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Just what is 'deflation'?" my roommate asked early in the morning while we were having breakfast.

"Deflation?" I asked. "Well, deflation is the opposite of inflation," I explained.

"Great! You are using one jargon to explain another jargon."

"Inflation is a term which refers to phenomenon of rising prices. Deflation is the opposite of inflation and refers to the phenomenon of falling prices."

"Falling prices. Wouldn't that be such a good thing? I could buy some more of my favourite strawberry flavoured diet yogurt. And also the latest line of pink lipsticks which have been just launched."

"Actually, you might just lose your job as well!" I remarked.

"Lose my job? What's the connection here?"

"First tell me where did you come across the term deflation?" I asked.

"Actually, I was reading one of these pink papers, and they had used the term in a headline: Is the United States (US) heading towards deflation?" she answered.

"So you did not read the story to understand what the context was?"

"Well, I tried to. But you know how these 'pink-paper' journalists write, trying to show off their knowledge, instead of explaining things in a way that readers like me can understand. I did not understand anything even after reading the story thrice. Though I did catch somewhere that Japan is the only economy which has experienced deflation for a significantly long period of time."

"So let me first explain to you what happened in Japan. Is that okay?"

"Yeah, suits me fine," she said sipping her cup of black coffee rather loudly.

"As you would know Japan was in a bad shape after the end of the Second World War with the US dropping nuclear bombs over Hiroshima and Nagasaki to bring the war to an end."

"I ask a simple question and you start telling me the history of Japan since 1945."

"Well, do you want me to keep talking or not?" I asked rather sternly.


"Gradually the country started to recover and by the early 1970s had become the largest exporter of steel and automobiles in the world. This from being primarily an agriculture-based economy."

"How did that happen?"

"This prosperity continued in the 1980s. Corporate profits were high and the unemployment was low. This also meant that people were earning as well as saving a lot of money," I went on.

"And where did all this money saved go?" she asked.

"That's what I was coming to. A major portion of the savings went into the stock market and the real estate market. This led to bubbles in both the markets. As Paul Krugman, the Nobel Prize-winning economist, writes in The Return of Depression Economics and the Crisis of 2008, 'At the beginning of the 1990s the market capitalisation of Japan -- the total value of all the stocks of all the nation's companies -- was larger than that of the United States, which had twice Japan's population and more than twice its gross domestic product. Land, never cheap in crowded Japan, had become incredibly expensive: according to a widely cited factoid, the land underneath the square mile of Tokyo's Imperial Palace was worth more than the entire state of California'," I quoted.

"So that was the Japanese bubble economy."

"Yeah, they called it the baburu keiki. Interestingly the Nikkei, Japan's premier stock market index touched an all-time high of 38,957.44 on December 29,1989, during intra-day trading."

"And then what happened?"

"Well, to flush out all the easy money floating around in the financial system the Japanese central bank started raising interest rates, in the hope that people will take out their money from the stock market and the real estate market and park it with banks. Initially this did not have any impact, but a few years down the line, both the markets were down around 60 per cent from the peak levels."

"And what is the status now?" she asked.

"The Nikkei currently quotes at around 8,800, nearly 77 per cent down from peak level, after 22-odd years."

"Good Lord!"

"So the next time some stock market expert tells you that stock markets always make money in the long run, tell them about Japan."

"I sure will!" she exclaimed.

"Now when bubbles burst, they have an impact on the real economy. When the stock market is going up and the real estate prices are going up, people feel wealthy. And they go out there and spend money. The more money they spend, the more money companies earn. Companies then in turn, pay their employees well, and they in turn go out and spend even more money. So this how the cycle of what is called the 'wealth-effect' works."

"And this cycle breaks down when bubbles burst?" she questioned.

"Yes, it does. Because suddenly people realise that they are not that wealthy. And when the spending stops, suddenly companies realise that there goods and services aren't selling. So what do they do?"

"Cut prices."

"Exactly. So we have a scenario where prices are falling. But when prices are falling, the expectation is that they will fall further, hence people postpone purchases. When people postpone purchases that means companies don't earn the kind of money they were earning before. This in turn means poor increments, loss of pay or even loss of jobs for employees. And when people around you are losing jobs you are definitely not going to go out and splurge money. Meanwhile, companies keep cutting prices to encourage people to spend, and people keep postponing their purchases. This is deflation."

"And this is what has impacted Japan ever since the bubbles burst."

"On a broad level, yes. Japan has seen periods of deflation as well as close to zero inflation."

"And the governments over the years have done nothing to break this cycle?" she asked.

"Oh, yeah, they have. . . interests rates were cut to zero, in the hope that people will go out and borrow money and then spend it. With people spending more money, the government hoped that it would create some inflation, as lots of money would chase the same amount of goods and services. With inflation, prices would rise, and people would then want to buy stuff right away, so that they don't have to pay more in the days to come."

"But it did not turn out that way?"

"Nope. Only if it was so easy to convert theory into practice, then every chemical engineer would be a Dhirubhai Ambani."

"What a statement!"

"Various governments also tried to pump prime the economy. They borrowed/printed a lot of money and decided to spend it in creating infrastructure. This, they hoped, would create jobs and the money earned by people would be spent and thus revive the economy. But that also did not happen. I guess people were just once bitten, twice shy."

"And Japan has been stuck in this quagmire ever since."

"Yes, my dear!"

"But where does the United States come into all this?" she asked.

"Oh. The US is going the Japan way."

"The Japan way? What is that?"

"After the dot-com bubble burst towards the turn of the century, the Federal Reserve of the United States, the US central bank, started to cut interest rates. With loans available easily, very soon a real estate bubble built up. This eventually led to what we now know as the sub-prime crisis. In the aftermath of the crisis, interest rates have been brought down to almost zero per cent levels, in the hope that people go out and spend money."

"But that's not happening?"

"Nope. Again the lack of wealth effect is at work. When real estate prices were going up, people felt wealthy, and they spent money either by borrowing or what they earned. Now real estate prices have crashed so people are poorer and they also need to return all the debt they had taken on to speculate when the real estate bubble was on. So despite the US government having low interest rates and printing a lot of money in the hope that people will spend it and revive the economy, that is clearly not happening."

