The U.S. economy is finally rebounding after five difficult years, but the aftermath of qualitative easing, and earnings skewed heavily towards profit over labor, have put the U.S. in a situation similar to Japan’s before its Lost Decade (a period of sustained de-leveraging and economic stagnation, sometimes now called the lost twenty years) that the country only now appears to be truly exiting.
Japan’s asset bubble collapse
Japanese stagnation, following both the asset bubble collapse in 1991 and the 1997-1998 banking crisis had a few specific characteristics, Natixis analyst Patrick Artus explained in a recent note. “Long-lasting private sector de-leveraging; distortion of income sharing in favor of profits, leading to weak real wages and household demand, rising profitability and self-financing rate; sharp increase in the holding of government bonds by institutional investors and … sharp rise in the public debt ratio,” says Artus.
When banks hold lots of government bonds it becomes difficult to raise interest rates without causing massive capital losses; weak demand fuels de-leveraging, self-financing causes savings to be used inefficiently, and when all these factors exist together it can be difficult to find a way out.
Low wages in the U.S.
According to Artus, those same characteristics clearly exist. Private-sector de-leveraging is more pronounced in the euro zone, but rising public debt ratios, increased holding of government bonds, and low wages exist in the U.S. as well.
But similar conditions don’t mean that stagnation and long-term de-leveraging are unavoidable. “The situation in Japan in 1997 was identical to that of the U.S. today,” says Nomura Research Institute chief economist Richard Koo. But he believes that Federal Reserve Chairman Ben Bernanke has drawn the right lessons from Japan’s experience to avoid the same fate by providing enough stimulus to boost domestic demand. “The United States appears to have learned from Japan’s experience and is trying not to repeat its mistakes.” However, Koo worries that the UK and other European countries may not be ready to deal with de-leveraging.
So far stimulus seems to have worked, but the real question is what happens after the end of QE. “As in Japan, the expansionary monetary policies in the United States and the euro zone may be irreversible,” says Artus.