US Economy Following Japan into Deflationary Slump
Do you remember what practically everyone said after the Japanese stock market began falling apart in January 1990?
“Don’t worry,” they said. “Japan has the most dynamic economy in the world...it’s just a temporary pull-back.”
Well, that was 17 years ago. Japanese stocks pulled back...and kept pulling back for more than a decade. Only recently have they begun to move forward again...and they’re still far cheaper than they were at the end of the Reagan years.
And do you remember how American economists and pundits criticised the Japanese? They refused to let their big banks fail, said the critics...and thus stretched out the pain of a correction.
“We wouldn’t do something that stupid,” they seemed to say.
And do you remember how here at The Daily Reckoning we predicted that the United States would follow Japan into a long, deflationary slump? You do? Well, forget it...we were obviously wrong. Or, at least seven years too early...because we made that prediction back in 1999!
Still, we were right in predicting that when the water started coming over the gunwales, English-speaking financial authorities would race to the pumps at least as fast as their Japanese counterparts.
Today comes word that the feds are bailing out the big banks as fast as their buckets allow. It is the biggest bailout in five years, say the reports...with big banks averaging about US$2.7 billion per day in loans from the Fed. These injections of cash are said to be ‘forced’ by the Fed itself...rather that the result of desperation on the part of member banks. Still, recent estimates put the increase in US money at nearly 50%, annualised.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Coffee Addict on 17 September 2007:
Bill
Blue chip bank shares, purchased during a major recession are impossible to beat as an investment. The gold and tangible asset investments which are much loved at Daily Reckoning don't come close as they lack any form of central bank insurance for bad decision making.
OK, like everyone else on this board I am sounding like a broken record restating the Privatisation of Profits / Socialisation of Losses issue in a thousand different ways. Consequently, I would like to say something new.
There is a view held by many investors and advisors that they cannot be hit by the current market fluctuations because they have diversified their investments across several asset classes. They believe their financial Teflon coatings are dishwasher (1929)proof! They are DEAD WRONG.
Some market conditions see strong correlations between performance of most asset classes. Risk adversity for example, impacts shares, property, securitised debt bonds, small business revenues and discretionary expenditure on stuff like gold & silver jewellery, diamonds and artwork alike. Inflation historically to favours property but NOT in conditions where it’s impossible to finance a property transaction.
I would be grateful if anyone could add to this line of thinking (or indeed contest it).