If things continue like this, the U.S. economy will bubble up?!
This is no good as it is! There are signs of bubbles in the American economy.
First of all, what is an economic bubble?
“An economic state in which the prices of asset classes such as real estate and stocks rise to levels far above the real economy due to speculation, making them difficult to sustain by speculation alone,” (Wikipedia)
In other words, an economy whose state has inflated like a bubble beyond its real strength.
In Japan’s bubble economy from 1986 to around 1990, land and stock prices rose to levels detached from the actual economy.
The Nikkei Stock Average reached an all-time high of 38,957.44 yen in 1989 (the first year of Heisei), and top rankings by market capitalization worldwide were Japanese companies!
If you put Apple, Amazon, and Alphabet in the positions where Japanese companies like NTT stood at that time, you can imagine how incredible Japan’s momentum was back then.
Let me briefly talk about the causes of the bubble.
In the 1980s, the United States faced severe twin deficits: a trade deficit and a fiscal deficit.
To reduce the trade deficit, the idea was to make the dollar weaker, so cooperation from other countries to weaken the dollar was requested. This was the Plaza Accord (September 1985).
As a result, the yen appreciated sharply. The exchange rate, which was around 240 yen per dollar before the announcement, dropped to around 120 yen per dollar two years later. This sharp appreciation hurt Japan’s export industry and plunged the domestic economy into a slump.
To counter this single-digit recession, the Bank of Japan lowered the official discount rate (the policy rate) at that time.
Subsequently, in the United States, the dollar’s decline caused imported goods to become expensive, raising inflation concerns. Then the policy of weakening the dollar was halted, and calls were made for lower interest rates worldwide with a flip-flop attitude.
If other countries lowered their rates, the US rate would become relatively high, attracting capital and causing a stronger dollar. This is the Louvre Agreement (1987).
Now, here is the key point. At that time, the Japanese economy was in the process of recovering from the yen appreciation recession and was considering tightening monetary policy.
However, the government and the Bank of Japan did not raise the policy rate in concert with the United States to tighten, and as a result, the bubble economy was created.
In other words, the cause of Japan’s bubble economy was too much money in circulation driven by low interest rates during the yen appreciation recession, but behind it was also the failure to raise the policy rate at the appropriate timing.
What I want you to look at is the current state of the American economy.
Key indicators are solid, and the economy is clearly doing well, yet Chair Powell has halted the rate hikes and shifted to a dovish stance.
In a situation where rate hikes should be considered, this is the same kind of situation Japan faced before the bubble.
Why is such a situation occurring? Mr. Moriwa, a teacher at the members-only FX information distribution service “Moriwa Trade School,” has explained the cause, and I’ll share a part of it.
[Video] If this continues, will the American economy bubble?
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