Great article by Bill Fleckenstein! The Japan comparisons have been dismissed for years but the similarities between the fates of both country's economies are becoming clearer every day.
Some investors have been getting rich, but a pileup of bad debts will weaken the U.S. economy and its stock and real-estate markets, echoing the Asian nation's travails of the 1990s.
Taking a big step back, the Bank of Japan acted foolishly throughout the 1980s, which caused that country to experience enormous real-estate and stock bubbles. Japan's stock bubble was really a residue of its real-estate bubble -- actually a credit bubble, as the banks lent money to any corporation with a pulse. (Does that sound familiar?)
Then the institutions that lent the money took forever to write off the bad loans. That's why Japan's real-estate market, stock market and economy did so poorly for more than a decade.
Here's why that matters to us, other than for the lesson it offers on bubbles (which our Fed has been unable to learn): After Japan's problems, that nation's central bank kept interest rates at virtually zero for the better part of a decade. That essentially-free money has been part of the reckless lending and misallocation of capital that has proliferated around the planet.
I'm not going to recount all the mistakes made by Greenspan that precipitated the late-1990s equity bubble -- which, suffice to say, was the biggest our country has ever seen.
After that bubble, Greenspan took a page out of the Bank of Japan's book and lowered rates to 1%. That helped precipitate the housing bubble here that ended in 2005.
As to why the unwinding has taken so long to commence, only recently has the cause become clear: the mark-to-model fantasy employed by those who have bought the sliced-and-diced mortgage paper.
But the fantasy is unraveling as these structured-credit products are now slowly being marked to market. Just as virtually every subprime-mortgage lender has blown up, Alt-A lenders (the next rung up the ladder creditwise) will blow up -- and, ultimately, many hedge funds will blow up, though we're in the early days of that process.
In the years since our equity bubble peaked, trillions of dollars' worth of debt have piled up throughout corporate America. So now, as we enter recession, we will experience not just a weak economy, real-estate market and stock market, but the exacerbating effect of a mountain of bad debt, completing the analogy to Japan of the 1990s.
