Saturday, August 20, 2011

Real GDP: Japan vs. USA

Lost Decade (Japan)

The term originally referred to the years 1991 to 2000,[1] but recently the decade from 2001 to 2010 is also sometimes included, so that the whole period of the 1990s and 2000s is referred to as the Lost Decades or the Lost Years (失われた20年, Ushinawareta Nijūnen).



Japan went from an annual exponential growth rate in real GDP of 5.9% to 1.0% after their housing bubble popped. That's a 4.9% decline in the growth rate. This pattern continued for two decades and shows no signs of improving.



The USA went from an annual exponential growth rate in real GDP of 3.2% to -1.3% after our housing bubble popped (through 2009). That's a 4.5% decline. Will it too continue into the distant future? We better hope not.





A similar story is told by comparing the drop in real GDP per capita growth. It clearly isn't just Japan's declining population that's the problem here.





As can be seen in these last two charts, Americans would seem to be far more efficient at laying off workers than Japan. The growth in real GDP per employed worker has taken a much smaller hit.

Please note that the data only goes through 2009. 2010 showed some improvement but 2011 is iffy at best. I have serious doubts that the improvement is sustainable and I think the markets are starting to doubt it too.

I've been giving some thought to locking in some profits on long-term TIPS but after thinking about these charts (the first two in particular) I'm content to hold them. Even today's 0.93% real rate on 30 year TIPS could look pretty good in hindsight if we experience 2 or more lost decades of real GDP growth. That's my theory and I'm sticking to it.

I said in the comments that I was thinking about making a decision tree to help me decide whether or not to lock in profits. The tree sort of ends here. My concern that we slide into Japan's long-term stagnation mess is just too great.


Source Data:
St. Louis Fed: Real GDP in Japan
St. Louis Fed: Real GDP per Capita in Japan
St. Louis Fed: Real GDP per Employed Person in Japan
St. Louis Fed: Real GDP in the United States
St. Louis Fed: Real GDP per Capita in the United States
St. Louis Fed: Real GDP per Employed Person in the United States

28 comments:

Mr Slippery said...

Mark,

I can't blame you for hanging on to your TIPS. I'm probably more short term oriented.

The charts are just frightening, though. Despite all the big talk from Bernanke, we are following the path of Japan. Of course, a lot of that blame belongs with the Treasury and Congress for propping up the big banks and making them zombies instead of nationalizing them and shutting them down.

A more Capitalist country, Sweden, handled it a different way.

cf said...

If we're going to be Japan wouldn't long zero's provide a better return?

Stagflationary Mark said...

Mr Slippery,

The charts are indeed frightening, and frightening should in theory be good for the believers in the gold religion.

So I guess I can't really blame you for holding onto some of your gold either.

I continue to preach the toilet paper and canned goods religion though, as the ultimate form of capital preservation in a world gone mad.

Stagflationary Mark said...

cf,

If we're going to be Japan wouldn't long zero's provide a better return?

I think there's a good chance of that being true. I'd probably even bet on it if the consequences for being wrong weren't so bad.

The thing that concerns me is that Japan doesn't run massive trade deficits. The situations are therefore not entirely identical. Put another way, over the long-term I think we can convince the world to spend all those paper dollars we export/exported to them on things such as oil. My gut says that 2% annual inflation over the long-term is doable.

By owning TIPS, my bet is actually on low real GDP growth (inflation adjusted growth). Low real GDP growth can happen both in inflationary and deflationary environments. This allows me to be more inflation agnostic.

I'm trying to be somewhat prepared for the inflationary economy of World War 2 and the 1970s, while also being somewhat prepared for the deflationary economy of Japan (which really wasn't all that deflationary long-term).

tj and the bear said...
This comment has been removed by the author.
tj and the bear said...

Mark,

You ever read the various authors talking about demographics, specifically "peak earners"? Japan hit theirs around 1990, and IIRC we've just recently passed ours, too. Nothing but economic contraction ahead.

That said, let's make sure not to confuse economic growth/contraction with inflation/deflation.

BTW, great charts as usual.

Stagflationary Mark said...

tj and the bear,

I have been trying to follow Japan's economy since turning bearish in 2004 and am indeed fascinated with the demographics there. Here's a scary tidbit that relates to us.

May 19, 2009
Main Street Anticipated Hard Times

Newly-released US census figures show a strong slowdown in the birth-rate that began before the economic crisis hit.

Back to you again.

