Let’s take a look at the economy in a few other parts of the world and their effect in North America. In the first week of October, Japan lowered their interest rates from 0.1 to zero per cent. Economists are labeling this move “compressive monetary easing,” which translates to an attempt to lower the value of yen and a more loose monetary policy.
This is the lowest interest rates have been in Japan since 2006. In doing so, we noticed on Oct. 5 that U.S. stocks rose from the first two-week decline since July. The Dow Jones industrial average gained 1.2 per cent and the American dollar fell, putting it nearly on par with the Canadian dollar.
Yay! Trips to Fargo!
As the American dollar fell, oil and gold got a lot more interesting. For the November delivery of oil, prices climbed to $70.41 a barrel, up a total of 46 cents. Gold futures for December climbed $13.50 to a total $1,017.80 per ounce.
These are just some of the economic shifts that took place in early October as Japan decided to lower their interest rates.
Currently China, Brazil, Korea and the US are all playing with the value of their currency, working to lower its value, in order to increase the value and number of exports in an effort to stimulate their economies. This practice has been dubbed a “currency war” by some economists.
This is where it gets fun. On Oct. 20, China announced that they would be increasing their interest rates, which made a few small changes in the economy and surprised many experts. However, analysts feel that this move was intended to stabilize China’s assets.
“After the hot money flows into China, it usually will not flow into banks but to the stock market or the real estate market to pursue profits. Raising the interest rates will be helpful to stabilize the prices of those assets, avoid the drastic fluctuations of the prices and shrink the profiting spaces of hot money. Therefore, it will be good for alleviating the disorderly flow of the international capital,” says Fan Jianping, director of the Economic Forecasting Department of the State Information Center.
However, Japan’s economic minister said, “I hope this move will lead to a soft landing for the Chinese economy.” He believes that China’s move to monetary tightening via an interest rate hike was aimed at preventing an “economic bubble.”
An economic bubble is a term used when the economy rapidly expands and contracts. The theory behind it is that asset prices, stocks etc., can be driven to rise above their real value by speculation, but this is a temporary situation, and eventually prices drop or, to use the lingo, the bubble “bursts.”
An example of this can be found in Japan’s economic history.
From the 1960s to the 1980s, Japan had one of the world’s fastest growing economies. The government was no longer regulating the financial market in the 1980s, allowing banks to lower interest rates, increasing the money supply, which increased spending. The housing industry exploded as access to credit was easy while property was still very expensive in Japan. Japanese stock values were soaring and a bubble was formed.
Later, when the government did decide to step in and increase interest rates by tightening monetary policy, stock prices began to plummet and the bubble was burst. Japan entered the 1990s with a miniature recession and the slowest economic growth for a major industrial nation.
In short, it seems that Eastern countries are doing their best to stabilize their economies by whatever means are necessary. This may lead to more unusual trends in our stock market, so don’t be surprised if the Canadian dollar shoots up or down, the same for gas prices.
