C.Liu,
I wrote:
>
>> C. Liu,
>>
>> You make the point that Japan should institute a regime of more
>> inflation to stimulate demand.
To which you responded:
>
>I did not. This was Krugman's post IMF point and also as of late the US
>Treasury's point.
Fine, it was unclear to me whose argument you were adopting. What is your position as to a "re-flation" of the Japanese economy?
I continue:
>> This makes theoretical Keynesian sense but
>> is problematic. It seems to me that the voodoo economics of the
>> supply-siders "worked" (which is to say that the economy expanded after
its
>> institution, despite the obvious flaws in the logic) because of one
simple
>> fact that should be central to any Marxist interpretation of events: The
>> capitalists have all the money. If capitalists don't loan out their
money,
>> the economy grinds to a halt.
And you respond:
>Capitalists have no choice, they must lend to somebody or die. If the
Third
>World borrower form a borrower's cartel that refuse interest rates higher
than
>5%, that will be the norm. What is needed is to tuen the conpetition for
funds
>to a competition for borrowers. It is easily done. Thamarke is
oversupplied
>with funds in relation to borrowers. It requires political leadership
which is
>lacking because the Third World is infested with "democracy".
This is clearly wrong. Compare the nominal amounts of internal lending and sovereign debt and you will find regular, internal lending dwarfs sovereign debt. The third world has little to say about interest rates. What's more, your argument flies in the face of reason. A capitalist with a million bucks under the mattress is not going to roll over and die if he can't lend it to somebody. There are always more would-be borrowers than there are lenders. That is plain.
I continue:
>> The regime of almost continuously falling interest rates and inflation
>> instituted by Volcker/Greenspan has made lenders rich and eager to be
richer.
And you respond:
>Your data are inaccurate. Volcker's legacy was high, double digit interest
>rates to fight inflation in the 80s. Greenspan's was low interest rate to
>extend the bubble. He said yesterday that the economic consequences of a
burst
>bubble, while "scarcely benign, needn't be catastrophic if the Fed responds
>appropriately to a stock-market crash, as it did in 1987." In other words,
low
>interest rates plus a bank bailout. So much for free market and market
>discipline.
It's difficult to know what you found in what I said to associate me with a "free market" argument, possibly you are making a point to someone else. Nonetheless, beginning when Volcker reigned in inflation with punishing rates, the environment for lenders has been extremely benign. For every point they've given up in nominal rates since, they've gained in capital appreciation of their portfolios both on the inflation and the rates front. While Greenspan hasn't been able to continually lower interest rates, he has come as close as can reasonably be expected. The Volcker/Greenspan era has been a paradise for lenders. Conversely, Japan is a lender's hell, hence the "carry trade" and the low amount of new internal lending.
Thus I continue:
>> With Japanese rates at near-zero and inflation low, lenders cannot expect
the
>> environment to do anything but deteriorate. The higher the inflation
rate,
>> the lower the value of bonds, etc.
>
And you respond:
>Japan has negative inflation, yet bond prices keeps falling for lack of
buyers.
Japan may have deflation, it's unclear. However, I would say the lack of buyers has something to do with the fact that lending money at near-zero interest is not very profitable.
Thus I continue:
>> This devaluation of debt assets might be catastrophic at a time when
Japan is
>> desperately trying to generate liquidity, their fabled savings rate
having
>> been pissed away by criminally stupid banking practices.
And you respond
>I said in my post that Japan increased money supply, but credit did not
increase because banks can find borrowers to lend to.
I assume you mean "cannot find borrowers to lend to" but either way, Bank of Japan efforts to increase the money supply have not created an increase in bank lending for many reasons. First I would say that the banks are probably trying to re-capitalize themselves given their frightening portfolios. Japanese bankers are very clearly dragging their feet on new lending for fear of exacerbating their present difficulties. With Japanese industry being so tightly associated with the banks, the banks' concerns are industry's concerns as well.
I continue:
>> The truth is that absent a socialist form of finance, the Japanese need
their
>> capitalists to part with more money or they will slide into depression.
>> Therefore, they have to encourage lenders to lend even, I think, at the
>> expense of "encouraging" (if we can term inflation an "encouragement" of
any
>> kind) consumers to spend.
And you respond:
>Please give an example of a socialist from of finance.
>Japanese consumers are not spending because of anxiety about future
security
>due to structural reforms of the economy, not for lack of money.
There is no socialist form of finance,...yet..., thus are we all dependent on the "largess" of capitalists to keep our economies moving forward. Money/capital is the first resource and prince of all resources. Without it there is no economic activity beyond an impoverished, barter economy. Unless socialists find a way to supply it, there will be no socialist economy.
I continue:
>> Your point about currency valuations is not entirely clear to me but
I
>> will add this observation: I had always assumed that the Japanese only
>> pursued a strong yen policy because a weak yen made their trading
partners
>> angry. However, when the yen began to look like it might go to 150
(running
>> up to the Russian crisis) the Nihon Kezai Shimbun reported a survey of
>> business leaders as to their opinion of an ideal yen/dollar value. They
>> picked a value corresponding to a *stronger* yen than existed at the time
>> (about 130, if I remember). The reasons for their attitude was made
clear:
>> Japan is a large-scale importer of raw materials. If, while commodity
prices
>> were falling, the Japanese business community wanted a stronger yen, will
they
>> not clearly want one now that commodity prices have seemingly bottomed
out?
And you respond:
>The import/export trade off on currency is a bogus argument. It is always
a
>wash at whatever foreign exchange rate, provided it is not volitile.
>The correct exchange rate for the yen is a political issue. Tokyo wants
around
>130. Beijing has served notice that if the yen goes above 148, the RMB
will not
>hold. Washington want a yen above 120.
The import/export trade-off on currency is most certainly not a wash because volatility is certain. Time passes between resource purchase A, goods sale B and subsequent resource purchase C. Time implies volatility. Money is lost, margins are thinned and uncertainty is established in the minds of industrialists. Thus are hedges against currency and commodity-price fluctuations put in and even those hedges are vulnerable. Again, with commodity prices looking to edge higher, won't Japanese industrialists be looking for a stable/rising yen?
peace