Is America Becoming Japan?

In the way of generals fighting the last war, the Federal Reserve and Treasury Department have resolutely printed and borrowed money in an effort to avoid another Depression. They may have succeeded, although as with all historical questions we won't know until after the fact. Economic growth has resumed. But we're not out of the woods, as last week's data reminded us. Employment growth, aside from temporary federal hiring for the census survey, has slowed to a trickle. Retail sales growth was disappointing. China is trying to throttle back its overheated real estate market. Hungary revealed its sovereign debt problems, adding a little fillip to the stew with a comment, subsequently withdrawn, about the possibility of restructuring. The BP oil spill, a dark, scythe-wielding, spectral presence, continued its death march into bayous, bays, and beaches, grinding down the economies of several states. We're at the beginning of the end of federal stimulus spending. With populism all the rage, this pipeline will run dry after currently authorized spending is completed. The Dow Jones Industrial Average is close to its low for the year.

The data suggests that the U.S. is at risk of the kind of stagnation that has bedeviled Japan since its stock market and real estate bubbles burst in 1989-90. Consumers are tight-fisted, banks won't lend, government deficits soar, and the economy grows fitfully at best. That describes Japan for the last two decades and it's starting to sound like America. With unemployment stubbornly high and the America's best export market, the Euro zone, seemingly turning into a nosedive, the prospects for future growth are guarded.

Tightness of bank credit to the real economy remains a central problem. Many smaller businesses have few borrowing options aside from banks. But banks large and small are haunted by bad real estate loans from the bubble years. They've kept these toxic assets inconspicuous, courtesy of a bank friendly, Congressionally coerced relaxation of accounting rules last year. But the continued flaccidity of the real estate market means that the toxic waste will have to be written down eventually, either when it's finally sold or when economic reality overwhelms overly chipper accounting rationalizations. The anticipation of those writedowns leads banks to hold their cash dear. Small businesses evoke thin, ragged Oliver Twist, begging for more porridge.

American banks seem to evoke Japan's zombie banks, which were insolvent but kept on life support by the Japanese government in order to maintain bad loans to failing businesses. America's banks might or might not be insolvent (the answer may differ when one applies economic reality as opposed to accepted accounting rules). They may be, in effect, funding bad loans by not foreclosing on many homes, which remain residences of defaulting borrowers. They hold piles of toxic real estate derivatives and wobbly commercial real estate loans. Now, they need to scrutinize the European portions of their portfolios and perhaps patronize the increasingly expensive credit default swap market for European obligations.

Despite massive government deficit spending and a zero interest rate policy, Japan's economy went nowhere for ten years after its credit crisis and then grew slowly if at all. The U.S. government, too, has relied on deficit spending and a zero interest rate policy. Few other ideas for economic revival seem to be on its agenda. Absent a sea change, it's hard to see how the U.S. economy won't sail into becalmed waters.