article and discussion on deflation

[brad]

http://www.freerepublic.com/focus/news/800870/posts

[adios]

I don't see a big problem with deflation in the USA but could be convinced otherwise. This is mainly due to the fact that consummer products that are non durable should hold their prices well. The underlying economy supports spending on these products very well IMO. In reality there has been on going deflation in some areas for quite awhile now such as consummer electronics and it's not likely to abate anytime soon. In other durable goods products I don't know. How bad could it be if for instance cars got cheaper or even housing for that matter?

[brad]

i dont know somebody here just mentioned deflation and i came across that link so i posted it.

but of course real estate credit bubble like if the price of homes went down ive read that could be bad.

of course 30's depression was basically a big contraction of the money supply ive heard but that could be simplification or maybe even wrong (say confusion of cause and effect).

also ive just read today that in japan the central bank is directly buying stuff or whatever to fight deflation there or whatever its a little (ok, way) over my head but basically it was interesting. also somebody at the fed (mabye even greenspan) was saying something (i think the last time they cut prime) like even if it went to zero that wasnt the end as they could still flood the country with money if they had to.

[Wildbill]

The problem for Japan right now is they refuse to print money to introduce inflation because it would do two things. First it would screw more with their ailing banks that would face an asset mismatch if interest rates went up. Banks there are lending at close to zero rates and if they raise the rates they will face even more defaults. Second, being a trade exporter, at least in mind, you can't print money and not have it cause problems. If they changed their mindset and thought of themselves as a consumer driven nation, what they are essentially anyways, then they wouldn't be held in this trap. If a trade exporter creates higher inflation on purpose it would quickly skew interest rates. That would lead to a rush of money coming into the Yen and then the exporter would lose business quickly in a competitve field. Bottom line is that Japan isn't hurting as bad as people think and deflation is just bringing its economy down to proper world scale. Citizens there are losing wealth, but slowly, and its all in the name of saving its exports and not reforming their banks. Eventually the people aren't as well off as they were and the economy has competitive costs with the world, and then things go from there with more business due to more rational costs. Japan's way of going about their business isn't all that bad. To do something about the deflation they have would probably cause more pain and suffering than the slow draw they have now is. The only way they could really change is to fundamentally change into a more open economy without being a big net exporter. The mindset just isn't there for that so they are doing the next best thing which is dealing with the pain in a moderate way which isn't causing a mass collapse of the economy and still hasn't driven unemployment up past US standards.

Deflation is not as hard to get out of as some people seem to think unless it comes along with a nasty downturn in the economy. Bad cases of deflation have come as a result of a bad downturn in an economy, not because of it. We are talking negative growth rates and a good time of it, not the slow growth we see right now. If the economy is growing its hard to have deflation because what generally sets it in motion is a "clump" of inactivity. Imagine if something bad happens and suddenly the economy has negative growth because of it, prolonged at that. What happens is the first of the clump says I can't buy anything right now, I have no money. Then there is excess and the prices need to be slashed. This has to be more than just a small part of the economy, it has to be quite a few people to generate an all-out competitive price response. As the prices go down, others say that they will just wait for lower prices and not buy. Eventually it becomes a cycle. That is how nasty deflation begins. People saying they are waiting for a bargain isn't enough. There has to be some core that truly isn't buying or will delay indefinitely their purchases to get it started. Otherwise people will have money burning a hole in their pocket and will just give in at the first price slash.

I think this commentary sounded like stupid thinking. After all, what is a 0% rate going to do for the economy? Not all that much from a business standpoint. The psychology is the key and by using all their bullets, that will give a sign of capitulation by the Fed and that would cause a serious panic. The Fed would be throwing up their hands and saying, ok its bad and we can't do much more for you. That is something you NEVER want to do unless forced to. Especially when it has little true value as 1.25% isn't what is keeping businesses and people from spending money.

[brad]

i just read like 2 or 3 days ago that the central bank of japan (bank of japan i think) started directly purchasing i dont know exactly stock or something. (to directly inject money into the economy).

ill have to look for the article cause it sounds like you might know what it means /forums/images/icons/smile.gif

[Wildbill]

They are pulling yet another ridiculous move. The BOJ has little credibility for its decisions, but its respected merely for the fact that it has more money to use than just about anyone in the world. They play and toy with the market many times more than the Fed does, so when they say something it has to be respected for its ability to move markets, but not necesarily for its ability to do good things. They are planning on buying stocks. Why? Well in their great thinking, they will inject money into the market and hope to create some momentum for one thing. Their stated reason, and its silly, is that they will increase the value of stocks which will make the balance sheets of Japanese banks better because they all have tons of shares that they either own or hold as collateral for loans. If the banks are more solid, they figure to loan more and pick up the economy.

So think about it this way, say you are the mayor of a town that has a struggling business that helps employ many of your residents and provides a central location for the town to gossip and eat. You have a budget that has some cash available to you to promote the town's business. So what you decide to do is go out and give money to your residents to go out and spend money on this business. Instead of spending the money by just giving it to the business, you spend it indirectly hoping to create a lively night there and maybe attract others that aren't involved in your plan to think this business is really deserving of their patronage. Sounds great on paper, sucks in reality. Reason being many of your residents are really not interested. They will take your money and pretend to spend it there or will spend very little of it and leave. Well that is exactly what the BOJ will face here. Speculators who are currently in the market will take the increase in the stock prices gladly and sell it off it real quick. They know that the world isn't going to rush into the market just because the BOJ is investing in it and then stay there. No way, this is a sign of trouble if you ever saw one. So all you get are speculators going the frenzy and then the locals that are already in and glad to take profits. After they all sell off their stock once the BOJ is invested, the price will be back almost to where it would have been anyways. So what you did is just took BOJ money and handed it to speculators! Does this sound wise to anyone? These guys do crap like this all the time, its amazing what outrageous things they do in their version of bank policy.

Simple solution is there, its just no one accepts it. Japan should not and is better off not being a major exporting nation anymore. Its ridiculous to think that and it flies in the face of any reasonable economist view. If you have the most expensive country in the world to do business in and have a massive consumer class, how can you say or justify your claim that you still should have a major surplus in exporting? Its plain stupidity for them to believe it, yet its a cultural issue. They are as a matter of policy trying to refute basic laws of economics, or more bluntly common sense! The consumers of Japan are perpetuating the deflation right now, yet the government is constantly trying to work against them. The laws of economics are fighting the government and deflation is a result of an economy trying to better match its consumer demand and supply. The sooner Japan accepts this reality, the sooner deflation ends and the citizens go back to lives with increasing prosperity. Its quite simple, if there are 100 countries that can make products for export cheaper than you can, you should let them do it! To force your economy to overpay to make products and then doubly sting them by making them overpay even more to buy products for themselves is terrible policy. It worked for decades when Japan wasn't the most expensive place around to live or to make things, but today that is their reality. Its the natural progression in world history, as you become wealthier you have to give up your production side to a great degree and become a consumer. It doesn't lead to poverty as some fools think, it leads to being in the club of first world nations.