The global economy falls back into its post-crisis funk

Matt O. Brien, The Washington Post

published

3:18 pm PDT, Friday, June 14, 2019

There may be no oracle, but there is a bond market. And really, what's the difference? This is, after all, what comes closest to a clairvoyant in matters of economics. ..

. . . This is bad news for the moment because it tells us that the whole world is becoming Japanese.

What do we mean by that? Well, nearly 30 years ago, Japan was the first big country to go through the cycle of expansion, slowdown and stagnation that the rest of the world has experienced and hated so much recently. The result was a "lost decade" of economic growth that eventually ended, but remained extremely vulnerable to shocks, even the smallest ones. In fact, Japan has not only found itself with low inflation, low interest rates and low population growth, but rather zero inflation, zero interest rates and growth. negative demographic. You see, all of this was both cause and effect of economic weakness. In particular, the fact that the Japanese labor force is shrinking and that its interest rates are already zero on the other hand, meant that its economy would both slow down and not be easy. to accelerate. save again.

Now, to be fair, it does not have to be the end of the world, or even an improved standard of living. Indeed, Japan has finally started doing enough things properly over the last five or six years, and the rest of the world is tired of making mistakes. If you adjust to take into account the contraction of its workforce, Japan has not really done much worse than its peers since the burst of its bubble in 1990. It is nevertheless some something you would prefer to avoid if you could. This type of low growth equilibrium and low interest rates just do not leave you with a lot of macroeconomic error margin – and tends to require a lot of fiscal stimulus for things to happen. hardly work.

Unfortunately, that's exactly what the bond market tells us. Consider the fact that the German government has just sold 10-year bonds at a record interest rate of minus 0.24% – yes, it is paid to borrow money – or that the US government has now seen his 30-year bond yields go back to where they were before Donald Trump was elected. The reason for these two factors is that long-term bond interest rates tell us what investors think they will be, on average, throughout the life of it, to which investors will be exposed. Adds a small extra to offset the risk of inflation. higher than expected. So, when markets think that the economy will be strong enough to force the Federal Reserve to raise its rates enough to avoid overheating, long-term rates will increase in advance.

That's at least what happened when Trump won. Investors, bothered by the prospect of significant corporate tax cuts, infrastructure spending for all others and all the deregulation desired by their hearts, have increased the yield on US Treasury bonds to 30 years of about 2.6 to 3.4% per hope. that all this would bring the economy out of its slump after the crisis. And for a little while, that's what happened. The economy has actually started to be around 3% instead of the current 2%, which has reduced unemployment to its lowest level in almost 50 years.

The only problem, however, is that it does not seem like it will last. How is this possible while the gross domestic product is still up 3.2% last year? Well, the simple story is that there is a good chance that things are being exaggerated right now. The best way to say it may be that an alternative measure of the economy, gross domestic income, shows an increase of 1.8% in the same amount of time. As Jason Furman, former Barack Obama adviser and current Harvard professor, points out, this gap is the largest between the two companies since the financial crisis. Which makes sense if you consider that there has recently been a chain of less than stellar data points. On the one hand, the growth of employment seems to at least slow down slightly, while the figures of the manufacturing industry are also, even more than expected.

The important thing is not that the economy is on the threshold of the recession, but to return to the growth of 2% in which it has largely stalled since the crisis. Part of the problem lies in the fact that Trump's tax cuts seem to have helped only short-term corporate shareholders, but not the long-term investment of companies, as promised. In addition, there has never been a Trump infrastructure plan, no matter how many times they said they would spend a week there. And the last part is that Trump rates could hurt consumers and scare businesses enough for the Fed to feel it has to cut rates just to maintain a modest level of growth. In this case, you have the recipe for Japanification: lower growth, lower interest rates, and young people who, even in what is supposed to be the right time, feel like they're in a Sufficiently tenuous situation for are less likely to have children than they would have been, creating a cycle of self-perpetuating demographic decline.

It's like the opposite of "A tale of two cities": not the worst case, but certainly not the best either. Far, far from it.