Best of the Week
Most Popular
1.Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - Harry_Dent
2. Is This How World War III Begins, In Almost Complete Silence? - Jeff_Berwick
3.Trump Wins 2nd Presidential Debate, Betfair Betting Markets Odds Bounce - Nadeem_Walayat
4.Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - GoldCore
5.End of SPX Stock Market Correction Nears - Tony_Caldaro
6.Get Ready for the Future - Exponential Machine Intelligence Mega-trend towards Singularity - Nadeem_Walayat
7.US Housing Market Bubble II – It’s Happening Again! - Andy_Sutton
8.FTSE BrExit Stock Market Panic Crash Resolves towards New All Time Highs - Nadeem_Walayat
9.Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - Nadeem_Walayat
10.Gold’s, Miners’ Stops Run - Zeal_LLC
Last 7 days
The Stock Market is an Accident Waiting to Happen - 20th Oct 16
It's Rally Time for Gold and Silver Equities - 20th Oct 16
Cashless Society – Risks Posed By The War On Cash - 20th Oct 16
China's Insanely Leveraged Housing Market Will Enter Its Secular Bull Market In 2017 - 20th Oct 16
Donald Trump Bounces Going into 3rd and Final US Presidential Election Debate - 20th Oct 16
Attention Please: Phase Two of the Gold and Silver Train Now leaving the Station. All Aboard? - 19th Oct 16
How to Successfully Trade a Stock Market Crash - Black Monday October 19th 1987 - 19th Oct 16
Tesla, Apple and Uber Push Lithium Prices Even Higher - 18th Oct 16
Silver, Debt, and Deficits – From an Election Year Perspective - 18th Oct 16
UK Property Market: Slow Growth Does Not Equate To Decline - 18th Oct 16
Trump Election Victory is in Your Power - 18th Oct 16
Stock Market More to Come! - 18th Oct 16
This Past Week in Gold and Silver - 17th Oct 16
A Falling Stock Market Cannot Be Allowed - Financial Repression Is Now “In-Play”! - 17th Oct 16
Commodities, Forex and Stock Market Trend Forecasts - 17th Oct 16
Stock Market Crash..or No Crash? - 17th Oct 16
A perspective on risk rally – Risks abound but Stock Market is Confident - 17th Oct 16
Bank of England Blames Brexit for Sterling Drop Inflation, Masks QE Money Printing Cause - 17th Oct 16
From Piety to Pride to Pity, America's Racial Divide - 17th Oct 16
Is Obama Juicing US Government Spending To Get Hillary Clinton Elected? - 16th Oct 16
Seek Your Independence: Anything Else Will Destroy You - 16th Oct 16
SNL - US Presidential Debates, 1st, 2nd, VP - Like You've Never Seen them Before! - 16th Oct 16
End of Economic Growth Sparks Wide Discontent - 16th Oct 16
Donald Trump on Life Support, May Abandon Election Campaign and War on Republican Party - 15th Oct 16
The Gold Manipulators Not Only Will Be Punished, They Have Been Punished - 15th Oct 16
Black Votes Matter - Is the US on the Verge of Mass Race Riots? - 15th Oct 16
Gold Stocks Screaming Buy - 14th Oct 16
Brace Yourself for the Quadrillion-Dollar Reckoning - 14th Oct 16
The Next Recession Will Blow Out the Budget - 14th Oct 16
John Mauldin: My Infrastructure Plan to Save the US Economy - 14th Oct 16
World War III On The Brink: War Will Continue Until It Triggers Economic Collapse - 14th Oct 16
US T-Bill Rejection At Ports In Progress - 14th Oct 16
These 2 Debt Instruments Pose Peril to Millions of Investors - 14th Oct 16
China’s Rocketing Housing Market Real Estate Bubble - 14th Oct 16
DIY Winter Home Maintenance Money Saving 22 Point Checklist to Get Ready for Winter/Fall - 14th Oct 16
US Stock Market, Big Picture View - 13th Oct 16
Stock Buybacks Main Force Driving Bull Market; Rewards Investors and Starves Innovation - 13th Oct 16
SPX Gapping Down... - 13th Oct 16
Syria - Obama Stepped Back From Brink, Will Hillary? - 13th Oct 16
The Structure and Future of Gold in the Investment and Monetary World - 13th Oct 16
Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - 12th Oct 16
Gold and Crude Oil - General Stock Market Links - 12th Oct 16
Samsung's Galaxy Battery Just The Tip Of The Iceberg - 12th Oct 16
Hillary: Deceit, Debt, Delusions (Part Two) - 12th Oct 16
Gold and Silver Metals Show Strength Relative to the USD Index - 12th Oct 16
Announcing Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 12th Oct 16
Confirmed Stock Market Sell Signals - 11th Oct 16
Hillary Deceit, Debt, Delusions - 11th Oct 16
Trump Support Crashes to New Low of 6.4 on Betfair Odds Betting Market - 11th Oct 16
The World Is Turning Dangerously Insular - 11th Oct 16
An American Tragedy: Trump Won Big - 11th Oct 16

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

LEARN to Trade

U.S. Faces Second Lost Depression, Why This Recession Is Different and What To Do About It

Economics / Great Depression II Apr 15, 2010 - 12:05 PM GMT

By: Mike_Shedlock


Diamond Rated - Best Financial Markets Analysis ArticleThe Business Insider has a very interesting presentation by Richard Koo on The Real Reason Why This Recession Is Completely Different. Here are a few slides.

