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Japan in the Nineties: happening again?

By IHCOYC in Op-Ed
Wed Jul 24, 2002 at 09:43:33 PM EST
Tags: News (all tags)
News

In the mid-Nineties, while the U.S. economy was still in a protracted boom, or bubble (whichever you prefer), the Japanese economy was entering a decade-long slump. This slump began with the bursting of a major speculative bubble.

It could happen here as well.


The Federal Reserve System has published a paper, Preventing Deflation: Lessons from Japan's Experience in the 1990s,1 which analyses the limits of monetary policy to cope with situations such as Japan faced after its speculative bubble burst.

The traditional tool used by the Fed to manipulate the financial markets towards stability has been the manipulation of interest rates by raising or lowering the U.S. federal funds rate, also known as the "discount rate," and frequently but inaccurately called the "prime rate." This is the interest rate charged by the Fed to the private banks who are its sole customers for money lent to those banks. Because of the way banks work, raising this interest rate shrinks the money supply; lowering the rate causes the money supply to expand.

There is a limit to the manipulation that is possible by this method, though. How low can you go? The interest rate, no matter what, will not fall below zero.

Those of us who survived the Seventies know what an inflationary spiral was. People became reluctant to save money, because they expected prices to rise: saving money actually cost you in the real things money can buy. The failure to save meant that money for investment wasn't there. In order to provide a real return, interest rates had to be higher than the rate of inflation. The result was a prolonged period of economic stagnation despite constant rising prices.

What Japan suffered in the 1990's was exactly the opposite: a deflationary spiral. Their central bank felt that the economy was becoming overheated in the late eighties; they raised interest rates. The money supply contracted as planned. This burst the speculative bubble: the money to speculate with wasn't there anymore. Prices for land began dropping. Demand for investment funds dropped as well. The financial markets overreacted.

Consumer prices, too, began dropping. This seems a welcome development; it became an expected thing, even as inflation was planned for in the Seventies. People stopped spending; why buy now, when you can get the same thing for less by waiting?

It proved difficult to restart the economy given this expectation. No one was going to lend or invest capital to business in this environment. How would anyone make money when demand is so sluggish? The result was a decade-long slump that arguably still is not over.

All the ingredients to follow this precedent are in place. The current U.S. bear market seems in hindsight to have begun in spring of 2000, when the Fed, feeling that the economy was overheating and that inflation was an immediate danger, raised the discount rate. The effects on stock prices led eventually to the collapse of the "Internet bubble," a speculative phenomenon that gave rise to billions in faery pelf, and whose effects were by no means confined to tech stocks.

One of the purposes of financial markets is literally the flushing-away of excess currency that would otherwise inflate a speculative bubble. Billions in paper losses can occur that merely represent the elimination of these illusory riches. Money, after all, is only worth what it can buy; and there is only so much stuff in the world. Financial systems give rise to paper billions that may not necessarily be backed by real worth.

What happened was more than this, though. The tech bubble was fueled by all sorts of wild and imprudent talk that now seems ironically funny. Unsound practices, first in the go-go industries, and later in other sorts of new venture capitalism, were exposed. As the tech industries matured, lawyers and lobbyists moved in: existing firms claimed various sorts of legal monopoly franchises, enforced them, and paid for and got new and drastic powers with their monopolies to boot. Not surprisingly, the pace of real innovation slowed remarkably.

There was a crisis in confidence that shook the foundations of the whole Japanese business culture. This, too, seems to be occurring in a far more drastic fashion in the U.S., where the papers and the talk shows are now full of plans to jail CEOs and accountants. No doubt, human sacrifices of some sort will be needed to slake the wrath of Democracy.

The prognosis seems grim. The authors of the Fed paper suggest that immediate and drastic stimulus is needed to head off a similar collapse here. Even in that case, though, there isn't much lower you can go before you run into the wall of zero. No one is going to pay you for the privilege of owing them money. And if even that is too little or too late, we may be looking at a decades-long downturn.

-----

1The link contains an abstract. Alas, the main paper is a PDF file. The PDF file can be viewed or downloaded from the abstract page.

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Poll
The U.S. economy is controlled by
o The Federal Reserve System 9%
o The Congress 2%
o The President 0%
o The Council on Foreign Relations 1%
o Rockefeller, Rothschild, et. al. 8%
o The Illuminati 27%
o The Benevolent and Protective Order of Elks 7%
o The breeze of a butterfly's wing in the Brazilian rainforest 44%

Votes: 98
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Related Links
o Federal Reserve System
o Preventing Deflation: Lessons from Japan's Experience in the 1990s
o Fed
o U.S. federal funds rate
o Also by IHCOYC


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Japan in the Nineties: happening again? | 71 comments (54 topical, 17 editorial, 0 hidden)
The tech bubble (3.50 / 8) (#4)
by psychologist on Wed Jul 24, 2002 at 03:46:58 PM EST

I utterly fail to see how people are still NOT seeing what I was preaching 3 years ago.

There was no tech revolution. There was media induced hysteria, and the sole aim was to make people invest in companies. Those companies were not created or invested in for long term returns; the returns for tech companies was supposed to be the IPO.

In other words, John X. Investor gives you 10 million to have some bright sounding idea, and to promote it as if it would change the world. You IPO, giving John 1 Million is initial stock value. Trading raises the price of your stock, and John Investor makes 100 Million.

After that, nobody gives a fuck about that company any longer - apart from the geeks who will later get laid off.

All that money that was invested in tech companies is not los. It doesn't disappear. It simply goes into some elses pocket.

In this case, the money you lost in the stock market is in the hand of the VCs and the few people who sold when the first company stock dropped.

I predicted it would drop dramatically a few years ago. I was right.

At the moment, the markets are still inflated, but they are stable. There won't be any economical crash. The American economy has not been really affected by the stock market drop - it has just made money change hands. The money is still there, and it will still be spent.

revolutions, bubbles, and panics (5.00 / 4) (#7)
by aphrael on Wed Jul 24, 2002 at 04:24:08 PM EST

There was no tech revolution

Actually, there was: the existence of the internet, and of applications operating on the internet, has significantly changed the way businesses operate in the US, and has changed a good part of the consumer world, as well.

That doesn't mean the hype was justified; if you look at, say, the economic response to the telegraph, or to the railroad, or to radio, you see a similar pattern: a revolutionary technological development leads to exaggerated claims and hyped-up belief that 'everything is different' resulting in a massive speculative bubble and a nasty panic.

Those companies were not created or invested in for long term returns; the returns for tech companies was supposed to be the IPO

I disagree. I think what happened is more that people with interesting technological ideas were encouraged to found companies in a an atmosphere where the investors had lost all business sense, and were blindly throwing money at anything remotely related to technology.

Which was a failure on two parts: vcs were investing in things they didn't understand, and techies were being invited into a business world they didn't understand. Which is a natural recipe for disaster.

Now, sure, some of the companies were fraudulent from the get-go, and some of the investors were cynically taking advantage of the bubble. But for most of the tech boom, what was happening was more honest and less cynical than that.

[ Parent ]

The VCs knew what they were doing (4.00 / 5) (#15)
by psychologist on Wed Jul 24, 2002 at 05:17:04 PM EST

Yes, there were a few good ideas. Unfortunately, those ideas can be counted on the fingers of my two hands, and I only have 8 fingers.

VCs were in for the IPO, not the revolution. All the VCs I spoke to were quite saavy about the risks, and none of the them, in my experience really had dreams about turning companies profiteable.

It was all just one big coorperate scam, and the losers were the people who didn't understand the rules.

[ Parent ]

Consumer confidence (4.00 / 1) (#9)
by Lord of the Wasteland on Wed Jul 24, 2002 at 04:33:12 PM EST

The American economy has not been really affected by the stock market drop - it has just made money change hands. The money is still there, and it will still be spent.

I don't think that there will be an economic crash. The American and world economies are in relatively good shape. However, that doesn't mean there won't be an economic slump. Back when the market was high, people felt they could spend freely because they thought there existing savings were growing. Now, spending is starting to drop both because of the evaporation of stock gains and the rise in unemployment. Furthermore, with the stock market plunging and confidence in corporate balance sheets badly shaken, people are not investing their savings is much either.

[ Parent ]

Suppliers get rich in gold rushes (4.66 / 3) (#16)
by fencepost on Wed Jul 24, 2002 at 06:46:36 PM EST

The tech bubble was a gold rush - there was some value there, but there were a lot of people trying to extract some of it.  There were two groups of people who do well in gold rushes - a few who are lucky or have good plans, and the people supplying everyone else.

Personally, I wouldn't have touched most of the Internet and tech stocks with a 10-foot pole, but it's interesting to look at a few like Oracle, Microsoft and Sun (definitely suppliers) which despite their drops are still well up from where they were in the mid-90s when the Internet started to really take off.
--
"nothing really says "don't hire me, I'm an idiot" quite as well as misspelling "pom-pom" on your resume." -- former Grinnellian
[ Parent ]

some suppliers didn't (4.00 / 1) (#37)
by khallow on Wed Jul 24, 2002 at 09:06:41 PM EST

There's a lot of stories of suppliers who loaned money to their shaky startup customers so that the customer could buy product. That's a lot of the telecom tragedy writ small.

Stating the obvious since 1969.
[ Parent ]

What is an economy? (4.00 / 3) (#5)
by Xeriar on Wed Jul 24, 2002 at 04:03:49 PM EST

Beyond a system of trade?

People acquire goods, muck around with them for a bit (call it farming, manufacturing or retail - whatever), and send it off.

The strength of the economy is based on how fast and well they can muck aroud with things, and how fast and efficient our transportation system is (transportation of people, goods and information).

The strength of a nation's infrastructure (highways, railroads, communications lines) are the ultimate limiter on its economic power. Want another economic boom in the U.S.? Support a better transportation system.

----
When I'm feeling blue, I start breathing again.

Paul Krugman comments on this. (5.00 / 2) (#6)
by thehappygit on Wed Jul 24, 2002 at 04:05:46 PM EST

Over at the NYTimes, Paul Krugman has a column [free reg required] addressing just this issue. Check it out.

Krugman's prior views. . . (none / 0) (#10)
by IHCOYC on Wed Jul 24, 2002 at 04:34:47 PM EST

. . . are discussed at some length within the Federal Reserve article itself.
--
"Complecti antecessores tuos in spelæis stygiis Tartari appara," eructavit miles primus.
"Vix dum basiavisti vicarium velocem Mortis," rediit Grignr.
--- Livy
[ Parent ]
link to Krugman's site (none / 0) (#35)
by khallow on Wed Jul 24, 2002 at 08:54:42 PM EST

A lot of Krugman can be found here.

Stating the obvious since 1969.
[ Parent ]

Stability is Overrated (3.80 / 21) (#12)
by thelizman on Wed Jul 24, 2002 at 04:42:00 PM EST

When fighter designers wanted to make the big leap to the next generation of nimble fighters in the late 60's, they abandoned stability concepts like mounting the main win along the center of gravity. Instead, they deliberately designed planes (like the F-16, the F-18, and later the F-22) to be unstable, and then used flight computers to maintain stability in flight?

Why the hell would anyone do this?

By introducing inherent instability into a design, and aircraft can then take advantage of exponential rates of pitch, yaw, and roll. These planes by design did not naturally orient themselves into a low drag profile in a given airstream, so if a maneuver called for a fast pitch, the aircraft inherently responded by pitching quickly. These unstable characteristics were later augmented by unconventional control surfaces (canards, divergent rudders, forward swept wings, etc) and thrust vectoring. The result is that modern fighters such as the SU-33 or the F-22 can assume very high angles of attack (AOA) that would stall conventional fighters. Both aircraft can actually reverse their heading in mid flight without changing their flight path - essentially doing a 180 and flying backwards (albeit in subsonic speeds). They are far more maneuverable than even some of the most artfully designed aerobatic planes used by barnstormers.

Why the hell am I talking about this?

Humans fear change - they don't like what they don't immediately understand or feel they can't control. We're comfortable thinking that the economy is a ship that can be piloted, but at best monitary policy only influences economy. You can't guarantee stability, and given the lessons of things like Game Theory and Chaos, I don't believe we should even try. The mechanism of free market captalism is self regulating if left alone, and there is strong supporting evidence (almost to the point of being blatently obvious) that our attempts to manipulate economy through economic policy are the root cause of instability.

In short, governments do through sheer stupidity what aeronautical engineers did through sheer genius. They use legislation, tarrifs, and trade controls to create an economy that is inherently unstable by limiting competition and discouraging niche exploitation. Then, they use nationalized banking systems, taxes, and business legislation to suppress or excite the economy.

Much like fighterplanes, this means there is the occasional "pilot induced oscillation"1 (instability). The difference is, governments don't actually control the economy any more than fuel sloshing around in a tank controls an aircraft.

Basically, unless we intend to create a high performance economy (which is not the stated goal - that being a "stable" economy), we should adopt a laissez-faire attitude, and completely get out of the business of trying to regulate what is largely unregulatable.

--

1. During the latter test phases, a YF-22 prototype was damaged heavily when the flight control system misinterpreted pilot input through the control stick, causing the plane to buck wildly. This is similar to inexperienced drivers who can't handle manual transmissions, except it involves a highly skilled pilot in a 20 billion dollar aircraft comprised of millions of parts made by the lowest bidder. Remarkably, the pilot rode the plane to a belly landing - I would've ejected and took my chances with a broken limb.
--

"Our language is sufficiently clumsy enough to allow us to believe foolish things." - George Orwell
How romantic! (3.36 / 11) (#19)
by valeko on Wed Jul 24, 2002 at 06:53:54 PM EST

The romanticism of your analogy is very beautiful, in the poetic kind of way. Just let the almighty Invisible Hand do it, and you can achieve the sheer, goddamn beauty of the world's best bird of prey, the F-22!

In encouraging deregulation you're completely ignoring the people that get screwed by your pilot-induced oscillation, but you obviously don't see too many of them, being confined to your obviously financially well-endowed environment.

"Hey, what's sanity got going for it anyways?" -- infinitera, on matters of the heart
[ Parent ]

Oh For Pete's Sake...[Flame Alert, Sheilds Up] (2.57 / 7) (#28)
by thelizman on Wed Jul 24, 2002 at 08:29:25 PM EST

You sir, are an ignoramus! I know most people here don't like seeing that kind of insult, but your ad-hominem class warfare attacks against people based on your ignorant assumptions seems to justify it as far as I'm concerned.

Let me ask you this, little man: Do you honestly think that I'd leave my "obviously financially well-endowed environment" to join the US Army making an astonishing pre-tax income of $15,000 (FY 2002 Basic Pay for E-3 < 4 Years)?

You know what, don't answer that, because you're still going to be wrong. You don't know one iota of who I am or what I stand for. You have only your ignorant assumptions as filtered through your own self-serving ideals. Petty minds like yourself are merely capable of perceiving a petty world.

