Will American economy follow the Japanese economy with a twenty-year lag? Where does Dow Jones Industrial Average go from here?
Fred Day
May 28, 2007

The Japanese economy has suffered for the last twenty years from deflation and stagnation. The root cause of the same was excessive borrowing by the Japanese Government Corporations and the public.

The World’s second largest economy with massive trade surplus that was sure to become the economic superpower plunged into deep deflation. The Yen took a bungee jump and interest rates went to zero.

Remember these all happened when Japan had a strong trade surplus and a very favorable balance of payments. The stock market bubble, the bubble in real estate – all collapsed in late eighties. The Nikkei took a sharp fall of more than 80%. If the Dow Jones Industrial Average mirrors Nikkei with a twenty-year lag, it can end up below 3000!

Is there a parallel between Japan in late eighties and US in 2007? Some economic think tanks believe it does except one thing. If the US economy is going follow the Japanese trail with a lag of twenty years, it will be much worse. The dollar can really crash because of massive trade deficit and balance of payments. The mild recession in Japan will translate in US as deep depression and the deflation will be extremely on the high side.

Some critics of this opinion say, Japan had its deflation; Germany had its economic downturn because of trade surplus. Well, it is almost saying, keeping liquid cash is stupidity. Only time will say if that hypothesis that negates common sense is of any real sense.

Remember, in 2003, the same proponents of Iraq war was claiming fast victory after a ‘shock and awe’ to the feeble, malnourished Iraqi Army that suffered from UN sanctions for more tan a decade. The reality is not what it seems on the surface. The reality lies with geopolitical trends and economic common sense on the long run.

If the American economy follows the Japanese trail, it will be catastrophic for the world’s economies for two reasons. First, the down turn in massive American economy will drag everyone else downwards. Second people will lose confidence in spend and borrowing theory. That will cause massive deflation and depression in world economies.

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