"Like Japan had!" she interrupted.

"Yeah. The cycle of wealth effect has broken down. When the cycle of wealth effect breaks down, company profits and revenues get hit, which in turn means firing of employees as well lesser hours for existing employees. The current rate of unemployment in the US is 9 per cent. But unofficial estimates put it at almost double that number. So when your friends are being fired, the last thing you will do is go out and spend money. With low spending, companies again cutting prices in the hope that will make people buy more. But that again is not happening, because people expect prices to fall further and thus postpone purchases."

"So what you are effectively saying is that the US is the new Japan."

"Yes, madam!"

"But what was that bit about losing my job?"

"I thought you would have understood that by now."

"How's that?"

"You work for a BPO company whose major clients are in the US."


"So if the companies in the US get hammered, there is likely to be less business for India-based BPOs and that might mean fewer jobs in India."

"In fact, if the American companies decide to cut costs, that might mean more jobs in India," she explained, having the last laugh, as always.

Originally posted to sheldonolan on Wed Sep 21, 2011 at 12:47 AM PDT.

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Comment Preferences

  •  The low rates (22+ / 0-)

    People and small Businesses are wanting to borrow for things they need, but the banks that got bailed out are not willing to loan.
    Leads me to believe the banks are in deep bantha poodoo.
    A bunch of red ink they are not owning up to.

    •  Or can't begin to track down, or think they might (6+ / 0-)

      have to ultimately eat or something.

      Capital Hoarding - it's the New Black (ink)!

      If ignorance is bliss, shouldn't tea baggers be a whole lot happier?

      by here4tehbeer on Wed Sep 21, 2011 at 07:25:43 AM PDT

      [ Parent ]

    •  "deep bantha poodoo"? (3+ / 0-)

      Don't have a clue what that is but I'm totally stealing it....

      Well, it sure is a mess, ain’t it, Sheriff….
      Yep, and if it ain’t it’ll do ‘til the mess gets here.

      Liberal = We're all in this together
      Conservative = Every man for himself
      Who you gonna call?

    •  Several million houses they have not repo'd (4+ / 0-)

      is why they look profitable, but really aren't. What bush, passion, Obama, and geithner are doing is to protect the banking industry from feeling the same pains as everyone else when the real estate bubble burst.

      I wonder if we would have been better off letting prices crash and letting banks fail. What we are doing now is akin to death by a thousand cuts. Housing starts continue to fall. His assistance to homeowners keeps them in their house a little longer and the debt off the banks' books.

      The question i have is money does not disappear. Someone made a killing in the real estate bubble. The question is who?

      You are spot on with your observation.

      •  Oh, hells to the yeah (1+ / 0-)
        Recommended by:

        We would have been far better off letting prices crash and banks fail.  For one thing, we wouldn't have bailed out the bankers to the tune of a trillion and change.  For another, houses would be cheaper.  For a third, those lucky enough to have some savings would have recouped thanks to the good ol' FDIC.  Finally, the healthy banks would have survived and market forces would have weeded out the (gigantic) weaklings.

        As for who made a killing, well, to be fair a lot of people like my parents who bought their house a long time ago and downsized came out smelling pretty good.

        When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

        by CharlieHipHop on Wed Sep 21, 2011 at 04:37:19 PM PDT

        [ Parent ]

        •  The money your parents made is chump change (0+ / 0-)

          compared to the money made on the credit default swaps. We taxpayers footed all those CDs (what I call side bets, but they call insurance except it is not insurance and it isn't regulated).

          I agree we would have been better off in the long run letting the bubble completely deflate. As for the banks they should have been allowed to fail. Others wouldnhave come in and bought their assets for pennies on the dollar.

          As to preventing a future mess like this one the only two rules we needed are

          1. Banks can't sell loans. They are theirs until then loan is paid off.

          2. Make credit default swaps illegal. If banks want to insure their loans they need to buy insurance which is underwritten.

          •  millions of people... (0+ / 0-)

            ... bought their houses 10-20 years ago.  It's not chump change in the aggregate.

            And, in case you hadn't heard, CDSs lost a lot of money.

            When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

            by CharlieHipHop on Wed Sep 21, 2011 at 06:07:40 PM PDT

            [ Parent ]

  •  Well, that's disappointing. (10+ / 0-)

    I was hoping there would be more giant robots when we finally turned into Japan.

    Non enim propter gloriam, diuicias aut honores pugnamus set propter libertatem solummodo quam Nemo bonus nisi simul cum vita amittit. -Declaration of Arbroath

    by Robobagpiper on Wed Sep 21, 2011 at 07:33:09 AM PDT

  •  This diary is on point, but perhaps a few years (3+ / 0-)


    "Because I am a river to my people."

    by lordcopper on Wed Sep 21, 2011 at 07:37:09 AM PDT

  •  A couple of points on deflation (10+ / 0-)

    One, corporate profits aren't really getting hit so much; corporate profits have recently been strong.  But, this won't stop them from cutting costs further.

    Two, we probably won't actually experience deflation, but with very low inflation, we still have conditions under which monetary policy can do very little, and only increased spending will pull us out of a slump.

    So given the Washington resistence to fiscal stimulus, we likely will be looking at high unemployment for a long time (and by now, also a decent chance at falling back into recession and seeing unemployment go yet higher).

    •  we can't spend our way out of this mess (5+ / 0-)

      we need to overhaul our monetary policy, rewrite our tax laws, repeal all FTAs to protect OUR workers as well as end all wars and bring our troops home.  and that's just the first step.  but none of this is politically feasible so we are looking at a 10, 20 year-long depression unless they start a huge war or we grab our pitchforks and throw these fuckers out!  

      Obama is really pissing me off.

      by That Korean Guy on Wed Sep 21, 2011 at 11:21:50 AM PDT

      [ Parent ]

      •  A man after my own heart! (0+ / 0-)

        My pitchfork is razor sharp.  Ready when you are...

