The United States Is Not Japan
Some fear that the U.S. today is in a similar place to Japan’s in the early 1990s. The U.S. is coming off two enormous bubbles—the Internet stock-market bubble of 1999, and the housing bubble of 2006—and therefore has high levels of government debt and near-zero interest rates.
However, if one combines our two bubbles, they do not come close to the size of Japan’s current one. Plus, unlike Japan, when our real estate bubble burst, the Federal Reserve under Ben Bernanke’s chairmanship moved to inoculate our banks by buying tons of their bad debt in our version of quantitative easing.
While these actions remain unpopular, they did free up U.S. banks to continue to lend money, and lending is the lifeblood of an economy. In contrast, Japan was slow to admit how much bad debt was in its banking system. Moreover, many believe that, 27 years later, Japan still has not owned up to or addressed how much bad debt remains in its banks.
Financial bubbles are the most dangerous threats to any economy, especially if, after they burst, they leave behind an insolvent banking system. History will say that Mr. Bernanke and previous Fed Chair Alan Greenspan were derelict, as both were trapped in an ideological prison that allowed our financial system to get dangerously close to exploding, only to be avoided by the quick actions of then Treasury Secretary Hank Paulson and that same Bernanke.
The Japanese Bubble
Twenty-seven years ago, the Japanese economy was at the tail end of the largest financial bubble in its history. The estimated value of the real estate in Tokyo alone was greater than that of all U.S. properties put together. The Nikkei 225, the index of the Japanese stock market, had just catapulted from 13,000 in 1985 to 38,915 in 1989.[i] (It is 16,600 today.)
Such a reckless bubble could not possibly have happened without the help of Japan’s banking system. However, when an asset bubble that big bursts, banks pay for their recklessness with bad loans. Then the economy stagnates, as insolvent banks are unable to lend.
Government Tries to Stem the Tide
To make up for the lack of bank-lending, as well as a drop in consumer spending emanating from a reverse wealth effect, Japanese consumers spent less as assets prices fell, largely because those conditions made them feel less wealthy. Now the Japanese government has gone on a dangerous spending binge. The ratio of the public debt to Gross Domestic Product (GDP), which was about 60% in 1990, has ballooned to 250%.[ii] (That ratio is 100% in the United States.)
Japan’s financial situation has gotten so bad that its central bank, The Bank of Japan—which already owns 30% of all outstanding government debt—seems hell-bent on buying more, hoping more purchases will cut the ratio by moving existing debt “off the books” in a shell game that would make any three-card monte street-hustler proud. (The U.S. Federal Reserve, in contrast, owns 12% of our government debt.)
Helicopter Ben Goes to Japan
An article this July in Bloomberg News described a recent meeting between Ben Bernanke (the architect of quantitate easing here) and his Bank of Japan counterparts. The report speculated that one of the points discussed was helicopter money.[iii]
‘Helicopter money,’ an expression initially attributed to Nobel laureate economist Milton Friedman, was made infamous by Bernanke during a 2002 speech on how a central bank can fight deflation by printing money and, instead of giving it to the banks, drop it right into the economy. Japan, which has tried almost everything, might be just desperate enough to give this a whirl.
These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
[i] Ingham, Geoffrey. The Nature of Money (Kindle Version). Hoboken, N.J.: John Wiley & Sons, 2013.
[ii] “Japan Government Debt to GDP.” Trading Economics, 2016. http://www.tradingeconomics.com/japan/government-debt-to-gdp
[iii] Fujioka, Toru, and Keiko Ujikane. “Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda.” Bloomberg Markets, July 14, 2016. http://www.bloomberg.com/news/articles/2016-07-14/bernanke-floated-japan-perpetual-bonds-idea-to-abe-adviser-honda