"Turning Japanese?" — "The US is Different"

The most dangerous sentences in the investment world always contain the word "different":

• This time it's different
• This country/city is different

These sentences are always followed a financial disaster.

So what about the US? Is it on the same path as Japan? Mr H, a friend of mine, sent me this report published on the FT

Turning Japanese? Not so fast, the US is different 

“Turning Japanese” was a classic one-hit wonder by The Vapors in 1980 and three decades later it is certainly not music to the ears of US policymakers and debt-strapped households as the world’s largest economy struggles for traction. 

The bursting of Japan’s debt bubble in the early 1990s heralded years of deflation and subdued growth, in spite of endless fiscal and monetary stimulus efforts. More That has seen equities languish, with the Nikkei 225 Average some 80 per cent below its peak, and kept the 10-year Japanese bond yield below 2 per cent since early 1999. Three years and counting since the bursting of the US credit and mortgage bubble, the yield on benchmark 10-year Treasury notes sits below 2 per cent, a level that suggests the US is in danger of emulating Japan’s experience of two lost decades. 

One significant concern is that, unlike Japan in the 1990s, the US is struggling at a time when growth expectations across much of the world are slowing. China is tightening policy and no one really knows the extent of contagion that may erupt from the denouement of the eurozone debt crisis, safe haven buying is pulling Treasury yields lower. 

While there are similarities between Japan and the US, there are crucial differences and 10-year yields below 2 per cent should be placed in context. For starters, the US does not face deflation at this juncture and also has a central bank that has been very proactive given its dual mandate of seeking stable prices and maximum employment. The US policy response since 2008 has been far faster than what occurred in Japan during the 1990s. 

Therein resides the hope for investors that the process of repairing financial and consumer household balance sheets will conclude well before the end of the decade. [...] 

Such efforts appear a hostage to the febrile political climate and a new stimulus plan announced by President Barack Obama to boost the economy this week, faces a tough ride through Congress. All of which leaves the Fed with the task of boosting the economy, as fiscal measures face the ranks of austerity hawks in Washington.[...] 

The drop in the 10-year yield below 2 per cent reflects eurozone fears and positioning by investors who hope to sell their paper back to the Fed, rather than a signal that the US is moving into a Japanese-style deflationary spiral. With the Fed determined to stop the US from sliding into deflation, an eventual recovery slowly beckons as households rebuild their savings and home prices stabilise. And “Turning Japanese” will simply remain a 1980s pop music artefact.

My take is that the author is not only completely ignorant of economics and the way the credit and fiat based currency system works, but is also completely incapable of even opening a history book and look at what happened in Japan.

Moreover, as I have stated many times in the past, "hope" is not a strategy. Buying risk on "hope" is completely stupid. Thinking that the Fed can do anything to boost borrowing when the social mood is reverting to debt averse and when both the consumer and the government are over-burdened with debt is completely is showing how high in the ivory tower the academics and journalists are.

The bottom line is that the more they will deny it, the higher the probability it will happen. It's actually happening as we speak. Deflation and the Greater Depression. You'd better admit it and start moving with the flow than deny it and face the wall a few months down the road.