That said, let's make sure not to confuse economic growth/contraction with inflation/deflation.

Absolutely. There are many ways this can play out even if we know contraction is coming.

I'm not even remotely suggesting that Zimbabwe is our future, but they did manage to get massive inflation and massive unemployment at the same time.

My investments are not at all well prepared for that outcome as you know. It is one risk that I am willing to take. Only hindsight will show if I outlive the decision. I do consider it to be a non-trivial risk.

I think I could survive a 1970s environment that never ends though. At least in theory.

Stagflationary Mark said...

Once again, not really betting on that outcome though. I'm just trying to be prepared for most really bad outcomes.

tj and the bear said...

Continuing from the last thread...

OOH, so much to respond to!

I really don't think I am making your point.

Yes, you do, but you just can't see it yet.

The "brand new home" was also primal and those who bought homes based on primal instincts did not do so well in hindsight.

So, has the primal instinct to nest left forever? No, it's just been temporarily suppressed. The illusion of economic, political and paper money stability has also suppressed the primal instinct for real, tangible money, too.

I would be far more bullish on gold if 99% of the gold ever mined was NOT still in existence. That is hardly a bonus for those who own gold.

THAT'S MY POINT. There is no logical, rational basis to own gold, let alone invest in anything associated with it. From a commodity standpoint it couldn't be worse. That's why your comparisons are irrelevant.

This is exactly why I am a gold heretic. You see gold as a religion. I do not.

I don't see gold as a religion any more than I see homeownership as a religion. What I do see is a profound primal instinct that transcends religion, ethnicity, politics, etc. It's always with us, but has been suppressed by decades of relative peace and prosperity. That's over.

Remember, I stated that gold is a barometer on economic & political instability. The minute I see a chance of things truly changing for the better I'll dump my holdings in a flash, but all I see is trouble ahead.

Like Mr. Slippery, I believe the dollar will either suffer a severe devaluation or go away altogether. When that happens I'll have something convertible to the new currency, but anyone holding paper denominated in dollars will not.

tj and the bear said...
This comment has been removed by the author.
tj and the bear said...

Check out the graph on this page:

http://sigmaseek.blogspot.com/2009/05/peak-earnings-and-demographics.html

If you consider that (1) people in the US historically reach their peak earning power in their late 40s & 50s, that (2) this group has been growing for as long as we've been alive, and that (3) this group will start shrinking and continue to do so for at least another decade... well, we're more than screwed

Stagflationary Mark said...

tj and the bear,

THAT'S MY POINT. There is no logical, rational basis to own gold, let alone invest in anything associated with it. From a commodity standpoint it couldn't be worse. That's why your comparisons are irrelevant.

I bet we could have worked this through far faster in person, lol.

You are claiming that I am trying to use logic to explain something that's illogical. I get it now. It would not be the first time!

It's always with us, but has been suppressed by decades of relative peace and prosperity.

I think the worst part for me is what a true bargain toilet paper is right now compared to so many of the alternatives (including my TIPS and I-Bonds). Most people take it for granted. I do not.

All it takes is the realization that many people in the world would have to work a very long time for just one roll of the stuff.

Stagflationary Mark said...

tj and the bear,

I hear you. The race is on between how long my nest egg can last and my lifespan. I assume -2% real growth after taxes, which is clearly far, far lower than most financial analysts would suggest.

I've been fortunate since turning bearish in 2004 that I've been able to do much better than that, but the trend is down and -2% might even be optimistic as we head further into the future. It is the reason I'm still buying 0.0% I-Bonds even though most would think the rate is ridiculously low.

The real yields of World War II are not something that the typical investor is remotely prepared for.

I'm picturing a gradual decline that is relentless. I think that is the path of least resistance. I could be wrong of course. It is just an opinion.

Stagflationary Mark said...

I read your link.

Now add missing jobs by gender to it. There are so many exponential growth trends falling apart at the same time. Sigh.

Stagflationary Mark said...

And for those just tuning in, the Mundell-Tobin Effect is definitely an eye opener.

Audrey said...

Love your charts - keep up the interesting posts. Scary but fascinating.

tj and the bear said...

There are so many exponential growth trends falling apart at the same time. Sigh.

Ain't it the truth!

Unfortunately IMHO I don't see a gradual decline. What I do see is more akin to Hemingway's description of bankruptcy.

As you have noted, there are too many ways in which we're NOT Japan.

