Economy

The Japanification of the US economy | TheHill – The Hill

Published

3 years ago

August 11, 2021

In the 1990s, Japan suffered a lost economic decade of highly disappointing economic growth and price deflation. It did so in the aftermath of the bursting of its massive equity and property market bubble. One has to wonder whether the U.S. might now be setting itself up for a decade of poor economic performance by allowing unusually large bubbles to once again form in its asset and credit markets and by throwing caution to the wind in the management of its public finances.

Even before the onset of the COVID-19 pandemic, the U.S. economy displayed troubling signs of Japanification. Following the 2008 bursting of its housing and credit market bubble, the United States experienced its slowest economic recovery on record while inflation remained consistently below the Federal Reserve’s 2 percent inflation target.

Meanwhile, its highly leveraged companies borrowed heavily at very low interest rate spreads, and the country seemed to have lost any constituency for budget discipline on both sides of the political aisle. Republican administrations proved to be very keen to cut taxes but were loath to cut public spending. Meanwhile, Democratic administrations proved eager to raise public spending but were hesitant to raise taxes. The net result was that the country now finds itself saddled with a record budget deficit and on an unsustainable public debt path.

The excessively expansive U.S. monetary and fiscal policy response to last year’s once-in-a-century health crisis makes it all too likely that in the years immediately ahead the Japanification of the U.S. economy will pick up pace.

By increasing the size of its balance sheet in less than a year by more than $4 trillion through its aggressive bond-buying program and by keeping interest rates at ultra-low levels, the Federal Reserve has created a troubling “everything” bubble in the U.S. equity, housing and debt markets. U.S. equity valuations are now more than double their long-term average and at lofty levels experienced only once before in the last 100 years.

Meanwhile, housing prices now well exceed their 2006 peak level and continue to increase by around 15 percent, while high-yield debt interest rate spreads are now close to their all-time lows.

By providing budget stimulus of as much as 12 percent of GDP in 2021 at a time that the Fed has its monetary policy pedal to the metal and that the Congressional Budget Office estimates that the country’s output gap is only some 3 percent, the Biden administration has increased the risk of economic overheating and persistently high inflation by year end. At the same time, far from thinking about long-term budget consolidation to restore public debt sustainability, Biden is rushing through Congress an improperly funded $1 trillion infrastructure spending bill and a $3.5 trillion anti-poverty and climate control package. This has to heighten the risk of high budget deficits and an unsustainable debt path for as far as the eye can see.

With inflation already picking up to a level not experienced in the past 30 years and to a level that is more than twice the Fed’s inflation target, it has to be only a matter of time before the Fed is forced to slam on the monetary policy brakes to meet its inflation objective. The Fed will do so first by tapering its bond-buying program and then by raising interest rates. That in turn is more than likely to burst the “everything” asset and credit market bubble, which has been premised on the assumption that ultra-low interest rates will last forever. It is also likely to worsen the country’s public finances as tax revenue receipts are bound to be adversely impacted by another leg down in the economy that the bursting of today’s asset and credit market bubbles will entail.

In much the same way as the bursting of its property and equity bubble in the early 1990s cost Japan a lost economic decade, the bursting of the U.S. “everything” bubble must be expected to usher in a prolonged period of disappointing economic growth, low inflation, unusually large budget deficits, the proliferation of zombie companies and yet another round of Fed quantitative easing. That is bound to increase the Japanification of the U.S. economy that already seems to be well underway.

Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

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Economy

Energy stocks help lift S&P/TSX composite, U.S. stock markets also up

Published

3 hours ago

September 17, 2024

Anne Joseph

TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.

The S&P/TSX composite index was up 34.91 points at 23,736.98.

In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.

The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.

The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.

The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.

This report by The Canadian Press was first published Sept. 17, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

Canada’s inflation rate hits 2% target, reaches lowest level in more than three years

Published

4 hours ago

September 17, 2024

Anne Joseph

OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.

The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.

Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.

Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.

The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.

The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.

“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.

Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.

“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.

The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.

The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.

A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.

Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.

Its key lending rate currently stands at 4.25 per cent.

CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.

The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.

This report by The Canadian Press was first published Sept. 17, 2024.

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Economy

Federal money and sales taxes help pump up New Brunswick budget surplus

Published

1 day ago

September 16, 2024

Anne Joseph

FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.

Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.

The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.

Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.

Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.

Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.

Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.

This report by The Canadian Press was first published Sept. 16, 2024.

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