The "Japanization" of America may be here, as the U.S. begins a long period of weak growth
The U.S. may face a prolonged period of stagnation. That's the warning from a Reuters op-ed written earlier this week by PIMCO CEO and co-CIO Mohamed El-Erian. He worries that the U.S. could be on a worse path than Japan was when it began its "lost decade." But he ends with a note of optimism, saying that policymakers have the power to avoid Japan's fate. Both their willingness and ability to do so should worry us, however.
Why We Face a Lost Decade
What has gone so wrong that the U.S. could be in for a decade or more of sluggish growth and relatively high unemployment? The problem all began with too much borrowing -- on all levels. Consumers, states, and the federal government borrowed too much money. The problem for homeowners is particularly acute, since many now have assets worth less than what they owe due to the housing bubble. Rapidly growing student loan debt makes matters worse.
What you end up with is a troubling cycle. Unemployment is high, so consumer sentiment is low. And as a result, Americans aren't spending enough money to cause firms to hire more aggressively -- so unemployment stays high. And the debt burden Americans are under cuts spending by even more. Many are trying to whittle away at their mortgages, credit card balances, home equity loans, and student loans. Others are trying to rebuild their nest eggs. Weak sentiment combined with deleveraging is a recipe for very slow spending growth.