  • Glenn Contrarian

    Kenn –

    Y’know, I think I’d rather take the word of the Nobel-winning economist over yours when it comes to determining what led to a particular recession.

    And all of a sudden you say, oh, well, JFK wasn’t a politician, oh, no, he was a statesman. Uh-huh. Right. And Eisenhower? George H.W. Bush? And what about the many other successful politicians who were decorated for bravery in combat? Remember, according to you, politicians by definition don’t have courage or vision or honesty or intelligence.

    What, then, about Ted Kennedy? In the beginning he was a loser, including the joke that was his military service (he got discharged as a private first class). But would a man lacking in courage run for a high-profile government office when two of his brothers had been assassinated? Maaaaaaaybe…but the odds are strongly against it!

    And how about Gabby Giffords? Sure, it doesn’t take courage to get shot by a crazy man…but go ask her space shuttle-pilot if he thinks his politician wife is lacking in any of those qualities – or would you then state that he doesn’t know what the heck he’s talking about?

    And best of all, guess what the most dangerous job in America is, the one that has the highest on-the-job death rate (with the sole exception of our submariners in WWII (22%))? President of the United States. Every single time they speak in public, they know – they have to know – that the Secret Service ain’t perfect, that there could very well be a sniper rifle aimed at his or her heart. You don’t think that takes courage?

    What I’m getting at, Kenn, is that sweeping broad-brush statements such as yours in which you’re declaring an entire profession as completely lacking in the above qualities…simply doesn’t belong in intelligent discourse. If you had said that politicians – and CEO’s and Wall Street bigwigs and lawyers – are significantly more likely than the common man to lack those qualities, then I could have agreed with you. But leave the broad-brush prejudicial statements out of it, please.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    Cynic’s definition:

    Statesman (n.): Dead politician.

  • Kenn Jacobine

    Really Glenn? You are going to defend an institution that has a 9 percent approval rating? Gabby Giffords a hero because she got shot? Ted Kennedy a hero? Wasn’t he the guy who perpetually cheated on his wife and one time drove drunk and the woman died by drowning. Oh, then he didn’t report the accident until the next morning. To say nothing of how he used his social position to get out of it.

    Glenn, overall politicians are a slimey bunch. They play the game, get elected, and thrive on the power of it all. They steal our property, send our young people off to endless wars, violate our rights, and live high off the hog.

  • Kenn Jacobine

    The difference between JFK and Obama is the following: Obama promised peace but refuses to buck the military industrial complex. Kennedy sought peace and lost his life because of it. That is the difference between a politician and a statesman.

  • Glenn Contrarian

    Kenn –

    Did I call either Gabby Giffords or Ted Kennedy a hero? No. That was YOU putting words in my mouth.

    What I SAID – in so many words – was that they have COURAGE. John McCain isn’t a hero, either, but he’s got courage in spades…and he’s got a measure (though not a heaping helping) of integrity and honesty. If you want a hero, then look at Cory Booker, a politician who is a hero.

    You complain about a politician cheating on his wife – well, THAT surely condemns the whole lot, huh – like Ben Franklin, Thomas Jefferson, and JFK? I’m not sure if you you’re aware of this, but infidelity is hardly confined to politics – read about Einstein sometime.

    But you keep on going with your broad-brush judgments now, you know, the one where you condemn an entire profession as lacking most moral redeeming values.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    The reality, of course, is that we all in our lives do things that are cowardly and things that are courageous. Sometimes we do them in the same day.

    Ted Kennedy is a prime example of this. You can’t reasonably argue that what he did at Chappaquiddick wasn’t just about the most cowardly thing a person can do – and he never honestly faced up to his actions (at least not publicly) till the day he died.

    Yet on Capitol Hill, Kennedy exhibited a degree of commitment, courage, passion and integrity such that you’d barely believe it was the same person. He was one of the great senators of modern times and we’ll rarely ever again see his equal.

    Another good instance, though less dramatic, of this dichotomy we all carry within us is George W. Bush. Dubya’s presidential style often seemed to show contempt for the office; but since leaving the White House he has displayed a keen awareness of the role of an ex-president and a deep respect for his successor, steadfastly refusing to criticize Obama (even though without a doubt he disagrees with most of his policies) despite the most strenuous efforts of certain journalists to goad him into doing so.

    It’s a cardinal error to take the qualities a person exhibits in a single incident and apply them to the entirety of that person’s character, even if he or she is a politician.

  • Glenn Contrarian

    Well said, Doc. As usual, you take my meaning and illustrate it much more effectively than I did. Not for the first time, I’m jealous of your skill with the written word.