        When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

        by CharlieHipHop on Wed Sep 21, 2011 at 04:40:21 PM PDT

        [ Parent ]

      •  I don't think that a huge war would do it (0+ / 0-)

        it creates of nothing of value in the society and , in reality, increases the burdens on society dramatically.

        big badda boom : GRB 080913

        by squarewheel on Wed Sep 21, 2011 at 07:45:46 PM PDT

        [ Parent ]

      •  let's go! (0+ / 0-)

        smash the chair, break the needle!

        by stolen water on Thu Sep 22, 2011 at 06:56:01 PM PDT

        [ Parent ]

      •  Actually we CAN spend our way out (0+ / 0-)

        We can, we just won't.  But if we would, the whole mess could be ended pretty easily.

        It does matter what we spend on, but there are no shortage of productive things we could spend on.  There are estimates that we need infrastructure investments of as much as $2 trillion.  Now is when we should be making some of those investments.

        Even if we were at full employment though, the optimal policy right now might still be a deficit of at least half a trillion.  This is because global growth prospects are so high.  So long as potential growth is higher in other countries, we should be running trade deficits, at a percentage of GDP approximately equal to the difference in potential growth rates.  So really, trade deficits of over $450B per year right now would be sustainable, and in our interest.  And you can add another roughly $250B which would be financed by domestic growth.

        But with an output gap of $1 trillion on top of that, optimal policy right now would really be annual deficits of around $1.7 trillion per year for a few more years.  

        Still, if you are nervous about all that deficit financing (though you shouldn't be, really), the reasonable alternative is to pay for some of that upfront now by actually taxing some of that idle cash that's out there.

    •  Why doesn't the Fed print a whole bunch of money (0+ / 0-)

      and give to people in an inverse relationship to their income. The wealthy would get nothing, the middle class some and the poor, a lot. That would surely spark spending of all sorts and since inflation is low to non-existent, we'd not have that issue crop up either.

    •  Corporate profits are from overseas. Weak dollar (1+ / 0-)
      Recommended by:

      promotes exports so most profits of US companies are from selling to the outside world. Demand in US is weak and will get weaker.

      If Kasich says State Troopers are assholes, What does that make me?

      by buckshot face on Wed Sep 21, 2011 at 01:51:06 PM PDT

      [ Parent ]

      •  Trade deficit is reasonable (0+ / 0-)

        There has been some uptick in exports, but we still buy more overseas than we sell.  The trade deficit overall is about where it should be.  Corporate profits are coming primarily form the government running deficits.

        [It is not possible to have a government deficit without having an equal private sector surplus, and vice-a-versa; it's an accounting identity]

  •  good, but missing an important feature (11+ / 0-)

    "Zombie Banks"  - Japan refused to deal with all the bad debt on the balance sheets of their banks, severely restricting liquidity and lending.  

    While our banks are not perfect,  they are in much better shape than the japanese banks at a comparable time, having both raised capital and offloaded debt to the government.  

    If you don't believe me just look at how much better our banks are performing than the euro trash comps.

    This should - eventually - significantly help our economy in a way the japanese economy was not aided.

    •  And that would be the case if there were no (13+ / 0-)

      bogus money disguised as credit default swaps and derivatives loaded throughout the entire banking system of the world, but primarily within the USA and Europe.  No one knows what they are worth (practically nothing or less) and no one wants to take them off the books and admit they are broke.

      No one knows how to "unwind" all the fake derivative money throughout the system.

      Thus the banks won't lend, because they are unsure of their own - and others' - footing.

      And because these derivatives were bought and sold at sums reaching the trillions - higher than global GDP - there is just too much phony paper to deal with. Or too much to handle quickly. Either way, the lending system remains at a virtual standstill.

      Until the root cause is addressed, until these investments are strictly regulated or prohibited and the fake value taken out of all the banking/financial system, we are stuck with virtually no movement.

      Geithner has been throwing money into a pit, hoping to "solve" the problem.  But no amount of money will paper over the fact that this root cause must de dealt with. Geithner is precisely the wrong person to look to for this task.  He's part of the Greenspan group who loved the idea of this "private money creation" scheme.

      Of course, as always, your mileage may vary.....

      Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

      by YucatanMan on Wed Sep 21, 2011 at 10:25:01 AM PDT

      [ Parent ]

      •  I really, really wish that somebody would explain (0+ / 0-)

        to me how all of these companies can have CDS written by companies that have no hope of ever making good on them.

        how is that not fraud ?

        why isn't senior management of AIG in jail ?

        Why are CDSs still legal, and why do people think they will actually be able to collect on them if they need to ?

        big badda boom : GRB 080913

        by squarewheel on Wed Sep 21, 2011 at 07:47:36 PM PDT

        [ Parent ]

    •  And Another Important Feature (0+ / 0-)

      Economies are not closed systems.  Inflation and deflation depend at least as much on what's going on in the rest of the world as on internal monetary policy.

  •  Look Up Krugman's "Lost Decade" & "Liquidity Trap" (6+ / 0-)

    He wrote an article about Japan back around 1998

    There’s always free cheddar in a mousetrap, baby

    by bernardpliers on Wed Sep 21, 2011 at 08:16:07 AM PDT

  •  America is not Japan (1+ / 0-)
    Recommended by:

    Japanese leadership fail to learn ,that  just being japanese and promoting japanese society and culture  is not enough to make it in todays  business world,

    •  Actually, you are right, America is not Japan (12+ / 0-)

      The Japanese culture is resistive to change.  It is also a more conservative culture (as defined by the traditional definition of "conservative", not the current political one).  The Japanese are also, and have always been, good savers.  When their economy collapsed, the "habit" of saving was already ingrained in their society - it only became stronger.  Therefore the resistance to spending.

      Americans are not good savers, at least not Americans born in the last 50 years.  We are instant gratification baby boomers, Gen Xers, and the like.  We are leveraged to death.  As scared as we are today, it will only take a few months of good news, and we'll be running up the credit cards again.  I know a family that was preparing to put in a swimming pool in 2008.  Then the guy lost his job.  Obviously, they didn't install the pool.  When he got a new job after six months of searching (one that paid less, and was by all description less secure), guess what they did?  They put in the pool.

      What is holding this economy back is two-fold:

      1.  We don't make anything in this country any more, except weapons, computer chips and zippo lighters.  This means we only get growth when we can create a bubble (real-estate 1980's, dot-com 1990's, housing 2000's).  The powers that be either haven't figures out what the next bubble will be yet, or they're holding off on it until the election in the hopes that Obama loses and doesn't get the credit.

