2002 October 24 Thursday
Stephen Roach on US-Japan Asset Bubble Parallels

Morgan Stanley economist Stanley Roach compares the US and Japanese bubbles in an excellent analysis that is worth clicking thru to read in full:

Thatís not to say there arenít some important similarities between the US and Japan that bear careful noting. Two, in particular, come to mind -- the asset bubbles and the impact of those bubbles on the real economy. On the first count, I hear repeatedly that Japanís bubble was much bigger than Americaís. After all, it wasnít just the Nikkei; it was also an outsize property bubble. It was the interplay between these two asset bubbles that wreaked such havoc on Japan in the late 1980s and early 1990s. The truly astonishing thing is that America canít look in the mirror and see precisely the same pattern. The Nikkei reached its peak of 38,915 on December 29, 1989. Over the ensuing 21 months it would go on to lose 38.5% of its value while Japanese land prices, as measured by the Japanese Real Estate Institute, would continue to rise by approximately 15% before peaking in September 1991. Fast forward to America. Between December 31, 1999 and September 30, 2002, the S&P 500 lost 45% of its value -- actually worse than the initial decline in Japan. Over the same 33-month period, nationwide US home prices as measured by the Fannie Mae (OFHEO) index rose around 15%. If thatís not Japanese-like, I donít what is. Property bubbles typically outlast those in the stock market. It was true of Japan in the early 1990s and it appears to be true of America today.

The Fed is still in denial about the threat of inflation. See, for instance, this article where Federal Reserve Vice Chairman Roger Ferguson rates the risk of deflation as fairly low. Also, Glenn Hubbard, chairman of the President's Council of Economic Advisors, thinks the chance of deflation is "really remote".

Share |      By Randall Parker at 2002 October 24 04:02 PM  Economics Political

Brett said at May 19, 2003 11:12 PM:

And let's not forget that real estate is the safe haven...What's going to happen when property values deflate, unemployment rises, and so many home equity loans have been taken out? Hmmm, gold? Sounds to me like bankruptcy reform could be needed.

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