Wednesday, November 3, 2010

America’s Losing Decade

<Please note:  This article was written about two and a half years ago (March, 2008), during the worst of the financial crisis.  I still stand by it.  I tried then, and even earlier, to warn the country that our economy was in peril.  But, sadly, my message did not reach the right people or they simply refused to listen.  Things are now unraveling just as I predicted. (I have carefully kept a record of all my correspondence and articles since August 2007, and even prior to the initial sub-prime mortgage collapse, and can thus demonstrate that my predictions came prior to the fact.) Considering the currently deteriorating economy, we do not have time to delay any longer. We should take action as soon as possible – before it is too late. If you think I am right, please share this with your friends, and if possible, urge our leaders and decision makers to come to terms with the actual situation and do something as soon as possible.>

Americans have looked aghast at Japan’s rapid economic decline in the past decade.  “Better them, than us,” is the unspoken refrain.  But could America be next?  What caused Japan’s decline?  Americans like simplistic answers.  Such as, it was their hubris, their excessive acquisitiveness, or their unwillingness to work more closely with the rest of the world as it moved towards globalization.  That’s nonsense. 

Many US economists believed, and continue to believe, that Japan’s failure was of its central bank and finance ministry to take decisive action.  It was a case of poor timing by waiting far too long to take steps to revive Japan’s economy, plus several macroeconomic policy mistakes.  As a result, Japan’s economic slump lasted much longer than expected with a stretch of stagnation that has become known as Japan’s lost decade. That’s a better explanation, but it too is incorrect.  Our inability to understand the causes of Japan’s decline could mean that we are about to make the same mistakes.

Ben S. Bernanke, the Fed chairman, even offered a prescription for Japan’s malaise in a 2003 speech in Tokyo:  a more aggressive monetary policy and “explicit, though temporary, cooperation between the monetary and fiscal authorities” to stimulate the economy.

Now, it looks like its our turn. Many economists believe our economic decline is very similar to Japan’s in the early 1990s, such as:

·      Housing-driven downturn plus sharp plunge in the real estate market
·      Sub-prime mortgage failures plus bad loans
·      Financial troubles
·      The falling of consumer spending and slow job growth

As expected, the Fed has finally acted decisively (if slowly, as some would say) to cut short-term interest rates sharply, twice, lowering its benchmark rate to 3 percent.  The Bush administration has followed by proposing a $168 billion stimulus plan.  And Congress has moved uncharacteristically rapidly to approve the package.  Moreover, it looks like the Fed is willing to lower more interest rates even more to lift the economy, despite serious concerns about the risk of higher inflation.

Many economists and policy makers look satisfied with what they have done, and, yes, the American economy will eventually (!) be revitalized.  But it may also deteriorate further before things turn around.

Let’s take a moment or two to reflect on what we’ve done.  How can we be so sure those policies are working well? Did they work in Japan? Are they a real solution for the real causes of the current economic malaise? What are the real causes?   To find the truth, we need to closely examine the real causes of both Japan’s and America’s economic problems again.

Japan showed a remarkable productivity increase and economic growth in the 1980s and the early 1990s.  This was made possible mainly by the rapid development and spread of a lean production system like Toyota’s  production system and by the broad automation process. Even though competitiveness in the international market and sales for export could be increased this way, job growth in their domestic market was comparatively slow. That is, economic growth without job growth became possible.

The funds that flowed in from its exports and the existing high savings rate could have significantly increased the domestic monetary liquidity in Japan, and this could have been directly linked to the activation of the real estate market.  As the income that increased through real estate investment was much greater than that through other productive business activities, this abrupt increase of net wealth effect in real estate must have been linked to the rapid increase of consumer spending.  Moreover, the savings rate must also have been rapidly reduced. Japan’s savings rate – a phenomenal 20% of household income in the mid 1970s, fell to an uncharacteristic 14% as recently as the start of the 1990s.
The overheated real estate market, without the support of employment increase, must eventually have created massive bad loans, and the falling of the real estate market must have been directly linked to the decrease of consumer spending and job growth.

