The more things change…the more they stay the same. Unfortunately, people don’t figure that out until some distance has been put between them and the situation in question.
Take Japan for example. For the last few years, Bill has been warning that the United States is entering a long, slow slump, ala Japan. But people refused to see the similarities…but now that they are staring us in the face, it’s hard to look the other way.
The parallels are startling. In 1992, then-Japanese Prime Minister Miyazawa wanted to help the banking system with public funds (read: a bailout), but public sentiment was strongly against it.
16 years later, U.S. officials found themselves facing a credit crunch of epic proportions – and responded with the largest injection of liquidity the U.S. markets had ever seen.
And the parallels continue. This is why – as points out Bill, in the ‘highlight of week’ essay, which we have excerpted below – it is so important to always be looking in the rear-view mirror…so we aren’t doomed to make the same mistakes over and over again:
“‘In economics,’ begins the Wikipedia description, ‘hyperinflation is inflation that is very high or out of control… Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses.’
“Who’s the biggest borrower today? The United States of America. At 12% of GDP, its deficit is more than twice as large as that of France. It already owes Japan and China as much as Germany owed its former enemies in reparations – adjusted to today’s money. But America’s debts are far grander than those of Germany in 1923 – even relative to the size of the US economy. Where Germany owed a little over $1 trillion; America – if you include private debt, official government debt, off-budget obligations and internal commitments – owes 100 times as much. And the United States keeps borrowing more. In a single year – 2009 – it will borrow $1.3 trillion, again, just shy of the debt that sank the Weimar Republic.
“While the private sector during the bubble years brought U.S. debts to a record 3.7 times the entire nation’s output, now it’s the public sector that does the borrowing. The Obama Administration is adding to the accumulated U.S. debt at a suicidal pace – 4 times faster than the record set just last year. And America’s central bank hands the borrower a loaded pistol; it is adding bank reserves – which allow the money supply to expand geometrically – at a 4,500% rate.
“That last number is not a typo. It’s an alarm. If the Federal Reserve were a heart patient, the defibrillators would be on already. If it were a normal bank, it would be closed down immediately.
“But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don’t do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the ’20s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it.
“The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts,” writes Nobel winning economist Paul Krugman in the New York Times this week. “Those demands should be ignored. It’s much too soon to give up on policies that have…pulled us a few inches back from the abyss.”
“‘It’s déjà vu all over again,’ he concludes, referring to the Japanese in the ’90s and the Americans in the ’30s. In both cases, he thinks their economies died because they turned off the juice too soon.”
The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.
Kate "Short Fuse" Incontrera is a regular contributor to The Daily Reckoning. Ms. Incontrera was also an associate producer and writer on the critically-acclaimed documentary film, I.O.U.S.A. Before joining Agora Financial in 2004, Ms. Incontrera studied writing at The University of Cambridge and at Towson University in Baltimore, Maryland.
The Affordable Care Act dumped 2,000 pages of regulations into the health care sector, stifling any innovation that could have brought about real cost savings. But even with these obstacles, there are still people looking for ways to do things better and at a lower cost. These new technologies could be the key to fixing health care in America...
While many of the newer social media stocks struggle for gains this year, old-school tech stocks have become some of the best trades on the market. With the rare exception (Facebook is doing well—shares are up 26% year-to-date) the social stocks are in the gutter. They got off to a fast start in January and Februray, but ran out of steam in the spring. Aside from a few feeble attempts, few have posted anything close to a noteworthy comeback. Twitter, LinkedIn, and Groupon are all down double-digits year-to-date. Groupon—the worst performer on this short list—is down 47%. On the other had, the biggest of the big tech stocks on the market are helping traders pile up even larger gains right now. Greg Guenthner explains…
In the 1960s, total credit in the U.S. broke the one trillion dollar mark...and since then, it has expanded over 50 times. But now, as Richard Duncan explains, the explosion of credit that's made America prosperous, threatens to take the entire economy down. And that could mean the return of another depression...
News flash: The future is uncertain. (Gasp!) But given this uncertainty how are you supposed to invest successfully? It would be nice to ride stocks on the way up... and bow out before the crash... but few are able to do it without sheer luck. Chris Mayer, searching for a successful method, looks back to the 1929 market crash for clues...
Despite rapidly rising food prices, American households still spend relatively little on groceries. And while plenty of factors contribute to lower food costs in the US, that can lead to serious competition... and that means a good investment opportunity is right around the corner. Dave Gonigam explores...
As owner of the world's reserve currency, the US has enjoyed a cushy spot in the global economy. But with the rise of a group of rival countries the dollar's reserve status is under attack. And if it somehow gets knocked off its perch, the effects throughout the world (and in the US in particular) would be disastrous. Liam Halligan explains...