Another Apt Observation
regarding the balance sheet recession we are in. The US economic situation is much more like Japan's that it is like Greece's.
WE ARE JAPAN ON FAST FORWARD
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.