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To answer this question, economists everywhere are looking for a frame of reference. Some analysts are drawing parallels to the 1920s. Others use the 1970s. But the economic conditions during these two periods are quite different than what we see now. The 1920s ended with a reversal of the Mellon tax-rate cuts, while the Smoot-Hawley tariffs all but stopped international trade and sent America into a tailspin. While President Bush deserves criticism for caving into protectionist forces, one would be hard pressed to make that parallel stick. As for the 1970s parallel, the similarities are easily dismissed; we do not have any inflation, and if anything the danger is deflation. Other economists, seeing no parallel on the homefront, have been forced to look for similar episodes outside the U.S. And one such parallel that is now making the rounds is that of the Japanese market during the 1980s and the 1990s. In a simplified form, proponents of the parallel say that all you have to do is fast forward the Japanese deflationary experience 10 years and you get the U.S. experience. But this is a dangerous idea. In Japan's case the government, through continuous blunders, prolonged the country's economic crisis. Yet, if we buy into the Japan parallel, we may also be buying into the country's failed solution — we would attempt to use our central bank and monetary policy to get us out of a vicious deflationary cycle. And that won't work — it certainly has not helped Japan. Fiscal policy, rather, is the only way out, especially if it can raise asset values for Americans quickly. And the simplest way to raise asset values is to lower the capital-gains tax rate or eliminate the corporate taxes. In addition to increasing incentives to produce, higher asset values will increase the creditworthiness of many of the people with negative net worth. Credit, meanwhile, will be much easier to obtain. Hopefully, with easier credit, rising asset values, and a recovering economy, the U.S. could once again climb aboard a new virtuous cycle. Remember, we are at an inflection point today; the wrong policy mix from Washington could push us into a protracted vicious cycle where the stock market decline slows down the economy. There's no need for us to be another Japan. The unfortunate thing is that our leadership in Washington does not seem to have a clue of how to get us out of the current mess.
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t is always darkest before the dawn. The U.S. financial markets seem to
understand this. The year-to-date numbers are quite discouraging, as all
the equity indices have declined double-digit amounts. The big question
is whether the market turbulence and down draft is near its nadir or whether
it will continue.