US Housing Prices Follow Japanese Experience

Interest Rate Policy Did Not Revive Housing In Japan or the US

Demand For Loans Drops In Spite of Fed's Heroic Efforts

Japan Land Prices and Private Sector Deleveraging

There are 27 slides in Koo's presentation. It is well worth a closer look.

Japan Nationwide Land Prices

Inquiring minds may be familiar with the line in hot pink in the chart immediately above. I have commented on it many times.

Flashback March 26, 2005: It's a Totally New Paradigm

Here are some excerpts from that post.
  • Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.

  • "I just don't think we have what it takes to prick the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."

  • Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.

I called the tip of the housing bubble in summer of 2005 based on the Time Magazine Cover "Why We're Going Gaga Over Real Estate" and have been updating the chart ever since.

Here is a fresh update made just today. I moved the arrow another notch.

Koo Video

The reason the recession is different is this is credit bubble busting depression not a recession. The effects are masked because of food stamps, unemployment insurance, and because of foreclosure policy.

Unlike the soup lines in the 1930's which were very visible, Food Stamp Usage at a Record 39 Million, 14th Consecutive Monthly Increase is not visible.

Record Unemployment

Likewise, 14 million unemployed are not readily visible because of unemployment insurance and because many are living in their homes for free courtesy of banks that have not foreclosed long after people stopped paying their mortgage.

That is the extent of my agreement with Koo.

Koo blames cutbacks in fiscal stimulus in 1999 and 2001 as the reason Japan remains mired in deflation. I do not buy it.

Arguably Japan picked two of the worst times to get fiscal religion (heading right into a dotcom bust and headed into the 911 attack).

However, Japan is deep in debt to the tune of 200+% of GDP and two short cutbacks in spending and stimulus (both aborted) certainly did not cause that problem.

Real Lesson of Japan's Lost Decades

The real lesson is no matter how much money you throw around, economies cannot recover until noncollectable debts are written off. That is why you have “zero interest rates and still nothing’s happening.”

The moment fiscal stimulus stops economies are virtually guaranteed to relapse until the core problem is resolved. The problem is Asset Bubbles, Malinvestments, and debts that cannot possibly be collected.

Bailing out the banks did nothing to fix these problems. Consumers are still saddled in debt, in underwater mortgages, with no job. Moreover, there is no driver for jobs given rampant overcapacity in nearly every sector.

Banks do not want to lend in this kind of environment so they don't. Businesses do not want to expand in this kind of environment so they don't. Meanwhile the Obama administration is making matters worse by increasing taxes on small businesses and proposing everyone pay for health insurance, with businesses forced to offer a plan or pony up part of the cost.

This too is giving small businesses an incentive not to hire. Housing prices are too high yet the Administration and Congress are hell bent on propping up prices. The solution is to let prices fall until they are affordable.

The irony is after all the bitching we have heard and all the "Affordable Housing Plans" out of Congress, we have a golden opportunity for affordable housing and no one wants it.

US Faces Second Lost Depression

I have talked about this before in U.S. Faces Second Lost Decade "Because" of Misguided Stimulus

Final analysis shows the U.S. Faces Second Lost Decade "Because" of Misguided Stimulus, not as a result of pulling stimulus too early as Koo, Krugman, and Romer suggest.

If that sounds wrong then just take a look at how we got here: Hoping to end the recession of 2001-2002, the Fed slashed interest rates, held them too low, too long, we had the mother of all housing/credit booms and the global economy crashed.

The US has nothing to show for all that stimulus other than a wrecked economy, massive debt that needs to be written off, and extremely wealthy parasite bankers bailed out by consumers after contributing to these problems.

Koo, Krugman, and Romer think more spending and more debt will solve the problem although Japan has proven without a doubt that such attempts are economic madness.

What got the world out of the great depression certainly was not insane monetary stimulus but rather WWII. War destroyed the productive capacity of much of the world, and with US productive capacity completely untouched and with returning soldiers ready to start families, the US led the world out of depression.

Let's hope it does not come to war again to solve these problems.

Over 10 years ago, the advice from Greenspan and the Fed for Japan was to write off the debts so that a recovery could begin. Ironically this is one of the few things Greenspan ever got right and Koo cannot even see it staring smack in the face of debt to the tune of 200% of GDP.

Stepping back for a moment, the best thing to do is not blow bubbles in the first place. Yet the Fed seems hellbent on blowing another. The result will not be any better this time than either of the last two.

By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2010 Mike Shedlock, All Rights Reserved.

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife