ECONOMY -- HOW WE GOT IN OUR CURRENT SITUATION

The following article submitted by Art R.

I have been doing a significant amount of research into our current
economic catastrophe.  The following is an excerpt from an interesting
article on the subject from a trusted source.  I am trying to be
selective for fear some may not read such a long article.  It is
interesting to note that we lectured Japan on how to handle their long
economic downturn and we are acting contrary to our own
advice........ARE WE THAT STUPID  OR IS REDISTRIBUTION OF WEALTH MORE
IMPORTANT THAN THE SECURITY OF OUR COUNTRY............Please note that
redistribution of wealth is a politically correct term for Socialism /
Communism.........................PLEASE READ the 

following................

"It's amazing; the US is doing everything that Japan did wrong," said a
friend yesterday.

Let's see, in the 1980s Japan's corporate leaders thought they were
going to take over the world. Investors thought so too. They expanded.
They wheeled. They dealed. Prices shot up and they all thought they
were geniuses.

In the '80s, everyone wanted to be Japanese. Management consultants
used Japanese words to describe commonplace insights. For example,
instead of saying that businesses always need to try to do things
better, they referred to "kaizen" as if it were the secret of success.
And US economists urged the Reagan Administration to have an
"industrial policy" - because that was what Japan had. Japanese
businesses were the envy of the world. Japan was the world's second
largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to
everlasting success. Instead, what it had was what comes before a fall.
The stock market crashed in Tokyo in 1989. The Japanese economy entered
a recession. At first, the experts believed it was temporary. They
urged investors to take advantage of the opportunity to buy into Japan,
Inc. at record low prices. They thought Japanese industry was
unstoppable...unbeatable. It would recover in no time, they said.

But Japan, Inc. didn't recover. Instead, it went into a long, drawn-out
recession that lasted year after year...with on-again, off again
deflation...and several stock market rallies. Each time stocks rallied,
they fell again. Each time the economy began to grow...along came
another setback. This continued for the next 20 years...until March of
this year...when Tokyo stocks hit their lowest point for the whole bear
market. A generation of investors had been nearly wiped out. Over two
generations they had made nothing. Trillions worth of wealth had been
erased.

What did the Japanese authorities do during these last two decades?
They fought the correction every step of the way, with the boldest
attempt at fiscal and monetary stimulus every undertaken up to that
point. Interest rates came down to effectively zero. And government
spending soared, creating the largest deficits in Japanese history.
Now, Japan's national debt approaches 200% of GDP - a peacetime record.
If it continues to grow at this rate, it will hit 300% of GDP in just a
few more years.

Sound familiar? It should. The key US interest rate is now effectively
zero. The Fed says it will leave it there for "as long as it takes."
And deficits have reached staggering levels - 13% of GDP. At this rate,
the US debt/GDP ratio will hit 100% in just a few years. And if it
continues, US debt/GDP will reach 200% not long after - as recession-
reduced tax revenues meet stimulus-increased outlays.

But wait...the feds say they won't let it happen. They'll turn this
thing around. The economy will begin to grow. Tax revenues will rise.
Prices will go up.

Hey...that's just what the Japanese said!

So far, the US is doing almost exactly what the Japanese did...propping
up zombie companies and stimulating the economy as best it can.

But if it does the same thing the Japanese did, won't the US get the
same results the Japanese got?

Here is where it gets interesting. Because the US economy is not
exactly like the Japanese economy. Japan had high savings...and a
positive trade balance. It could run up huge government debts and "owe
it to itself." It could finance its government debts with the savings
of its own people, in other words. It never had to worry about
foreigners refusing to buy its bonds...or selling them suddenly.

America's government debt is different. The US doesn't save enough to
finance its own deficits. So it depends on the kindness of strangers.
And if those strangers ever lose faith in America's ability or
willingness to repay its debts, they'll drop the dollar like an
annoying girlfriend. And when they do, the whole global monetary system
will come crashing down.

But suppose savings rates go up in America - to, say, 10% of GDP, like
they were before the bubble years. That would make $1.4 trillion of
savings available to finance the feds' deficits. And suppose the slump
continues...as we think it will, with another big scare in the
investment markets. People will seek safety in...yes, you guessed
it...US bonds. This will take the pressure off the dollar and permit
the US to finance its countercyclical spending without depending
heavily on foreigners. The recession/depression will be annoying...but
not insufferable. And Bernanke will figure het has more to lose by
undermining the dollar than to gain from it. In that case, the Japan-
like slump could go on for many years - just as it has in Japan!