Now, getting beyond your horribly arrogant attack on me as a person, we can look at the insipid drivel you wrote above:
In encouraging deregulation you're completely ignoring the people that get screwed by your pilot-induced oscillation
If you had actually bothered to read my comment (or assuming you did, if you were capable of comprehending any of it), you may note with significance that a deregulated economy is pilot-less, and therefore there would be no issue of pilot induced oscillation. Like all naturally occurring systems with more than one participant, the system is naturally balancing and neither needs nor benefits from human interference.

Next is your feigned concern for 'the little guy who gets screwed'. News flash bubba: EVERYBODY is getting screwed right now, and as much as we like to blame the big evil corporate executives, the fact of the matter is that time and time again the only consistant factor in any economic crisis is that government regulation was a contributory factor. Whether it is lights out in California, or the shockwaves from the Global Crossing/Enron/Worldcom flops, some bureacracy somewhere has had it's own Invisible Hand at work. I can name more people than I have fingers and toes to count who I personally know of that got ass-raped by a cactus in the recent economic downturn and then stock-market rollercoaster, and everyone looks to big brother for the solution big brother is incapable of providing.

Tell you what, before coming unarmed to a match of wits, I suggest you read some basic economic theory, and perhaps peruse some Game Theory. In the mean time, I'll take freedom over government controls.
--

"Our language is sufficiently clumsy enough to allow us to believe foolish things." - George Orwell
[ Parent ]
Translation service (3.77 / 9) (#43)
by greenrd on Wed Jul 24, 2002 at 10:02:34 PM EST

To summarise your points:

  • We don't know one iota of who you are or what you stand for... this speaks clearly to your communication skills (or lack thereof).
  • Let's throw in some buzzwords like Game Theory and Chaos to prove that we can't predict anything about what our regulatory actions will do to the economy
  • Nevertheless - in a surprising yet elegant paradox - we can predict with unerring accuracy that deregulation will have a positive effect - where "positive" is defined as "better or at least less bad than the situation would have been like with more regulation".
  • As you so rightly put it, "News flash bubba: EVERYBODY is getting screwed right now,". There is no distinction in the effect of a downturn has on a janitor compared to the effect it has on Bill Gates. Social classes are a myth. The interests of the rich are perfectly aligned with the interests of the middle-classes and the interests of the poor, and this assumption is so obviously self-evidently correct that it does not even need to be explicitly stated.

"Capitalism is the absurd belief that the worst of men, for the worst of reasons, will somehow work for the benefit of us all." -- John Maynard Keynes
[ Parent ]
We don't know? (2.00 / 4) (#50)
by tekue on Thu Jul 25, 2002 at 05:45:42 AM EST

We don't know one iota of who you are or what you stand for... this speaks clearly to your communication skills (or lack thereof).
No, Greenrd, it's just you (and quite obviously Valeko) who doesn't know what he's talking about. I happen to understand him and agree with what he's saying. Get a clue.
--
Humanity has advanced, when it has advanced, not because it has been sober, responsible, and cautious, but because it has been playful, rebellious, and immature. --Tom Robbins
[ Parent ]
Right (1.00 / 1) (#39)
by prometheus on Wed Jul 24, 2002 at 09:39:31 PM EST

And no one ever gets screwed in any other system's cycles.  Valeko for World President!

Funny that other systems are more likely to have a "pilot"...

--
<omnifarad> We've got a guy killing people in DC without regard for his astro van's horrible fuel economy
[ Parent ]

I disagree with your analogy and conclusion (4.50 / 6) (#25)
by broken77 on Wed Jul 24, 2002 at 08:02:54 PM EST

I think your analogy is perhaps not the best choice. You can't really compare a fighter plane and the economy. But, just for the hell of it, I'll take your choice of analogy and run with it the way I think it would run. You'll have to forget the fact that my story quickly becomes outrageous and impossible (not metaphorically speaking, but what the actual plane could do) :-)

First, we redesign the plane to be more nimble and agile, making it inherently less stable. Then, something completely unexpected happens. The plane gains its own consciousness, ejects the pilot immediately, and starts to fly itself. Since it has gained its own consciousness, it realizes that it is a fighter plane, and designed (very well) for battle, and killing. So it decides to go around shooting anything that gets in its way. As it learns, it becomes better at shooting and killing and maneuvering. We send other planes to try and subdue this beast, but it annihilates these planes quickly and effortlessly. Soon, it finds more planes like itself in the world, and together, they realize they can do more damage together than they could separately, so they morph into a larger, stronger plane. This cycle continues until there is only one huge, borg-plane in the sky, consuming all in its wake. All smaller planes who try to fight this borg are quickly gobbled up or destroyed, leaving us with a giant, domineering, all-controlling force in the sky. And as it knows that it's the biggest force and nothing can compete with it, it realizes it can do whatever the fuck it wants to whomever the fuck it wants without fear of retaliation.

That's how I see it, anyway.

I'm starting to doubt all this happy propaganda about Islam being a religion of peace. Heck, it's just as bad as Christianity. -- Dphitz
[ Parent ]

bad anology (4.00 / 1) (#26)
by strlen on Wed Jul 24, 2002 at 08:07:10 PM EST

well, there's always individual corporations controlling the economy. as for the fighter plane example given, the plane was made negatively stable (meaning you need to do something extra to keep it normally operating), to give a greater degree of input for the pilot, just as a laisez faire economy gives the producers and consumers greater degree of input, thus expanding its productivity.

--
[T]he strongest man in the world is he who stands most alone. - Henrik Ibsen.
[ Parent ]
Invoking the Darkness (4.00 / 1) (#46)
by johnny on Wed Jul 24, 2002 at 10:32:00 PM EST

which is book 3 of the series "The Passing of the Techno-Mages" by Jeanne Cavelos (in the Babylon 5 universe of discourse or whatever you call it)has such a character--a sentient fighter-bomber named Anne Sherridan who lives only for the thrill of destruction.

Be that as it may, yours is the best comment I've read in 16 months here at k5. Not only is it clever and unexpected, it gets to the crucial question: what is an economy for? We know what a fighter plane is for--it exitsts to destroy stuff. But what is an economy for? Whose purpose does it serve? Before we can decide on its design I think it might do well to consider these questions.

yr frn,
jrs
Get your free download of prizewinning novels Acts of the Apostles and Cheap Complex Devices.
[ Parent ]

You couldn't be more right on the money. (5.00 / 1) (#48)
by broken77 on Wed Jul 24, 2002 at 11:40:01 PM EST

And many people have tried to address this issue lately. What is an economy for? What is it's purpose? What end result to we hope for via an economy? I won't try answer these questions fully here, because it's tough. Really tough. But I'll just say this... Our entire political model is based on supply/demand, buyer/seller, labor/product, etc. A small list of dichotomies just like this. It would seem that our economy is designed in order to consume goods and produce capital. But there is something that is ignored in almost every single aspect of these dichotomies. And that is... People! Who is affected by each of these relations? How? Are only these people affected, or are there more on the outside that we haven't considered? Shouldn't the output of an economy be centered around what is best for people, instead of for maximum profit? But, you might say, profit is best for people! Is it? Think about those things... Then read this tutorial. It's enlightening to say the least. When I first started it, I was a little leary, it looked like it was going to go into some Communism rhetoric. But it didn't. It was very well written and thought out, and non-propagandist. If you like it enough, read the next tutorial. I'm still working on that one right now. Good luck!

Oh, and P.S., thank you for the gracious comment :-) That's the best kudos I've ever received on an online forum.

