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Is US Next Japan?


Battlelines drawn between deflation and hyper-inflation.

We have received a number of inquiries from Minyans asking us to compare the economic future of the U.S. with Japan's problems after its housing bubble burst in 1990.

Toddo scribed this morning on the case for deflation vs. hyper-inflation and the ramifications of each. We asked a few of our macro-savvy professors to weigh in on the debate.

Mr. Practical:

The parallels are debt and huge amounts cross-collateralized through derivatives. The U.S. in this comparison is much worse off than Japan was.

The difference is creativity and cajoling by the government.

The result will be the same, just manifested differently.

Professor Scott Reamer:

Policy responses - fiscal, monetary as well as legislative on both the federal and state level - are not mitigating factors themselves, as Japan's experience and the U.S.'s during the 1930-1934 period suggests.

The only variable is whether the magnitude of the debt boom preceding the current bust was smaller or larger than the one in Japan during the 1980s and the one in the U.S. during the great depression. By all measures I have seen and analyzed, the current bubble is bigger than both in absolute
and relative (to GDP) dollars.

Professor Stephanie Pomboy:

I think a critical point to make - aside from the magnitude of leverage - is that what's 'different' in this cycle is the degree to which that leverage has been created outside the banking system over which the Fed (and other central banks) exert control.

This makes pulling the traditional levers less useful in preventing deflation 'this time.' Even the nontraditional measures (TAF, expanded collateral accepted at the Discount Window, etc.) are less useful in that they focus on the banks, which accounted for a meager 19% of credit creation over the last year.

Of course, all of that strengthens the case for deflation...

Minyan Peter:

Two other differences I see in this cycle which point me to deflation are:

a) the breadth of debt categories involved and
b) the degree to which the lenders are global.

Japan was almost entirely commercial real estate and margin debt, where, as we all know, this one is pretty much every loan category under the sun. Its debt bubble was largely contained within the Japanese banking/financial system (with a little New Zealand thrown in).

You need only look at the police line up for the monoline insurer bail out to see that the impacts of this one are flowing all through Europe and into Asia. By my count the top banks in countries representing 80% of global GDP have been adversely impacted.

Like Stephanie, I don't know how you get hyperinflation out of this one.
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