Saturday, 12 February 2011 08:43

If Japan Lost Two Decades From Its Bubble Popping, How Many Decades Should The US Expect To Lose?

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The Harlem Community Development Corporation and AAREPNY hosted a breakfast symposium on real estate last Thursday in which I was the keynote speaker. The audience consisted of bankers, developers, investors, lawyers... the usual fare. I fear I may have rained on the optimism parade with my presentation, but I also feel a few salient points were communicated. I have included portions of the presentation here for the blog readers to peruse. One of the main themes of the presentation was that of "lost decades". How likely is it that we can have 20 more years of housing price declines? Note: The "74%" reference below is a typo, the Japanese residential index did not drop that far.

Let's see if any of this sounds familiar, as excerpted from Wikipedia:

The Lost Decade (失われた10年 Ushinawareta Jūnen^?) is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years1991 to 2000,^[1] but recently the decade from 2001 to 2010 is also sometimes included, so that the whole period of the 1990s and 2000s is referred to as the Lost Decades or the Lost Years (失われた20年, Ushinawareta Nijūnen).

The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a massive wave of speculation by Japanese companies, banks and securities companies. A combination of exceptionally high land values and exceptionally low interest rates briefly led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable, the Finance Ministry sharply raised interest rates in late 1989. This abruptly terminated the bubble, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks being bailed out by the government.

Michael Schuman of Time Magazine noted that banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended... This led to the phenomenon known as the "lost decade", when economic expansion came to a total halt in Japan during the 1990s

Paul Krugman was even mentioned in this Wikipedia article, as follows...

Paul Krugman described Japan's lost decade as a liquidity trap, in which consumers and firms saved too much overall, causing the economy to slow. He explained how truly massive the asset bubble was in Japan by 1990, with a tripling of land and stock market prices during the prosperous 1980s

I suggest that Mr. Krugman compares his hometown to that of what he considers to be "truly massive", he is sure to be shocked! And as for that myth that a booming GDP will lift asset prices, let's see how well that worked out for Japan over the last 21 years...

There's a lot more to go over, but I'll let you watch the video to get the gist of it. I suggest that you expand to full screen and the highest resolution that your bandwidth permits in order to see the charts and graphs clearly...

[youtube MukxtjCVc5o]

Of course, I have laid out the shadow inventory system for paying subscribers, so they can see what the current (as of December) backlog and supply is, as well as estimates on how long it will take to clear out the excess inventory. Click here to access the online spreadsheet. To subscribe, click here.