I'm starting to doubt all this happy propaganda about Islam being a religion of peace. Heck, it's just as bad as Christianity. -- Dphitz
[ Parent ]

Great Stuff Here -- not enough discussion (none / 0) (#60)
by lightcap on Thu Jul 25, 2002 at 01:15:46 PM EST

Write an article on your thoughts about the purpose of an economy! I'd love to see/get involved in the discussion that would ensue. I'm stuck in a rut right now fighting issues intellectually that are at a much higher level than this discussion (note: higher level as in 10,000 foot view, not superior). I'd love to see what other k5ers have to say about the root problem...what is an economy for? Why perpetuate an institution if we don't even know what it's for?

Thanks for the great comment!.
Mommy, what were trees like?
[ Parent ]

Only so many hours in the day :-) (none / 0) (#62)
by broken77 on Thu Jul 25, 2002 at 02:36:46 PM EST

But, I'll see what I can do. It's something I've always wanted to write about anyway.

I'm starting to doubt all this happy propaganda about Islam being a religion of peace. Heck, it's just as bad as Christianity. -- Dphitz
[ Parent ]

Natural economic oscillations (4.00 / 1) (#40)
by Osty on Wed Jul 24, 2002 at 09:45:50 PM EST

You can't guarantee stability, and given the lessons of things like Game Theory and Chaos, I don't believe we should even try. The mechanism of free market captalism is self regulating if left alone, and there is strong supporting evidence (almost to the point of being blatently obvious) that our attempts to manipulate economy through economic policy are the root cause of instability.

While I agree to some extent with your supposition, and personally believe that a laissez-faire approach to economics is the best approach, I think you've missed an important point. By itself, the Free Market oscillates. It goes up, it goes down. What the government does is not try to flatten those oscillations, as that's impossible. Instead, the point of manipulating interest rates is to minimize the effects of the oscillations. That means lower highs, and higher lows. Historically, this is a rather new approach, only taking an "active" role in economic affairs since the Great Depression of the 1930s. Prior to that, with a laissez-faire approach, there were numerous high highs (the roaring 20s, other examples that I can't point out because I don't have my history books on hand right now) and low lows (the Great Depression, obviously). Things went on a cycle of roughly 30 years or so between boom and depression. There really was no such thing as a "recession", because when the market turned, it went all the way down. A "recession" is a relatively new term, where the market has turned but it's not into full-blown depression.

Basically, unless we intend to create a high performance economy (which is not the stated goal - that being a "stable" economy), we should adopt a laissez-faire attitude, and completely get out of the business of trying to regulate what is largely unregulatable.

As I said above, I agree with you about laissez-faire, but I'm of the opinion that such a sweeping change is unnecessary. Instead, what we need is a younger, just-as-competent Allen Greenspan replacement. The guy's getting old, and he pretty much "controls" the economy (indirectly through the Fed, of course). A more laissez-faire approach would work, I think, where interest rates are manipulated less and in smaller amounts, but to stop manipulating them at all just may throw us back 100 years and put us right back into the natural cycle of huge booms and huge depressions. I, for one, don't want that.


--

NoPopIE, Internet Explorer popup killer (win2k/xp only, for now).


[ Parent ]
I concur (none / 0) (#47)
by cpt kangarooski on Wed Jul 24, 2002 at 11:01:11 PM EST

The present system works a lot better than the old ways did. How often do you hear about runs on banks? About our entire economy collapsing in mere days? It used to happen. The economy affects more than just a few people. Where a fighter jet is appropriate for one guy, a jumbo jet that goes to great lengths to minimize turbulence is better for an entire populace.

--
All my posts including this one are in the public domain. I am a lawyer. I am not your lawyer, and this is not legal advice.
[ Parent ]
Dumbass. (none / 0) (#57)
by delmoi on Thu Jul 25, 2002 at 09:51:11 AM EST

You take one metaphor, and then apply it to the opposite. You say that modern fighter planes are unstable and computer controlled, and on the other hand we should do the opposite with the government fiscal policy, because "governments don't really have control of the economy"

Look at the difference between inflation rates between 1840 and 1940, and between 1940 and 2002. Huge difference. Why? Because we tried to take control, and largely succeeded.

here's an idea for you. The economy is not a fighter jet, it's an economy. Read a book on macro economics. To say that the level of control a government has over an economy is equivalent to the level of control of jet fuel sloshing around in a gas tank has over a plane is absolutely retarded and completely at odds with reality.

metaphors do not prove anything
--
"'argumentation' is not a word, idiot." -- thelizman
[ Parent ]
Equivalent American Structural Problems? (5.00 / 4) (#13)
by _Quinn on Wed Jul 24, 2002 at 04:53:13 PM EST

I was under the impression that Japan hadn't come out of its slump yet because of structural problems in its economy; when the bubble burst, the keiretsu became ineffective, but they haven't really been replaced either.  I was also under the impression that Japanese banks are carrying more bad debt (than American banks) and aren't getting rid of it, artificially constricting the money supply.  Recent articles from other news sources, if I recall correctly, have been somewhat disappointed by the conservative actions of the new Japanese PM, especially as his campaign platform was serious reform.  Especially in light of Wall Street's reaction to the Enron/Worldcom scandals (please, FedGov, protect us!), what structural problems do you see preventing the US economy from recovering relatively rapidly?  Or am I totally off-base here? :-)

-_Quinn
Reality Maintenance Group, Silver City Construction Co., Ltd.

Wall Street's Reaction? (none / 0) (#49)
by krkrbt on Thu Jul 25, 2002 at 04:17:43 AM EST

Especially in light of Wall Street's reaction to the Enron/Worldcom scandals (please, FedGov, protect us!)

Unless you are in fact someone who works on the fabled street itself, please remember that your perception of the reaction of the individuals who collectively make up the "Wall Street" you generalize is filtered through Media, probably mass- and corporate owned-.  I read once that mass, corporate media is not really "the last bastion against totalitarianism", as we've all been lead to believe in our schooling, but is in fact, "first government cheerleader extraordinaire".  I think this was in a mises.org daily article - the author had previously worked at a daily paper, and noted how the most desirable jobs were on the government beat - city hall, courts, police, etc.  Business news?  boring, no room for advancement.  

So of course a corporate-, mass-media is going to say, "FedGov, we need your wisdom, protect us!".  I'm currently working on this theory, that says people who work for 'government' & serve 'government' (ie, reporters) live in their own little private world, one more degree (than everyone else) removed from reality.  They have their own special world - 'Government types' make the news, 'Reporter types' report the news to the outside world, and form the 'public' debate around their own personal biases.  hmm, that's probably not too clear, hopefully it'll come out better next time...

[ Parent ]

Japanese slump connected with US policy. (4.55 / 9) (#20)
by valeko on Wed Jul 24, 2002 at 07:16:23 PM EST

On a more broad macroeconomic level, one of the reasons for the state of the Japanese economy throughout the 1990s is definitely the contrast in the US policy, upon which a lot of Japan's economic paradigm was dependent. That, and, it doesn't help that when one measures economic "health" in terms of "growth" as prescribed by the same school of economics from which the geniuses on the IMF board are alumni.

In a nutshell, Japan was cultivated by the US during the Cold War as an essential ally and a bulwark against Communism in East Asia. It was important, against the backdrop of China, Vietnam, etc, to provide a successful working model of why the American system of free-market capitalism works. Japan, South Korea, and to a lesser extent some other SE Asian nations, were all "miracle economies" that experienced an enourmous postwar boom that often manifested itself in continuous double-digit growth rates throughout the 1950s and 1960s. Japan in particular was touted as being exemplary of the miracles that the American gospel brings.

