We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the fifth question, from a reader who wishes to remain anonymous. Martin’s response is below.
Anonymous: With the government indirectly supporting asset prices, to what extent is the current economic situation like Japan’s at the start of their lost decade, and is it likely that a multi-year gentle deflation in assets prices may occur?
Martin Wolf: There are strong similarities between the situations today in the US and UK, in particular, and in Japan in the 1990s. Like Japan, the US and UK suffered large asset price bubbles, above all, in property. Like Japan, the US and UK had huge expansions in credit and a massive overleveraging of the financial sector. And, like Japan, the US and UK had to adopt unprecedented fiscal and monetary expansion to stave off a post-bubble collapse into a true depression. While the bubbles and excess leverage were smaller in the US and UK than in Japan, more of the world economy has been affected this time. That will make it far more difficult for the affected economies to export their way out of their difficulties. I expect the recovery to be weak and the need to sustain large fiscal deficits, to support demand, to be much greater than many now assume. At the same time, monetary policy has been much more aggressive, much sooner, in the US and UK than it was in Japan. So I do not expect a long-term deflation in consumer prices, as has happened in Japan. In the US, property prices have gone a long way towards completing their adjustment. This seems less true in the UK. Equity prices look a little overvalued again, but not extraordinarily so. So, on balance, I do not expect a multi-year deflation in asset prices. In the longer term, inflation seems a greater danger, if the US and UK cease to be able to sell public debt on favourable terms and the central banks are forced to buy most of it.