I’ve spent a great deal of time over the last three years discussing the balance sheet recession and the plight of the US economy (NYSE:SPY). When the USA suffered its massive housing bubble it involved an even larger debt bubble. When this bubble burst consumers were left servicing bubble era debts with post-bubble era cash flows. The result is what has now come to be known as the balance sheet recession.
Although this is a rare phenomenon, it’s not unheard of. Japan (NYSE:EWJ) is on the tail end of a 20 year balance sheet recession that started with their own debt bubble and asset price implosion. And while I’ve been quick to compare Japan to the USA over the years, I think it’s important to recognize several distinctions that make our situation more favorable.
This is a household balance sheet recession.
The USA is suffering a household debt crisis. Japan suffered a corporate debt crisis. The following chart from Richard Koo’s Holy Grail of Macroeconomics compares the leverage environment in the USA and Japan. As you can see, Japan’s corporations were grossly overleveraged. It’s not surprising then that their de-leveraging has lasted as long as it has.
Although US households remain overleveraged they’ve made substantial progress in recent years to improve their financial standing. Household liabilities to disposable income have declined from 130% to 113% since 2008. So while households still have substantial de-leveraging to do in the coming years it’s not unreasonable to assume that households will be able to shoulder more and more of the economic burden as these ratios improve and balance sheets normalize.
Demographics are superior in the USA.
One of the primary hurdles for Japan in recent decades has been a decline in the overall population. While the USA is facing increasing demographic burdens as the baby boomers retire, the broad trends are still favorable. National Bank of Canada (NYSE:EWC) recently described the situation:
“It is important to keep in mind that Japan’s deflationary problems have been exacerbated by a decline in the population of prime-age house buyers (defined as the number of people in the 20-to-44 age group).
Unlike Japan, the U.S. is at a positive inflection point for that specific age cohort. According to the U.S. Bureau of Census, the population of people aged 20-44 is expected to increase through the next twenty years (13 million people). Japan, for its part, has already experienced a decline of 6% for that cohort (or 3.2 million people).”
The US government was faster to respond.
The most important difference has been the government response. Now, the USA has done a great deal wrong over the last few years in terms of bolstering the economy. The primary gripe that I have pointed to in recent years was the fact that the Fed and Congress focused too much on saving the banks and not saving Main Street. This was never a banking crisis. It was always a household crisis. Therefore, much of the stimulus aimed at saving banks has turned out to be relatively futile. Nonetheless, we have responded with a fair amount of Main Street aid and have done so in a much faster fashion than Japan did. The following chart shows that the U.S. response was in fact much more swift than the Japanese approach:
So, the bad news is that we are still strikingly similar to Japan (NYSE:EWJ) and that means the economic weakness will continue as long as the balance sheet recession continues and consumer deleverage. The good news, however, is that we are unlikely to suffer through two lost decades as the Japanese did following their balance sheet recession.
Cullen Roche is the founder and CEO of an investment partnership and the website Pragmatic Capitalism.