Fed cuts rates; crisis over?

Michael Cohen mike at cns.bu.edu
Fri Oct 16 14:25:53 PDT 1998

Jorn Andersen wrote:

> At 18:10 15.10.98 -0400, Michael Cohen wrote:
> > I think the key variable which is unknown is the Japanese
> > situation. However, here too there is positive evidence,
> > Japan is apparently spending 1/2 a trillion + dollars to
> > bail their banks out and taking more "leadership" in their
> > "sphere of influence".
> Isn't one of the problems that Japan has already poured out a lot of money
> (lowered taxes, government investments etc.)?
> I have read that extra government spending in Japan within the last year or
> so has been as much as 40 pct. of GNP. I mean: They can do so once and
> maybe two or three times, but they can't continue to do so, can they?
> And up to now it seems this public spending has only had a limited effect.

If they take the move of handing out vouchers in large quantities which is starting to be onthe table they can't but stimulate spending. These vouchers will be good for a limited time only. A normal capitalistic country would worry about the "work ethic" but Japan still has normal businessmen working from 60/80 hours week.

> So it seems they face the dilemma of either pouring even more money after
> those already spent - and with which effect? - or letting whole chunks of
> banks, factories etc. go bust.
> The last option is a very dangerous one - but how realistic is it that they
> will be able to blow new life into it's economy by public spending?

They are also supposed to be handing out cheap mortgages which will also create a boom.Its hard to know exactly whats going on there. I was listening to a Japanese language Financial broadcast in English and guessing.

> And the next question, I think, is: What will the medium term effects be of
> this huge - even if it's insufficient, it's still huge - money-spending?
> Isn't it "just" going to add to future problems?
> If the basic problem is "overproduction", then speeding up the economy will
> just build up future problems, won't it?

It's probably more like the US S&L problem misallocation of resources and development in a Euphoric Market system. My understanding of Japan is that the housing in general is atrocious. If domestic demand can be stimulated to meet the supply of goods then solution can work. Japanese problems are much more political and social than economic. They are really not short of liquidity. The savings rate in Japan is still 15 to 20% / income per year.

> > Its nice to see this executive committee of the
> > ruling class as so scared.
> Indeed. But still they act as if this is only a temporary problem: "Next
> year or the year after growth will go up again", seems to be what they were
> taught to say in their business schools. I just saw an interview with the
> Mexican president, who had no problems with predicting 3-4-5 pct. growth
> next year or the year after ...

Jorn if you know anything what is causing the dismal Swedish economic performance of the last 8--9 years written in English let me know I'm interested in finding out. Also is Denmark's unemployment anything like the 9 - 10% unemployment reported in Sweden.


mike -- Michael Cohen mike at cns.bu.edu Work: 677 Beacon, Street, Rm313 Boston, Mass 02115 Home: 25 Stearns Rd, #3 Brookline, Mass 02146 Tel-Work: 617-353-9484 Tel-Home:617-734-8828 Tel-FAX:617-353-7755

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