Generally, it is redundant to mention that Japan's economy is largely export-driven. Here in America we know this very well. The US had a very large role in cultivating this status because it allowed Japan preferential access to its endless domestic consumer market during the Cold War, even at the expense of domestic American manufacturing and industry. The continuing protests by American automotive workers against the liberal Japanese imports were largely ignored and even quieted down, because it was essential to retain Japan and its very powerful and dynamic economy in the Cold War world.

For better or for worse, Japan was also generally not bothered about its form of capitalism, despite the fact that it differed vastly from the general theme of the US's neoliberal prescription for the rest of the world. The keiretsu system made Japan relatively impermeable to large amounts of American investment, buyouts, and of course, the bane of everyone's existence - "capital flight". Meanwhile, exports increased, and the American policy of accomodating this relationship at all costs proved detrimental to the welfare to large sectors of the domestic American working class. This can be exemplified merely by looking at the demographics of places like Detroit, Birmingham, and Gary (IN), which were all once thriving steel and automotive manufacturing centers. Since many domestic production plants have closed down, due in part to the Japan policy. (Many other pieces of domestic production also closed down, but owing to a different reason - the general tendency to migrate production outside the US in order to lower labour costs, obviously.) Japan was also able to gain a very influential financial position inside the US, pouring in plenty of investment, financing a lot of American debt through buying Treasury bonds, and various other adventures.

In the post-Cold War world, the American demand for the application of neoliberal policies, specifically the opening of the Japanese market to foreign investment. One of the final straws came at the beginning of the 1990s, when, if I remember correctly, Sony bought Hollywood's MCA Studios (though, this was later resold to the Canadian enterprise Seagrams for ~$5.7 bil in 1995 or so). Policies were appropriately adjusted, and a lot of Japan's export-driven aggressive growth suddenly began to stagnate.

Apart from that, one of the other important factors is consumer spending inside Japan itself. Japanese traditionally rely heavily on personal savings, far more so than is the case on the whole with the American consumer market. I am not an expert, but a lot of the business ethics in Japan are fundamentally different For example, Japanese banks do not always make decisions on loans to large enterprises based exclusively on the amount of return, because often considerations such as the resulting contribution to the macroeconomy are of greater interest.

Obviously, a lot of this is changing now, caving in to American demands, as well as adjustment of the tariff fare and currency market policies as well. Japan's postwar upbringing as a showcase of the gospel of capitalism is an important determinant of the sustainability of its economy in the future.

"Hey, what's sanity got going for it anyways?" -- infinitera, on matters of the heart

Steel was the wonder material of the 1890's (4.60 / 5) (#52)
by Alan Crowe on Thu Jul 25, 2002 at 06:17:53 AM EST

This can be exemplified merely by looking at the demographics of places like Detroit, Birmingham, and Gary (IN), which were all once thriving steel and automotive manufacturing centers

Find out what a welded blank is. Get yourself a CAD package and see how much steel you can save with a detailed stress analysis. Benjamin Franklin got it right when he said "a penny saved is a penny earned". Things that used to be made out of solid steel are now made of 50% steel, 50% cunning. Play "count the holes in the roof beams" next time you take your kids to the shopping mall. Making stuff out of steel pays Korean wage rates, making stuff out of cunning pays American wage rates.

Read "The Machine That Changed The World" by Womack, Jones, and Roos, ISBN 0-89256-350-8



[ Parent ]
Very insightful post! <nt> (none / 0) (#56)
by CodeWright on Thu Jul 25, 2002 at 09:47:17 AM EST



--
"Humanity's combination of reckless stupidity and disrespect for the mistakes of others is, I think, what makes us great." --Parent ]
You got that backwords (5.00 / 2) (#53)
by CaptainZapp on Thu Jul 25, 2002 at 07:07:45 AM EST

Sony bought Hollywood's MCA Studios (though, this was later resold to the Canadian enterprise Seagrams for ~$5.7 bil in 1995 or so).

Sony never bought MCA Studios (alas it's either MCA or Universal Studios), but after their hugely successful venture into Audio (CBS) they wanted a film studio and settled for Columbia pictures (which they still own).

Nancy Griffin & Kim Masters have written rather entertaining book about how Sony was ripped off badly in this deal by two flamboyant "Hollywood Executives".

[ Parent ]

The Deming Way in Manufacturing (5.00 / 2) (#64)
by cam on Thu Jul 25, 2002 at 06:07:43 PM EST

Japan in particular was touted as being exemplary of the miracles that the American gospel brings.

Japanese manufacturing was far superior to all other countries manufacturing for quality control until the early 1990's. Japanese industry adopted the "Deming Way" in the 1950's. In 2002 Japanese quality is indiscernable from American and Australian quality. It has made the modern market for manufactured goods very homogenous as all manufacturers are now looking at their process rather than the product as the items that need to be monitored for quality. Poor quality process produce poor quality products.

Up until the late 1980's Australian industry was still using inspection regimes for quality control and were maintaining large inventories. As a young engineer in the early 1990's Australian heavy industry was just really starting to adopt statistical process control and just in time inventory. The quality shows now, but in the 1980's quality between Australian manufactured cars and Japanese manufactured cars were huge.

The advantage Japanese manufacturing held in quality from the 1950's to the 1980's is now gone. Just about every country except those new to manufacturing can match Japanese quality through.

cam
Freedom, Liberty, Equity and an Australian Republic
[ Parent ]

Central banking, and interest rates (4.50 / 4) (#22)
by imrdkl on Wed Jul 24, 2002 at 07:25:19 PM EST

had very little to do with the current crisis. There's two very important events which you don't mention at all, which are largely responsible for the downturn, and the near-panic in the US right now. The first was 9-11. The second began a long time before Enron, and what is seen now is only the tip of the iceberg.

The shock, anger, disgust, and shame will eventually give way to apathy and concern for survival, as it always does. Greed will continue to drive those with the knowledge and power to find new and better loopholes in the system.

This has very little to do with stagflation, or overly-fiscal monetary policy, although there is a limited analogy to the corrupt power structures which affect the Japanese economy and continue to hold it in limbo.

The real estate "bubble" in Japan, which arguably tipped the first domino in their collapse, was much more related to the amount of available land in Japan (as opposed to the US), than anything else. Real Estate, as an asset, really doesn't compare to the "assets" which were offered in the tech bubble. Real estate is, after all, real.

Your analogy seems pretty shallow, overall. (to be rather blunt) Would you disagree?

FWIW, I agree (1.00 / 1) (#24)
by snacky on Wed Jul 24, 2002 at 07:33:52 PM EST

Your analogy seems pretty shallow, overall. (to be rather blunt) Would you disagree?
I thought the article as a whole was pretty shallow. It looks like the kind of article I'd expect to find in my local newspaper. I happen to think the major stock indeces were way overpriced for the last few years, and they won't see new highs for a long time now that we've returned to reality. The author has vaguely conveyed the sense that unrealistic valuations were a big part of the problem, but the meandering into monetary policy was a waste of time IMO.

--
I like snacks
[ Parent ]
Have we returned to reality? (5.00 / 1) (#45)
by aphrael on Wed Jul 24, 2002 at 10:29:09 PM EST

The major indices are back where they were in '98, but that's still *up 200%* from where they were in '95.

[ Parent ]
The significance of monetary policy (4.00 / 1) (#36)
by IHCOYC on Wed Jul 24, 2002 at 09:02:32 PM EST

Monetary policy has evolved into the chief tool of the financial establishment for coping with the vagaries of the business cycle, and attempting to soften the blows on the average worker and consumer. They aren't going to be wholly unnoticed, but stability is their explicit goal.

It became this tool in the era after World War II, and specifically in the 1960's and 1970's. Arising under the circumstances that it did, both the core concepts of monetary policy and the experience of the people who guide it came out of a background where inflation was the biggest bugaboo. The collapse of a major speculative bubble is a learning experience for these people.

What the Fed paper essentially suggests, if it doesn't say so outright, is that the tools in the Fed's toolbox may not fit any of the controls needed to cope with the current crisis; and that they may not even know where to find those controls.

This message has been placed here IN MEMORIAM by the Parent ]

There is no tool (5.00 / 1) (#38)
by imrdkl on Wed Jul 24, 2002 at 09:32:38 PM EST

that can fix broken trust. It just takes time.

The Fed, although strongly rumored to be doing more than it's share to prop up the market lately, has few legal options. I agree with that much.

If corporate America hadn't been caught doing the exact thing that we've been telling Japan not to do for the last 20 years (being opaque), it wouldn't be such an irony, your article.

Nevertheless, I voted +1 for the opportunity to climb on my soapbox. :)

[ Parent ]

monetary policy (4.00 / 2) (#44)
by aphrael on Wed Jul 24, 2002 at 10:27:26 PM EST

There's been some interesting work done that suggests that the fed's increase in liquidity in late 1999 --- done because of fears that the 'year 2000 problem' would cause some sort of global financial crisis if things *actually stopped working*, which was a plausible belief in those days --- had the inadvertant effect of dramatically increasing the M2 and M3 money supply, thereby indirectly causing the stock market bubble. Not conclusive, by any means, but interesting.

It's also unclear to me that the events of Sept. 11. have anything to do with the recent market plunge; the memory of the American public is short, and the markets recovered last fall. It seems to me that it's more likely related to general concerns about corporate honesty caused by things like enron and worldcom.

[ Parent ]

differences between Japan and US (4.90 / 10) (#29)
by khallow on Wed Jul 24, 2002 at 08:30:12 PM EST

Other's have mentioned that there's differences between the US now and Japan then. I'll elaborate on some of those differences. The first thing to realize is that there's no magic cultural difference between the US and Japan. Fortunely, K5ers already seem to have that figured out.

  • Japanese business is even more secretive and insular than US business. Globally, I think a positive outcome of the current economic trainwrecks will be some real openness in business dealings. In Japan's case, as noted in the paper above, no one really understood what was going on for years. In particular, the actual stage of depression didn't start till 1995. Why didn't they act earlier? Because they didn't know what would happen. Incidentally, one could remark on the risk-avoiding behavior of Japanese politicians and businessmen, but I haven't noticed a real difference between them and their US (or other nationality) counterparts. Another significant effect of the secretiveness is that it allowed organized crime to enter the picture.

  • Back in the late 80's, the Japanese banks were looking for new revenue sources. Japanese banks have always had trouble earning as much as their counterparts in the US earn. One of the problems is that the Nissan market at the time had stock valuations (and Price to Earning ratios that were among the highest in the world). So how can you make more locally than the puny yields in the stock market?

    Answer: you lend to the Yakuza. The loans were higher in interest rates. However, as the recession hit, the lenders found they had a problem. Namely, it was much more difficult (not to mention much more unhealthy) to recover bad debt from organized crime. No idea of the size of these debts is known, but according to the Resolution and Collection Corporation, a 1997 government body tasked with buying and resolving bad loans, slightly less than a fifth were due to "anti-social elements".

  • Massive inefficient government spending. Ok, the US is notorious for this as well. However, Japan is unusual in that its spending is actually subsidizing it's postal savings accounts. So to repeat, Japan's banks are being undercut by the Postal Savings Accounts which used to loan money to construction projects funded heavily with public dollars.

  • Few rules on conflicts of interest for public officials. Here, I refer more to the practice of "descending from heaven". Further, bribe-taking is fairly common (for the briber). This seems to correspond to a older less effective era of US law enforcement. Ie, I think US law enforcement is further along on fighting government corruption than their Japanese counterparts.

In summary, I think Japan has serious problems that still haven't been dealt with. While the US and Europe do some things less effectively than Japan does, Japan should look hard at how these other countries fight corporate crimes and reduce government corruption.

Stating the obvious since 1969.

Doh! (none / 0) (#30)
by khallow on Wed Jul 24, 2002 at 08:36:44 PM EST

I must commit an act of stupidity every once in a while in order to lure you into thinking that I'm human or something. In this case, the biggest difference between the Japanese recession/depression and the US one now is that Japan's was considerably worse. Ie, about half of both real estate and the stock markets tanked. Further, one of the triggers for the Japan mess was the bursting of the US commercial real estate in 1990 and 1991 which had been pumped up courtesy of the Japanese corporations. In comparison, the main loss in the US has been in the high techs. While publically held companies have lost around half their value, and I assume commercial real estate is pretty weak, private real estate has managed very well (and keeping consumer confidence up). And we don't have any of those damn 60 year loans that your grandkids will still be paying off.

Stating the obvious since 1969.
[ Parent ]

Why not just print money? (4.60 / 5) (#51)
by Alan Crowe on Thu Jul 25, 2002 at 05:57:20 AM EST

Governments can finance their expenditure by
  1. Grabbing money (taxes)
  2. Borrowing money
  3. Printing money
Governments can control the money supply by
  1. Reserve ratios
  2. minimum lending rates
  3. Printing money
Commercial banks can lend more than they take in as deposits. If I deposit a dollar in bank A it can lend $7. If two of those dollars are deposited in bank B, if can lend $14. If four of those dollars are deposited in bank A it can lend a further $28. Commercial banks can kite their way to hyper-inflation, chaos and disaster. Traditional monetary policy uses interest rates to fly this kite steadily, at about the right height.

The article worries about the kite landing and not getting airborne again. It feels restricted to two policy instruments, conventional monetary policy, by which it means cutting minimum lending rates, which stops working at zero, and fiscal policy, by which it means financing government expenditures by borrowing money, instead of grabbing it.

Fiscal policy works when the problem is lack of confidence. If buildering firms are reluctant to borrow money to build houses because there is a recession, young persons might just stay with their parents, leaving the builders to go bust, then fiscal policy has lots to offer. The Government can borrow and build the houses, which puts money in the pockets of the building workers, and maybe restarts the economy. Or maybe it doesn't. The article makes the point that every attempt at fiscal stimulus leaves the government deeper in debt, and the Japanese government has run up enourmous debts fighting this recession.

I'm puzzled by this: if you are trying to cure a monetary contraction, you have cut interest rates to zero, which hasn't worked, and have then turned to fiscal policy, why on earth borrow the money. That is taking money out of the hands of persons who might overwise spend it, and committing the government to pay it back later. Why not just print the money and spend it, without borrowing it?

On page 38 the article coyly notes

In addition, the Bank of Japan appears to have been reluctant to be viewed as passively monetizing government debt, out of fear that such a policy could erode the BOJ's credibility and eventually lead to runaway inflation.
I assume this is the explanation for not printing money. I understand where they are coming from. The classic monetary screw-up is that a populist government promises more in electoral bribes than it dare raise in taxes. So it borrows. When it cannot borrow any more it prints. This leads to inflation, hyper-inflation, chaos, fascism, world war, getting nuked.

