Time and time again I hear the mantra that low interest rates inevitably leads to high inflation - but how come Japan has managed to have a combination of near zero interest rates and near zero inflation for such a long time?...
What Went Wrong with Economics
mickanomics: Time and time again I hear the mantra that low interest rates inevitably leads to high inflation - but how come Japan has managed to have a combination of near zero interest rates and near zero inflation for such a long time?...
Are you saying that artificially-low interest rates must cause prices to increase? If so, that is incorrect. Prices could decrease because of higher productivity, but inflation of the money supply could counteract that price-deflation, thus, causing prices to remain unchanged. Besides, prove to me that Japan has not had price inflation.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
Stranger:For a business to expand it must first identify a profitable investment opportunity. If the economy was not liquidated after a previous bust, then there will not be any such opportunities, and so there will not be business borrowing, and so there will not be fractional reserve inflation.
That's a very interesting point.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
The Bank of Japan can have such low interest rates because the Japanese public saves much of their money. A high savings rate lowers the natural interest rate significantly.
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mickanomics: Ok... now I would guess that Americans have been so traumatised losing all that money on housing, and having their pension funds devastated, that they will now en masse be desperate to save. This means that perhaps there won't be hyperinflation in the US after all.
Ok... now I would guess that Americans have been so traumatised losing all that money on housing, and having their pension funds devastated, that they will now en masse be desperate to save. This means that perhaps there won't be hyperinflation in the US after all.
It's possible if savings rates over a long term increase in general, but I'm suspect to that in the US. I think eventually, spending will increase by consumers and you will see similar levels of consumption.
In any case, rising prices does not equal better economy, all things remaining equal.
I'm not really a fan of the concept of the liquidity trap, I think it largely misses how the economy works by bastardizing monetary policy as a tool to promote economic growth in itself.
existence is elsewhere
The Yen doesn't look to me like a very strong currency for all products that are manufactured in japan. Isn't that beacuse of inflation? I thought that is why Videogame arcades are more popular in japan over consoles(just like in mexico) because its cheaper.
Daniel: Are you saying that artificially-low interest rates must cause prices to increase?
Are you saying that artificially-low interest rates must cause prices to increase?
Not at all... I'm just saying that its something I've heard from so many sources.
Daniel: Besides, prove to me that Japan has not had price inflation.
Besides, prove to me that Japan has not had price inflation.
Ermmm, I don't know how to do that. I was simply stating what I had heard. I may be wrong. If Japan has had significant inflation then feel free to correct my mistake. I am here to learn.
Stranger,
What you're saying then is that the economy does not grow. There are never any changing or new desires or needs that want to be fulfilled that are not already. Only the purchase of cheap equipment during liquidation sales enables entrepreneurs to continue the same production that the previously failed business was doing.
I don't think so.
The economy runs on supply and demand. Capitalists forecast what will be in higher demand in the future and observe the lack of supply. The great forecasters are able to ramp up and have the supply ready for the new demand.
If you're interested in learning more on this you should read Mises' profit n Loss
You can have significant monetary inflation (via artifically low int rates?) while prices remain flat. This can happen when production increases commensurate with monetary inflation. Prices remain flat instead of healthy price deflation. Just as the price of ball point pens or computers have fallen (deflated) as productivity has increased. In this case, inflation with stable prices, still create malinvestments and distortions in the economy (ie unsustainable growth). This is what happened during the 1920's. Eventually there will be ever rising levels of monetary inflation required to keep the malivestments profitable. Eventually prices will rise considering the central bank does not have the oversight to be quick enough to control price inflation via money supply management. There's a lag effect. One day there will be a bubble that results that will have to burst. Just as the stock market in the latter part of the 1920's inflated and ended in the 1929 crash.
What throws off non-Austrians is the 1929 bust occurred without significant price inflation.
ladyattis:The Japanese culture encourages vigorous savings, so the money as it is entering the market will leave at a rate approximately equal to its entrance.
This not entirely accurate. It's true the Japanese culture encourages savings, but genuine savings have to be invested in something, which is money spent, which increases the demand for goods, which leads to price inflation.
A more accurate answer is that as the money stock in Japan has risen, the Japanese have increased their demand to hold cash. Now this attitude might well have been fostered by the Japanese propensity to save instead of consume, but instead of saving and investing money, they're simply holding onto it (which is technically not saving). After all why invest when the return on the investment is practically zero?
