Japan Recession versus US Recession

This economic train wreck has barely even started, so one of your best bets is to say in cash.
— John Talbott,  author of  Contagion: The Financial Epidemic that is Sweeping the Global Economy and How to Protect Yourself from It

Will the US recession be as bad as the Japan recession of the 1990s? Contrary to popular belief, there is a good chance that it could be.

First, it's interesting that some people are saying, "No one saw the US recession coming! This is hogwash! It's not as if there were no experts out there warning us of the inevitable serious economic downturn — with possibly something as serious as the Great Depression in the works. The causes of a recession are quite evident.

In the last few years there were a number of people predicting extremely bad eonomic times ahead for the US with some stating that it would be worse than the recent Japan recession. Problem is, people in mainstream society wrote these people off as kooks when, in fact, the people in mainstream society were the kooks. Some people also don't know the definition of a recession.

It's worth revisiting some of the people who were right in their predictions. Take Peter Grandich, for instance. For the record, Mr. Grandich predicted just weeks before Black Monday in 1987 that the stock market would crash. He subsequently forecast that the stock market would go to a record high within a year, which it did. He was on the right again in early 2000 when he forecast a sharp drop in the market.

Then in December 2005 in an interview with the Globe and Mail Grandich pointed out the danger of the amount of debt that Americans had taken on and continued to assume and how this would lead to a US recession, likely as bad as the last Japanese recession.

"Americans have been robbing Peter to pay Paul and Peter's tapped out," Grandich said. "In a society where the question is no longer 'can we afford it' but rather 'can we make the first monthly payment?' Americans continue to literally mortgage their future away and will face a day of reckoning unlike anything in our entire history."

At the time Grandich also saw the greying of America as a looming economic disaster that he though would dwarf the energy crisis and threats of terrorism. "The social, economic and political impact will be unlike anything America has ever seen," he said. Interestingly enough, a lot of the baby boomers that Grandich was referring to have now lost practically all of the equity they had in houses and stocks.

Do you expect these baby boomers, particularly retirees, to start spending and help make the US recession better? Not likely given that they have little or no money. In fact, the Japan recession was also in small part a result of their aging population that tends to spend a lot less money.

With this in mind, the US recession could be much worse than the Japan recession. A former head of Merrill Lynch recently told the Globe and Mail that although he is an optimist, he thinks the US is in for a more difficult time than even the Great Depression. During the Great Depression the United States lost the equivalent of one year of GDP, but this time it could lose a lot more, and much more than Japan lost during the Japanese recession of the 1990s.

Other individuals such as economist Bob Proctor apparently called the top and bottom of every market crash since the 70s correctly. He also predicted the current real estate market meltdown. He thinks the present US recession will be worse then the great depression, which of course would make it much worse than the Japan recession of the 1990s.

You should have also listened to Peter Schiff, president of Euro Pacific Capital, who was made out to be an economic kook. During 2006 and 2007 Schiff toured cable TV financial shows. Schiff warned that the economy was headed for the skids, with the meltdown extending far beyond the credit crunch and subprime mortgage market.

During one debate on Fox News in May, 2006, four panellists in a row were given the opportunity to give their forecast for the U.S. housing markets: Each so-called expert stated, "The worst is over." Contrarily, Schiff said, "The worst is yet to come." Virtually everyone else laughed and assured the audience that nothing of the sort was likely —  or even possible. Fox News anchor Neil Cavuto sarcastically remarked to Schiff, "All right, Peter, I wish we had more time with you. I know you want to continue that exposé on Santa Claus."

One great thing about life is that results don't lie. This is true with economic and financial forecasts. The truth is what counts in the end. RESULT: Schiff was right and the other experts were, in fact, the kooks.

Of course, there are still a lot of kooks in denial about the US recession possibly being as bad as the Japan recession — let alone as bad as the Great Depression. These are the same people that called astute individuals such as Peter Grandich, Bob Proctor, and Peter Schiff kooks or idiots.

The  quote is from an informative article in the Globe and Mail relating to the Japan recession versus the present US recession (You can read it at  Is Japan's 'lost decade' a window to the future? )

"If Japan is any guide, it will take much more time [for the US] to rebound from the current global crisis than many of us expect. Much more money, too. Of all the lessons from Japan's unhappy experience, the most profound may be: Expect the worst. This is going to be a long, rocky ride."

Some other important points made from this article:

The Japan economic recession was caused mainly by companies that got themselves into debt in the boom years, and then had to go through the tough stage of paying off their loans. The US recession is a problem caused mainly by households that borrowed too much due to escalating house prices, then saw the values of their homes plunge.

Akira Kojima, a senior fellow at the Japan Centre for Economic Research, points out that the average U.S. household has a debt equivalent to 160 per cent of its income when credit card debts are factored in. Getting out from under that burden will take years. “Companies can de-leverage,” said Mr. Kojima. “They can fire people, they can cut salaries, they can sell assets."

Incidentally, the Japan recession is not over yet. Japan is facing deflation again. The intensity this time can be far greater than seen in the last twenty years. As for the US recession, it likely has a long ways to go before we see how bad it really gets.

This is an interesting read: How Japan learnt how to stop worrying and love the recession

As was recently stated in a  Publishers Weekly article about the US recession, "Maybe the mainstream media is just too polite to come out and say: we're pretty damn close to a depression in this country (recently, the National Bureau of Economic Research finally confirmed that the nation has been in recession since December 2007)."

"In just a year the stock market almost halved its highs of 2007; nearly two million jobs have been lost in 2008 alone; foreclosures are rampant; the housing market is years from recovery; bankruptcies are at an all-time high; 401(k) plans are at an all-time low; the clueless Detroit automakers are near extinction; and, by the way, Americans owe over $1 trillion on their credit cards. Let's face it, this is an economic mess that would put fear even into the stouthearted Franklin Delano Roosevelt himself."

In short, solving the US recession may be much harder than solving the Japan recession with so much of the US economy in such deep trouble. And don't be all that surprised if the present US recession turns out to be worse than the Great Depression.

North American Stocks Will Become Even Cheaper

In 2008 share prices fell dramatically as the worst financial crisis since the Great Depression caused almost $1 trillion of bank losses and dragged the world’s largest economies into recessions. The MSCI World Index has tumbled 44 percent in 2008, set for the biggest annual decline in its four-decade history.

Can share prices go any lower? Apparently, yes — horrific, in fact.

See this Bloomberg.com article: Stocks Will Become Even Cheaper

Copyright 2010 by Ernie Zelinski — All Rights Reserved