Be Prepared for Low Growth/Deflation

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 TradingEconomics.com 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. 

P.S. 

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

Japanese Economic News Headlines

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