More to my Asian deflation scenario:
From Edward Yadeni.
The scoop
c For Private use only
The Japanese banking crisis is far from over. Japanese officials recently admitted that troubled and nonperforming bank loans are much larger than they've admitted in the past. The Ministry of Finance said that a survey of the banking industry for the six months to September 30 found $578 billion in bad loans, or three times more than the ministry indicated only a few weeks ago! The numbers are staggering.
However, even these numbers may be underestimates. There must be lots more bad loans as a result of the Asian crisis after September 30. Japanese officials are clearly attempting to gain some credibility, but why should we believe them after they denied for so long that the problem was much worse, as most objective observers claimed? Most amazing, Japanese bank regulators are resorting to more gimmicks to hide the banking crisis, including allowing banks to value their stock portfolios at the purchase, rather than market price.
Another take on deflation:
Deflation is a clear and present danger. The Asian Crisis has converted the global deflation scenario from a risk to a clear and present danger. Milton Friedman says that deflation can't happen as long as the central bank pumps up the money supply: "Deflation is the easiest thing in the world to avoid; you just print more money."
Fed Chairman Greenspan seems to agree:
While asset price deflation can occur for a number of reasons, a persistent deflation in the prices of goods and services-just like a persistent increase in these prices-necessarily is, at its root, a monetary phenomenon. [January 3, 1998 speech]
However, Mr. Greenspan also notes that asset price deflation "can feed back onto real economic activity" by depressing the willingness to consume and invest, and by impairing the banking system. He even claims that asset deflation, more so than product price deflation started the depression of the 1930s, and is a major source of Asia's current problems. Mr. Greenspan knows that the money supply process depends not only on the central bank, but also on the banking system, borrowers, and depositors.
In Asia, banking systems are broken, so money supply is shrinking, which is deflationary for the region and for the world, too. Look at Japan. The Bank of Japan could rent helicopters and drop yen all over Tokyo, and I doubt that the beneficiaries of the money rain would rush to spend their windfall. Instead, they might just sit on the cash because their is no rush to buy when prices are falling. |
