Christopher Wood puts the issue well in a WSJ op-ed piece:
With the U.S. government stepping in to keep markets from clearing, today’s U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump.
All of the above behavior invites legitimate comparisons with post-bubble Japan, where banks took years to be cleaned up as a result of regulatory forbearance. The same kind of forbearance is preventing America’s increasingly distressed commercial real-estate market from clearing. Similarly, as was the case with Japan, monetary-base growth has exploded in the U.S. over the past year courtesy of the Fed, while bank lending is declining. This is why there is every reason to fear that America is already in a Japanese-style liquidity trap.
This is why Wall Street should make the most of the rally in U.S. stocks while it lasts. The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed’s easy money policy.
Japan is still in the economic doldrums. Despite recent electoral turnover, its leaders shows few signs of having the understanding or guts needed to encourage the liquidation of bad assets and freeing of mummified capital. Instead of needed tax cuts and structural reforms to improve business incentives, the government will bail out JAL. This is business as usual and predicts that the economic slowdown that first took hold in Japan in the early 1990s will continue. The USA isn’t Japan but our leaders are doing their best to copy Japan’s failed Keynesian fiscal regime. The outcome is likely to be similar.
The money manager Marc Faber had it exactly right when he was interviewed recently on CNBC: As American business de-leverages, government is levering up. If we continue down the path of increased debt, bailouts, and enormous public spending that drains the risk capital out of the productive sectors of the economy, the government bubble will eventually burst, and the resulting economic crisis will dwarf the current one.