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Another Apt Observation



June 22, 2011 – Comments (5)

regarding the balance sheet recession we are in. The US economic situation is much more like Japan's that it is like Greece's.


22 June 2011 by Cullen Roche

Richard Koo’s latest note contains a chart that regular readers have seen before.  Similar to my recent analysis, Koo attempts to forecast the de-leveraging of US households using broader trends (via Business Insider):

It’s easy to look at this chart and conclude that the US economy will remain in the garbage can until 2020 or so.  I don’t think that’s an accurate reflection of the current environment though.  First of all, Japan is the proper comparison.  Greece and the bankrupt Euro nations exist in a monetary system that is not comparable to that of the USA. Although both Europe and the USA are suffering balance sheet recessions, one is an autonomous current issuer.  The other is a single currency monetary system in which each nation is a currency user.  Therefore, the whole solvency debate in the USA should be disregarded (unlike Greece).  Second, we are Japan, but slightly different.  As I stated late last year we are Japan on fast forward:

    “The bad news is, we are Japan, but the good news is we are Japan on “fast forward”.  As I described in mid-2009everything in the USA’s balance sheet recession appears to be occurring much more quickly than it occurred in Japan.   So, the good news is that we won’t need government aid as long as the Japanese needed it.  In the meantime we must remember that stimulus is not self sustaining recovery.  Ultimately, the USA will not be out of the woods until the private sector begins to meaningfully expand, contribute to closing the output gap and help reduce the 9.8% unemployment rate.  Based on many macro trends I have said this could be occur as early as 2012, however, any number of exogenous risks could set us back by months or years.  Thus far, there are some relatively positive signs coming from the private sector, however, we are still a long ways from sustained private sector recovery.

    For now an accommodative Fed, a $1.3T deficit, a general lack of austerity and a tepid private sector recovery is likely enough to sustain economic growth, but not enough to meaningfully close the output gap.  This all continues to point to a period of very high unemployment, tepid economic growth and a recovery that feels like a recession.  As I said in early 2010 we might be in a technical recovery, but it still very much feels like a recession with a 9.8% unemployment rate.  The good news is we’re not talking ourselves off the edge of the cliff.  The bad news is the recovery remains tepid and highly susceptible to exogenous risks.”

In June 2009 I posted this chart (via Nomura) comparing the Japanese and US credit crises.  You’ll notice that it took Japan 10 years to accomplish what the USA did in about 2 years:

This is important because the US government and private sector have been much faster to respond to the balance sheet recession than the Japanese were.  Most importantly, we’ve run large and continual budget deficits throughout the current malaise.  The Japanese were notorious for their start and stop stimulus which created a bumpy de-leveraging process.  The USA has not succumbed to the persistent fear mongering campaigns of those trying to convince us that we are Greece.


... at least not yet. Hopefully we won't, but We will see.

5 Comments – Post Your Own

#1) On June 22, 2011 at 7:24 PM, MegaEurope (< 20) wrote:

Koo's Fig 1 is kind of a mess.  It ought to show real $, debt/assets or debt/income, not nominal "seasonally adjusted" $.  And what's with the title "US household debt" compared to the note "Home mortgage debt"?

Other than that, good post.

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#2) On June 22, 2011 at 10:07 PM, ChrisGraley (28.51) wrote:

Good Post, but...

I think that it would be better to be Greece.

We can emerge from a crash, but we can't emerge from the delay of a crash  until it happens. 

Japan lost a decade and is still no better off than they were 10 years ago.

We can't afford a decade. 

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#3) On June 23, 2011 at 10:57 AM, dwot (28.88) wrote:

Many times I have made comparisons to Japan in terms of the property and stock market bubbles.  However, Japan had incredibly strong exports and reliable quality.  

If you look at cars, I know so many people who have had bad American cars, well, I'd only buy an American car at a discount as I don't have faith in them based on horror stories of poor quality and garbage excuses to not honour the warranty.

I had new General Electric appliances in my home 18 years ago, and I had 4 service calls to fix those appliances in the first two years, the last call for a repeat of the problem 3 months earlier, yet the warranty would not cover it and I will never have GE products in my home again.  My perspective is that US companies are not to be trusted for quality.  Chinese companies aren't trusted either, but Japanese companies are very trusted.

So, you have a global recession/bubble and so many companies are trying similar strategies to improve their balance sheets which means Americans can't rely on exports to help the economy the way Japan could. 

I think Japan funding their own debt is also a significant difference, one that makes the US far more vunerable.  Certainly a weakening US dollar would help to bring manufacturing jobs back home.

But right now I don't see where the jobs that give disposible income and allow for stimulating the economy come from.  I see a growing working poor which would keep the economy stagnant. 

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#4) On June 23, 2011 at 11:38 AM, binve (< 20) wrote:


I agree up to a point. But the fact is that home mortgage debt is the biggest slice of US household debt and is by far the biggest factor driving the balance sheet recession. It is bad in aggregate for US consumers (debt to income is about 110% in aggregate), but for the middle 3 quintiles it is more like 140-150%. The expectation is that this situation won't clear for years.

ChrisGraley ,

>>I think that it would be better to be Greece.

Whether it is better to be Greece or not is really irrelevant. Because the fact of the matter is that the currency systems of Greece (and any EU country) and the US are completely different and the currency systems of the US and Japan are the same.

Greece cannot be compared to the US. The US is soverign currency issuer, Greece is a currency user. The more apt comparison is that the EU countries are to the Euro as the US states are to the US Dollar. We could compare Greece to California / Nevada / Arizona / etc. because they both have to finance spending. That is not true for either the US Federal Government or the Japanse government.

dwot ,  

>> Japan had incredibly strong exports and reliable quality.

There are some differences to be sure. This is why one cannot say that the US is Japan in a strict sense. But of all the macroeconomic situations we can compare against (same currency systems, similar balance sheet recessions, etc.) the US is the most similar to Japan..

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#5) On June 23, 2011 at 1:57 PM, leohaas (30.13) wrote:

A very interesting observation (although somewhat out-of-date considering the 9.8% unemployment repeatedly mentioned).

The conclusion must be that we will not be out of trouble until the deleveraging is done. The comparison with Japan from this perspective is very useful. The fact we are on a similar trajectory, except about 5 times as fast as Japan, is no doubt disappointing and sobering to many.

Another way to say the same is that we must finish our cup of poison. We could have downed it in one gulp. That would surely have killed us. Instead, we are sipping it slowly. That may still kill us. Or maybe it gives our body just enough time to build some resistence to the poison.

The same is true for our economy. Some argue that we just should have let a complete crash happen. Then we would have been well on our way to recovery by now. If our society would have survived. After all, the bottom would have been a lot lower.

What is going on right now, with all the stimuli, bail outs, easing, benefit extentions and tax cuts is a deleveraging in slow motion. It will take long (although not nearly as long as for Japan, as this article is arguing), but at least it did not kill us because the bottom was a lot shallower.

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