Thursday, July 09, 2009

Monsters from the deep...

The "green shoots" propoganda tool is not holding to the facts. We all harken back to the halcyon days of three weeks ago when Fed Ex and multiple T.V. sock puppets were proclaiming the worst was over. Little did we know (well, actually, the astute players are not surprised at all) of the dangers lurking beneath the surface...

Seasonal bumps in unemployment claims (which are further distorted by Auto issues) do nothing to hide declining payroll taxes, rising unemployment, etc. And we still have the next wave of commercial real estate disasters to deal with.

Typically, mindless government spamming (er...spending) is good for stocks, but most now realize the credit mechanism is hopelessly broken and will suffer further damage when the CMBS issue finally surfaces in its Godzilla-like ferocity.

Speaking of Japan and real estate risks, no shortage of pundits comparing our present situation to Nippon's lost decade. The comparison is clearly not apples to apples (demographics is one massive difference), but it is worth noting the policy responses and their effects. The following excerpt is from this article.

The scenario was eerily familiar. A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south. The national government responded to the crisis by encouraging more lending and spending previously unfathomable amounts of money on public works projects in an effort to stimulate consumer spending and restart growth.

But that stimulus did not save the Japanese economy in the 1990s; far from it. The ensuing period came to be known as the Lost Decade, characterized by multiple recessions, an annual average growth rate of less than 1 percent, and a two-decade decline in stock prices and corporate profits.

The Japanese government’s easing of credit rates, instead of spurring real demand, created artificial demand. Federal loans and stimulus spending were not economically productive, and they vastly increased the nation’s debt and prolonged the economic malaise. Worse, businesses spent critical time on the sidelines, waiting for government bailouts and other centralized actions, instead of speedily consolidating their losses, clearing their balance sheets of bad investments, and reorganizing.

The United States in 2008–09, unfortunately, has started down the same path. Federal intervention and the expectation of additional government action are removing firms’ incentive to clean up their balance sheets by selling “toxic” assets. Why accept pennies on the dollar if a deep-pocketed new bidder (i.e., the state) looms large on the scene? The Japanese experience shows that when the government is an active participant in the market, many firms would rather accept state support than initiate the inevitable financial reckoning. Such a status quo does not provide a sustainable foundation for the economy. Instead, it restricts economic growth and creates a cycle of stagnation.

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