NEW YORK (Steven C. Johnson) – As the U.S. economy slouches toward another recession and confidence in policymakers erodes, investors are coming to grips with the notion that the country may already be several years into a Japan-style lost decade.
If so, the years ahead could be a very tough slog. U.S. households, unlike those in Japan, have higher debts and lower savings, while massive deficits have sapped political support for the type of robust government spending Japan relied upon.
“I’m more convinced we are headed in that direction,” said Scott Mather, portfolio manager at PIMCO, the world’s largest bond fund with $1.2 trillion in assets under management. “We might have an even harder time than Japan did.”
U.S. economic output through the second quarter of 2011 has yet to surpass the level seen before the crisis hit in 2008 and may not do so soon; economists polled by Reuters give the country nearly one-in-three odds of falling back into recession over the next year.
“The financial turmoil of the last three or four months has been the markets coming to terms with a period of prolonged slow growth,” said Andrew Scott, professor of economics at London Business School. “With households paying down debt and not consuming, it’s hard to see where growth will come from.”
Boosting exports — an early objective of the Obama administration — won’t be easy since most of the developed world is also ailing, with Japan, Britain, Switzerland, China and others wary of allowing their currency to gain too much strength.
“We will be lucky to do as well as Japan, because they at least had a stack of cash to help them through,” said Michael Cheah, who helps manage $1.5 billion at SunAmerica Asset Management in Jersey City.
Some economists argue both Japan and the United States misdiagnosed their economic diseases. When credit-driven asset bubbles burst, an indebted private sector — companies in Japan, households and banks in the United States — focused exclusively on paying down their debts.
“That’s when the classical economics taught in universities goes out the window,” said Richard Koo, chief economist at the Nomura Research Institute and author of “The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession.”
Koo said Japan’s eventual embrace of robust fiscal stimulus filled the gap left by the private sector and kept the economy from tumbling into full-fledged depression. By 2006, Japanese growth had started to recover and interest rates to rise, though momentum dried up when the 2008 financial crisis hit.
“It took Japan 15 years to recover because policy was applied in such a zig-zag fashion,” he said. “If the United States could maintain fiscal stimulus for three to five years, I’m sure the economy could pull itself out sooner.”
With the United States already running one of the largest budget deficits as a share of output since World War II, political opposition to fiscal stimulus is high and rising. President Barack Obama proposed a $447 billion job creation plan this month but Republican leaders in Congress oppose plans to pay for parts of it with higher taxes on the wealthy.
The subsequent stock market sell-off was driven partly by “the realization….that there will be less ability to stimulate the economy with fiscal measures,” John Chambers, head of S&P’s sovereign ratings committee, said last week.
Of course, massive spending swelled Japan’s debt burden, too — it’s now more than 200 percent of output. And while the government has been able to finance it by borrowing from its citizens, that may change as its aging population retires.
But “Japan faced a depression and avoided it. They could have done much worse,” said Robert Madsen, senior fellow at the MIT Center for International Studies. “The responsible policy was to use fiscal policy.”
Alan Wilde, who helps manage $52 billion as head of fixed income and currency at Baring Asset Management, said he “remains to be convinced” that the United States is destined for a “Japan-style lost decade.”
In fat, he says bond investors may need to keep an eye on inflation. Data last week showed core consumer prices, which remove food and energy costs, rose 2 percent in the 12 months to August, extending a recent upward trend.
“My hunch is we end up with much higher inflation,” he said, as “bond markets show much greater volatility than previous years as we lurch from strong recovery to abject disappointment with more regularity.”
That could limit the future Fed flexibility, too. Markets expect the central bank to tilt its bond portfolio toward longer-dated maturities when it meets September 20-21 to try to push long-term interest rates lower, a move that won’t add to the money supply and, some say, won’t do much for growth.
“To get banks to lend, we’re going to flatten the curve? The 10-year is already there, and if you can’t stimulate the economy with a 10-year yield at 2 percent, 1.5 percent isn’t going to do it either,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, with $28 billion under management
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Category: Business/ Economy
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