Economics Questions

Re: Why no inflation in Japan?

leonidia — Mon, 27 Jul 2009 07:09:22 GMT

Just to be clear:

When I say an increased demand to hold cash, I don't mean an increased demand for bank notes or coins (currency). I mean an increased reservation demand for money in general, and a corresponding unwillingness to spend. Thus Japanese individuals and corporations saw their demand deposits increase as a result of money printing, but didn't increase their spending correspondingly.

Re: Why no inflation in Japan?

leonidia — Mon, 27 Jul 2009 06:55:57 GMT

Lohengram:
The reason was that there was such large outflows of Yen from Japan to other countries like Iceland; New Zealand and many others, that’s why you didn’t see general price rises as you might expect from all the monetary inflation from the Japanese banking system.

This is wrong.

It's true there was a huge carry trade, but that's not the reason prices didn't rise in Japan. When Americans and others borrowed Japanese Yen, they didn't just sit on the money. There'd be no point borrowing Yen unless you eventually spend it on something. In fact the money was used to by all sorts of goodies, which is why Japan had a huge trade surplus with most other countries. Japanese Yen therefore flowed back into Japan, and the money stock in Japan increased as though the money never left..

The only way that Yen wouldn't flow back into Japan would be if international debts between non-Japanese individuals and corporations were being settled in Yen, and large cash positions were continually held outside the country. While this certainly happened, it was not as significant as the money flowing back in, as evidenced by the trade surplus.

The bottom line is that from 1990 to 2008, the combined demand deposits of Japanese individuals and corporations at domestically chartered and Shinkin banks, plus the total amount of currency, increased by about 170%. The reason prices didn't rise was an increased demand to hold cash.

Re: Why no inflation in Japan?

Lohengram — Sun, 26 Jul 2009 18:50:20 GMT

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?...

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Well first off your definition of inflation matters here, monetary expansion is a kind of inflation so they clearly inflated in that way. As to why prices were not generally observed to rise I think it's necessary to keep in mind that Japan isn't an Autarchic society. There was quite a famous financial system with Japan at its heart called the "Carry Trade" which seen large quantities of currency loaned from countries with low interest rates to countries with high interest rates, it's one of the main sources of all the money the Icelandic banks were playing about with. That's why you seen what would otherwise be a strange occurrence, which is that the Yen increased in purchasing power within Japan but was quite weak on the currency markets even thought the currencies it was losing value against were losing purchasing power within their own countries. The reason was that there was such large outflows of Yen from Japan to other countries like Iceland; New Zealand and many others, that’s why you didn’t see general price rises as you might expect from all the monetary inflation from the Japanese banking system.

Re: Why no inflation in Japan?

leonidia — Fri, 24 Jul 2009 23:37:49 GMT

Jonathan M. F. Catalán:
The explenation is elsewhere: including that there is price inflation, because otherwise there would have been steep price deflation, and there is high demand for cash (and/or uncontrolled bank reserves are contracting at a similar [or faster] pace than controlled bank reserves are growing;

I think this is basically correct. My only quibble has to do with the part about reserves. This theoretically could be a cause of price deflation, but this situation is not applicable in either the Japan and the U.S. today because, while fiduciary media (bank credit created through the fractional reserve process) has contracted, the difference has been more than made up for by an increase in the monetary base. Thus the overall money stock has been increasing.

You hear a lot of people saying that the contraction in bank credit has been responsible for a general price deflation (in the US today,), but this is incorrect because the overall money stock never contracted. The contraction in bank credit has led to localized price deflation (real estate for example), but cannot be responsible, in the current environment, for an overall fall in prices. The real cause has been an increase in the demand to hold cash.

Re: Why no inflation in Japan?

Jonathan M. F. Catalán — Fri, 24 Jul 2009 23:15:28 GMT

High household savings is not a reason why there hasn't been a large increase in the general price level in Japan. The following graph is shows the trend in household savings in Japan:

http://www.economicthought.net/wp-content/uploads/2009/07/Household-savings-in-Japan.png

This one shows and compares household savings in five different countries, including Japan and the United States:

http://www.economicthought.net/wp-content/uploads/2009/07/Household-savings-Japan-US-France-Canada-Germany.bmp

They are higher than the United States', but are not high enough to offset the expansion of the money supply by the Japanese central bank (and, if the natural interest rates were actually that low, then the central bank would not have had to expand credit as much as it did to maintain low interest rates in Japan). The explenation is elsewhere: including that there is price inflation, because otherwise there would have been steep price deflation, and there is high demand for cash (and/or uncontrolled bank reserves are contracting at a similar [or faster] pace than controlled bank reserves are growing; this is a similar case as the United States during the first four years of the Great Depression, as analyzed by Murray Rothbard).

Re: Why no inflation in Japan?

Stranger — Fri, 24 Jul 2009 17:21:55 GMT

bearing01:

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.

That's not what I'm saying. I'm saying if prices remain above the market price, then there will not be profit opportunities.

Re: Why no inflation in Japan?

leonidia — Fri, 24 Jul 2009 16:57:14 GMT

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.

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.

Re: Why no inflation in Japan?

wilderness — Fri, 24 Jul 2009 14:47:29 GMT

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. 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.

Re: Why no inflation in Japan?

wilderness — Fri, 24 Jul 2009 14:28:18 GMT

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.

Re: Why no inflation in Japan?

mickanomics — Fri, 24 Jul 2009 10:18:38 GMT

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.

Re: Why no inflation in Japan?

fakename — Fri, 24 Jul 2009 06:22:13 GMT

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.

Re: Why no inflation in Japan?

DanielMuff — Fri, 24 Jul 2009 06:20:34 GMT

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?

Re: Why no inflation in Japan?

leonidia — Fri, 24 Jul 2009 06:15:14 GMT

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.

Re: Why no inflation in Japan?

bearing01 — Fri, 24 Jul 2009 06:01:17 GMT

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.

Re: Why no inflation in Japan?

bearing01 — Fri, 24 Jul 2009 05:51:35 GMT

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