I do not believe that it is enough for a government to buy bad bad assets and build more infrastructure. Even getting the banks to lend will take time. These stimuli must be combined with a strong series of tax cuts in order to encourage consumer spending. Domestic spending is the thinner that unclogs the arteries and allows the US economy to pump cash through its system revitalising that which was previously calcifying.
From Noriel Roubini,Is the U.S. a Japan 2? The Return of Japan’s “Free Fallin” Stag-Deflation and the Risks of a U.S. L-shaped near depression.
"Thus, even if the US were to do everything right and fast enough (on the monetary, fiscal, bank cleanup and household debt reduction) we would still have a severe two year U-shaped recession until early 2010 with a weak recovery of growth (1% or so that feels like a recession even if you are technically out of it) in 2010-2011. But if the US does not do it right this severe U-shaped US and global recession may turn into a nasty multi-year L-shaped near depression like the one experienced by Japan. We don’t have to go back to the Great Depression (when output fell over 20% and unemployment peaked over 25%); even a stag-deflation and Near-Depression like the Japanese one would be most severe for the US and the global economy. And while six months ago I was putting the odds of this L-shaped near-depression at 10% or so such odds have now risen to one third. So time is of the essence and the clock is working against US and global policy makers. The time to stop dithering is well past; and the time to implement a program of forceful, coherent, credible, globally-coordinated monetary, fiscal, financial clean-up and debt-resolution is now. The US and global economy are truly risking a near-depression if the policy reaction is not bold, aggressive, sustainable and credible".
From Doug Casey "Anatomy of Japan's "Lost Decade"
"The similarities between the U.S. now and Japan then derive from the big run-up in debt prior to the onset of economic crisis. Likewise, the reactions of the Bank of Japan and the Federal Reserve in cutting interest rates to zero and using unconventional methods to buy assets to expand their balance sheets are much the same. Further, the central governments both went into deficit to support the economy. Fed up with low growth from the early 1990s, Japan experimented with quantitative easing between 2001 and 2006, adding $250 billion to its excess reserves. The U.S. has adopted the concept of quantitative easing with even more vigor and promises much more intervention than even Japan. Japan has taken almost two decades to do what the U.S. is planning to do in two years. What can we learn from these results? 1. Very little happened in Japan. From beginning to end, the Japanese government spent trillions in its various stimulus programs, including currency interventions, but the economy did not return to robust growth. The GDP after 1990 has stayed level, so the best that can be said is that their actions may have helped the country avoid a worse downturn. Other than temporarily, their interventions certainly didn’t help the Japanese stock market, which dropped from 38,000 in 1990 to 8,000, doubled from that level during the easing, then sank back to 8,000. One might, therefore, be tempted to conclude that the U.S., like Japan, could be in for a slow economy for a long time".
From Paul Krugman, New York Times, "On The Edge"February 5th 2009
"And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time"?
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