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Op-Ed: Recession Turns Japanese?


20-year downturn in Japan provides valuable lessons for US.


Editor's Note: James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career.

Every day seems worse than the previous day: 500,000 people laid off every month. A banking system on life support. Plummeting home prices. Retailers going bankrupt in record numbers. Mounting foreclosures. And consumer confidence at record lows.

Not only is the bad news not going away, it's going to get worse and last longer than most people can comprehend. The US is facing a 2-decade downturn -- and attendant social unrest -- just as Japan did in the period from 1990 until the present day.

It took 28 years to get to this point, and it will take at least a decade to repair the damage. Some indisputable facts will put our current predicament in perspective:

  • The US National Debt was $930 billion in 1980, or 33% of GDP. Today it is $10.7 trillion, or 76% of GDP. The national debt has grown by 1,150% in 28 years.

  • GDP was $2.8 trillion in 1980. Today, it is $14 trillion - and declining. GDP has grown by 500% since 1980 - which means the national debt has grown more than twice as fast as GDP.

  • Total US consumer debt in 1980 was $352 billion. Today, US consumer debt totals $2.6 trillion - 738% in 28 years. Revolving credit increased from $56 billion in 1980 to $982 billion today, a 1,750% increase in 28 years.

  • The real median household income was $41,258 in 1980. The real median household income in 2007 was $50,233. Over the course of 28 years, households are bringing home 22% more. The trickledown theory turns out to be a drip.

  • The personal savings rate was 12% in the early 1980s and reached negative 1% during the Bush administration. It has inched above 2% in the last few months.

After examining the data, it's clear we have borrowed ourselves to the brink of disaster. The only logical way to resolve this quandary is to reduce spending, pay down debt, and increase savings.

This is what consumers have begun to do. With consumer spending accounting for 72% of GDP, a drop in spending means serious recession. The excesses are being painfully wrung out of the system.

Japanese Experience

To all those buy-and-hold advocates: Please take a long hard look at the following chart.

Click to enlarge

On December 29, 1989, the Japanese Nikkei Index reached 38,957. Today, the Nikkei Index stands at 8,106, an 80% decline over the course of 2 decades. It was at this same level in 1983, 26 years ago. This is what you call a secular bear market.

There have been 3 bear market rallies of 60% and 1 rally of 140% - but the market is still 80% lower than it was at peak.

As for the US, we've already lost a decade:

Click to enlarge

The S&P 500 reached 1,553 in 2000 and took 7 years to breach that level in late 2007, at 1,576. It currently stands at 850 (its 1997 level), 46% below its all-time high.
As the US stands poised to make many of the same mistakes Japan made in the 1990s, another lost decade could be in the cards. History doesn't repeat, but it does tend to rhyme.

No positions in stocks mentioned.

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