The lessons are right under our nose, yet we ignore them...

TOKYO (AP) — Japan's trade deficit widened in September as exports plunged 10.3 percent from a year earlier, weighed down by Europe's debt crisis and a surge in antagonisms with China that have damaged close economic ties.

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With the risk of recession rising, the Bank of Japan needs to convince markets that it will do anything necessary to pull the economy out of its two-decade old malaise, said Matthew Circosta, an economist with Moody's Analytics in Sydney, Australia.

Riiight.

Like they haven't done more than any other Central Bank in history to "stimulate" the economy?  They haven't dumped hundreds of trillions of Yen in zero and near-zero interest-rate "money" into the economy?  They haven't done this for twenty years without effect?

Why didn't it work?

It didn't work because it can't work.

Japan, like the US and other western nations, made promises it cannot keep.  These promises would require ridiculous tax rates to fund. Rather than assess those tax rates the government "printed" the money, debasing the currency. 

Or so they thought.

So why is the Yen at 80 instead of 120, where it was?  Why has it strengthened?

That's simple: Look at monetary base as credit and currency and then tell me what really has happened in Japan.

Japan's "growth" was driven by an expansion of leverage, not output.  The actual internal productivity of the economy was declining, and on a debt-adjusted basis GDP was failing to expand for a long time before the collapse came, just as is the case here in the United States.

And just as here, in the United States, when the trouble showed up the government refused to allow those firms that had made bad bets to be forced by the market to eat them. As here, financial institutions had gotten so entrenched into the economy that they were considered "too big to fail" and were protected at the expense of everything -- and everyone -- else.

But Japan had one ace up its sleeve we did not.  It had both a favorable trade balance and decades of household saving that it could tap to hold down interest rates and shift the government "stimulus" and "rescues" from. 

Now that's gone; Japan's personal savings rate went from 15% in the 1980s to just 2% today, below ours.

And remember that "personal savings" includes debt payments; it is simply computed as (income less spending.)

So why hasn't Japan already gone "boom"?

Primarily because Japan still managed to export about 3% of its GDP abroad as of 2010.

But that's narrowing too.

Japan's "miraculous" ability to continue to run huge fiscal deficits and cover it with ridiculous central bank policy is coming to an end.  Both China and Europe are slowing; while there are plenty of people talking about things "getting better" in both places, the fact of the matter is that in Europe especially there has been zero done to actually address the problems that led to the mess there, just as our government is refusing to address the economic issues here.

CAT's results this morning underline this; the firm is talking about CapEx having essentially collapsed, and they put forward a pretty gloomy forecast.  On the other hand, in their appearance on CNBS they said they didn't expect "recessions" globally over the next year.

Best of luck on that one folks; reality shows up in the earnings and once you've cut all the fat what's left is margin compression and actual slowdowns in operations, and both of those flow through directly to the bottom line.