I'm not saying that the Bank of Japan was wrong about Japan. Their country has political problems. They spend government money on bridges that nobody wants to cross, so that the construction companies have the money to fund the political parties that pass the laws that spend the governments money on bridges that nobody wants to cross. Against that background the BOJ might be right to fear inflation, hyper-inflation, chaos,.... Or maybe they have a simpler concern. Useless infrastructure projects drain men and materials from the real economy. Perhaps printing money, only to have it wasted, will harm the economy as much as it helps, and risk the BOJ's credibility for nothing. But the focus of the article is set out on page 2

An analysis of Japan's experience may shed light on a host of questions that potentially could face policymakers in the United States and other economies at some future point.
Reading between the lines, I understand them to be saying this
Share act like money in importand ways. When the stockmarket falls, its is much like a monetary contraction, and requires a compensating monetary expansion. Gosh, that was a big fall in the stockmarket. What are we going to do if cutting the minimum lending rate to zero doesn't lead to a big enough monetary expansion to compensate?
If that does happen, why not just print some more money?

Really Bad Idea (TM) (4.00 / 1) (#54)
by Nikau on Thu Jul 25, 2002 at 08:37:15 AM EST

If that does happen, why not just print some more money?
Simple - when you print more money to flood the market, there's an evident surplus so people theoretically have more. But then prices rise to balance this out. So more money will be printed to try to get ahead. Inflation occurs again. Then more money will be printed. And prices rise - well, you get the picture.

This is hyperinflation as you mentioned above. I don't think there's any way for more money to be printed to stimulate the economy without also triggering a rise in prices.

This is what happened in Germany after World War I. There was a coup attempt, people went on strike, production halted, and prices rose. The government printed money to balance the inflation, and prices rose again, so they printed money... The cycle goes on.

The link two paragraphs above probably manages to explain it better than I can (IANAE - I am not an economist) but to me that's why they don't print more - it basically solves nothing.

---
I have a zero-tolerance policy for zero-tolerance policies, and this policy itself is the exception to itself which allows me to have it without being contradictory. - Happy Monkey
[ Parent ]

Limited goal => limited printing (5.00 / 2) (#55)
by Alan Crowe on Thu Jul 25, 2002 at 09:19:36 AM EST

But then prices rise to balance this out.

At this point you have inflation. Conventional monetary policy starts working again. You can set the minimum lending rate below inflation to get negative real interest rates, if that is what is needed. Once you have turned deflation to inflation, you have cured the special problems specific to deflation, and then you stop printing money.

My understanding is that prices are sticky downwards. If the Fed expects the economy to adjust to a monetary contraction by reductions in prices and wages, we are in for a major depression. But one need only run the printing presses long enough to avoid the need for downwards adjustments in prices and wages. Then we can have an ordinary recession :-)



[ Parent ]
Keynesian dog <nt> (5.00 / 1) (#58)
by CodeWright on Thu Jul 25, 2002 at 09:54:48 AM EST



--
"Humanity's combination of reckless stupidity and disrespect for the mistakes of others is, I think, what makes us great." --Parent ]
Money is a divisor (1.00 / 1) (#59)
by IHCOYC on Thu Jul 25, 2002 at 12:26:57 PM EST

Money is a divisor. Making more doesn't make anyone richer, at least not per se. All that is achieved by printing money is the dilution of existing supplies of money. This is why those who are in charge of the economy, anyway, see it as a bad idea. They see these things from the perspective of those who are already sitting on a tub of money.

What's important, ultimately, is shoes and ships and sealing-wax, cabbages, U.S. politicians, and other things available for purchase with money. Money may be a "social construction," but these are bits of the world that are worth something. True worth lies in these things, not in money. More of these things cannot be made by fiat alone. And increasing the production of any one of these means the diversion of resources that might have been used to make something else.

(Any time you hear someone talking about "creating wealth," RUN! Wealth cannot be created, only changed or moved. Anything else involves the violation of the law of the conservation of matter and energy, a rule that even marketing is subject to.)

The situation discussed in the article is a situation where there is more than enough money out there to keep the system liquid and grease the wheels of exchange. The problem is that the expectation of further deflation suppresses spending. It also discourages investment: anyone who brings anything to market runs a strong risk that they'll end up having to sell the finished product for less than the cost of the materials that went into it.

Raising taxes to defeat the expectation of lower prices might actually do more in such a situation than printing money --- at least, if government could discipline itself to invest that money rather than spend it. It would be even easier to implement, I suspect, in countries that use a VAT.
--
"Complecti antecessores tuos in spelæis stygiis Tartari appara," eructavit miles primus.
"Vix dum basiavisti vicarium velocem Mortis," rediit Grignr.
--- Livy
[ Parent ]

I must take exception (5.00 / 1) (#61)
by _Quinn on Thu Jul 25, 2002 at 02:26:18 PM EST

"(Any time you hear someone talking about "creating wealth," RUN!  Wealth cannot be created, only changed or moved. Anything else involves the violation of the law of the conservation of matter and energy, a rule that even marketing is subject to.)"

Wealth is the value of things, not their composition: of a chair and a pile of lumber (and sealant and glue and screws, whatever), the chair is worth more.

"And increasing the production of any one of these means the diversion of resources that might have been used to make something else."

Also known as the opportunity cost, which does not prevent the creation of wealth; in fact, because it allows for specialization, it increases wealth production: if I'm a good carpenter but a bad lumberjack, I can create more wealth by building good chairs and paying a lumberjack (who's a bad carpenter) for the wood than either of us could if we both harvested lumber and built chairs.

-_Quinn
Reality Maintenance Group, Silver City Construction Co., Ltd.
[ Parent ]

Value and wealth (3.00 / 2) (#63)
by IHCOYC on Thu Jul 25, 2002 at 03:03:10 PM EST

We may be using words differently.

The world is full of valuable junk. I paid $1200 for an 8088 machine back in eighty-something. I still have the motherboard around here. The computer still works as well as it ever did, if only I still had a compatible keyboard, a Hercules monitor, my 5 1/4 diskette software, and a drive to load it from. It is fully peopled with 512K in memory chips on the board. I'd have cut off a finger for my own computer back in '75. I paid $1200 for this one. Now it's still here mostly because I cannot bear to part with it, since I know how much investment it represents.

In twenty years, you'll have to pay somebody to haul that chair away. Value is personal, subjective, fleeting, and temporary. Perhaps it can be "created," if you ignore the morning after.

There are dozens of worthy commodities, representing resources used and opportunity cost paid. From zucchinis to Hawai'ian shirts to tampons, they hold no value for me because I don't want them. Someone buys them; not me.

Too much effort is spent in the U.S.A. persuading people to pay extra for vain cachet. This creates "value," but it only increases the wealth of, e.g., one brand of fungible cola drink at the expense of a less prestigious competitor. This sort of "value" is only the apples of Sodom.

Wealth is more a measure of the amount of the world's resources that money can command. While perhaps not immune to subjectivity, it represents something somewhat less ephemeral and more substantial.
--
"Complecti antecessores tuos in spelæis stygiis Tartari appara," eructavit miles primus.
"Vix dum basiavisti vicarium velocem Mortis," rediit Grignr.
--- Livy
[ Parent ]

"Creating wealth" versus "transferr (none / 0) (#69)
by Alan Crowe on Sat Jul 27, 2002 at 05:53:43 AM EST

(Any time you hear someone talking about "creating wealth," RUN! Wealth cannot be created, only changed or moved. Anything else involves the violation of the law of the conservation of matter and energy, a rule that even marketing is subject to.)

The phrase "creating wealth" is to be understood contrastively. The contrast is with "transferring wealth".

Alice has a violin. Bob wants a violin too. EITHER Bob takes Alice's violin from her OR Bob gets some wood and makes one.

