Dualflation

[day4night]

Quote from Angrycat:

That makes no sense. Saving and investing are synonymous. Japan is an export economy, thus it doesn't really depend on domestic demand. Thus, if the Japanese save, they are really making their earnings available for production of goods.

The problem with Japan is not the savings rate but the fact that taxes are incredibly high and revenue is used for inefficient government run programs like its terrible national health service and keeping Zombie companies alive. The incentive to work is low and so is optimism.

First, Japanese savings have been invested overseas to a very large degree, helping in some cases to develop countries whose new companies can now compete with the Japanese in their traditional export markets.

Second, the idea that savings and investment are equal seems spurious. If I lend my savings to your bank, but you can't find a decent loan to make, then how were my savings an investment? Now, you might find a loan to make to someone who will use the money overseas, but this isn't investment in Japan, it's investment in Australia or the US or China...

On Japan in general I also have a hard time ascribing their deflation to a culture of savings.

Health care being the culprit -- hard to agree because a quick search showed me that it takes up 6% of GDP in Japan, only a third of our health care costs.

Low motivation, hmm, hard to say.

Another factor has got to be that prices were kept artificially high for decades as a part of the export-orientation. Prices of Japanese goods used to be twice the price in Japan as in the US. A system of middlemen which is dissappearing can mean both higher unemployment and lower costs. That prices would fall in this environment is only logical. Add new foreign competition, both in and outside Japan.

About taxes and deflation, could you explain? I don't understand the link, unless you're saying taxes create a disincentive to employment. So then you decrease the labor pool, so potential output is theoretically lower, less enterprise, less demand for credit, less credit money created, so higher value of that money relatively, and therefore deflation? Is that the gist? But why didn't that happen in Sweden for example?

 

[morganist]

Quote from day4night:

First, Japanese savings have been invested overseas to a very large degree, helping in some cases to develop countries whose new companies can now compete with the Japanese in their traditional export markets.

Second, the idea that savings and investment are equal seems spurious. If I lend my savings to your bank, but you can't find a decent loan to make, then how were my savings an investment? Now, you might find a loan to make to someone who will use the money overseas, but this isn't investment in Japan, it's investment in Australia or the US or China...

On Japan in general I also have a hard time ascribing their deflation to a culture of savings.

Health care being the culprit -- hard to agree because a quick search showed me that it takes up 6% of GDP in Japan, only a third of our health care costs.

Low motivation, hmm, hard to say.

Another factor has got to be that prices were kept artificially high for decades as a part of the export-orientation. Prices of Japanese goods used to be twice the price in Japan as in the US. A system of middlemen which is dissappearing can mean both higher unemployment and lower costs. That prices would fall in this environment is only logical. Add new foreign competition, both in and outside Japan.

About taxes and deflation, could you explain? I don't understand the link, unless you're saying taxes create a disincentive to employment. So then you decrease the labor pool, so potential output is theoretically lower, less enterprise, less demand for credit, less credit money created, so higher value of that money relatively, and therefore deflation? Is that the gist? But why didn't that happen in Sweden for example?

read my last post. i did not say i agreed with those positions i simply stated that is what the macroeconomic mainstream stated. if you follow the link it will explain about how negative interest rates were used and why.

also if you read my post you find your answer as to why there are problems with saving and investment disparities. the area is complex and not much fun but you can see why there are so many problem now as a result.

i was simply trying to be kind by telling you what a couple of schools of economic thought believe. it was not my opinion. in relation to dualflation i still stand by my position due to the explanation a gave in my previous previous post in relation to the difficulties in meeting full capacity in a recession due to capital generation and skills.

 

[Angrycat]

Quote from morganist:

actually savings and investment are not necessarily synonymous. as the bank holds the money people save and then invest it they act as the agent. this causes problems for example at the moment receipts of money in banks has risen however the lending out to businesses has fallen because of the high risk that the bank has to take. because the bank acts the agent people don't take the risk into consideration they just take the low return the bank offers and don't question where the money is going. it is not necessarily invested in new businesses in fact the interest rate for new start ups is high if they can get that money in the first place. that is part of the problem at the money people cannot get credit due to the investment problems banks have. until september 07 banks would sell of debts as credit and default derivatives now no one is buying so they have to take more of that risk on themselves making them less willing to lend.

although your position makes some sense on a macro level in financial reality it makes no sense. by your judgement of a macroeconomist you are one yourself wrong about things in general.

Well, that joke about macro-economists and micro-economists is from the Stand-up Economist - a professor of economics who does stand-up comedy on the subject of economics and keeps us in stitches. A dismal science indeed.

I believe I qualified my statement with "almost the same" for the reason you mention. You assume (for expediency, I suppose) that all savings is put in a bank. This is not necessarily so. One may invest directly in a start-up business, in an existing closely held business or in stocks.

You're basically saying that the risk tolerance of the Japanese is low - they are willing to accept a near zero interest rate from the banks. The banks' tolerance is low - they are willing to lend only at a very high credit spread.

Why is that?

I suspect that high taxes play a large role. Taxation reduces return to the investor but does nothing to mitigate risk. Thus, high risk projects do not yield an adequate return on an after tax basis and the supply of funds for new businesses is low.

Essentially, credit is shifted away from productive enterprise and toward zombie companies that spend their time destroying wealth. Thus, despite the amount of money printed and endless stimulus packages, Japan remains both economic growth and inflation-free.

But this has nothing to do with the savings rate being high.

 

[morganist]

Quote from Angrycat:

Well, that joke about macro-economists and micro-economists is from the Stand-up Economist - a professor of economics who does stand-up comedy on the subject of economics and keeps us in stitches. A dismal science indeed.

I believe I qualified my statement with "almost the same" for the reason you mention. You assume (for expediency, I suppose) that all savings is put in a bank. This is not necessarily so. One may invest directly in a start-up business, in an existing closely held business or in stocks.

You're basically saying that the risk tolerance of the Japanese is low - they are willing to accept a near zero interest rate from the banks. The banks' tolerance is low - they are willing to lend only at a very high credit spread.

Why is that?

I suspect that high taxes play a large role. Taxation reduces return to the investor but does nothing to mitigate risk. Thus, high risk projects do not yield an adequate return on an after tax basis and the supply of funds for new businesses is low.

Essentially, credit is shifted away from productive enterprise and toward zombie companies that spend their time destroying wealth. Thus, despite the amount of money printed and endless stimulus packages, Japan remains both economic growth and inflation-free.

But this has nothing to do with the savings rate being high.

yes i agree not all saving is put into banks however as the value of shares is based on the gearing of the company due to credit problems at the moment equity investment will be affected as well as credit investment. thus start up capital is constrained in equity capital too (yes I know it is not a good situation).

you other point is valid in relation to why the japanese economy is like that. i do not disagree i never disagreed i merely pointed out the generally perceived view of macroeconomists. that is why i am different from the mainstream macroeconomist.

look i appreciate your responses and think you post well although i don't agree with everything you posted and gave you my reasoning why.

is does however concern me that you think i am only a student or graduate. are you serious and why if so. surely you must think my points are valid even if you don't agree with them that is a difference of opinion not cause for malpractice.

could please explain why you thought that.

 

[Angrycat]

Quote from morganist:

it is good to have a decent response. although i don't agree with your position in entirety. i think there will be price rises due to monopolisation because of the difficulties in starting new businesses up to compete with the larger ones due to credit constraints and the lack of incentive for people to invest due to low interest rates. so i don't agree with your argument there due to the difficulties that the economy will create for entering a market with constrained capital when there is already an established provider there.

Low interest rates have the opposite effect - they encourage investment because money is cheaper.

Upon a little reflection, I think I can go along with our monopolisation argument - but not because of credit constraints. Small businesses are getting credit all the time and banks don't actually provide most of the credit to small businesses in the United States. Also, we will not have monopolies in the United States. We will have a smaller number of very large companies. So, oligopolies, but not monopolies. They will result in barriers to entry increased through increased and more draconian regulation. This is already happening - to the benefit of insider firms and at the cost of competition.

