Once upon a time, there was a grand economy, home to businesses the rest of the world envied, a talented labor pool, and booming, almost unstoppable, growth. Its real estate fueled effortless fortunes. At its peak, it didn't look like anything could get in its way.
Unfortunately, a real estate bust of unprecedented proportions ended the party, just in time for the central bank to slash interest rates as if its life depended on it, giving those who saved money a slap in the face.
I'm not talking about the United States today, although the similarities are uncanny. I'm talking about Japan in the '90s.
Believe it
What happened to Japan after its own bout of credit euphoria should catch your attention. Unemployment soared, GDP growth flatlined, its currency tanked, real estate plunged, and the stock market fell consistently for many years. Not just for a few months, but about a decade. Sound awful? Imagine the same thing happening here.
With gas prices soaring and consumer confidence already heading south, the prospect of mimicking Japan's drawn-out recovery is almost too painful to discuss. Some economists forecast the U.S. economy getting back on track in the second half of this year, and even that scares the bejezus out of us. Imagine a slow, steady decline that didn't begin to mend until 2018.
Unfortunately, we're not Japan. Our economy harbors a few important traits that could make our road to recovery even worse than anything Japan experienced.
We ain't samurais
If we're going to compare our economy to the Land of the Rising Sun, let's get two important differences out of the way: Japanese citizens save their money, and Japan's economy manufactures and exports a lot of stuff. Americans, on the other hand, spend more than they make, and rely on an economy that's 70% consumer spending. That's a big, big difference, and it's not in our favor.
Japan's "lost decade" did a number on consumers, no doubt about it. Yet they were always able to save money. From 1989-2003, households still saved an average of 10.8% of their disposable income. That was extremely important, giving the weakened economy ammunition to combat outflows of capital used for investment, and allowing consumers to keep consumption virtually unchanged. The American economy has no such advantage; we're reliant on foreign investment to bridge the gap between perception and reality. (Do you really know who's paying your mortgage every month?) Japan's personal savings allowed it to partly fund its own way of life while the rest of the world looked elsewhere. Who'll pay for our way of life if the greenback loses its allure?
To be sure, that hasn't happened yet. Citigroup, Morgan Stanley, and a slew of other troubled American companies had no trouble snapping their fingers and getting foreign capital when times got tough. But there's no guarantee that good fortune will continue. No part of globalization dictates that the rest of the world is required to fund America's spending binge indefinitely. And with up-and-coming economies like China and India on a tear, it's tough to buy the argument that America is too big to fail. The Roman Empire, the Ottoman Empire, the British Empire, the Aztecs, the Inca Empire, and Britney Spears -- they all fell from dominance. We can, too.
By trade betrayed
Even during its period of economic lethargy, Japan had the rest of the world buying its products at a feverish pace. Throughout the "lost decade," Japan kept a foreign trade surplus every year, likely fueled in part by America's thirst for products from the likes of Sony (NYSE:SNE), Canon (NYSE:CAJ), Toyota (NYSE:TM), and a mountain of electronics firms filling the aisles of Best Buy (NYSE:BBY) and Circuit City (NYSE:CCU).
Again, we have no such luxury. The U.S. economy has posted a trade deficit every year since 1976, and our running foreign tab now expands by nearly $2 billion every day. Sure, we're home to a collection of truly global juggernauts, like Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG). But on a net basis, we're reliant on the rest of the world to sell us stuff, rather than buying the stuff we make. When times get tough, which they are, that's not a comfortable position to be in.
What, me worry?
The American economy is still gigantic, prosperous, and nimble. But the history of countries that overindulge on such a monstrous scale isn't too comforting. As Winston Churchill once said, "Those that fail to learn from history are doomed to repeat it." Let's hope Fed chief Ben Bernanke paid attention in history class.
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