      2.  Whatever the reason above, without a bubble to invest in, the big money is sitting on the sideline.  This money is what fuels the US economy.  There are things to invest in, like infrastruture, new technologies, etc., but those are long-term, relatively low initial return investments - not what the big money is looking for.  They want a get-richer-quicker bubble to invest in, and lacking any motivation to do otherwise, they are going to continue to horde the big money until that bubble emerges.

      Our best hope is to get past this 2012 election.  Then, if  a republican wins, and the money has been holding out on the bubble,  the bubble will emerge and the economy will take off again.  If Obama wins, perhaps the bubble will be unavoidable because the money will just be so restless, that they can't keep it pent up any more.

      Of course, it is possible that they don't have a new bubble lined up and ready to go, or they have no idea what that will be.  In that case, we will become Japan - just a ruder and less civilized version.

      Regardless, good diary.  I'll rec it.

      •  A possible way out (13+ / 0-)

        is to raise corporate and capital gains taxes, and use the revenue to support public infrastructure and social safety net spending.

        This has a two-fold effect. It removes excess lazy capital making long-term investment by companies more attractive, and inhibiting bubbles.

        It also puts money in the pockets of the most likely spenders, having the highest stimulative return.

        This is well understood by Republicans, but they won't let it work because it means their masters will be less rich.

        Critical Thinking: The Other National Deficit.

        by cultjake on Wed Sep 21, 2011 at 09:36:24 AM PDT

        [ Parent ]

        •  Sadly (2+ / 0-)
          Recommended by:
          NoMoreLies, skidrow

          corporations are now largely multinational, so what we do here can only serve as a partial effect on their influence.  

          The best thing would be to put a tax on gasoline and natural gas so that effort would be directed toward developing alternative economies that in the long term won't kill us.  The inconvenient truth is that use of fossil fuels will soon make the planet uninhabitable, probably within the next 150-200 years, if not sooner.  The sad truth is that all efforts to spur consumption only speed up environmental degradation, unless they are coupled with efforts to reduce their environmental effects.

          Increasing capital gains taxes would do little to curb speculation in commodities or other real assets, although I would agree there is no good reason to tax them at rates less than other form of income.

          It would be better to have a multi-tiered real estate tax, that would tax larger homes progressively more and multiple vacation homes even more, except when they are legitimately used as rental units.  We need to redefine the directions any expansion of consumption takes to provide for an orderly consideration of environmental consequences or we are, simply and frankly speaking, doomed as a species.

          If one doesn't believe this, consider that all projected climate models predict that mean temperatures for Kansas City will likely be over 100 degrees F in 100 years for more than 150 days out of the year.  If folks think its bad in Texas now, imagine what it would be like when it stays that hot in Kansas City for that long ever year.  To make matters worse, a number of leading climate scientists, those at MIT in particular, are arguing that most climate models have failed to account for the actual rise of observed temperatures by a factor of about 4 times.  

          Considering that temperatures are rising at rates higher than at any time in the history of the planet, you would think it might wake a few folks out of their slumber as they ponder what is going to happen to our economy and how we will get out of the predicament we are in.  

          If I were Obama's science advisor, I would direct him to implement emergency plans immediately to create green sector jobs and a new green economy, with the scant hope that we might actually have enough time to save ourselves, much less the economy, while there is still time to do so.

      •  America is not looking at the big picture (4+ / 0-)

        Global oversupply of the capacity to create goods.  Easily transferred factories to the countries with the lowest labor costs. Free flow of capital.  A deflationary cycle that is now a global problem.  There is no way out using any of the old models.

        From May 29, 1992:
        "It is not only large financial institutions which are tumbling into bankruptcy, the whole world is becoming bankrupt — mentally and spiritually, said Maitreya’s associate. The world is going through a huge crisis and all the medicines have been tried and failed. Maitreya says that the tumour has got to burst open before the healing can begin, he said.
        The world is in such a chaotic state that it could happen at any time. The politicians and the generals can do nothing to stop it — everything they have tried to avert disaster has failed.
        The Tokyo Stock Market has been turned by the politicians and businessmen into a giant monster serving only a culture of greed. Now it is crashing like everything else. Even the United Nations is being forced to serve the interests of the strong and the greedy. Only charitable institutions, like Oxfam, are caring for the weak and the needy; governments are too caught up in killing and destroying. . .
        Crime is on the increase throughout the Western world. Look at the faces of the politicians, they have no sparkle. What is happening is beyond their comprehension. The world is like a volcano waiting to erupt — in fact it is only a matter of time before it bursts open.
        America — The disintegration that is taking place in the former Soviet Union is now happening in America. The Los Angeles riots are not an isolated outburst. Every state is crumbling and it is worsening day by day, said the associate.
        The states are desperately turning to the Federal Government for aid, but it is not forthcoming."
        - World Teacher Maitreya through an associate as reported by Share International

        •  The problem is not spiritual its environmental (2+ / 0-)
          Recommended by:
          NoMoreLies, too many people

          Humans have exceeded the capacity of the planet to support this many people, particularly the few extraordinarily greedy, and we are rapidly degrading the planet's life support systems faster than we can "grow our economies".  In the face of such biological reality, it should come as no great surprise that the folks at the bottom feeling the most intense selection pressures are responding in unpredictable and chaotic ways.

          Volcanoes waiting to erupt are not the problem.  Every single day, humans produce more that 1000 times the heat-trapping carbon dioxide than all the world's volcanoes combined.  Within 5-15 years agriculture as we have known it may become increasingly impossible, over wide areas of the planet.

          The only answer humanity has left to support economies is to adopt economies that are based on science and environmentally sustainable.  All the fossil fuel lobby PR, will not in time make a whit of difference to dislodge this impending reality.

      •  Nonsense (4+ / 0-)

        Japanese culture is not resistant to change.  In fact it has a special alphabet, the katakana designated specifically for foreign words.

        Virtually every leading edge high tech industry has a strong player in Japan and for many industries it has no peers.  It is not surprising that after the recent tsunami (Japan led the world in seismograph research as well), the auto industry and many high tech corporations making networking equipment suffered tremendous slowdowns resulting from the bottleneck in the loss of leading edge production facilities.  For example, the technologies used in automotive computerization and specialized robotics manufacturing are dominated by Japanese firms.