Quote from morganist:

in relation to your argument against my first point that interests me. because that is the more widely accepted reason for inflation in macro economic circles currently due to the inflation is a monetary caused situation view by monetarists. you are pretty ballsy to go against the mainstream view although i understand why you have taken that stance.

to your last point. i am a macroeconomist not student or new graduate. it makes me wonder why you thought that. did you not think my position was valid. perhaps i did not explain enough but it is difficult to get people to read detailed posts so i kept it simple. in relation to my views, that would have no barring on my occupation or progress through my occupation some macroeconomist have very wild views mine are fairly common.

there are many macroeconomists who argue about inflation and how it should be catergorised if anything my post should make you think i am a marcoeconomist.

anyway thank you for your reply. it is good to get another persons opinion and it was well written with some good argument some of which i espouse.

Thank you and I only asked because of the way you wrote your post and now I understand why you chose that style.

Quote from morganist:


oh sorry i forgot to answer you point on reduction of capacity to manufacture. the fact is there will be little investment to enable the ability to manufacture to the capacity that it existed previously. you also have to take into consideration that when the products manufactured altered the labour force has to develop the skills to produce them so they will need retraining. this will take time. although there will be an emergence from the recession once the ability to generate sufficient capital to enter these new markets and also retrain people to manufacture them it will be a few years at least and there will likely be a short term reduction in manufacturing and service providing capacity, apart from very menial forms.

I'm assuming you're using "manufacture" in a very broad sense since the United States economy is not based on manufacturing. I'm afraid that Americans are going to need more than retraining. Have you seen the state of our schools? We have a post-industrial economy and we're graduating students without basic math skills.

Frankly, while I don't agree with Krugman on much, I do agree that we've produced very little outside of the housing bubble since the late '90's. So, I fear it will take a lot more than simple retraining of the labour force. We are going to need innovation - that is, innovation beyond badly constructed derivatives products.

 

[morganist]

Quote from day4night:

First, Japanese savings have been invested overseas to a very large degree, helping in some cases to develop countries whose new companies can now compete with the Japanese in their traditional export markets.

Second, the idea that savings and investment are equal seems spurious. If I lend my savings to your bank, but you can't find a decent loan to make, then how were my savings an investment? Now, you might find a loan to make to someone who will use the money overseas, but this isn't investment in Japan, it's investment in Australia or the US or China...

On Japan in general I also have a hard time ascribing their deflation to a culture of savings.

Health care being the culprit -- hard to agree because a quick search showed me that it takes up 6% of GDP in Japan, only a third of our health care costs.

Low motivation, hmm, hard to say.

Another factor has got to be that prices were kept artificially high for decades as a part of the export-orientation. Prices of Japanese goods used to be twice the price in Japan as in the US. A system of middlemen which is dissappearing can mean both higher unemployment and lower costs. That prices would fall in this environment is only logical. Add new foreign competition, both in and outside Japan.

About taxes and deflation, could you explain? I don't understand the link, unless you're saying taxes create a disincentive to employment. So then you decrease the labor pool, so potential output is theoretically lower, less enterprise, less demand for credit, less credit money created, so higher value of that money relatively, and therefore deflation? Is that the gist? But why didn't that happen in Sweden for example?

i will quickly explain the link between taxes and deflation (and for the love of good it is not my opinion it is from a established school of thought so if you don't like it tell them).

when tax is higher the amount of money in circulation is lower as it is taken out of the economy for a certain time. this reduced the amount of transactions and thus creates deflation less money supply in relation to output (90 dollars per 100 apples as opposed to 100 dollars per 100 apples). effectively the higher the taxed the less time the money spends in the system and thus the 'velocity' of money is lower. keynes described this as leakage.

not my opinion just what the keynesians and some other non classical macroeconomist believe.

 

[Angrycat]

Quote from morganist:


look i appreciate your responses and think you post well although i don't agree with everything you posted and gave you my reasoning why.

is does however concern me that you think i am only a student or graduate. are you serious and why if so. surely you must think my points are valid even if you don't agree with them that is a difference of opinion not cause for malpractice.

could please explain why you thought that.

