US Lost Decade

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Revisions to US GDP data and the Fed’s admission overnight that the US economy is in for a period of extended weakness suggest a very high likelihood of a lost decade dating from the beginning of the recession in December 2007. US GDP is still below end 2007 levels, and I think it is very easy to see weak growth for another 5-6 years on the back of weak household spending and investment due to balance sheet fragility. Between June 1991 and June 2001 Japanese GDP grew only 9.5%. For the US to achieve the same growth as Japan in its (first) lost decade would require the next 6 years to average about the 1.5% real GDP growth that many are now predicting. Like Japan, collapsing asset price bubbles cannot be solved by loose fiscal and monetary policy, and like Japan the US is suffering from an extended period of policy weakness. In light of all of this the financial market bounce overnight is very strange. Expecting QEIII the markets instead got an admission that the US economy is in for a lost decade. Maybe the market was expecting worse?

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