    And I notice you rarely if ever feel the need to emphasize words with all-caps or italics – about which Clavos has repeatedly pounded on me several times. That’s a lesson that I would do well to learn.

  • Glenn Contrarian

    And Doc –

    The reality, of course, is that we all in our lives do things that are cowardly and things that are courageous. Sometimes we do them in the same day.

    That strongly reminds me of how almost without exception, those who are decorated for valor in combat refuse to call themselves heroes.

  • Igor

    Of course, those ideas only apply if you believe that National Honor inheres in individuals.

  • Glenn Contrarian

    Igor –

    That depends on one’s definition of “National Honor”. Extrapolate a bit on what Doc pointed out, and it should be clear that while there are some without honor, there’d be just as many with a great deal of honor, and all those who fall in between the two extremes have some degree of honor.

    Honor’s very important to me, as I’m sure it is to most BC writers regardless of political stripe. But again, it depends on one’s definition of honor, doesn’t it?

  • Clav

    I think Igor makes a valid and important distinction about honor.

    The reverse of his observation also applies: does the honor of citizens inhere in the nation?

    The two are distinct kinds of honor, and it is possible for one to exist independent of the other.

  • Glenn Contrarian

    True enough, I’ll agree with that.

  • Igor

    Americas Lost Decades began in the 1980s after Reagan and the radical right ascended to power and citizens real incomes started to drop.

  • Kenn Jacobine

    Reagan was the biggest taxer and spender president to that point in time. Again, you 20th Century liberals can’t have it both ways.

    Nixon took us off the Gold Standard in 1971 and that was the beginning of wholesale price inflation and the demise of the middle class.

  • Glenn Contrarian

    Kenn –

    Reagan was the biggest taxer and spender president to that point in time.

    Actually, when Reagan entered office, he dropped the top marginal tax rate from 70% to 25%. It was only after we went into the ’82 recession that Paul Volcker was able to convince him to raise taxes and increase revenue…and our economy came back fairly well. He was certainly the biggest spender, but on taxes? No.

    And I’m still waiting to hear exactly how it is that we had a 90% top marginal tax rate from 1951 till 1960, and a 70% top marginal tax rate from then until 1981, yet didn’t fall into a Great Depression due to the horrendous tax rates? Why is that, Kenn?

  • Glenn Contrarian

    And come to think of it, our top marginal tax rate just before the Great Depression was 25%. The rate just before the ’82 Recession was 25%. The rate before the Great Recession was 35% (with a much lower capital gains tax).

    But NONE of these came at times of high taxes? Why is that, Kenn?

  • Kenn Jacobine

    You are talking marginal tax rates – how many taxpayers actually paid the top rate between 1951 and 1960? Besides I never said high taxes caused the GD or the GR. You have me mixed up with some right-wing guy. I have been very clear that in my opinion it was monetary policy of the Fed that caused both.

  • Glenn Contrarian

    Kenn –

    It would be wrong of me to ignore your reply – I’ll look up the numbers and see what the ratios of revenue-to-GDP were, and the comparative amounts of revenue from those of the higher and lower tax brackets – it may take a few days (the next two days are full of family obligations), but I will get back to you.

    And I admit I had thought you were of the opinion that the lower the tax rates were, then the better off the economy would automatically be. If I’m wrong in that, then I apologize. Was I wrong?

  • Kenn Jacobine

    Don’t get me wrong, I am for the lowest rates for everybody, but high rates in my view do not cause recessions – monetary manipulation by the Fed or as was the case in the 19th Century national banks and government do.

  • Glenn Contrarian

    Kenn –

    I’ve been doing some digging, and while I don’t see any numbers yet that bear out your opinion about recessions being caused by the government, so far I don’t see anything disproving your contention, either.

    What I do see so far is that since 1950, there’s apparently little direct correlation between top marginal tax rate and periods of recession, so that means that one of my arguments may well be false. This does not by any means disprove either Keynesian or Austrian economic theory – it only means I may have bought into a correlation/causation fallacy. The revenue-to-GDP ratio does not seem to presage economic instability, so I’ve got to go back to the drawing board.

    That said, I still don’t see anything indicating that the Fed or government manipulation of money is in any way worse than laissez-faire monetary policy. So I’ll keep digging – there’s lots to learn.

  • Igor

    Fed manipulation is benign when it is counter-cyclical, but malignant when it is pro-cyclical. That’s why the Feds fixation on anti-inflation fails half the time. How could it not? Half the time a Fed anti-inflation policy aids the instability and half the time it fights instability. That’s why observers who look at half the picture are misled.

    Fed supporters say “look, half the time it works! We’ve got to do it ALL the time”.

    Fed opponents say “look, half the time it fails, so we should NEVER do it”.