Not long ago, The Wall Street Journal published an exposé explaining why Japan’s negative-rate experiment is floundering — and the risks that other developed economies, including the United States, could face if they follow the Japanese economic model.
Contrary to conventional wisdom, the biggest threat to America’s future is not terrorism, immigration or any other kind of external menace.
I believe the greatest peril lies in something that could derail our American way of life; the (current and future) welfare of tens of millions of retirees, semi-retirees and active workers; the soundness of our financial system; and the strength of our business sector.
That threat is “homegrown,” the result of decades of inept policymaking by government officials and central bankers, who, to this day, remain oblivious to history and have chosen, time and again, to engineer an economic paradigm that positions special interests ahead of the best interests of generations of Americans.
That Could Never Happen Here — Really?
I often find myself relating the story of Japan and its very public, very demoralizing, fall from the top of the economic world. (Countless are stories, like this recent BBC report, that have covered the country’s economic lethargy and ‘lost decade’— or should I say, lost decades.)
In 1989, the Nikkei index, the equivalent of the American Dow Jones Industrial Average, had soared to a value of nearly 40,000. But when the euphoria ended the market rolled over and crashed hard. Over the next few years the price of an average share of stock was cut in half, and in the nearly three decades since has never once come close to regaining those record-setting heights.
I used to meet people who told me that kind of thing ‘could never happen here’ — but is that really true?
The Bank of Japan, the country’s central bank, was reluctant to drop interest rates in response to the crash, opting instead to allow the marketplace to find a point where the larger, overall economy could regain its balance.
Unfortunately, that point was not to be found and in just a little over five years, rates on Japanese bonds were driven all the way down to the zero level. The year was 1995.
And that’s where interest rates remained until early last year, a span of more than two decades, when the Bank of Japan threw in the towel on its zero interest rate policy and began issuing bonds with negative interest rates.
The move left a lot of market watchers shaking their heads, or as Financial Times recently put it, BOJ’s errors threaten a lasting scar for central banks.
Historical Blindness Can Be Costly
Tens of millions of Americans have much to lose if our own government fails to learn anything from the past and refuses to apply historical insight into modern-day policymaking.
Now, after more than eight years of near-zero rates here in the U.S., people now say, ‘that could never happen here, could it?’, by no means as certain as before.
It’s difficult to imagine anyone living in Japan during the late nineteen-eighties anticipating what was to come economically. After all, at that time, they were on the top of the world.
They were the world’s largest net creditor nation and enjoyed one of the highest GDP’s per capita. Real estate in Tokyo was the most expensive on earth, not to mention citizens had one of the highest standards of living on the planet as well as the world’s longest life expectancy.
A stock market crash and a failed economy had to be the last thing on anyone’s mind.
We Live in a World Where the Impossible Keeps Happening
The current Wall Street narrative is that financial events of the kind the Japanese have endured are unlikely to be repeated here, with some experts going so far as to call that kind of thing impossible.
But the world is full of risk and uncertainty, and lately, it’s a world where the impossible seems to keep happening — where some of the most unlikely prospects end up becoming reality. Brexit, the Trump presidency, and negative interest rates (NIRP) were all considered impossibilities right up until the very moment they came to be.
Stunning is the only way to describe the differences between the financial condition of Japan then versus the current state of the American economy.
By the end of the 1980’s Japan was a manufacturing powerhouse featuring a high-paying job market and record low unemployment. Consumer and government debt was negligible, making the world’s second largest economy an economic model for the rest of the planet.
By contrast, Americans haven’t seen a single year of 3% GDP growth in the last decade, the number of hours in the average work week continues to shrink while wage growth is nearly stagnant, and the retail sector is wracked by a growing number of bankruptcies while consumer debt is reported at new, all-time highs.
Stimulus in the Wrong Hands is Meaningless
Economic stimulus programs are the use of monetary or fiscal policy to kick start struggling or broken-down economies. Tactics such as lowering interest rates or increasing government spending make sense during the early days of the crisis, but when such measures are kept in place for an extended period of time, years or even decades, logically they lose all impact and effectiveness.
In other words, dubious, highly questionable BOJ policymaking has turned the land of the rising sun into the land of perpetual recession.
To the point, twenty years of zero interest rates and other economic ‘stimulus’ have completely failed to re-energize the Japanese economy, just as the trillions of dollars in government spending here have done little in the way of returning the U.S. economy to its former position of economic preeminence.
When you consider the amount of damage done to the American economy over the last decade that has come as a direct result of policymaking out of Washington, it might be time to seriously question whether economic leadership here is any smarter, or any more competent than their contemporaries have been in Japan.
The potential consequences to your wealth and retirement make the question too substantial to ignore.
Fiscal policy has emerged over the last decade as a kind of acid test for the leadership here in America – a test they’ve mostly failed. By implementing emergency measures with no clearly defined objective, policymakers have created a situation with major consequences that any one of us would be foolish to ignore.
It’s equally foolish to think those causing the problem will suddenly change course and begin moving the country in a direction of more rational solutions. If anything, they’ll make it worse.
Very dire is the message that negative interest rates, a 20 trillion dollar debt, and a long list of other economic metrics are trying to tell us.
Now, more than ever, it makes sense to look at the big picture and start taking some reasonable steps to distance yourself from the risks.
Fact is, if you’re willing to accept reality, there are some remarkably simple measures you can begin implementing today that can make a world of difference to your future wellbeing, and that of your family.