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Japan is the canary in the bankers’ coal mine
“Japanification” describes a severe and prolonged deflationary state in which demand drops, prices and wages fall, and economic activity remains moribund for decades. Japan has been trapped in a deflationary state since the collapse of the Nikkei stock market bubble in 1990.
Seventeen years after the collapse of the Nikkei, in Time of the Vulture / How to Survive the Crisis and Prosper in the Process (2007), I wrote:
When the Japanese bubble collapsed in 1990, the Nikkei lost 80 % of its value and drove down the prices of residential and commercial property in the process. This collapse of equity and housing prices subsequently unleashed deflationary forces in Japan still in effect today.
Like a stubborn and malignant cancer, deflation has been eating away at the Japanese economy ever since its appearance in 1990. In spite of 0 % interest rates from 1999 to mid-2006, statistics compiled by The Economist Magazine show what deflation is still doing in Japan.
COUNTRYHOUSING PRICES1997-2006
United States + 100 %
France + 127 %
Australia + 132 %
Britain + 192 %
Ireland + 252 %
South Africa + 327 %
Japan – 32 %
When the US dot.com bubble burst in 2000 (the largest stock market bubble collapse in history), economists and bankers knew—because of Japan—a catastrophic deflationary contraction could occur.
To prevent such an economic contraction, the US flooded its markets with cash. The Fed lowered interest rates to 1% and normally tight-fisted bankers gave over $1 trillion to US home buyers without requiring any proof of income, creating an even bigger bubble, the 2002-2007 US real estate bubble
When the US real estate bubble burst in 2007, the 2008 financial crisis was so severe the Fed was forced to employ Milton Friedman’s untested theory, a “helicopter drop of money”, a massive and unprecedented flood of cash, i.e. increasing US bank reserves 65X, from $13 billion to almost $850 billion; and central bankers slashed interest rates to almost zero.
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Despite the Fed’s helicopter drop of money and low interest rates, US economic activity plunged as it did during the Great Depression.
Velocity of money
When the Fed’s helicopter drop of money and low interest rates failed to restore economic activity, central bankers used quantitative easing, QE, to flood markets with even more money.
IN 2009, CENTRAL BANK QUANTITATIVE EASING PREVENTED AN IMMINENT DESCENT INTO ECONOMIC CHAOS, A DEFLATIONARY COLLAPSE.
QUANTITATIVE EASING, HOWEVER, ONLY BOUGHT TIME AND, TODAY, TIME IS RUNNING OUT—AND IT’S RUNNING OUT FOR EVERYONE, NOT JUST JAPAN.