        The problem Japan has is a fundamental problem they have always had and which plunged them into WW II.  They lack oil and natural resources needed for modern industrial manufacturing, which makes the fact that they still lead the world in many areas of manufacturing all the more impressive.  Also impressive is their spending in education.  You can be sure that the average Japanese has far better English skills than his American counter part have Japanese or other foreign language skills, although this is offset by the polyglot nature of American culture.

        Nonetheless, I largely agree with you concerning our own economy.  The problem we face now, like Japan is that the nature of the two bubbles that burst were financial and unlike speculation on commodities or housing or manufacturing, these kinds of downturns have much longer recovery periods, typically decades in length, if you look at the underlying fundamentals.

        I think if Obama wins, we have a slim chance that we could become competitive in an emergent green technologies economy.  If republicans win, we are almost certainly going to succumb to the effects of global warming before enough folks wake up enough to begin to do anything about it.  It will be the latter trend, as well as the continued collapse of biodiversity worldwide that is now driving economies.  Its just the nature of human interaction to sweep such details of the various ecological dislocations under the rug so not as to disrupt the schemes of the greedy (as evidenced by the US response to the Gulf oil spill, which is still ongoing and will be for the next 20-50 years from a biological perspective).  In any event, either rich or poor, humans will just have to begin adjusting to the changes, or check out like so many other of earth's creatures.  Should anyone be surprised that the cries from those at the bottom are getting louder and more strident?

        My guess as a biologist is that humanity perhaps only 100-150 years, with the next 5-10 most critical as once the momentum of climate change builds, far to much carbon dioxide will be in the atmosphere to reverse it in the scale of human lifetimes.

  •  we need to get a hold of ourselves (2+ / 0-)
    Recommended by:
    satanicpanic, Marie

    Great explication re: the 'wealth effect cycle'.
    It comes down to people's feelings.
    "I feel rich, because my house (which I won't sell because I need someplace to live) is suddenly, magically worth a crapload more than it supposedly was yesterday. Think I'll take out a ginormous loan for crap I don't need and can't afford!"
    That is stupid, stupid, stupid.
    And greedy.
    Because you're NOT rich. Somebody inflated the "price" of your house. It's more like a misprint than a g-damned dividend check.
    Conversely; "Oh, noes! S&P downgraded the US credit rating to AA+! I'm dumping all my money into gold!".
    that is stupid, too.
    Because you have nothing to fret about. If you have money to dump into gold, you don't have crushing debt, now, do you?  Stop with the lemming act, already.

    Given that the phenomenon discussed is very real, this means that these drivers (greed and fear) are every bit as hegemonic as the diarist indicates.
    The controlling majority of players in the money game are driven by lizard- brained, emotional reactions. How can this not end in disaster?
    This would not be the case if more people actually used rational thought in their financial lives; Stuff like "can I afford that car without risking my home?" or "Since I'm the only embalmer in the county, I can be sure to remain employed no matter what CNBC shrieks about" needs to replace stuff like "I want that!" and "OMG the sky is falling!".
    Emotions, their unexamined nature, and the deference to "feelings" people have despite objective evidence contradicting them are doing damage to society on multiple levels; remember the oft-asked "do you feel safer?" during the bush years? WTF did that nonsense even mean?
    The trump-card standing of emotions in all aspects of public life has many repercussions; it excuses ignorance, justifies bigotry, degrades expertise and intellect, amplifies negative effects of real phenomena, and in this case causes real suffering.
    We all have feelings and emotional reactions. Where we have lost our way is in not differentiating between feelings based on history, analysis, and evidence and feelings that are utterly baseless, or handed to us prepackaged by the mouthpieces of the elite. When it impacts the outside world, we need to examine our feelings and put them up against reality in one way or another before giving in to them wholesale. We can no longer afford to treat ourselves like such fragile little children.

    I had hoped a return to Depression-era hardship, if we had to endure it, would make us at least a slightly more cognizant people, but so far we have done nothing but double down with our fee-fees.

    Class war has consequences, and we are living them.

    by kamarvt on Wed Sep 21, 2011 at 08:49:19 AM PDT

    •  True enough but on overdrive in (3+ / 0-)
      Recommended by:
      NoMoreLies, greengemini, kamarvt

      the absence of rules that are clear, understandable, and applicable to all.  When they can't be secretly rigged to benefit the few at the expense of the many.  As Elizabeth Warren are been articulating so well, this country began throwing out the rules for ordinary people decades ago.  Back then, "Keeping up with the Jones" was a sin, and for some time now it's been an emotional imperative/necessity.  

  •  Insert "Turning Japanese" Pun Here (4+ / 0-)
    Recommended by:
    Pozzo, Nulwee, YucatanMan, pgm 01

    6/24/05: Charlie the Tuna Creator Dies En lieu of flowers, please bring mayonnaise, chopped celery and paprika.

    by LunkHead on Wed Sep 21, 2011 at 08:51:21 AM PDT

  •  Except that prices here in America are going up. (7+ / 0-)

    At least at grocery store!

    There is definitely inflation concerning food prices. That we define inflation as rising costs couple with rising wages seems silly  to me.

    Rising costs seems enough of a definer. Though there should be at some point when costs begin to fall. However, and what is not talked about in the diary, due to energy costs (specifically oil) I don't see how food prices could drop. There would have to be a significant drop in energy costs and though oil may drop slightly due to lack of demand here the scarcity of the resource (due to dwindling supplies and increased demand in emerging markets) it seems unlikely energy costs will drop enough to affect food production.

    Factor in the "new normal" concerning our erratic weather due to climate change and the resulting crop losses, I think expensive food prices are here to stay regardless of wage trends.

    Every election either the democrats lose or the republicans lose. But in every election there is always the same winner. And he drives a Mercedes.

    by Methinks They Lie on Wed Sep 21, 2011 at 09:20:49 AM PDT

    •  Lack of commodities market regulation. (2+ / 0-)
      Recommended by:
      Marie, greengemini

      Speculators can manipulate the prices because they don't actually have to take delivery of any of their bets.  

