Tuesday, February 17, 2009

Worse then Japan

The Economist has an article that suggests that our financial crisis may be worse than Japan's and that we should not dismiss it lightly:
Japan’s outcome—a decade in which growth averaged 1% a year and gross government debt rose by 80 percentage points of GDP—was not one to be proud of. But given the magnitude of today’s mess, it may soon seem not that bad after all.
There are several reasons for thinking that our problems may be worse. Our housing bubble was larger, our shadow banking system has collapsed -- Japan did not have one, de-leveraging is taking place on a massive scale, and it is hard to see where demand is going to come from in the rest of the world to pull us out of this. Japan suffered its crisis with high savings rates, we start with low savings. Hence, as households in America try to restore their balance sheets where will demand come from?

No comments: