This paronomasia and analysis is from James Quinn at theburningplatform.com and was published at Minyanville (one of the best financial education and economic sites on the web – it is in our blog roll and check it out esp. Todd Harrison’s work and the late great Bennett Sedecca’s. They have excellent intellectually honest discussions and analysis.
The Nikkei Bubble from 1983-Present
Japan was going to dominate the world. From 1983 until its peak in 1989, the Nikkei rose from 7,500 to 38,900 – a 500% increase in 7 years.
Following World War II, Japan implemented tariffs that protected their industries from overseas competition. This resulted in large trade surpluses and an appreciating yen. With artificial protections, Japanese companies made mal-investments. Easy money and false confidence led to a frenzy in the stock and real-estate markets. Japanese banks had financed this speculative bubble with high-risk loans. The PE ratio of the Nikkei reached 78 in 1989.
Today, 20 years after this peak, the Nikkei hit a low of 7,500 – the same level it started at in 1983. This has occurred despite spending billions on make-work stimulus programs, reducing interest rates to zero, and artificially reducing the value of the yen. The ultimate outcome has been a national debt that’s 150% of GDP with a rapidly aging population and no way out.
See any similarities?
Now, there are 3 bubbles deflating simultaneously: Housing, consumer spending and US total debt. And they can’t be re-inflated.
The following chart from Gary Shilling’s newsletter clearly shows that home prices went into a classic bubble inflation after Alan Greenspan reduced interest rates to 1% and urged Americans to take out adjustable-rate mortgages. Americans believed the hype from the National Association of Realtors and Wall Street: Home prices were sure to go up forever.