Britannia Radio

The Coming 'Lost Decade' in America?By Dr. Steve Sjuggerud
Historically, when the government meddles in the markets, things don't turn out well...
The most recent example is Japan in the 1990s, and that ended with the "Lost Decade." Here's what happened:
Japan had a huge real estate bubble.
Banks overlent on a massive scale, making risky loans that were almost doomed from the start.
The stock market and the real estate market started to fall.
To save the economy, the Japanese Central Bank took extraordinary measures... lowering interest rates to unprecedented levels. But it wasn't enough.
Once the crisis was in full swing, the troubled banks hoarded cash instead of lending money. The economy gummed up. Asset prices went down. And people froze... They wouldn't invest in stocks or real estate.
Sound familiar?

The next steps sound familiar, too...



Instead of allowing bad banks to fail... instead of allowing the system to "clear"... the government pumped in cash to prop them up. The result was hundreds of banks and businesses existing in a sort of purgatory... neither private nor public... neither alive nor dead... They were known as "zombies."

The result? Japan's Lost Decade. Real estate prices plummeted. Japan's main stock index, the Nikkei, dropped from a peak near 40,000 to a low of about 7,500 in 2003.

Japan's government, of course, was trying to help.

It's easy to say, "Let 'em fail." But when you're in the thick of things... when it comes right down to it... it's hard to do. When the public is pleading for government to "do something," then government feels compelled to, well, do something.

In hindsight, most analysts agree that if the Japanese government had simply gotten out of the way and let the bad banks and businesses fail, the country wouldn't have experienced the Lost Decade of the 1990s...

And the Lost Decade has basically morphed into the Lost Two Decades these days. Japanese residential real estate prices have fallen every year since the peak in 1990. And the Nikkei is still down 70% today – nearly 19 years later.

Like the Japanese government did in 1990, today, for better or worse, the U.S. government feels compelled to do something. In the short run, things might actually be better...

Whatever lawmakers do today will prop up the system for now. They'll save countless businesses that rely on lines of credit to function, and therefore save many jobs on "Main Street."

But then things will likely get worse...

We may dodge a major crisis... only to enter a "zombie" stage. This includes more regulation, lower returns on capital, and uncertainty about who's running what. We could end up with "zombie" financial institutions, companies that are not private but not exactly public either... owning mortgage bonds of uncertain value. In other words, like Japan's Lost Decade.

It might be better for the government to do nothing and let businesses fail. But "do something" is the cry. And something is what's happening.
So let's hope lawmakers do as much as can be done at this moment... which will then allow government to get out of the way as soon as possible.


Fed Chairman Ben Bernanke is a student of the Depression. If he has any say, he won't let the mistakes of the Depression (or Japan's Lost Decade) happen here. If the government's got to do something, his plan, undoubtedly, will be to flood the system with dollars until the gears start turning again.

If that's the plan, then holding at least some gold – the "anti-dollar" – is probably something worth doing...

Good investing,

Steve

WHY CANADA IS THE MARKET'S SMALLEST LOSER

A look at global stock market returns over the past year produces a clear theme: With just about every country index down in the last 12 months, the "smallest loser" is the biggest winner.

As of yesterday's close, the smallest loser among country-specific ETFs is the iShares Canada (EWC).

Canada earned this label with one of the world's richest bundles of natural resources. The country is dotted with huge mineral deposits. It's home to the world's safest large oil field. It's also blessed with timber, diamonds, and agricultural assets. Despite the big commodity correction this summer, the prices of these resources are much higher than they were six years ago.

With large weightings in Barrick Gold (the world's largest gold company), Suncor Energy (oil), Teck Cominco (base metals), and Canadian Natural Resources (oil), the EWC is down just 9% in the past 12 months. This is actually a solid return when compared with the huge losses China, Russia, Korea, England, and India have suffered. There aren't many places to hide in a bear market... but Canada is providing a small amount of shelter.







A Spanish bank is offering its customers cars free of charge in exchange for opening long-term, interest-free deposits. Banesto, a mid-sized lender controlled by Santander, Spain's largest bank, is offering savers Citroën cars or Piaggio motor scooters in lieu of interest payments under a promotion called Sobre Ruedas, which translates as "smooth running".

Banks routinely offer customers opening new deposits small gifts like pens, although Banesto has in the past given clients computers and flat-screen televisions. The latest offer, however, marks the bank's biggest product giveaway to date.

Banesto does not pay interest on depositors' capital during the lock-in period of the offer, but is offering to take care of details such as registration and transport to the nearest dealership. Those customers who do take it up pay tax as if the vehicle's value were interest.
– Financial Times


Russia wants to influence global oil prices through output forecasts and mothballing deposits for future development, Energy Minister Sergei Shmatko said on Thursday.

Mr. Shmatko said Russia's policy would not involve co-ordinated action with OPEC states, although he said Russia admired OPEC's influence on prices and should do its part to smooth the oil price "roller coaster ride" of recent months.

Russia, the world's second largest crude exporter, sent a high level delegation headed by Deputy Prime Minister Igor Sechin, a key ally of Prime Minister Vladimir Putin, to a September OPEC meeting and has promised to do the same when the Organization of the Petroleum Exporting Countries meets in December.

Falling prices are of particular concern to Russia as its oil companies struggle to keep oil output growing and the government tries to balance its need for rising production with a policy of heavy taxation on the oil sector.
– Globe and Mail