Over the last 15 years, Japan has steadily adopted expansionary economic policies to revive their economy without finding clear alternatives for job growth.  Japan remains in a semi-permanent slump, and its economic situation has worsened, such as:

·      Rapidly worsening Japanese savings rate;
4% of household income in 2002
2.6% in 2004
Now almost zero or in a negative condition.
·      High annual fiscal deficit; more than 10% of gross domestic product
·      Continuing economic stagnation
·      Persistently high unemployment
·      The rapid aging of the population
·      Near-zero interest rates on bank deposits
·      Long-term decline in stocks
·      Pay cuts and job shortages

At one time, most of the Western countries, including the U. S., looked with envy at Japan’s post-war economic rise.  No longer.  Due to the abrupt increase of productivity and commercialization capability through the rapid development of IT in the modern information age, the ratio of employment to business investment and/or consumption is rapidly decreasing.  Due to the excessive and lasting expansionary economic policies over the last several years, a bubble has formed in the equity market across the board; and, accordingly, the financial markets are in a very unstable condition.  Consumer savings rate continues in a near-zero or minus condition.

The question now is, not how can we be like Japan, but how can we avoid the economic slump that Japan is experiencing?  Can the powerful economic expansionary policies, including the Bush Economic Stimulus Plan, lift the economy again?

My answer is simply “No, it cannot”. Because under the current market or economic condition with the low ratio of employment to business investment and/or consumption and the increasing inflation possibility, the expansionary economic policies will not work effectively.  Rather, other unexpected abnormalities will possibly occur.  Instead, America’s losing future will eventually be unavoidable.  This will also become, not just America’s lost decade, but the world’s lost decade.

What is wrong with our market or economy? What is the real cause of the current economic problems?  It’s the market structure (or process).

Under the existing outdated market structure, we cannot increase job growth as much as desired and create greater effects on efficiency and effectiveness from the market or economy, no matter how powerful and aggressive expansionary economic policies are adopted.

One of the main reasons why Japan had this structural economic decline almost ten years earlier than other countries is they had a traditionally more fixed and closed functional market structure than others, along with faster developing capability of productivity and commercialization.

Therefore, to avoid the persistent decline Japan has undergone, we should convert the outdated existing market structure to a new market structure as soon as possible, which can improve the ratio of employment to business investment and/or consumption significantly, create greater effects on efficiency and effectiveness from the market or economy, and provide a policy for better working conditions.

Fortunately, the conditions and circumstances for the development of a new market structure are already in place.  If decision makers are willing to make the hard choices, it will be relatively easy to implement – if we act soon enough.

Therefore, I strongly recommend the governments and leaders of the Western countries initiate the development of a new market structure better suited to the modern information age, and provide the active assistance and support necessary to revitalize their own economies soon.  It is that or a decade of decline reminiscent of Japan’s lost decade.

<If you wish to know more details on new market structure (process), please take a look at my another article entitled "Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity". ->

Author:           Luke Ho-Hyung Lee ( - Ho-Hyung (“Luke”) Lee is by training a lawyer, an international businessman and entrepreneur – and an inventor.  He is currently the president of Ubiquitous Market System, Inc. (UbiMS). Ubiquitous Market System is nothing less than a new synergy market system that will put us on the real path to prosperity.


  1. "One of the main reasons why Japan had this structural economic decline almost ten years earlier than other countries is they had a traditionally more fixed and closed functional market structure than others, along with faster developing capability of productivity and commercialization."
    I feel like I want to agree with you on this, but you don't actually explain how the market structure you describe Japan having leads to a "structural economic decline".
    Still, very interesting viewpoint.

  2. @cirbeck -- I have been watching the Japanese economy very closely, and believe I understand the real causes and solutions for not only Japan’s economy but the world’s economy including the U.S.'s economy.
    What is the real cause of the current economic crisis? The conventional answer is that it is the housing market bubble burst, the sub-prime mortgage system failures or the balance sheet recession in Japan's case. That’s the simple answer. But what underlies those? Is it perhaps the existing market process itself? I can see free market ideologues cringe now. But with the market process as it exists now, the market as a whole cannot self-generate enough businesses and jobs to keep the level of consumer spending at the desired level. That is, the existing market process for the real market is too heavily efficiency-oriented and no longer suitable for the modern information market.
    If we do not change this existing efficiency-oriented market process soon to a more effectiveness-oriented market process, I strongly believe that this economic tailspin cannot be stopped. At the very least, as long as the current conditions remain, we cannot achieve sustainable economic growth.
    I am not a professionally trained economist; I am a businessman. But I think my business experience gives me an insight into our economy.
    Unlike others who share our concern, I have a clear solution.
    Please see: Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity