The enormous liquidity sloshing around the international financial system – a legacy of monetary stimulus during the global financial crisis and post-pandemic fiscal stimulus – have left us confused about what real growth is.
For example, productivity-enhancing capital investments in production, infrastructure (both digital and physical) and human resources increase growth rates and absolute gross domestic product. But how many people are watching this?
Instead, the level of a country's stock market is an important indicator of economic health that people are increasingly paying attention to and that can be influenced or manipulated by domestic monetary policy and international capital flows.
People walk past a stock market display board in Tokyo on January 22. The Nikkei 225 closed above 36,000 points, reaching its highest level since February 1990. Photo: EPA-EFE Witness Japan, which has done smart work under Prime Minister Fumio Kishida and his colleagues. His predecessor Shinzo Abe has made such a strong impact on the country's stock market The Nikkei stock average has reached its peak highest in over three decades.
But as economist and analyst Richard Katz noted in a recent commentary, this does not mean Japan is back. While Japanese stock prices are up 60 percent compared to six years ago, real “GDP is up a trivial 1 percent,” he notes.
This is an important point, and not just in relation to Japan. In monetary terms (such as GDP), growth has been inflated by central banks' liquidity pump in most advanced economies.
We tend to focus on how this affects the prices of goods and services – and current price inflation – but financial liquidity also drives up the prices of stocks and real estate, leading to asset price inflation, which in turn increases GDP.
Traders on the floor of the New York Stock Exchange on January 29th. Photo: Reuters
Stock markets in Japan and the United States are booming on strong liquidity, and the sentiment-boosting effect is reinforcing perceptions about how strong the two economies are.
Not so in China, where a combination of subdued (or, as some would say, prudent) consumption and modest monetary stimulus are at work, along with a downbeat mood in equity markets deflationary tendencies.
All of this gives new meaning to the term “market economy,” as it implies that major economies are increasingly driven by the level of their stock markets per se, rather than by the incentive of market competition.
The increasing use of monetary and fiscal “tools” (as policymakers call them) by governments after the global financial crisis and then during and after the pandemic has created the impression of official omnipotence.
China can cope with its real estate crisis. Can the US and Europe say the same?
Even the IMF has joined the ranks of optimists in its latest World Economic Outlook update, with economist Pierre-Olivier Gourinchas writing: “The clouds are beginning to clear.” The global economy is beginning its final descent towards a soft landing…”
Certainly it is premature, especially for the International Monetary Fund, to declare victory in preventing something long predicted (including). from the IMF itself) hard landing when the currency balloon is still at full height and waiting to pop or be stung?
By some estimates, U.S. stocks, particularly those in advanced technology sectors, are grossly overvalued, and stocks in Japan are at their highest levels in three decades. A correction delayed (or crash) is not a correction averted.
The trigger, and the financial and economic stress it causes, will not be a return to rising interest rates, but the simple fact that interest rates remain high in an environment of record debt levels. The debt burden will increase, with unknown consequences, and it will hurt.
02:19
Japan's economy shrinks 2.1% on high inflation after strong post-Covid recovery
Japan's economy shrinks 2.1% on high inflation after strong post-Covid recovery
As Katz notes in his commentary on Japan, “Under certain conditions, the stock market can both reflect the economy and help predict its future.” But these conditions do not exist in Japan, nor do they always exist elsewhere.”
One reason is that stock valuations in the US, Japan and other markets are high because so much official liquidity is being introduced. There is little incentive to leave the country and few other places to go – until an inevitable loss of confidence sends markets into panic.
Another reason is the high volume of share buybacks in these markets. When companies buy back their shares, this tends to increase shareholder value because it reduces the supply of shares on the market and the total amount of dividends to be paid.
The financial sector has a duty to break the cult of justice
But it also amounts to a reduction in capital and resources available for investment in new productive or human resources, and is consistent with the short-termism that is increasingly prevalent in stock markets and the cult of stocks.
Standard balloons or bubbles have been inflated generously, but the larger they are, the harder they fall or the louder they pop before crashing back to earth. Stock markets are not the all-powerful entities that are commonly assumed.
Anthony Rowley is an experienced journalist specializing in Asian economics and finance
Comments are closed.