The US is already Japan, only worse off

The US already is Japan with near-zero interest rates, a broken financial system and politicians who don't seem to realise the severity of the problem. The only question is whether the US will be so lucky.

For all its rigidities and idiosyncrasies, Asia's biggest economy never fully collapsed. It never got near a depression, nor did deflation get out of control the way many analysts predicted following the implosion of the 1980s bubble economy.

While asset prices plunged, the economy drifted lower at a glacial, pace for a decade until growth returned in 2002. Japan didn't unravel. Households merely adjusted and lived off their savings and untold wealth was destroyed but Japan muddled along. US politicians who say stimulus efforts are too big aren't paying attention to the lessons from Japan.

The Federal Reserve is. In a credit crisis, government spending is far more potent than monetary policy. Japan's crisis-management was not ideal either. It acted too slowly at first and never had an exit strategy. Growth is still reliant on free money and the largest public debt in the developed world.

It's highly doubtful that the US's experience would be as stable as Japan's. Households in Japan had trillions of dollars of savings; Americans don't. Japan began its crisis as a creditor nation; the US is a debtor nation. Japan doesn't rely heavily on foreign capital to finance imbalances; the US, with its gaping current-account deficit, does.

Global growth also softened Japan's slide. Today, there's no such source of growth. Exports won't bail the US out the way they did Japan.

Japan's economy never became as dependent on the financial services industry as the US did. The US's crisis is more complex than Sweden's, too. The US has at least a dozen systemically vital commercial banks. The Swedish government handled its crisis taking over just a couple of banks. It seems inevitable that the US will begin nationalising troubled banks. Yet politics is standing in the way, unlike with Sweden's experience.

The "toxic assets" weighing on US banks weren't around in the early 1990s when Sweden dealt with its crisis and Japan was discovering its own. Japan's crisis was a straightforward bad-loan one. The securitisation boom in the US created several layers of troubled assets sometimes moving counter to one another.

Household debt didn't plague Japan. Its crisis was about corporate borrowing, which skyrocketed in the 1980s using property and stock portfolios as collateral. The US problem is more about over-indebted consumers and there are far more people involved.

That should worry US policy makers and be a warning to politicians. With credit hard to come by and Americans sitting on little savings, the US may be facing its own lost decade.

Will the US handle things as well as Japan? It's impossible to say.

Books by Adam Smith and John Maynard Keynes are of little help to traders wondering if they will have a job in six months or economists predicting growth rates a year out.

Japan's experience can inform Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner. Japan acted too slowly to dispose of bad loans. Politicians complicated things with an ill-timed tax increase in 1997 and didn't begin recapitalising banks until a year later. Another lesson: Know when to begin dismantling stimulus programs.

Japan is now back in recession - a reminder that policy makers didn't do enough to retool the economy.

The US is acting faster than Japan did but that doesn't ensure success. US officials need to realise they have already turned Japanese. Now it's a matter of reducing the severity of the funk.