Just where is this economy going? And how long will it stay in the doldrums?

While our current economic predicament may feel quite unique, there is actually a case study that we can examine to try to get a predicative handle on this beast. Take a look at Japan in the late 1980’s. Their economy, the second largest in the world at the time, was percolating along. Many economists in the mid-80’s projected that Japan’s gross domestic product would surpass the United States within fifteen years due to Japan’s efficiency and business work ethic. By 1990, however, Japan’s economy was not humming along. They suffered a huge real estate bust. In reaction to falling real estate values and activity, the Japanese government lowered their equivalent of the Fed Funds rate to zero (that’s right, zero). Then their stock market lost more than 60% of its value. Sound familiar?

So what the heck happened to Japan? The answer: for the next ten years (i.e., all of the 1990’s) they experienced comparatively low real estate values and a languishing stock market that basically went sideways as opposed to cascading upward. For the Japanese people it was financially painful.

Are we in for a worse experience? Well, Japan had two huge advantages over the United States current situation: 1. They were, and still are, a net exporter of goods. 2. Their population was, and still is, voracious savers of money. In other words, the general population actually had non-401K cash savings to fall back on during hard times.

Are the next ten years going to be gloom and doom for us? Perhaps not. While the government certainly got involved in Japan’s recovery, their efforts paled in comparison to the capital infusions that Uncle Sam has ponied up. With proper stewardship of recovery dollars, coupled with some healthy behavioral changes by the general population, there is a good chance that we will emerge from this mess a shaken, but strong nation.