      Strict regulation needs to return to all markets, with commodities being at the top of the list.  Unfortunately, this administration doesn't believe in such things. This president is an admirer of Reagan's deregulatory schemes.

      Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

      by YucatanMan on Wed Sep 21, 2011 at 10:28:10 AM PDT

      [ Parent ]

      •  Only partially true (2+ / 0-)
        Recommended by:
        NoMoreLies, YucatanMan

        This effect comes from the bulk of our oil being imported and the weakness of our banking and financial system, which makes the risk of using dollars higher.  Hence, Saudis and other oil producers, who have problems of their own, want to see more dollars in exchange for oil.  This gets passed along throughout the food chain as American agriculture and food product distribution systems largely rely on oil.

        The turning of corn into ethanol has largely also added to this effect as corn based syrups are widely used in food production and now much of what corn is produced can be directed toward its use as fuel, thereby forcing prices up, with actually limited ecological benefit, since so much gasoline is used to produce corn and fertilizers.

        Nonetheless, I would agree that all forms of commodity trading not tied to hedging associated with delivery of product, should be closely regulated for needless speculation.  For example, I think certain kinds of business, such as investment banks should be prohibited from directly speculating in commodities.  If they want to speculate in commodities, let them do it through loans to agribusiness, which is more directly tied to increasing production, as opposed to quick profits.  

        One way to to phase this in, since it might put the likes of Goldman Sachs and other such speculators out of business at once, is to phase in increasingly steep taxes on very short term capital gains, where commodities futures are held for mere minutes, hours, or days, rather than weeks and months.  This would increase stability in these markets and make them more predictable for producers, who we need to be helping rather than speculators.

  •  Interesting (9+ / 0-)

    While there are similarities, there are important differences as well.

    The top two being:

    1. The dollar is the reserve currency of the planet.
    2. The US military posture that ensures global trade.

    The US is not the New Japan. If the US economy stagnates as Japan's has, you are looking at a breakdown in global trade and finance.

    And an increased chance of general warfare.

    •  And..... wait for it..... (3+ / 0-)
      Recommended by:
      Marie, Plubius, zett

      we are wobbling on the edge of a breakdown in global trade and finance.  That's part of the whole concern over the Euro.

      1)  The dollar is the reserve currency of the planet, today.  Co-workers argue that could change. I counter with: "to what?"   What other currency would replace it?  Well, hang on and see what the next decade brings.  If China's appetite continues to grow and becomes a/the major consumer of global resources, the currency will switch as well.  The USA then would likely be worse off than Japan, having to adapt to the loss of the 'value' of being reserve currency of the planet.

      2)  Our military has been at a straining point through the last decade of Bush wars.  With the budget cuts coming, major weapons systems will be reduced or eliminated and force size cut back.  China, on the other hand, is building carriers and carrier-destroying missiles.

      I completely agree with you about today. I have great worries that our present status will continue into the future unless we place known solutions into place.  Roosevelt handled a similar situation correctly and Obama needs to pick up his playbook.  

      If we continue on the "austerity" and "the heck with out of work people" tack, we will lose our ability to field a global military and our weak manufacturing/employment picture will deteriorate our stability and status as reserve currency.

      Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better. -- Harry S Truman

      by YucatanMan on Wed Sep 21, 2011 at 10:33:58 AM PDT

      [ Parent ]

  •  Population (0+ / 0-)

    Another interesting thing is the difference between the US and Japan over this time frame (90s to the present) is population growth. US population growth remained robust in the 1990s and 00s, while growth plummeted in the Japan. GDP growth is closely related to overall population growth. When producers within a country keep pumping out stuff while the population remains stagnant or declines, this has a deflationary effect. We can think of deflation simply as a monetary phenomenon -- money increasing in purchasing power relative to stuff, becoming more valuable over time. This is the natural consequence of economic growth with a fixed supply of money.  Of course, central banks try not to let that happen, increasing the supply in order to at least get a mild rate of inflation.

    Japan is pretty crowded, around 128 million people living in a place the size of Montana. To grow their economy, they are pretty much restricted to exports. The US still has a tremendous about of room for rational population growth.

  •  ppl can't buy if they have no money (5+ / 0-)

    At the end of the day, the problem we face is that too many people have too little money.  It doesn't matter how low prices fall; all it'll do is make it easier for the investor class to own more of the country - no-one else can justify spending money that they might not be able to replace either by re-selling goods or by working.  It doesn't matter how much money corporations have if no-one wants to buy their products: they won't hire, they won't buy better equipment, and they won't expand ... disproving supply-side economics while we're at it, as if that'd do us any good.  Hell, it doesn't matter how many people have jobs if those jobs pay little more than it takes to buy life and could disappear at any time.

    Unfortunately, neither Washington nor Wall Street want you and me to have any money. Either it'd be more than we deserve (and many conservatives, including ones I know personally, believe no-one deserves anything) or Gordon Gecko wants it and therefore he should have it.

  •  US like Japan? (0+ / 0-)

    The Japanese have always saved more than the US.  Also they are very humble, hard-working people who deserve better leadership than they've gotten.

    Also, these people are in great shape, most are really healthy-looking.  Not so many fat people.  

    Just look at some of the video clips of the earthquake earlier in the year.  Fast-acting, quick-moving.  One man jumps out of the taxi, runs down the street and hops into a suitable building.  Runs all the way up to the top floor.  Stops to look out the window as the tsunami sweeps everything away.

    Very brave, admirable people.

  •  4.7% unemployment in Japan (4+ / 0-)

    I would be overjoyed if the US is turning into Japan.

    In fact, Japan is exhibit #1 of why the GDP measuring stick is a sick joke at best.

    Also- I think nobody should be allowed to talk about terms like inflation or deflation, without talking about the causes of such. Inflation and deflation are symptoms. Just like a fever is a symptom. Just because Joe has a fever and you have a fever doesn't mean you have the same problem as Joe. Joe has a fever because he has a flu. You have a fever because you just contracted HIV. You both have fever.

  •  So we get high speed rail? (5+ / 0-)


  •  I had a front row seat during the Japanese bubble (3+ / 0-)

    I moved to Japan in 1988 to study at Tokyo's Sophia university and stayed until 1992 so I had a front row view of the excesses of the bubble era.  

    One of the most striking results of the Japanese bubble was the creation of a "lost generation" of young people who were unable to secure good employment after graduation and became resigned to a life of being under-employed or part time/contract employment without security.

    Accordingly, this lost generation shifted its values and consumption patterns and decided that owning things like cars was an unnecessary burden and that buying a house was something akin to a fairy tale. The sense of futility and loss of confidence that emerged and took root is in stark contrast to the bubble era when national pride and giddy consumerism were at their peak.

    Looking at the America of today, you can see the beginnings of our own lost generation and a similar shift of popular sentiment into that of deep despair. When pundits and economists were declaring the official end of the American recession in June 2009, I knew that the US, just like Japan, was only beginning its long ride downward and that this recession was a decade long wave that would wrench everything from the moorings. It is going to be a brutal ride.

    •  Tell me About it (1+ / 0-)
      Recommended by:
      pgm 01

      I lost 5 million in the Japanese market.

      What the author doesn't specifically mention is that because the Japanese are big savers the debt they owe is largely to other Japanese institutions.  Not only is the not a nation of savers, but the debt Americans owe is largely owned to foreign nationals, such as the Chinese, the Japanese, the British and the Saudis.  

      Sadly, with republicans about to take the helm, we are in for a very bumpy ride, unless people organize to prevent it, which won't be easy considering that republicans largely control the mainstream media.

    •  LOL ... (0+ / 0-)

      I joined a Japanese company in 1988 where I still work (in China).

      So I'm not going to get started commenting on this diary ....

      What about my Daughter's future?

      by koNko on Thu Sep 29, 2011 at 01:34:30 PM PDT

      [ Parent ]

  •  we should be so lucky... (1+ / 0-)
    Recommended by:

    If the worst that happens to us is that our economy comes to resemble Japan's, I will be incredibly overjoyed. Life has been awesome for the vast majority of Japanese over the past couple of decades. It will be fantastic if our economy (and society) remains as strong over the next twenty years as Japan's has been for the past twenty.

    I don't think that's likely -- not impossible, but not likely -- and I will be surprised and delighted if it comes to pass.


    •  Uhm (1+ / 0-)
      Recommended by:

      The problem in Japan is that the problem has not been solved, only put off. 20 years later and still waiting for the end game. Let's see how people feel once the end comes (as it may now that internal savings may not be enough to fund the deficits).

      "I can live with doubt and uncertainty and not knowing. I think it's much more interesting to live not knowing than to have answers which might be wrong". Feynman

      by taonow on Wed Sep 21, 2011 at 04:07:20 PM PDT

      [ Parent ]

  •  If there is zero inflation then why (1+ / 0-)
    Recommended by:

    is the cost of everyday items going up. When I shop at my usual discount stores I have noticed that the discounts are not as deep.  One of my favorite stores is Big Lots and I have noticed that they are increasing their prices for the same stuff I bought last year. The cost of utilities and gas are rising in my area as well as groceries.

    •  because inflation is 3.77%, as of August (0+ / 0-)

      and probably higher than that, if the trends hold-- newer data isn't in yet. I don't know why this brand new member wants to stoke deflation fears, but I suspect they have an agenda.

      "Soylent Green is a corporation!"--Mitt Romney. Eat the rich.

      by ubertar on Wed Sep 21, 2011 at 05:06:39 PM PDT

      [ Parent ]

  •  Except (0+ / 0-)

    Except in some ways the US is in a worse position.

    Japan has had a continuous trade surplus and it has been able to borrow from its own people to fund its government deficits (at least up until now).

    The US runs trade deficits (think of them as a leak in the economy, and the US relies on foreigners to lend its government money to run deficits.

    The US is not yet as far down the path as Japan, but the path ahead looks a lot bumpier.

    "I can live with doubt and uncertainty and not knowing. I think it's much more interesting to live not knowing than to have answers which might be wrong". Feynman

    by taonow on Wed Sep 21, 2011 at 04:05:05 PM PDT

  •  Is the US printing lots of money? (0+ / 0-)

    You say this:

    So despite the US government having low interest rates and printing a lot of money
    but is that really true? Can you back it up?
    Is there any evidence that we're moving toward deflation?
    If that were to happen, the first thing we should do is print lots of money, and use it to pay off the entire US debt.

    "Soylent Green is a corporation!"--Mitt Romney. Eat the rich.

    by ubertar on Wed Sep 21, 2011 at 04:56:33 PM PDT

  •  Inflation has been increasing since January (1+ / 0-)
    Recommended by:

    of this year. The most recent data, from August, shows US inflation at 3.77%. See this chart:

    It doesn't look like inflation will be an issue any time soon.

    "Soylent Green is a corporation!"--Mitt Romney. Eat the rich.

    by ubertar on Wed Sep 21, 2011 at 05:01:47 PM PDT

  •  Didnt Japan revalue currency upwards? (0+ / 0-)

    Japan previously exchange rate was very low so making japanese goods cheaper ---thus exports high.  But then it revalued its currency in terms of US making japanese goods more expensive.

    The yen lost most of its value during and after World War II. After a period of instability, in 1949, the value of the yen was fixed at ¥360 per US$1 through a United States plan, which was part of the Bretton Woods System, to stabilize prices in the Japanese economy. That exchange rate was maintained until 1971, when the United States abandoned the gold standard, which had been a key element of the Bretton Woods System, and imposed a 10 percent surcharge on imports, setting in motion changes that eventually led to floating exchange rates in 1973. As of 2011, the yen has become much stronger and the USD to JPY ratio is about ¥80 to the dollar.

     By 1971 the yen had become undervalued. Japanese exports were costing too little in international markets, and imports from abroad were costing the Japanese too much. This undervaluation was reflected in the current account balance, which had risen from the deficits of the early 1960s to a then-large surplus of US$5.8 billion in 1971. The belief that the yen, and several other major currencies, were undervalued motivated the United States' actions in 1971.


    And this is what is happening to the US.  US currency is expensive in relation to China artificially and needs to be brought down in order for US exports to occur and manufacturing to come back to US.

