In major markets, there have been two occasions when stock market indices have crashed and stayed below their peak for a quarter-century. One was the U.S. in 1929, where the Dow Jones Industrial Index finally topped its 1929 peak in 1954. The other was Japan, where the December 1989 Nikkei peak of 38,915.87 was surpassed only in February 2024. Sorry, Trump-san, but the current U.S. market looks more like late 1980s Japan than any U.S. predecessor and the market downturn may last as long (in inflation-adjusted terms) as Japan’s, which would end it in 2060.

The Japanese bubble had unique characteristics, both on the way up and after it burst. For one thing, it was far more fueled by debt than most Western stock market bubbles, or even real estate bubbles. Monetary policy was easy and the government attempted to control a surging yen in 1984-88 by keeping interest rates low. However, the government also increased government spending aggressively, since budgetary income appeared buoyant. The result was a classic asset price inflation, not matched by consumer price inflation because the yen was spiraling upwards, depressing the price of imported goods. The cheap money resulted in a debt-fueled bubble in two areas. One was real estate, where Japanese residential real estate rose to prices utterly unaffordable by Japanese sararimen (though 100-year mortgages became common to improve cash flow). Notoriously, at the peak the grounds of the Emperor’s palace in downtown Tokyo were worth more than the state of California.

The other debt-fueled binge, mostly by the corporate sector, was a surge of “tokkin” funds, whereby companies would set aside reserves and use their borrowing capacity, not for productive investment in their business or even for acquisitions, but to speculate in the ever-rising stock market. Profits on tokkin investment would be reported to shareholders as if they had been made in the company’s business, inflating reported earnings and pushing up share prices further. The tokkin funds brought an exuberant upsurge in stock prices, with the Nikkei index trebling between 1985 and 1989. They also caused a huge debt problem when the market bubble burst, because companies were loaded with debt, had share portfolios worth less than the debt raised against them, and reported earnings that were suddenly bare of artificial inflation from stock market profits.

After the bubble burst, Japan made several mistakes. With the collapse of tokkin portfolios quickly bringing debt defaults, it did not allow Schumpeterian creative destruction to take its course, instead propping up “zombie companies” in some cases (Sharp, for example) for decades, allowing them to suck value out of the economy. It attempted to prevent a proper recession by increasing government spending on infrastructure, building “roads to nowhere” that were primarily determined by the political clout of local politicians.

It allowed the yen to rise even further; whereas it had been around 160 to the dollar in 1989-90, a level already far above that earlier in the decade, it was allowed to appreciate until on several occasions before and after 2000 it stood for substantial periods at 80 to the dollar. Even though Japan was enjoying (no, not ‘suffering from’) price deflation for much of this time this made exporting almost impossible. I remember meeting with senior finance staff of Honda around 2005, forecasting (correctly) that the yen was again about to rise to 80 and being met with horrified explanations that such a level would make international business impossible for even Japan’s most efficient companies.

Japan suffered an inevitable financial crisis in 1998, with the collapse of several major banks such as Long-Term Credit Bank and one of the “Big Four” brokerage houses, Yamaichi Securities. Several other banks entered into forced mergers to preserve their existence, resulting in Japan’s previously competitive banking system becoming highly oligopolistic.

During the period of maximum strain in 1998, the Bank of Japan was unlucky enough to receive a visit from future Fed chairman Ben Bernanke. He peddled his usual zero interest rate/quantitative easing snake oil and the foolish Japanese bought it, jamming interest rates at zero or below for the next 25 years and over time buying 6% of the Tokyo Stock Exchange capitalization (mostly through ETFs) and an astounding 53% at its peak of the Japan Government Bonds outstanding.

After the banking crash of 1998, Japan’s economy was purged and ready to recover, and the advent of Junichiro Koizumi (prime minister 2001-06) promised austere fiscal policies that would allow growth to resume. Alas, the Bernankeist monetary policies being followed made it all too easy for the government to run deficits, so more and more of the economy was devoted to servicing government debt, which rose to an astounding 270% of GDP at its peak, killing growth and making it very difficult for the industrial sector to innovate or for small businesses to get financing. This produced an entire generation of stagnation, which is only just beginning to lift as the Bank of Japan has reversed its most damaging policies and begun to raise interest rates.

