We begin with the proximate financial picture:

In the late '90s, New York enjoyed a classic stock market bubble centered on technology shares. It did not take a genius to see that it would blow up; they always do. At the time, we expected the U.S. economy to follow Japan's path with a long, slow, soft slump that would deflate asset prices over the next 10 to 20 years.

Japan's Nikkei Dow hit a high over 39,000 in 1989. This week we read in the International Herald Tribune, "Japan [finally] roars out of its doldrums." The Tokyo stock market rose to 12,896! If America were to follow the same trajectory - as we guessed it would - in the year 2015 you might read in the paper, "America springs back to life...Dow rises to 4,000!"

If this sounds extraordinarily gloomy, we point out that it is not our fault; it is only typical of the way stock markets work. There are upswings that last from 15-20 years followed by downswings that last 15-20 years. After WWI, stocks ran up to the 1929 high. Then, they crashed and dragged around until the depths of WWII. After WWII began, another big surge to the upside, peaking in 1966. Thereafter, stock prices shilly-shallied around, but generally sank until 1982. That was the year that Business Week famously pronounced that stocks were not just down, but out. "The Death of Equities," its cover pronounced. But the news of stocks' death was greatly exaggerated. In August of 1982, stocks entered a bull market that lasted 18 years.
 
America's stock market bubble exploded in January 2000. But the damage was focused - as was the bubble itself - on tech shares. The Nasdaq has tracked the Nikkei fairly well with a 10-year lag. The economy and the broader market followed a different path. After seeming to sink into a Japan-like decline, the Bush/Greenspan team gave the world the biggest jolt since the invention of the electric chair. The federal budget swung from a surplus to a deficit - a swing of $700 billion. Interest rates were shoved down below inflation and remained there for more than two years. This was more stimulus than the world had ever seen. It produced the biggest bear market rally the world has ever seen, too; this time centered on residential real estate.

We have a friend whose story is probably typical. The man is now in his 50s. He never earned very much money and lived hand-to-mouth all his life. But he bought a small house when he was in his '30s, and then a larger one when he was in his '40s. Now, through no effort of his own, he finds himself with a house said to be worth $1 million with a very small mortgage on it.

He is now a millionaire. But where did that money come from? It seems to have come out of thin air. It may be said that it is merely a reflection of changing preferences in the society. Instead of spending their money on fur coats or McDonald's meals, people choose to spend their money on housing; so, they are paying more money for houses. But we see no evidence in the statistics that fur coat sales have declined, nor have McDonald's revenues. The property bubble added trillions to the net worth of Americans since 2001. If it were merely a shift of preferences, the figure would have been flat; something else would have had to go down in order for property to go up. But that is not what happened. Property levitated, as if by magic.

People don't ask questions when they think they are getting rich. The question marks come out later - along with the recriminations and show trials. For now, people happily count their money; they don't ask where it came from.

Japan's property bubble occurred almost simultaneously to its stock market madness. Both then deflated: first stocks and then real estate. Property prices fell as much as 80 percent, and are still at their deflated levels 15 years later.

Americans think their houses are actually worth more than they were five years ago, but most of that increase is a puffed up bubble...a delusion...a fiction, just as it was in Japan. We are waiting for the bubble to (finally) pop. When it does, we expect a resumption of the bear market/recession that began in 2000/2001. Asset prices should deflate for at least another 10 years.

But there is a big problem with trying to apply the Japanese experience to the U.S. market. America needs a bear market, to bring stock prices down to more appealing levels. It needs a recession, too, to encourage Americans to save and reduce the trade deficit. America needs trouble, in other words, like white-hot steel needs a hammer, to beat out is fantasies and harden it up. It's too bad Americans are so deep in debt. They cannot take a beating; they can't afford it.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.