A similar thing is going on in the U.S. The reservation demand to hold cash has increased because of uncertainty in the market, and this has lead to price deflation (for now!), even in the face of an increasing money stock. The difference is that in the U.S., the Fed has increased the monetary base significantly more than Japan did in the 1990s. As a result there is a very real possibility that in the US hyperinflation of the money stock could ensue, should the effective reserve ratio return to previous levels (assuming the Fed didn't or wasn't able to reduce the MB in time). In such a situation, prices would rise dramtatically, particularly if the reservation demand for money decreased at the same time. A kind of doubel whammy.
mickanomics: Daniel: Are you saying that artificially-low interest rates must cause prices to increase? Not at all... I'm just saying that its something I've heard from so many sources. Daniel: Besides, prove to me that Japan has not had price inflation. Ermmm, I don't know how to do that. I was simply stating what I had heard. I may be wrong. If Japan has had significant inflation then feel free to correct my mistake. I am here to learn.
So why did you bother asking?
bearing01:You can have significant monetary inflation (via artifically low int rates?) while prices remain flat. This can happen when production increases commensurate with monetary inflation. Prices remain flat instead of healthy price deflation. Just as the price of ball point pens or computers have fallen (deflated) as productivity has increased.
It's interesting though, but if a country is flooded with money, so as to encourage consumption as it is causually wont to do, then this net production in industry is impossible, assuming 10 years of flooding or low interest rates is enough, shouldn't consumption have totally replaced production? And I think that this is true in Japan where you (I) have heard that net production has ceased to exist for quite some time hence the lost decade. It is possible that this savings rate is therefore a mere statistical slight of hand. For instance macroeconomists consider saving as not spending so having a high savings rate translates, in this definition, to being a spendthrift who happens to bury some of his money in the ground more so than another spendthrift across the ocean. Also, does anyone know if the japanese savings rate is greater than our savings rate or their past savings rate or in comparison with some ultra high savings rate like 100% because this makes all the difference in seeing if their economy is productive versus unproductive -it is possible to save and invest in production but still produce less than what is consumed and yet save more than an even worse spender across the ocean.
Daniel: So why did you bother asking?
I am asking about Japan in order to understand what is going to happen in the US. I've seen many Austrian minded people say "look out! Hyperinflation is coming!" because the monetary base is being expanded. But presumably its the total money supply that counts. Now, if there is a new net propensity to save rather than borrow, then it may be that the total money supply can not increase in line with the monetary base. We may and up with the US behaving more like Japan with no significant inflation.
If Americans can save enough to off-set a debt of trillions of dollars, but that would mean Americans, individually, would need to get out of debt first. Japan with their savings is more like America during the pre- and during Great Depression in which Americans had been saving instead of driving up debt not only with loans but credit, etc...
At least that's how I understand this, but I am not completely confident in what I stated here.
leonidia: U.S. The reservation demand to hold cash has increased because of uncertainty in the market, and this has lead to price deflation (for now!), even in the face of an increasing money stock.
U.S. The reservation demand to hold cash has increased because of uncertainty in the market, and this has lead to price deflation (for now!), even in the face of an increasing money stock.
Gas prices haven't dropped as significantly as oil prices even though I keep hearing some analysts say demand is low. Energy prices are still high. Also healthcare costs are super high due to regulations that rid competition, etc... and I think inflation is involved to. Housing prices were very high and the bubble popped. I think healthcare is in a government induced bubble too. I'm not completely sure of any details, but it seems reasonable.
wilderness: leonidia: U.S. The reservation demand to hold cash has increased because of uncertainty in the market, and this has lead to price deflation (for now!), even in the face of an increasing money stock. Gas prices haven't dropped as significantly as oil prices even though I keep hearing some analysts say demand is low.
Gas prices haven't dropped as significantly as oil prices even though I keep hearing some analysts say demand is low.
Yes. Of course. Money isn't neutral. But gas prices have gone down compared to a year ago, as has real estate, stocks, commodities, and many other things. All things being equal you wouldn't expect this to happen across such a broad range of goods when the money stock is expanding. The ASM (Austrian Money Stock) is up about 12% in the last year. Since the supply of goods hasn't increased significantly, the only possible explanation is an increase in the reservation demand to hold cash.