It’s The Inflation, Stupid!

Let’s look at some charts comparing Japan to the U.S. Maybe there is something we can extrapolate to figure out what might be in store for us, here in the Good Ole U.S.of A. 

Let’s start with this from about Japan’s GDP growth rate over the last 40 years. 

Japan’s Annual Growth Rate

Notice in the 1980’s a few quarters it was negative. But mostly the growth rate was extraordinary.  

Then came the 1990’s and BOOM!!!!  tons and tons of negative growth. Look at all that!  Quarter after quarter, year after year, just languishing. 

2002 comes around and it looks like Japan is back. Yet, in 2009, which was the year the book by Richard Koo I keep referring to came out, The Holy Grail of MacroEconomics, starts another cycle of a perpetual yo-yo economics, up-down, up-down. 

Through it all one thing remained constant..check this out:

Japan Inflation Rate

Low Inflation – Deflation even!  From 1993 on, nothing. No inflation to speak of, at all. No matter what the government or the Bank of Japan did it was nearly 0% inflation year over year. It’s crazy because NO textbook would ever predict this. 

All the econometrics, data mining and modeling, none of it mattered.  Not one economist would have predicted that Japan for nearly 30 years would sustain such low inflation, especially given the amount of debt the country had accumulated. 

Let’s take a look around the world shall we?

Economies Around The World

First thing I want to point out is the DARK red cell. That is Japan’s Debt to GDP %. It’s nearly 250%!   

Secondly, go to the left a bit on the same row and you’ll note that the Japanese GDP grew all of 1.20% Year over Year from the 2nd quarter of 2018 to the 2nd quarter of 2019.  

Thirdly, note the interest rates.  A NEGATIVE 50 bps. 

And lastly, notice the inflation and jobless rate, all of .50% and 2.20% respectively.  

It isn’t supposed to work this way!  I can’t stress this enough. 

So, how does the US compare? 

U.S. Growth Rate

Well, as you can tell from the above our yo-yo economy has been subdued over the last 30 years or so, and of course, inflation has followed suit.  Low inflation, moderately low growth. 

We’ve had some years with growth in any quarter is over 5% and we’ve had some years where growth in any quarter is negative.  But a whole lot less variance than what used to be, that’s for sure. 

How is the US inflation rate been?

U.S. Inflation Rate


As you can see from the chart below, it’s been very stable, hovering well below 5% for the last 20 years.  

How about other U.S. economic data?

Right now our inflation rate is 1.80% with a growth rate of  2.30%. U.S. interest rates are 2.25%, jobless rate is 3.70% and debt to GDP is 106%, which is the third highest of the major world economies. 

Compared to Japan, we have less debt to GDP, more inflation, higher growth, higher interest rates but also higher joblessness.  

Let’s take a look at our stock market vs. theirs too. 

The Nikkei:

The S&P 500:


Lots of similarities there, no? 

And like Japan, we also have an aging population.  Automation WILL affect us all. How? No one knows. But it will be disruptive indeed. 

Interestingly, though, is how the average Japanese Household has kept its debt level in check, to some degree, over the last 25 years or so. 

Japan HH Debt to GDP

Notice, the Japanese HH debt to GDP flattened, shrunk and leveled off from the 1990’s to today.  Could THAT, and that alone, be the cause of the Japanese low growth, low inflation, low interest rates AND low joblessness?

Maybe.  But let’s just say that in the U.S., with our insanely high debts to attend college and buy houses, people simply STOP borrowing and instead pay down what they owe. 

What will happen then?  Hard to see a growth-like scenario like the 1950’s and 1960’s when we were just starting our love of debt consumption. I think that ship has sailed and Americans are starting to realize that taking on enormous amounts of debt is not a path to prosperity but rather one to indentured servitude. Most people don’t want that. 

My Prediction

And thus, my prediction is the U.S. economy will be more like Japan going forward. Which means you need to throw away your economic textbooks and figure out HOW to prepare for a low inflationary/deflationary economy.

I’ll be thinking on this a lot going forward. Would LOVE to hear your thoughts. 


Some recent Japanese economic headlines.  Not much different from our own, no?