There is a difference. At least Alice thinks there is a difference. Bob doesn't much care, he gets a violin either way, though the easy way has certain obvious attractions, to those with philosophical doubts about whether it is possible in principle to create wealth.

[ Parent ]

Let's take a closer look. (none / 0) (#70)
by IHCOYC on Sat Jul 27, 2002 at 12:51:18 PM EST

Alice has a violin. Bob wants one. Yes, Bob can always steal Alice's, but this transaction is outside the rules of the economy.

Bob can purchase Alice's. Or Bob can go out and arrange for the wood, varnish, gut, and other stuff that goes into the making of a violin, and make one himself, or have one made. The result is a violin that may or may not be as good as Alice's. (If Alice's violin was made in seventeenth century Cremona, a new one may not be equivalent.)

If Bob purchases Alice's, no wealth has been created, only transferred. Bob gets a violin. Alice gets money whose value comes what it buys, money that Bob no longer has.

If Bob makes a violin, he has all sorts of costs as well. He either has to buy or make the wood, varnish, and other things that go into making the violin. This costs him either money or time. And, of course, the ingredients once incorporated into Bob's new violin are unavailable for other uses; this too is a cost. If the finished violin commands a higher price than the total cost of the raw materials that went into it, that price represents the craftsman's hire. It too was bought at a price; it was not free. No wealth has been created here either; only transferred.
--
"Complecti antecessores tuos in spelæis stygiis Tartari appara," eructavit miles primus.
"Vix dum basiavisti vicarium velocem Mortis," rediit Grignr.
--- Livy
[ Parent ]

Who mentioned stealing? (none / 0) (#71)
by Alan Crowe on Sat Jul 27, 2002 at 02:37:29 PM EST

Bob pays a politican to pass a law saying that the violin is a male instrument, and Alice has to hand it over.

No I'm not kidding. This is exactly what is going on when Congress passes a farm bill to give $150billion to farmers. These kind of government enforced transfers are the bread and butter of modern life. I'm not even taking a stand against them in this post. I'm just saying that one has to keep the difference between "transfers" and "creation" straight, least one ends up with not enough created to be the source of the transfers.

I'm amused by

If the finished violin commands a higher price than the total cost of the raw materials that went into it, that price represents the craftsman's hire.
You don't work for Anderson do you? This is similar to waht is done in takeover accounting. If Megacorp pays $100million for Minicorp, but Minicorp only has assets worth $42million, the accounts don't show that Megacorp lost $58million by overpaying. No, sir. The books show $42million assets + $58million goodwill, and the aquirer always gets value for money.



[ Parent ]
Increasing the money supply (none / 0) (#67)
by aphrael on Fri Jul 26, 2002 at 08:40:15 PM EST

tends to devalue the purchasing power of money, causing runaway inflation. that this should be so is clear --- if you increase the supply of less money, it is suddenly less *rare*, and *in general* things which are less rare decrease in value (because you're less likely to give up something you value highly for something you can get anywhere than you are for something you can only get in extremely unusual cases).

Two good examples of this are of Germany during the 20s, and of France during the Revolution. In both cases, the government printed lots of new paper money; in both cases it rapidly became worthless.

[ Parent ]

Yes, yes, I know all that :-( (none / 0) (#68)
by Alan Crowe on Sat Jul 27, 2002 at 05:31:23 AM EST

The traditional reason for printing money is to make people better off. The government has promised to make people rich. This was unwise. It prints money, doubling the money supply. The people now have twice as much money. But since prices also double, they are no richer. The same political pressures still apply, so the government tries again, doubling the money supply. Repeat.

As persons realise that printing money in order to have twice as much money doesn't make them any richer, the government tries quadrulping the money supply. This way lies madness and destruction.

This has nothing to do with the article. The article pointed out that Japan has got itself stuck in deflation. This adds additional burdens to the economy, of a pyschological nature, to do with prices being sticky downwards. They have done the usual thing, of cutting minimum lending rates to zero, without effect. The article asks: what else can they do? The Fed worries about America getting stuck in a similar situation, due to the current stock market crash, and because America did get stuck in a similar situation in the 1930's.

What do you do if prices are falling, which is disrupting the economy, because workers have `issues' with wage cuts, and so forth, and the usual monetary controls have stopped working, because the Fed has already cut minimum lending rates to zero and can go no lower.

My question is: why not just issue currency to make up for the monetary tightening due to the stockmarket crash, and then stop issuing currency. Since the goal is not to make the people rich, the fact that it fails to do so, does not create a political pressure to repeat the remedy. The goal is create enough price rises so that the economy is no longer deflating. This has various second order effects. One can set the minimum lending rate below inflation, creating negative real interest rates. Failing industries can cut wages by stealth, paying wages increases that do no keep up with inflation. This seems to be politically necessary. The government needs workers to get pissed off with poor pay in declining industries and move to industries with better prospects. In the context of deflation this means nominal wage cuts. But that is too much to bear. The workers will be out on strike. Or the employers, realising this will just shut the factory. Yaddah, yaddah, yaddah, nobody bothered to read my post, not even the three posters who were kind enough to take the time to try to answer my question, so I should just give up :-(

[ Parent ]

A decade-long slump (5.00 / 1) (#65)
by theantix on Thu Jul 25, 2002 at 06:15:09 PM EST

'the Japanese economy was entering a decade-long slump'

My friend, they have not recovered yet.  It is very innaccurate to claim that the slump will be a decade long, becuase it may take them much longer to recover than that.  They still show signs of resisting making the changes required to clean up their system (i.e. Banking system reform, a more open corporate structure).

--
You sir, are worse than Hitler!

Japan v. United States (5.00 / 1) (#66)
by qr2215r on Fri Jul 26, 2002 at 12:36:35 PM EST

There really isn't any reason to believe that the US is on the road that Japan has been trudging through for the past decade. The two countries are too different in order to draw any meaningful comparisons. Japan's government, for example, heavily interferes in the economy through its industrial policy in order to promote high levels of employment but prevents businesses from failing. Business failure is the chief disciplining feature of capitalism, and when that is not present, makes the economy far less efficient, meaning that it produces less, lowering the standard of living for everyone. In the past, industrial policy for Japan may have been oriented correctly to promote the government's desire for an export-led economy, but because the government does not respond to changes in the market, its policies do not adapt accordingly.

The US, on the other hand, still allows businesses to fail, for the most part. There is a high degree of capital mobility. As a result, the US economy adapts far more quickly than any other in the world. As long as the Congress does not impose onerous costs either through taxation or excessive regulation, the current recovery should continue.

During the 70's, excessive regulations hampered business growth: to take as one example, the federal government was monitoring the content of inflight meals to prevent price competition between the airlines! The disastrous policy of the fixed exchange rate led to the inflation of that decade. Argentina's and East Asia's recent woes were caused by that very same policy. Even the New Deal largely failed to bring the country out of the Depression and probably contributed to its length by dissuading private investment and contracting the money supply (see Thomas Sowell's recent column).

In short, outside of ensuring that information produced by companies is accurate and that fraud is punished, it is difficult to see any government action as being helpful. The lesson that should be learned from Japan is that government intervention, while helpful to those who are currently employed, does not help those who wish to be employed or wish to establish a new business. The status quo becomes the goal of national policy, and this will inexorably lead to increased inefficiency, lower employment, and a lower standard of living. Unless and until Japan's policymakers are willing to lower taxes, simplify regulations, and otherwise promote competition, they will continue to be in the tank.

Japan in the Nineties: happening again? | 71 comments (54 topical, 17 editorial, 0 hidden)
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