Bloomberg’s Tom Keene points us to Robert Feldman’s 2001 work on Japan’s long economic winter. Feldman notes that following a major economic crisis, economies seem to follow a very predictable set of steps: Crisis, Response, Improvement, Complacency, Repeat.
Although written about Japan, it is certainly applicable to both the US (2007-09) and Europe (2011-13). My reinterpretation and updating of Feldman’s Crisis work is as follows:
1. Response: When any crisis reaches a panic stage, authorities will typically react (and overreact) creating an overwhelming response to the crisis. This usually includes lots of cash and some immediate legislative relief.
2. Improvement: This response throw enough money at the problem that symptoms are temporarily relieved. The improvement is not structural, but rather, is driven by a sugar rush of excess liquidity. It feels good but it is not economically nutritious.
3. Complacency: The baling wire, chewing gum and duct tape improvements of the temporary patchwork repair creates a false sense of accomplishment. The improvements feel good, the data improves, markets rally. Thios leads to a sense of complacency amongst all parties (Government, private sector, banks, consumers, etc.)
4. Repeat: With few of the structural problems fixed, the excess liquidity eventually flows to the same sources of the original crisis, setting the stage for the next crisis .
Feldman’s keen observation was that the natural consequences of complacency is an eventual return to crisis. As of 2001, Japan was beginning their fourth CRIC cycle.
Bringing us up to date, the US appears to be deep in the Complacency stage. Things have noticeably improved, but the structural problems underneath remain.
In Europe, we seem to be late in the Response phase, awaiting the early Improvement part of the cycle to kick in.
Unlike Iceland or Sweden. neither the US nor Europe has addressed the fundamental underlying problems. Which simply means that somewhere off int he future, we will enjoy the Repeat phase . . .
Cobwebs and CRICs Japan Economics
Robert Alan Feldman
MORGAN STANLEY, April 4, 2001.
Crisis, Response, Improvement, Complacency, Repeat
Econocchat, March 05, 2012
Interview: Tom Keene, Robert Feldman
July 11, 2011 6:06 AM