LESSONS THE U.S. CAN LEARN FROM JAPAN AND THE EUROZONE Presented by A.G. Malliaris THE TRANSFORMER ASSOCIATION SPRING MEETING Chicago, May 1, 2013

Outline of Discussion The Financial Crisis of Real and Financial Factors Special Emphasis on Deleveraging Compare Japan During the 90s with the US and EU Now Key Lessons for the U.S.

The Global Financial Crisis of Began as a Subprime Debt Crisis in the U.S. Global Credit Boom Ends Housing and Equity Bubbles Burst Balance Sheets of Households and Financial Institutions Are Out of Balance Real Sectors Contract; Unemployment Increases EU Sovereign Debt Crisis Follows Where Are We Now?

Inflation and Public Debt in EU

Inflation/Deflation in Japan

Public Debt in Japan

Japan’s Export and Reserves

Inflation in the U.S.

Current Account in the U.S.

Lessons From Japan in the 90s Dual Bubbles Burst: Real Estate and Equity Markets Excessive Leverage in Corporate and Banking Sectors Prolonged Leverage Adjustment Persistent Slow Economic Activity Rapidly Rising Government Debt Major Correction in Asset Prices/Lost Decade

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Exhibit 4. US Economy Is still a Long Way from Previous Peak 26

Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak 27

Exhibit 11. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years 36

Exhibit 10. Drastic Liquidity Injection Failed to Produce Drastic Increase in Money Supply (IV): Japan 37

Exhibit 12. Japan’s GDP Grew in spite of Massive Loss of Wealth and Private Sector De-leveraging 38

Key Lessons The Eurozone Faces Significant Challenges to Restore Banking Stability A Repair of the Financial Sector is a Precondition for Economic Growth Sovereign Debt Crisis for Several Members Remains a Major Concern EU as the US and Unlike Japan During the 90s Has a Good Corporate Sector The Weakness of the Euro Contributes to EU competitiveness

Where Are We Going?

LESSONS FOR THE U.S. Avoid Deflation!! WHY? Discuss Lessons from Japan and Role of the Fed’s Q1, Q2, Q3 Promote Exports as Learned from Both Japan and the EU Repair Financial Sector: U.S. vs. EU & Japan U.S. Corporate Sector Is Doing Well; S&P 500 is a Great Positive Address Political Uncertainty in U.S.