I hope I explained why in my previous post. Look, I didn't mean it as an insult. There are many economics students who are better economic thinkers than some of their professors.

I don't expect you to agree with me entirely. Considering opposing points of view is the path to intellectual growth.

 

[morganist]

Quote from Angrycat:

Low interest rates have the opposite effect - they encourage investment because money is cheaper.

Upon a little reflection, I think I can go along with our monopolisation argument - but not because of credit constraints. Small businesses are getting credit all the time and banks don't actually provide most of the credit to small businesses in the United States. Also, we will not have monopolies in the United States. We will have a smaller number of very large companies. So, oligopolies, but not monopolies. They will result in barriers to entry increased through increased and more draconian regulation. This is already happening - to the benefit of insider firms and at the cost of competition.





Thank you and I only asked because of the way you wrote your post and now I understand why you chose that style.





I'm assuming you're using "manufacture" in a very broad sense since the United States economy is not based on manufacturing. I'm afraid that Americans are going to need more than retraining. Have you seen the state of our schools? We have a post-industrial economy and we're graduating students without basic math skills.

Frankly, while I don't agree with Krugman on much, I do agree that we've produced very little outside of the housing bubble since the late '90's. So, I fear it will take a lot more than simple retraining of the labour force. We are going to need innovation - that is, innovation beyond badly constructed derivatives products.

thank you for the reply. to answer your question yes manufacturing was meant as a whole but i think i did put a bit about skills in there. anyway thank you for you posts and you were a good poster it was well thought out. if it is of any consequence i don't agree with negative interest rates and i am not that fond of krugman.

in relation to your argument about saving and investment. it is a very complicated area due to the central banking situation and also variable and non variable rates of interest in different situations. i will not go into it in detail but lower rates for savers does not necessarily mean lower rates for borrowers.

i have to go to bed now it is four o'clock in the morning in england.

anyway thanks for your input it was actually what i was hoping to get. because we argued about it it affirmed my position.

 

[Angrycat]

Quote from morganist:

thank you for the reply. to answer your question yes manufacturing was meant as a whole but i think i did put a bit about skills in there. anyway thank you for you posts and you were a good poster it was well thought out. if it is of any consequence i don't agree with negative interest rates and i am not that fond of krugman.

in relation to your argument about saving and investment. it is a very complicated area due to the central banking situation and also variable and non variable rates of interest in different situations. i will not go into it in detail but lower rates for savers does not necessarily mean lower rates for borrowers.

i have to go to bed now it is four o'clock in the morning in england.

anyway thanks for your input it was actually what i was hoping to get. because we argued about it it affirmed my position.

i thoroughly enjoyed it as well. I was wondering what you were doing up so very late.

"i will not go into it in detail but lower rates for savers does not necessarily mean lower rates for borrowers."

I do realize all that and it's a very difficult discussion to have on such a message board because of the complexity. Also, I would have like to have given your ideas some more thought before responding, but that's also difficult in this forum.

Good luck with your research

 

[morganist]

Quote from Angrycat:

i thoroughly enjoyed it as well. I was wondering what you were doing up so very late.

"i will not go into it in detail but lower rates for savers does not necessarily mean lower rates for borrowers."

I do realize all that and it's a very difficult discussion to have on such a message board because of the complexity. Also, I would have like to have given your ideas some more thought before responding, but that's also difficult in this forum.

Good luck with your research

thank you. i stay up late because that is when i do my best work it is quiet and i do not get disturbed. if i am awake in the day. people always get me to do jobs for them. so i avoid it by being up at night. also i used to work these hours in my last jobs so i got stuck. currently i have some work being reviewed by my government looking at a another method of generating capital not based on interest rates so eliminates the problem of not being able to act as an incentive for capital generation and having the knock on affects of insolvency as a result of greater debt repayments, which would occur if interest rates rose.

the opposition party are also reviewing it. it has been a few months, which is a good sign because it means they are reading it.

see you on the forum