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Tuesday, February 5, 2013

Low rates and Recessions

I have seen multiple people claiming that we cannot have a recession because we have not had fast enough growth and rates are low.  We certainly have not had fast growth.  I don't think anybody would argue against that.  Does that really mean we are not at risk for a recession?  Lets start with the U.S. GDP growth rate chart.

In this recovery we have barely had growth above 2.5%.  This is unlike any other recovery in this chart.  At first glance one would have to say that maybe it is true.  However, this is the first time in history that the FED has had a zero interest rate policy (ZIRP).  Isn't there at least a slight possibility that means it is different this time?  Is there something we can use for comparison?  There is always Japan.  They have the same debt and age demographic problem we have.  They are just 10 years ahead of us.  Here is a chart of their GDP marked with recessions.

The red line blips up on recessions and down when the recession ends.  We can see that growth in Japan has been very weak with periodic recessions.  The only strong growth they had was after the last recession.  I can see two recessions that started with barely over 2.5% growth in between.  Japan embarked on QE in March of 2001.  Recessions have been happening every 2-3 years with or without QE.  Yes Virginia, you can have recessions with low interest rates, QE, and very little growth in between.

Some people will say we are not like Japan, but I beg to differ.  If it is not the debt and age demographics that have plagued Japan for over 20 years, what is it?  While the global economy was booming, they have been wilting.  Can somebody please explain to me some other reason for that?  The only excuse I ever hear is that they did not lower rates fast enough or they did not start QE soon enough.  I guess they think that more of something that does not work will somehow magically work, LOL.  Those solutions don't work unless the problem is liquidity.  In their case and in ours, liquidity is not the problem.

Here is a chart of Japan I have shown before courtesy of Doug Short to refresh your memory.

Bond yields below 2% and ultra low discount rates seem to make for a lot of volatility, but not a steadily rising stock market.  Will the U.S. be any different?


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