This is not Japan
Credit Suisse published an interesting, optimistic analysts' note this morning on how the current situation in the U.S. differs from the mess that Japan recently went through.
- Property prices dropped by 80% from peak to trough in Japan, while the drop in home prices in the United States is unlikely to be worse than a total of 35%.
- The Bank of Japan was very late in recognizing the extent of the country's problems. The country's monetary policy was tight for five years into the downturn and it did not begin its quantitative easing efforts until 11 years in. The U.S. certainly has a recent, relevant case study to use when attempting to fix things.
- Credit Suisse claims that U.S. housing affordability is the most attractive on record (I personally am somewhat skeptical of this statement) and that it is 38% above the average since 1978. The house price to wage ratio is still only "marginally attractive," but it does sit at 8% below the average level of 1980 to 1998, which is the period right before the current housing boom started.
Few can dispute that the Fed and Treasury are taking swift and dramatic action to help turn around the economy. I have always believed, and still do, that they will be able to print enough money to prevent long-term deflation...at least the all-important wage deflation, and eventually stabilize the economy some time in late 2009. My focus has always been on what the unintended consequences of these attempts to reflate the economy will have. To me, a drop in the value of the U.S. dollar and the resulting inflation are a logical result of the United States current monetary policy. Time will tell.