Japanese Economic News Headlines

One of my subscribers on the Youtube channel sent me this article, “Sequence of Returns Risk: Decomposing Real Returns into Nominal Returns and Inflation to Find the Real Villain”

I’ve actually cited this author before but it’s been a while since I’ve read him. That is too bad because he is a treasure trove of incredible research. Highly, HIGHLY, recommend you visit his blog.

Anyway, while the article is way above the brain power for a kid from an island in Maine he does say something I CAN understand, “(I)nflation over the full 30-years has almost the same R² as equity returns in the first four years of retirement.”

Or in other words, “(To make the implicit explicit: I think that people over-worry about stock market crashes affecting their retirement and under-worry about inflation affecting their retirement.)”

See that? He says inflation is as big a concern over the course of your retirement as is retiring into a market crash. Unfortunately, we, myself included, focus more on the initial stock market declines, which happen fast and violently, than we do over the slow boil of the frog in the inflationary pot. Yet the slow boil is just as devastating!

We all have been told the ’30s were the death sentence of a portfolio. Simply not true. My analysis of the Wellington Fund proves this.

If you retired in 1930 and pulled 6% a year from Wellington, adjusted for inflation, your money would have lasted until 1949. That’s almost 2 decades, pulling 6% a year out, starting in the beginning of the GREAT DEPRESSION!

That same scenario starting in 1966 would have only lasted you until 1979. If you retired in 1973 and took 6% a year out, you’d have been broke by 1987.

“The 4% rule Josh! What about the 4% rule? Surely that would have saved us!!!”

Nope. If you started in 1966 and took 4% a year, adjusted for inflation, you’re broke by 1985. Every other time frame, you’re fine. But not then. I’ll let you take a guess as to why…

In fact, just to bore you more with numbers, if you took 5% a year out of the Wellington Fund starting in 1930 your money would have lasted you until 1959. That’s nearly 3 decades! I’m quite comfortable with that. But start the same scenario in 1966 “AAAND It’s Gone” by 1981, to quote those wonderful investment guru’s from South Park.

By the way, if you took 6% a year from Wellington starting in 2000, adjusted for inflation, you’d still be sitting on $91,000 at the end of 2018.

So, what to make of all this?

Well, this exercise in the Wellington history has been my Saul on the road to Damascus moment, I’ve been blinded by the glaringly obvious. Market declines hurt, but inflation kills. And this leads me to challenge the entire premise of typical retirement planning.

Take out the inflationary period and EVERYTHING is better. Everything. Unfortunately, if you retired in 1966 you would not have known the calamity that was coming. In 1966 the market declined less than 7%. No big deal there. Inflation was only 2.86%. Again, no big deal.

In 1967 and 1968 you were back to normal, with the markets returning around 8% each year and inflation running 3%. All is quite on the Western Front. Unfortunately, unbeknownst to you, YOU were the frog in the pan of slowly boiling water.

Fast forward to today. Markets were down a small amount last year, 5% or so. Inflation is low. All is quiet on the Western Front, indeed.

But, and this is where I take extreme issue with President Trump, he is Nixonian in some regard, wanting to devalue the dollar to be able to better compete with foreign competitors in our exports. This only makes sense, actually. Make in America and sell it overseas. The export economy.

Awful hard to do that with a strong dollar. Awful hard even to sell American-made goods in our own country when foreign goods are cheaper. Just basic economics. And Trump isn’t stupid. He knows to increase demand in our domestic-manufactured products the price needs to go down.

How do you do that without killing wages??? Devalue. But remember devaluation = inflation. Strong dollar is good. Weak dollar is bad.

Trump is doing the next best thing, actually, putting tariffs on goods coming into the country from countries that are stealing from us, China. But while that ultimately will make China buckle, manufacturers aren’t stupid either. They simply move their production facilities to more US-friendly countries. And we’re right back to where we started. (Still a net gain for us, mind you, but it doesn’t solve the riddle of a strong dollar making imports cheaper.)

So, we need to keep our eye out. Because while things are good now a couple executive/legislative mistakes could cost us…BIG TIME. Yes, we know the left’s policies are horribly inflationary. But the right, ala Nixon, and even Trumpster, can be allured to making similar mistakes.

And ultimately, it’s inflation that is the enemy. Nothing else comes close.

© Copyright 2018 Heritage Wealth Planning