    Protect Democracy. Keep lying GOP out of the People's House.

    by timber on Wed Sep 21, 2011 at 05:11:07 PM PDT

  •  No, (0+ / 0-)

    there are huge differences between the US and Japan. In some ways the US is better off than Japan, in some ways the US is worse off.

    US better off than Japan

    (1) First of all, Japan has a very strict immigration policy. Virtually no immigrants are allowed, and the few who are allowed are loathed. Secondly, Japanese society is more patriarchal, fewer women work outside the home, and looks down heavily on out-of-wedlock birth. As a result, the Japanese fertility rate is about 1.35, whereas the US fertility rate is about 2.1 (replacement level). So Japanese society is aging much more rapidly than the US society, and all of the problems that come from aging will be far more severe in Japan.

    (2) The US is the world's richest country in terms of energy resources, once all sources such as coal, natural gas, as well as renewables are factored in. If you include the US's vast agricultural resources, plus the easy access to Canada's vast resources including oil shale, there is a very positive picture of US long term energy security. Japan is a tiny island with almost no natural resources. In fact, WWII was started over this very issue. With the political decision to move away from nuclear power, that will become even harder for the Japanese.

    (3) Although Japan has long had a competitive international export sector, Japan's domestic economy is not competitive and is heavily protected. Its domestic productivity levels are very low, and the amount of start-up activity is tiny compared to the US. There are almost no business schools. This is the real reason for Japan's economic malaise.

    Japan better off than US

    (1) Japan has consistently run current account (trade) surpluses, which means that it despite its energy paucity, it is not dependent on foreigners to uphold its standard of living. The trade account is the ultimate measure of economic independence, and it is why Japan can easily sustain government debt of 220 percent of GDP with the lowest bond yields in the world and a currency that is considered a safe haven even compared to the world reserve currency (dollar). Its debt is domestically held, and the sum of total corporate, household and government debt is actually lower than in the US and UK. In contrast, we run one of the biggest trade deficits in the world, which does make us vulnerable to a dollar crash in future crises.

    (2) As mentioned above, Japan has a relatively low unemployment rate of 4.7%. Therefore, the problems are not quite acute. One can argue whether this is a good thing in the long run, for if the problems were more acute, then there would be more pressure on the political system to deliver solutions. But for the past 20 years, this can be seen as a silver lining for Japan, especially since it has prevented political unrest.

    Well, there you go. Overall, the US is much better off than Japan, for basic reasons of size and natural resources. The US is also far from deflation. The current CPI is running at 4% YoY. These comparisons are quite absurd.

    "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

    by randomfacts on Wed Sep 21, 2011 at 05:19:48 PM PDT

  •  this diary is a cut and paste ripoff (4+ / 0-)
    Recommended by:
    randomfacts, pico, Unitary Moonbat, twigg

    from this article:

    I'm HR'ing the tip jar until and unless the diarist can show they have permission to repost. I thought I smelled troll.

    "Soylent Green is a corporation!"--Mitt Romney. Eat the rich.

    by ubertar on Wed Sep 21, 2011 at 05:27:37 PM PDT

  •  it seems to me the purpose of this diary (0+ / 0-)

    is to undermine support for the President's jobs bill, and for government spending on infrastructure in general. I'm appalled that this was republished to community spotlight.

    "Soylent Green is a corporation!"--Mitt Romney. Eat the rich.

    by ubertar on Wed Sep 21, 2011 at 05:41:37 PM PDT

  •  I recommended because (0+ / 0-)

    of good discussion provoked herein.  However, I think we are likely in to a Reaganesque cylcle of stagflation with stagnant or falling wages and higher prices.

    Democrats give you the Bill of Rights; Republicans sell you a bill of goods!

    by barbwires on Wed Sep 21, 2011 at 05:58:37 PM PDT

  •  Well written! (0+ / 0-)

    Very informative! I'll be passing this around quite a bit I think!! thanks!

    "Convictions are more dangerous foes of truth than lies."


    by Erevann on Wed Sep 21, 2011 at 07:08:20 PM PDT

  •  Yep, made this observation back in 2000 (0+ / 0-)

    I could see the long cycle setting up.  I don't foresee the market doing much in the coming decade, and I expect income inequality and wealth disparities to continue to escalate.  I traded the bounce in the mid 2000's with my retirement accounts, then got back out.  Still don't see a re-entry point.  

    The highest income portions of society naively believe they are exempt from this sort of economics, but they are not.  They take their lumps later in the cycle.  Each tranche is learning that now...slowly.  The sooner we go after their sacked loot, the better.

    The areas we seem to differ with Japan is that immigration and natural resources should help us reinflate eventually.

  •  In case anyone's wondering, (4+ / 0-)

    we at CS decided to pull this diary from the box until we hear back from the diarist on the issue of authorship.  If you have any questions about our policy or how the decision was made, please feel free to send us a group PM and we'll be happy to discuss it.

    Saint, n. A dead sinner revised and edited. - Ambrose Bierce

    by pico on Thu Sep 22, 2011 at 12:52:14 AM PDT

    •  Good Call! (2+ / 0-)
      Recommended by:
      ubertar, Unitary Moonbat

      I hope the Diarist can clear this matter up to everyone's satisfaction.

      If not, there is a message there for all ..... Fool us once and we will not allow that same Diarist to fool us again!

      We go to great lengths to ensure that material in the CS is deserving of a place. On the occasions, rare though they are, that something slips through we move quickly to rectify things.

      It is also helpful when other Users step in with concerns, as happened in this case.

      I hope that the quality of debate will improve,
      but I fear we will remain Democrats.

      by twigg on Thu Sep 22, 2011 at 07:21:48 AM PDT

      [ Parent ]

  •  turning into japan would be an improvement! (0+ / 0-)
    Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10% unemployment and 50 million people without health insurance. A new report has found over 14% of Americans living below the poverty line, including 20% of children and 23% of seniors, the highest since President Lyndon Johnson's War on Poverty. That's in addition to declining prospects for the middle class, and a general increase in economic insecurity.

    How, then, should we regard a country [japan] that has 5% unemployment, healthcare for all its people, the lowest income inequality and is one of the world's leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the U.S. and China by a country mile.

    smash the chair, break the needle!

    by stolen water on Thu Sep 22, 2011 at 02:42:05 PM PDT

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