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A rather ominous graph accompanies a review of the United States economy this week by Mary Daly, vice-president at the Federal Reserve Bank of San Francisco.
Japan’s experience beginning in the early 1990s, notes Daly, underscores the risk of getting into a long period of sustained disinflation. Japan fell into deflation in the mid-1990s and has yet to recover.
The graph does not show the rise in strength of the Yen, which is a large factor in dampening core inflation for a net export nation. The United States, however, is a net importer and is facing a weakening Dollar. When factoring in the rate of population growth, compared to core inflation, the graph lines would show Japan as struggling to maintain the status quo and the U.S. in a steep decline. What is common between the two countries, is the usage of monetary policy to inflate growth within the country, without fully addressing the import/export factor. Both countries need a much cheaper currency on the world stage. Japan to re-ignite its export industry and the U.S. to raise the cost of imports and bring back jobs that have gone off-shore. Actions that would place both countries at odds.
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