Japanese Deflationary Spiral...

[DanS]

Yes, he says that, and he says the nationalisation gives reason for hope there will be fundamental reform in the financial system. How is that cheerleading?o

I guess it seems like he's cheering at a funeral.

And that quote doesn't contradict my optimism in the long run.

At this pace, you're talking about the very long run.

[Colonâ„¢]

Originally posted by DanS
I guess it seems like he's cheering at a funeral.

You're seeing things I'm not seeing. Any examples?

At this pace, you're talking about the very long run.

Depends on how quickly they clean up the mess in the financial system. The deflation rate alone suggests the output gap is pretty large and I think their economy could rebound amazingly fast once they get capital flowing to the right places.

[Colonâ„¢]

Oerdin, most of Japan's national debt is held by Japanese.

[Kidlicious]

Originally posted by Tingkai
That article seemed to show that deflation was not a terrible thing. People are still spending money, just differently. It quotes one person who says she takes a couple of vacations a year. Salaries have stagnated, but prices have dropped so purchasing power is up.

It's easy to say that deflation is good because prices are falling. Falling prices are not bad in itself exept when they lead to increased savings. That is, falling prices will be good for the economy as long as nominal wages fall and consumers spend their extra savings on other goods and services instead of speculating on increased value in the currency. Deflation hasn't been too bad in Japan yet, partly because nominal wages have fallen. However, continued deflation will definitely have dramatic consequences. I don't see how nominal wages can continue to fall to efficient levels, even in Japan.

[Colonâ„¢]

Dan, does sales tax only apply to goods and not to services?

[DanS]

Yes, sales tax applies only to goods in the US. But if you import something, then no sales tax applies (or rather, it applies to the seller, but is not collected, just as happens with out-of-state goods). Services are not taxed, except perhaps in special cases. There is a running battle between city hall and lawyers in DC for a service tax of 1-3%, for instance. But DC is a little screwed up because it doesn't share in any income taxes from the suburbs and tries to institute all sorts of commuter taxes (unsuccessfully).

[Dinner]

Originally posted by Colon
Oerdin, most of Japan's national debt is held by Japanese.

My example was based up Latin America and east Asia minus Japan. Everything which I've read points to Japan's deflationary spiral having to do with a highly regulated enviroment which prevents the rationization of excess capacity, banks which would be considered bankrupt in most countries (alot of it is due to the deflation of realestate but some of it is due to the government channeling low interest loans to targeted industries during the boom years), and fact that prices were run up sky high during the bubble so they have no where to go but down now.

The example in my previous post was to anwser the question of why most countries don't deal with deflation and a debt crisis simply buy printing money.

[Kidlicious]

Oerdin,

The problem in the Asian Financial Crisis was high interest rates. A lower interest rate would have prevented the bubble. For example, in Thialand the bubble burst, and then they added liquidity to the system. They had no other choice but to do so, and they should have done it sooner.

[Dinner]

Originally posted by Kidicious
Oerdin,

The problem in the Asian Financial Crisis was high interest rates. A lower interest rate would have prevented the bubble. For example, in Thialand the bubble burst, and then they added liquidity to the system. They had no other choice but to do so, and they should have done it sooner.

The problem was debt and the inability to repay it on time. Lowering the interest rates would have reved up the economy but also would have increased inflation.

[Colonâ„¢]

Dan, that's interesting. I wonder how much this distorts normal purchase patterns and whether there would be proportionally less purchases of services if both would be taxed equally across the US.

[DanS]

Well, to be fair, sales tax is not that high in most states. Some states don't even have it. In DC it is 5.75%. In Maryland, it is 5%. In Virginia, it is 4.5%. Most people buy a lot of stuff on the internet nowadays, anyway. No sales tax there most of the time.

[Kidlicious]

Originally posted by Oerdin


The problem was debt and the inability to repay it on time. Lowering the interest rates would have reved up the economy but also would have increased inflation.

It works differently in some countries. High interest rates tend to bring in too much foreign investment. The level keeps increasing until investors recognize the bubble and then they pull out and then all the central bank can do is try to flood the banks with liquidity.

[Dinner]

Hmm, I hadn't thought of that. At what point does the high interest rates cause more harm to the domestic economy then benifit from foreign capital?

[Kidlicious]

Originally posted by Oerdin
Hmm, I hadn't thought of that. At what point does the high interest rates cause more harm to the domestic economy then benifit from foreign capital?

It depends on each situation.

[Dinner]

I would think that in nearly all cases the total amount of domestic production would far out weight the amount of incoming foreign capital. Thus you'd want to keep interest rates moderate so as to not kill the real economic engine of the country during your prosuit of foreign funds.