As we watch the meltdown occur in Japan from the devastating 9.1 earthquake, I can only wonder how this is going to send ripples around the world. This is a glaring reminder that we are all connected from the tectonic plates to our economies. The Japanese disaster will show us how people can pull together and support each other in our time of need, but it will also remind us how intertwined our economies and our livelihood have become, and how the Japanese disaster will become our own.
Japan has had an interesting run to say the least over the past 50 years. From 1960 to 1980 their overall economic growth was dubbed “a miracle”, with a 10% average in the 60’s, 5% in the 70’s, and 4% in the 80’s.
However, this type of growth normally has its circumstances and in early 1990 Japan entered the “lost decade” of zero growth and the primary stock index has been in a bear market for the last 20 years. At a top near 38,000, it currently sits around 9,600 (after Monday’s 6.2% sell off) and has never topped 22,000 in that entire period.
During that time, interest rates were cut to zero, public works programs were enacted, and quantitative easing was utilized but none of them succeeded from stopping the slumping economy and deflation. The oxygen mask was only a temporary measure and did not succeed in breathing life long term into the country.
Similar measures have been taken in the US, and have had little to no effect as the deficit widens and the private industry reports artificially inflated profits due to government injected funds.
Due to fact that Japan has tried various measures over 20 years to stimulate the economy, it now enjoys the world’s second largest public debt, currently at 200% of GDP. Zimbabwe and its bazillion dollar bill is a startling reminder of how inflating can be a delicate and dangerous prospect, as they find themselves at #1.
So how do the events in Japan affect us in North America?
More Worldwide Government Debt
The earthquake in Japan could be a finishing blow that it may never recover. Already saddled with the second largest public debt in the world, the government will have no choice to inject money into the country, which it already did in Monday’s money markets with a reported $184 billion. Although it may help stabilize the economy short term, the long-term consequences are as sure as a coma victim. They are not going to come out of this one alive.
However, this will not stop world governments, most notably the US, from getting involved in any way possible. A noble gesture on the surface, but surely adds another layer to an already strenuous debt load.
Rescuing an economy after 20 years in a bear market, with interest rates already near zero, and a natural disaster which will surely accumulate in the 100’s of billions of dollars, seems like a bad idea at best from a financial viewpoint especially since the rescuer is drowning in its own cesspool of bad mortgages, banking deals, festering unemployment, weak retirement funds, and state and federal deficits which can never be repaid. It’s akin to floating down a raging river with a bicycle tire tube trying to throw a line to rescue a runaway yacht.
This is all before we even consider another earthquake or nuclear meltdown, which will make the situation become screamingly worse.
Did I mention tension in the Middle East, and a soon to be battle over a rich oil reserve country that is required by the US if it continues to utilize oil in the coming decade? What about rising tensions in the US and abroad?
It’s one tick from exploding.
Yes, the US has an equal shot at entering a period like Japan’s lost decade. The only thing that saves its assets at this point is being the proud owner of the reserve currency. If that privilege is questioned or taken away, it’s only a matter of time before residents are being swept away in a tsunami of debt-riddled inflation.
However, as with any natural or manmade disaster, there is always a silver lining to consider. These types of events tend to build community and camaraderie between people and cultures that may have had no such link before. It allows for fresh new ideas and changes to be enacted, and can bring reflection that perhaps our society became too complicated and it’s time to go back to our sustainable roots and make life simple again.
2011 is to be the year where we think with our heart and not our mind. The Japanese disaster situation surely will start us off in the right direction, and send us into 2012 with a new attitude.
One that allows us to prosper.
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