Japan was bound to suffer a slump after 1990, as the previous decade’s malinvestment was worked off. The zombie companies made the slump last a decade; the Bernankeist monetary policies added more than two further decades, so the stock market did not recover its 1989 level until 2024. Similarly in the U.S., abominable economic policies under Presidents Hoover and Roosevelt turned the inevitable short sharp downturn after the 1929 crash into a 25-year destruction of stock market value, from a market that, unlike Japan in 1989, was not especially overvalued in 1929.

The other U.S. stock market downturns since 1929 did not involve mountains of debt and hence the subsequent recessions were short-lived. In 1968 and 2000, stock market speculation had built up to an extraordinary extent, but only a few of the late-1960s conglomerates and none of the late 1990s dot-coms were heavily financed by debt, so the subsequent downturns were relatively short-lived, though the bankruptcies of Penn Central in 1970 and Enron in 2001 were substantial shocks to the system. 1979-82 saw a deep recession with only a mild stock market downturn, as 1970s inflation had already eroded the value of stocks by about two thirds from their 1968 level.

Only the 2008 crash involved heavy debt financing, in that case in dodgy home mortgages rather than stocks; although stock indices declined by almost 70% top-to-bottom, the stock market had not been very overvalued in 2006. In any case, 2008 saw the debut of Bernankeism, in which money was pumped into the system to prevent a downturn (and prevent the economically necessary Schumpeterian creative destruction). The result was more than a decade of appallingly sluggish economic growth and even worse productivity growth that, with a mild remission for President Trump’s first term, lasted until April 2025, when Trump’s “Liberation Day” and his rapid deregulation, especially through dismantling the “climate change” scam, began to dispel the Bernankeist low-growth miasma.

The stock market is unquestionably extremely high at present, but in principle that might presage only a repeat of 1970 or 2002, a short sharp recession with only a couple of major bankruptcies. However, there are disquieting signs of 1980s Japan. Most important, the revolting rash of stock buybacks, driven by top management’s stock option greed, has increased leverage ratios throughout the corporate sector, in some cases wiping out book equity altogether. This is painfully reminiscent of the tokkin mania. Companies are equally borrowing and drawing down reserves to invest in the stock market, but instead of a broad-based equity risk they are investing only in a single stock, their own. When the market break comes, those companies will not have to report losses, as did the tokkin nitwits, but that is simply a matter of grossly inadequate accounting; in reality the value of the company stock they have bought will sharply decline while the debt incurred will remain outstanding.

There are further sources of untoward debt in today’s market. The expansion of business lending beyond the banking system to specialist private debt funds has inevitably led to an erosion of credit standards, such as the elimination of debt covenants, that will produce a blizzard of debt losses when a downturn sets in. The subprime auto loans market has the same dangers as the subprime mortgages market (plus others besides) that have already caused two collapses and will undoubtedly bring more. Yield premiums for low-quality public debt over high-quality debt have collapsed, leading to an overhang in this area also. All these factors are reminiscent of 1980s Japan; the potential for a deflationary spiral as in 1990s Japan is undoubtedly present.

The massive deflationary cleansing of the overindebted U.S. corporate sector will last 34 years if U.S. politicians replicate Japan’s mistakes. The Trump administration has shown itself far too partial to bailouts, pouring new capital into the most decayed sectors of the economy such as Intel. Thus, the likely “rescue” of Boeing and other stock-buyback victims will replicate exactly Japan’s creation of zombie companies, that suck value out of the economy for decades. President Trump’s absurd real-estate-speculator desire for interest rates below the level of inflation will not only increase the level of inflation but cause the kind of Bernankeist stagnation under which Japan suffered for a quarter century. The U.S. government is still running gigantic budget deficits at the top of a boom, with unemployment around 4%; the Trump administration and Congress’s pathetic inability to cut spending bids fair to give the United States public debt of 250% of GDP by 2050 or so, condemning the private sector to credit starvation and decay.

All economic forecasts are uncertain, but one that is more certain than most is that this column will not be around by 2060, when the impending super-recession will end, given current policy trends. Sharp policy reversals are in order, to prevent such a result and cleanse the U.S. economy of its insufferable load of zombie debt.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)