Troy said...

oooh oooh Japan. Me love Japan. Me lived in Japan in the 1990s and me speak Japanese-talk good!

Me want to go back to Japan later this decade to avoid Soylent Green future coming here!

Me don't know if good idea or not.

As mentioned above, their trade surplus even with such a strong yen is a curious thing.

Yen was at parity with the dollar during the war, so 50 doesn't sound all that outrageous.

50 sets up an interesting yen-yuan cross. Right now Chinese labor is pretty cheap for the Japanese multinationals -- Y800 a day, which is the cost of decent fast-food meal in Tokyo.

As for this:

"Japan hit theirs around 1990, and IIRC we've just recently passed ours, too. Nothing but economic contraction ahead."

I tend to disagree. Japan has plenty of teenagers with nothing to do due to their screwy recession.

Japan isn't short of people and I don't think their baby boom is half as bad as ours. For one, old Japanese people are tough mofos, no AARP for them.

Secondly, they have their public health sector wired down pretty well. They need tons more nurses still, but so do we . . .

And yet their credit picture is off the hook . . .

http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html#axzz1VdEpC3nN

471% debt to GDP! Sayonara1

But look at the UK. UK is #2 for my buyout country maybe, but they're just as screwed.

I'd go to Canada, but that's a crowded trade. Singapore?

Maybe a doomstead would work. Pt Roberts is interesting . . .

http://en.wikipedia.org/wiki/Point_Roberts,_Washington

Stagflationary Mark said...

Audrey,

Thanks!

I wish there were more happy charts to share, but I guess I just don't have it in me (nor does the economy apparently).

Troy said...

goddamn Lion spellcorrector!

bugout not buyout!

Stagflationary Mark said...

tj and the bear,

As you have noted, there are too many ways in which we're NOT Japan.

I may be a tad biased by the horror and science fiction I have read that is coming to life before my very eyes.

An Unsafe Haven

Things have a way of going on longer than we can all possibly imagine, even as they do start to fall apart. That's just an opinion too of course.

I would have a different opinion if we were the only country going through this. That brings me to another catch phrase I've tried to start here. So far, no luck. I think there's a good chance for the future though!

Misery loves companies!

Stagflationary Mark said...

Troy,

I think world war was supposed to clear out all these kinds of problems in the past.

There's nothing quite like a worldwide broken window fallacy to bring joy to the masses.

That is SO crazy that you bring up Point Roberts. The guy who cut my hair for nearly 15 years moved there. NO JOKE!!

Perhaps my years of bearish commentary had some small subconscious impact on him. One wonders!

Speaking of which, I really need to start thinking about finding someone else to cut my hair. I don't think he's ever coming back, lol.

Stagflationary Mark said...

One more thought.

I have no desire to move to another country. I think I'd rather try to stick with the fairly known and monumental problems here over blindly stabbing in the dark.

For example, I ruled out Spain years ago. ;)

Troy said...

I just worry about civil disorder.

I saw Reginald Denny get his head bashed in on live TV. I was a zip code or two away, but it was a formative moment for me. I actually went and applied for my passport that Friday, since school was cancelled.

Doomsteading might work I guess and certainly is more workable than bugging out.. Bellingham seems nice. Pt Roberts kinda looks inconvenient, I need at least monthly trips to Costco, Target, etc.

I've got mucho family in Washington (we basically colonized Morton LOL) and absolutely love the Puget Sound area. The trees!

Stagflationary Mark said...

Troy,

I just worry about civil disorder.

I bought a .45 when I turned bearish in 2004 and visited a local gun range more than a few times.

I hadn't fired a firearm since my youth.

For now I keep it in a safe. I'm hoping it can stay there but at some point it will probably move to the nightstand. Sigh.

Stagflationary Mark said...

I should add that a big jammer door brace makes a fine addition to nearly any home, as does a full size dog (she's bigger now, lol).

Troy said...

Doors in Japan open outward.

But for protection I'd go with a short-ish shotgun.

Nothing like racking a shell to get the point across, plus I think stress and handguns don't go together that well.

Remember Michael Caine's hideout in Children of Men?

that's what I want in a doomstead. Invisibility.

But Japan seems to be a better than that. Pretty civilized people.

though with google maps that's kinda hard.

Maybe this guy had the right idea:

http://en.wikipedia.org/wiki/Forestiere_Underground_Gardens

Stagflationary Mark said...

Honest Japanese Return $78 Million in Cash Found in Quake Rubble