Real Conservatives

In a recent New York Times op-ed by columnist Thomas Friedman, the author suggests that if Americans, and its politicians in particular, don’t shape up and get serious about finding real solutions, our nation might simply limp on into the future.

According to Friedman, members of both parties in Washington have some reforming to do. He points with specific poignancy at the Republican Party with which he has so often sided. He laments that if the GOP doesn’t escape from the extreme anti-tax tea party contingent, no real progress will be made.

On the other side of the coin, Friedman seems to hold no real hope that the current administration will offer a solution centrist enough to attract independents and force the GOP to compromise. Both parties seem so entrenched in the wings of their own party that the only thing they ever seem to do is campaign, never getting any real work done.

In Friedman’s opinion, drastic compromises need to be made on both sides. Real conservatives need to shed the vehement resistance to any tax increases and focus on investment in America’s future through things like education and infrastructure. While liberals need to face up to entitlement spending and be willing to make long term cuts to Medicare and Social Security, working to control an out of control budget.

Friedman asks if we’re going to roll up our sleeves and get to work, or whether we’ll simply limp on as we are. Read the entire article at:

http://www.nytimes.com/2011/09/21/opinion/friedman-are-we-going-to-roll

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Japan’s Experience Shows that Deflation Cannot be Ruled Out

In light of a quick response from the U.S. to the economic downturn in the form of quick interest rate cuts and stimulus spending, many fear that inflation is imminent. However, based on Japan’s financial crisis and subsequent deflation during the 90s, we cannot rule out deflation.

Some are claiming that if deflation were to happen, it would have already become apparent in the wake of the housing bubble burst and recession. However, according to a recent report from Capital Economics, this was not the case for Japan where deflation took nearly nine years to set in.

Source: Capital Economics

In fact, the U.S. is showing many of the same signs that the Japanese economy did during the first half of their lost decade. Despite having slashed interest rates in just two years in the U.S. as opposed to the six years it took in Japan (chart 1), the U.S. economy is tracking Japan’s 1990s behavior in all of the key indicators.

Despite quicker and more aggressive fiscal and monetary responses by the U.S., Core CPI inflation and Average Earnings (%y/y) have behaved nearly identically to Japan’s for the first five years after asset price bubbles burst.

Source: Capital Economics

Furthermore, our unemployment rates have spiked much more rapidly. Unemployment in Japan was a slow increase of about three percentage points over the course of a decade. In the U.S. on the other hand, unemployment immediately jumped five percentage points in only three years (Chart 6).

Additionally, the initial recession after the bubble burst in the U.S. was much deeper than the one Japan experienced in 1989 and 1990 (Chart 5). And Japan experienced periods of short, rapid growth during their lost decade. The end of 2011 will mark five full years after the housing bubble popped; GDP growth will be 2% or less in 2011. The U.S. is already half way through our own lost decade. If we can learn anything from Japan’s experience, it’s that deflation cannot be ruled out.

Source: Capital Economics

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