Bernanke is right

Are you among that prestigious but tiny band of Japanese Deflation Deniers?

Sorry, I don't really mean to be so snide.

However, regarding deflation in the Japanese economy, my eyes see what is plain to most observers -- an entire decade of slack domestic demand, falling or languishing consumer and asset prices (i.e. the Nikkei as an example -- attached Nikkei chart courtesy of E-Trade), and a government that is pulling out all the stops to the tune of 200% debt to GDP to stop the very deflation you don't see.

I think the consensus is in. Japan has been in a deflationary spiral for a decade.

http://www.nytimes.com/2010/10/17/world/asia/17japan.html?_r=1

 

Gosh Denner, I've never felt so attacked by someone I agreed with so much.

First, I'm hardly intending to be superficial. Like so many, I'm a victim of all the phenomena you have described. I lost the vast majority of my income in this environment. I completely understand what it means to feel like it’s the end of the world and thank God I still have at least some income and my wife has managed to find 2 part-time jobs.

Please don't make the mistake that because I see what you have described as what it is -- deflation -- that I agree with the government response to combat it. Their solution will only ultimately deepen and worsen the trouble.

The implosion of credit is clearly deflationary. The government's attempt to reinflate credit to stimulate the economy will go down in history as one of the all-time economic futilities ever wrought by mankind. Demand is saturated. I couldn't agree more. The deflationary correction was destined to happen and it will play out. Why deny the use of the term? Or am I misunderstanding you?

 

Fetus - Martinghoul, zdreg and a few of us were having a nice little discussion, thinking we might actually learn something from thus thread,

and you start pulling up a chart of the Nikkei from eTrade..? :eek:

What's next, a quote from Jim Cramer?

Is this the basis of why deflation is bad, because stocks went down in Japan? Unlike the US, where stocks always go up?
Or hyperinflationary Germany in the 1920s or Zimbabwe in recent times where stocks in local currency went into the stratosphere?

Japan had a stock bubble, valuations got out of hand and prices came back into line. Big deal, bubbles happen, Japan's was 20 years ago. I didn't see any deflation deniers on the board as far as Japan is concerned. It is common knowledge that Japan HAS had mild deflation on and off for ten to fifteen years, in the region of -1 to -2% some years.

But please tell me why mild deflation of -1 to -2% is so terrible? It means your money goes further, dude!
If you go shopping for a laptop and it is 10% cheaper than last month do you think this so terrible? Do you offer to pay 10% more?

As another poster said, which assets would you like to inflate to offset price declines in electrical goods? Food? Energy? Well buddy, your luck's in because we've had price rises already AND THANKS TO BUBBLE BEN THERE IS MORE TO COME!!

Slack domestic demand? Sure, that's why GDP has been flat for donkey's years. But maybe the Japanese realized that maxing out on their credit card to buy some useless junk consumer goods was less preferable to saving their hard earned cash for a rainy day? And now those yen which they've saved all this time go quite far when you convert into other currencies.

Think of it as a squirrel collecting acorns for the winter.

 

"sorry for the so snide..." to rescind a remark there is a button at the bottom of the page called edit/delete.
skip the apologies and do the right thing the 1st. time.

as to the facts you neglected to mention what the debt/gdp was at the beginning of the time period. what is change in the the suicide rate in japan. what change has there been in the emigration rate in japan.
japan has been in a deflationary cycle for a decade. that is a given. can you present facts that show it is in a "deflationary spiral"?
definition of spiral:A curve on a plane that winds around a fixed center point at a continuously increasing or decreasing distance from the point.

can you present facts that living standards have declined substantially in Japan? where is the downside to minor deflation?
for sure there is an upside. debtors are punished for their profligacy.

 

What, benwm? Is it Etrade you don't like or charts? Let's see, the last time I checked, a chart is a chart is a chart, so it must be Etrade you hate. I guess I can try to pick a different provider next time, but the point is that this is a picture of asset deflation in Japan. We have one of our own right here in the USA from October 2007 to March of 2009 or so, and I believe we'll see more pictures like them in the not too distant future. Sorry if I invaded your nice little private discussion in this public forum. I'll leave you guys alone together if you want, but I thought it might be interesting to join the debate.

