降阻剂厂家辽宁:US stumbling into its own lost decade

US stumbling into its own lost decade

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2011-8-19 10:57

The debt crisis in the US will have a far-reaching influence on the global capital market and economic development. As the crisis is still going, anything could happen.


The US Federal Reserve announced on August 9 that it would keep a record low federal fund rate, under 0.25 percent, until the middle of 2013. Effectively, it announced to the world in advance that it would implement extremely low interest rates and a very slack currency policy in the future two years.


This is an understandable policy. Now the market is in panic and a shot in the arm is needed to save it. The stagnant economy needs to be stimulated by lax monetary policy. Besides, interest reduction is also a good thing for the US government, since it is heavily in debt and will constantly use new debt to pay back old in the future.


Some developing countries, such as China, have become more and more prosperous by relying on infrastructure, technological imitation, manufacturing industry and exports.


But as the world's largest and most developed economy, the US could only rely on consumption and innovation for its recovery.


Consumption occupies over two thirds of domestic US GDP. The subprime crisis caused the wealth of many US families to shrink and housing prices are still dropping. That makes consumption growth impossible right now. Under such background, it is impossible for the obvious growth of consumption.


Innovation has been the engine of US economic vitality in the past 20 years. In the 1990s, the PC and Internet revolutions boosted the US economy. But after 2000, the engine of US economic growth became an unsustainable real estate industry fueled by low interest rates.


It's hard to see what the next big driver of the US economy will be. But the future is hard to predict and the US may well surprise us. Since we know nothing about the next source of growth, we had better stay cautious.


Right now the Federal Reserve is maintaining extremely loosening monetary policy. Ben Bernanke, the current chairman of the Federal Reserve and a student of the Great Depression, always heeds the lesson that the tight monetary policy worsened the crisis of 1929-31. He loosened the monetary valves after the financial crisis.


However, loose money is not a universal cure. After the financial crisis, the basis of economic recovery should be consolidated. When a crisis breaks out, there are often some problems with the liquidity of the financial system. A liquidity injection could help relieve problematic symptoms as well as help avoid unnecessary knock-on effects.


Monetary policy does little to address the problems of US economic growth, which are obvious if we look at Japan's experience. In 1991 after Japan's real estate bubble burst, the government kept the interest rates low. From 1996 to 2010, the annual deposit rate was only 0.3 percent, on average. However, Japan is now moving into its second "lost decade."


Japan's slack monetary policy didn't save its economy. It did produce an often-overlooked side effect: the currency carry trade, namely, borrowing yen at low interest rates and investing in the products of high-yielding currencies.


With the opening of the global capital market in the 1990s, the carry trade has spread the effects of a lax yen to the whole world.


The US has adopted the same extremely loosening monetary policy as Japan did. The only difference is that the US economy is larger than the Japanese economy, the US capital flood is greater than Japan's and today's global capital market is more open.


There are two possible results. Either the flood of US capital sweeps the global market or everyone closes their doors. There will be many twists and turns ahead before the integration of global economy and finance is realized.  





Global Times