If anyone remembers that 1980’s, they remember the rise of Japan as a major market power. Articles and books were being published on how Japanese companies would soon dominate the world and how the United States could learn from their companies and government.
Then, the Japanese recession hit.
I have read a number of articles recently that suggest that the United States is entering a prolonged era of slow growth much like the Japanese experienced.
Here is an example from The Guardian:
As things stand, the US is rapidly beginning to look like Japan (a country that has as yet failed to recover properly form a property and stock market bubble that burst in 1990). Like Japan, the US appears to be stuck with a zombie banking system, ineffective monetary policy, an ever-rising national debt and persistently low economic growth. http://www.guardian.co.uk/commentisfree/cifamerica/2010/aug/12/useconomy-usdomesticpolicy
Now, the writer of the article mentions the Monetarist School (Chicago School) for some of the problems we are experiencing. He even sites Milton Friedman and Anna Jacobson Schwartz’s A Monetary History of the United States, 1867 – 1960 as the manual the U.S. is following.
The writer’s solution is to follow the works of John Maynard Keynes.
…Keynes argued that money should be created by government and spent on investment projects: a sort of combination of monetary mechanisms with fiscal policy.
Okay, I’ll agree with the writer on some points (Monetarist School has some challenges) and disagree with his solution (Say “No”, to Keynes). In fact, I will go further and state that many of the challenges the U.S. market is facing are timeless. We will continue to experience this forever as long as we feel we can rule from Washington and the Federal Reserve Bank.
The boom and bust we are currently experiencing is the malinvestment governmental bodies pushed for that gave us our last boom. For those not familiar with the term malinvestment, think about it this way… If the government subsidizes a certain activity more than the natural market would naturally support, we have an incentive for more activity to be created in that area. The results may be that the market is ratcheted up to an unnatural level.
So, how does this work in practice? We usually get an idea from someone whispering to a leader… “Hey, wouldn’t it be a great idea for everyone to own their own home?” Who could resist such a noble request? The results are a mixture of government policy and Federal Reserve tinkering creating the incentives to accomplish the goal. The resulting incentives are for resources to be delivered to the current noble cause.
Now, it is important to remember that resources are scarce. If they are being used one place, they cannot be used another place. When incentives are made by a central authority rather than the natural market, resources needed to fulfill the goal become more expensive in the subsidized area and ideas competing with the subsidized area. (Hey, did anybody’s home appreciate during the last boom?) In fact, with the rising prices, labor is also attracted on an unnatural level. (How many of you used to build homes? Sell homes? Sell Mortgages? Build furniture? Sell furniture? …the list goes on.)
What the U.S. is experiencing now is the unwinding of the malinvestment.
Is this interesting to you? If so, expand your understanding through the eloquent arguments of George Reisman. The chapter attached is from his book “Capitalism: A Treatise in Economics“. He even offers solutions. http://georgereisman.com/blogWP/?tag=credit-expansion
It should be noted that even with the absence of Federal Reserve tinkering, the market would experience some movement. Natural movements can be expected.