Also, I never made a moral judgment about whether or not deflation is "bad." My point was simply that deflation is a fact. And yes, of course in a reinflationary period (a mere respite/correction in the midst of a deflationary cycle) there are pockets of deflation and inflation simultaneously, but in the aforementioned first deflationary leg down, almost everything related to assets, commodities, consumer products and debt fell precipitously together. When in the aggregate you have sustained, sharply declining prices, I call that deflation. What do you call it?

Take one more look at that Nikkei chart if it doesn't offend you too much. You call that mild? I guess "mild" is in the eye of the beholder.

Lastly, oh yes it's wonderful to have persistently declining prices and have the buying power of your domestic currency go up -- that is as long as you have plenty of currency. The problem is that decades of credit and asset inflation have left quite a large lot of Americans cash poor. Many of them have their net worth tied up in assets like their homes and in consumer debt of all kinds. When prices of assets collapse, what happens to that net worth? When desperate, over leveraged lenders call in debts and debtors don't have cash to pay those debts, does the increase in buying power of a purchase instrument you don't have matter much? In deflation, the only reason that cash notes become more powerful with respect to buying power is because people are rushing to get out of crushing debt and collapsing asset prices. Where do they all want to go? To cash. It certainly isn't because the economy is producing.

So if you have a lot of cash, good for you. You can watch a lot of people suffer while you enjoy your new found buying power.

Is the deflationary process necessary after decades of credit induced asset inflation? Certainly! Is it painful nonetheless? Absolutely! Will we be better off in the long run? Of this, I am not so sure. When you realize that every citizen of this country would have to come up with over $44,000 to eliminate the $14 trillion (and still growing $1 trillion a year) national debt, default is not beyond the limits of probability. That wouldn't be pretty. I don't think default is likely, but all that is needed is for our foreign sugar daddies to lose confidence in our ability to service that debt without destroying our own currency.

As for the Japanese, read the NYT article I included in my prior post. It doesn't seem to me that they're all rolling around naked in all the great buying power brought to them by deflation. Does it to you? The wealthy lifestyles that Japan's economy once supported are mere shadows of their former selves. We may be next.

 

My goodness, zdreg. Really? "Do the right thing?" Excuse me. I must not have realized whose presence I was in -- one who is obviously above a friendly little jab in a spirited debate. Inexcusable! I'm truly sorry if I hurt your feelings.

Ok, more facts.

In 1980, Japan's gross debt to GDP was about 50%. In 1990, it was about 65%. In 2000, it was about 140% and now it's 200%. Source: IMF WEO

According to medicalnewstoday.com in a June, 2008 article, "New figures released by the Japanese authorities this week show that the country's suicide rate is still climbing despite government efforts to dramatically reduce the figure by 2016..." Further, "Nearly 100 Japanese killed themselves every day in 2007, that is over 33,000 people in the year, a rise of 3 per cent on the year before, and the tenth year in a row that the figure has exceeded 30,000 said Japan's national police agency.” My conclusion is that deflation in Japan, which as you just agreed is a fact in spite of your gross understatement, has definitely not had a mild societal effect.

Regarding the definition of "spiral," gee I guess I should have dug out my dictionary. But I think you know what I meant. A deflationary spiral is one that becomes more entrenched over time and very hard to get out of.

Lastly, you speak of "minor deflation," a mischaracterization I dispute intensely, as if we have control over such a process. Deflation tends to take on a life of its own. It becomes a cycle that has to run its course and is usually as deep and sustained as the inflation that preceded it. Since this forum started out about "Bernanke is right," which economic force do you think he'd rather be battling?

