Actually, It's Starting to Look More and More Like We Have "Japan Disease"

The big fear that occasionally wakes even die-hard bulls up screaming is that the US is en route to becoming Japan.

If we're Japan, any recovery in the economy and market will likely be temporary. In the case of the market, any recovery will also be followed by a plunge to lower lows. For another decade, at best.

Japan's economy has basically gone nowhere for the past decade, and its stock market is trading at about one-quarter of its level of 20 years ago. If the US were to suffer the same fate, the DOW will be trading at 4,000 in 2020.

So be afraid, very afraid.

Most bulls, of course, dismiss the Japan comparison as absurd. They note the speed with which we dealt with our banking crisis (at least partially), whereas Japan let its own drag on for more than a decade. They note that Japan's population growth is stagnant and will soon start shrinking. They note that Japan's economy is rigid and inflexible and that our more entrepreneurial culture will pull us out of our own doldrums.

These points have some truth to them. And those who scoff at the idea that we're becoming Japan will continue to hang their hopes on them.

But there's another area in which the two countries are very similar, one that could be the most important of all: At least for now, we're both in the midst of a deflationary deleveraging, in which money supply growth is miniscule and bank credit continues to contract.

Paul Kasriel of Northern Trust has put together a series of charts that show this comparison, and it's not encouraging. Despite the Fed offering unlimited free credit to the banking system, banks continue to shrink the amount they're lending (except to the Federal government). Thus, this free money is not making its way into the economy, the money supply is barely growing, and credit continues to shrink (for the first time in 60 years).

Here's Why We're More Like Japan Than You Want To Know >