MLR - The Lost Decade?

Published : March 13 2011 at 21:49 ET
The Lost Decade?

Dr. Kacher's Japanese background: My mother was born in Japan and we have many relatives who live in Osaka and Tokyo. They have always been industrious and enterprising. For example, my uncle started the camera company Minolta. That said, the last twenty years have been unkind to them.

Japan's economics: Japan's post Nikkei bubble policies have been disastrous. The government lowered interest rates as far down as possible hoping to restart the economy, but government policies hamstrung corporations with crippling pieces of legislation. For example, one law made it nearly impossible for a company to fire an employee once hired, so companies could not function on a competitive level. Japan has not just a lost decade, but decades due to inept government policy.

How will Japan survive their current crisis? The current crisis in Japan in just that, a crisis, and all crises are economically generally short-lived. Japan has a long history of massive earthquakes and it has always quickly bounced back. The long term impact of this crisis on Japan and the rest of the world will be benign.

Japan's Government Policy: What is malignant is Japan's government policy, much as we have seen in the U.S., that encouraged bad loans in the 1980s with no regard for the quality of the borrower which helped inflate the bubble to grotesque proportions. After the bubble burst in 1990, the Japanese government tried a series of economic stimulus programs and bank bailouts, so their 2.4% budget surplus in 1991 turned into a deficit of 10% by 1998, and today, their national debt to GDP ratio stands at a whopping 249%.

Fiscal policy in Japan: Incidentally, the rescuing of zombie banks and businesses did not work in Japan and it will not work in the U.S. Japan practiced a zero interest rate policy, expanding the money supply to encourage borrowing, but companies in Japan decided to pay down their debts rather than borrow to invest and expand, thus the recovery has been protracted and painful.

How is Japan's Fiscal Policies Similar to the U.S.? A similar situation is liable to occur in the U.S. as the fed embarked upon its most aggressive rate-cutting campaign ever. It then began rescuing zombie banks and businesses, first with JPMorgan Chase & Co (JPM) then Fannie Mae and Freddie Mac. The bailout added several trillions to the U.S. debt load. Bernanke effectively snubbed the free market system, thinking the central bank can do better, even though numerous historical examples abound that this only prolongs the recovery.

What's the outcome? The fact of the matter is that free markets are remarkably resilient such that if any banks or businesses are in such trouble that they are bound to fail, the free market philosophy says let them fail. It also says no enterprise or institution is too big to fail. With central bank intervention prohibiting free markets from doing their thing, trillions have been flushed away into poorly run enterprises, depriving well-run companies from expanding. Ultimately, U.S. taxpayers and savers are left holding the bag, as growth is curtailed, recovery is prolonged, taxes are hiked, and the devaluation of the dollar continues.

So what should investors do now? Invest in hard assets [stocks, real estate, precious metals, commodities] as they should continue their rise, with the occasional correction, due to the following factors: QE, commodity supply shortages, and demand exerted from emerging creditor countries such as China and India. Such countries should continue to increase their gold and silver reserves since they assume that debtor nations will continue to devalue their currencies. As always, we will continue to provide specific investment ideas in stocks and ETFs in real-time to members.


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