 

December 22, 2010
(Next Release on December 30, 2010)
An Unusual Autumn for Gasoline Prices

Historically, retail gasoline prices in the United States have followed a seasonal pattern. Prices typically rise during the summer driving season and drop after Labor Day. Over the 2004 through 2007 period and in 2009 (2008 is excluded due to the rapid run-up and subsequent crash in crude oil prices over the course of that year), the national average price for a gallon of regular gasoline fell an average of 22 cents between Labor Day and the middle of December. However, 2010 has seen a reversal in this pattern; the national average price has risen by 30 cents per gallon since Labor Day, the largest increase over that period since EIA began publishing weekly retail gasoline price data in 1990. The $2.98 per gallon national average price of regular gasoline is the second highest on record for the third week of December, surpassed only by 2007 when the average price reached $3.00 per gallon.

http://www.eia.gov/oog/info/twip/twip.asp

---the largest increase over that period since EIA began publishing weekly retail gasoline price data in 1990--

 

your 2nd snide apology confirms your character.

"It becomes a cycle that has to run its course and is usually as deep and sustained as the inflation that preceded it. "
bernanke does not believe in your statement . if he did he would not be opening up the printing presses. he would let deflation run its course but he doesn't have the courage to do so.

as to your remark that inflation is followed by deflation of the same
magnitude please show some historical precedents.

 

Fetus -
I had a look at the article written by Steve Lohr from New York, but it is really this type of fear mongering which I detest. It is plain misleading. If Bernanke wants to print gazillions he should be honest and say, "as a nation we all borrowed too much, we now need to devalue your dollars to help out those who took on too much debt", as opposed to using Japan scare stories based on untruths or tales of the 1930s Great Depression. This type of article enables him to hoodwink the masses.

Comments in the article such as:-
"a growing number of economists are pointing to Japan as a dark vision of the future"
"China has so thoroughly eclipsed Japan that few American intellectuals seem to bother with Japan now"

Some reality is needed. Japan unemployment is half the level of the US. Japan is AHEAD of the US in terms of job creation. It took the US approximately one year to get into this position!

As for comparisons with China, the new economic powerhouse - the fact is the GDP of Japan and China is about the same and yet China's population is ten times bigger. Per capita Japan is ten times RICHER than China.

Valuations in Japan got way out of line in the late 80s, PE ratios were 100 or 200 for many companies. This was clearly unsustainable. As a result there is a mistrust of investing in stocks in Japan hence the indices flat-lining for the past decade. So the banks and Tokyo city boys complain, no easy money for them. People prefer to invest in bonds instead and that is why Japan is able to fund its debt at a rate at 1.2% compared to 3.4% in the US. And the US has to beg China & Japan to finance its debts...

The main problem with Japan's risk preference for bonds over stocks is that it lets the Government off the hook, and they are are able to spend too much. A smaller state and lower corporate taxes would almost certainly create a more dynamic economy - Singapore's tax regime would be the ideal for Japan, though perhaps unrealistic.

As for Japan being the "dark vision of the (US) future"...I think the US will be lucky to have such a future. You only have to look at the level of USD.JPY in recent years to know how market participants perceive the relative risks of the two economies. Amazingly, despite what some describe as a twenty year 'deflationary spiral' the yen is stronger now than where it was at the 1989-90 bubble peak.

 

You completely misread me, zdreg. The second one was not an apology at all.

You're kind of on the touchy side, aren't you? It's probably better that we discontinue our dialog. Go ahead and take your last shot, though that one about my character was a pretty good parting shot. I actually think you might mean that. That's a pity. I'm not as bad as you think. Your call. I'll refrain from a response.

You asked for precedence so I'll honor that request. One popular answer would be The Great Depression. Remember the roaring 20's? And how long did it take us to pull out of that deflation?

Another answer is the Japanese experience, but we've been on that topic too long.

How about the "South Sea Bubble" for a British variety.

There are many. You could even cite the Tulip Bulb Mania as an example of what I said.

You are also correct on one point. Bernanke is clearly trying to fight deflation and not letting it run its natural course. My point is that he'll fail. It will run its natural course any way and cause much havoc in the process. But he's really just a politician with a legacy to protect. He's just doing what any politician would do.

Merry Christmas, zdreg, and I do really mean that.