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Economy

Is U.S. enjoying a new Great Moderation?

TOKYO -- The U.S. economy is overall strengthening and looking as if it has recovered at last from the Lehman shock of 2008. Some people even suggest that another period of Great Moderation is upon that country.

     Early June in New York, a night cruise on the Hudson River was packed with people enjoying food and great views of the city. In Midtown, a table at a restaurant well-known for its breakfast service was a 25-minute wait.

     Things appear to have returned to the exuberant times in the early summer of 2007 in the city. This is in line with reports that the U.S. payroll has recovered to rise above the record before the collapse of Lehman Brothers Holdings in 2008.

     Ian Bremmer, president of U.S. research firm Eurasia Group, thinks the U.S. economy has mostly overcome the negative impact of the global financial crisis. He said the U.S. economy is clearly doing better than Japan, Europe and emerging economies. The inflow of funds into the U.S. reflects this assessment, according to Bremmer.

     Expectations are growing among financial market players that the U.S. economy is again entering a period of Great Moderation, in which the economy grows moderately on the back of easy monetary policy. It is understandable they are looking forward to reliving the good times during the 2000s up until the financial crisis.

     U.S. stocks are now in record-high territory, but long-term interest rates in that country remain in the 2% range. This comfortable financial condition is made possible by funds flowing into the U.S. from around the world.

     Behind this flow of money lies growing geopolitical risks in Ukraine and East Asia, which raise the value of U.S. Treasurys as a safe asset.

     Looking around the world, it is clear that most countries are battling to stimulate their stagnant economies. The eurozone and Mexico reduced their interest rates. In Japan, additional monetary easing measures remain a real possibility. All these point to continuing excess liquidity worldwide.

     An economist at a U.S. investment bank noted that the income gap, aftereffects of the global financial crisis and aging population are main domestic factors that have been driving investors toward bonds.

     Despite the talk of an economic recovery, low- and mid-income people, who have a high propensity for consumption, have yet to see meaningful wage growth. Young people, who have been hit particularly hard by the financial crisis, have developed a more cautious attitude toward consumption than previous generations. On top of this, baby boomers are retiring. All these add up to a conclusion that there is little chance of the U.S. economy overheating, according to the economist.

     If strong consumption is not expected, it makes sense to view record-level U.S. stock prices as unsustainable. But Ed Hyman, chairman of U.S. research firm ISI Group, believes there is no need to worry about U.S. stocks. Corporate earnings are strong, and the easy money policy will continue, Hyman noted.

     Strangely, though, people working in the U.S. financial sector do not appear to be energized. This is probably because various financial watchdogs have been slapping penalties in amounts never before seen to punish financial institutions' breaches of regulations. Their motivation is clearly stemming from the determination to prevent a repeat of the global financial crisis, but their zealous pursuit looks as if they are competing to see who can be tougher.

     "We are now seeing graduates of prestigious U.S. East Coast colleges quit U.S. investment banks and join us," an executive of a Japanese bank said.

     He wondered if this means the U.S. financial sector has become too constraining for some.

     It is still unclear if stronger financial regulation is helping to stop Wall Street indiscretions and prevent the economy and markets from overheating. But if it is indeed holding down market participants' greed, the new Great Moderation may enjoy longevity.

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