Worried about a Japanese-style lost decade? Don't be, says the Goldman Sachs January 2011 Outlook, offering five reasons we aren't doomed to ten years of weak growth and deflation:
1. Our Bubble Was Smaller: "Real estate values in Japan peaked at 17 times disposable income in 1990, having appreciated by 182% over the prior five years. In the US, real estate values peaked at 8.5 times disposable income in 2005, and had appreciated by 77% over the prior five years.Therefore, one can say that Japanese real estate was 100% more overvalued than US real estate, and a greater correction was warranted."
2. Our Response Was Swifter: "The Federal Reserve cut the Federal Funds rate to1% in 14 months from peak interest rates and to 0% within 2 months after that. The Bank of Japan took 46 months to cut to 1% and then another 77 months after that to cut rates to 0%. With respect to quantitative easing, it took the US one year from its peak in interest rates to raise its money supply to 14% of GDP; it took Japan nine years."
3. We Cleaned Our Banks Faster: "In the US, within a year of the equity market peak, the first financial institution failed, five major financial institutions including Merrill Lynch, Wachovia and Washington Mutual were sold, and the government authorized $700 billion dollars or 5% of GDP through the Troubled Asset Relief Program (TARP) to stabilize financial institutions. In Japan, with government forbearance, no major banks failed until eight years into the downdraft and the government only authorized 2.3% of GDP for funds to recapitalize the banks."
4. We're More Productive. "Productivity growth decelerated significantly in Japan in the first three years after its real estate and equity markets collapsed. In the US, productivity growth has actually accelerated. This divergence can be attributed to the faster pace of restructuring in American companies versus the slower pace in Japan. US companies reduced their labor force rapidly, driving up the unemployment rates from 4.7% to over 10% in two years. In Japan, the unemployment rate remained unchanged at 2.1% in the first two years and reached 5.5% over the next ten years."
5. And We're Younger. "Japan's working population has declined by more than 5% over the last 20 years, and is expected to decline an additional 5% over the next five years. The working population in the US, on the other hand, is expected to grow by more than 10% over the next 25 years through a combination of higher fertility rates and immigration."