by Mitch Kokai
Senior Political Analyst, John Locke Foundation
In the 1990s, Japan suffered a lost economic decade of highly disappointing economic growth and price deflation. It did so in the aftermath of the bursting of its massive equity and property market bubble. One has to wonder whether the U.S. might now be setting itself up for a decade of poor economic performance by allowing unusually large bubbles to once again form in its asset and credit markets and by throwing caution to the wind in the management of its public finances.
Even before the onset of the COVID-19 pandemic, the U.S. economy displayed troubling signs of Japanification. Following the 2008 bursting of its housing and credit market bubble, the United States experienced its slowest economic recovery on record while inflation remained consistently below the Federal Reserve’s 2 percent inflation target.
Meanwhile, its highly leveraged companies borrowed heavily at very low interest rate spreads, and the country seemed to have lost any constituency for budget discipline on both sides of the political aisle. Republican administrations proved to be very keen to cut taxes but were loath to cut public spending. Meanwhile, Democratic administrations proved eager to raise public spending but were hesitant to raise taxes. The net result was that the country now finds itself saddled with a record budget deficit and on an unsustainable public debt path.
The excessively expansive U.S. monetary and fiscal policy response to last year’s once-in-a-century health crisis makes it all too likely that in the years immediately ahead the Japanification of the U.S. economy will pick up pace.
By increasing the size of its balance sheet in less than a year by more than $4 trillion through its aggressive bond-buying program and by keeping interest rates at ultra-low levels, the Federal Reserve has created a troubling “everything” bubble in the U.S. equity, housing and debt markets.