LECCE, Italy (Kyodo) The U.S. economy — the epicenter of the ongoing global financial and economic turbulence — seems to be edging toward a path to a much-needed recovery.
U.S. stock prices are spurting upward on expectations of an early economic recovery, signs which can be found in the narrowing rate of growth contractions.
Unquestionably, the so-called “green shoots” are sprouting in the world’s largest economy. But some officials and experts are still skeptical about a smooth return to U.S. economic recovery, citing fears about deflation.
“The U.S. recovery hinges on whether or not it can skirt deflation,” said a Japanese official. “A deflation scenario cannot be ruled out yet, though such risks have been reduced recently.”
It may sound like an odd argument because it now appears as if everyone is talking about inflation, and some analysts go as far as to warn about hyperinflation being just around the corner.
“Deflation, not inflation, is the clear and present danger,” said Nobel prize-winning economist Paul Krugman in a recent column on the U.S. economy.
He cites lower consumer prices than a year ago and stalled wage increases in the face of high unemployment as reasons.
The Japanese official echoed the sentiment, “The jobless rate is expected to rise above 10 percent in the fourth quarter, so wages will come under further downward pressure and consumer spending will remain weak.”
Behind the concern that the U.S. economy could suffer from deflation is Japan’s experience with stubborn price falls in the 1990s, following the burst of its economic bubble. Those who are warning about the danger of deflation are either veterans of Japan’s Lost Decade or students of it.
In fact, there is still no whiff of inflation in Japan. Two decades after the benchmark Nikkei Stock Average peaked above 39,000, it stands now at slightly above 10,000. The key short-term interest rate is at a rock-bottom 0.1 percent.
Some say inflation is inevitable due to resurging hikes in commodity prices. But such a trend is like a mirage — just reflecting expectations for an early economic recovery, not because of a recovery itself.
Others claim that the Federal Reserve is printing a lot of money, which can cause inflation, and the swelling budget deficit will eventually force the U.S. government to inflate away its debt.
Krugman counters these lines of argument.
He said although the Bank of Japan purchased debt on a massive scale between 1997 and 2003, consumer prices declined instead of picking up.
Kruguman also said deficits will not push up prices in a manner in which the real value of the debt is pared. “Such things have happened in the past… But…examples are lacking” in modern history, he said.
While pointing to a potential deflation in the United States, the Japanese official sees hope of stabilization in the nation’s financial sector.
“The stress tests turned out to be successful,” the official said, referring to the U.S. government’s recent checkup on the health of financial institutions to determine their capital needs and viability. “Financial stability is a step in the right direction.”
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