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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: GraceZ who wrote (923)	1/30/2001 3:46:30 PM
From: ahhaha	Read Replies (1) \| Respond to of 24758

Japan isn't in deflation unless you think we are in inflation, since their deflation is commensurate to our inflation. Japan is a good example of "liquidity trap". In a supply managed economy like Japan it is necessary to practice demand stimulus when money is trapped by direct creation of a form of money, currency, which isn't trapped by money cost and can be used for consumer expenditures. Even then there is no reason why anyone has to spend. There are other problems about creating currency. Many institutions there don't trust the financial status of the still over hanging real estate loan problem, and so if a lot of currency is available, it is likely to disappear through the borders into the dollar. This is a remarkably insidious process since the nominal effect is to drive down the yen encouraging yet more disintermediation. So Japan is constrained from demand management as the FED is constrained from supply management. Is this currency leakage realistic? It is through vehicles of factoring. Of course, the Japanese authorities think they have learned something from their past mistakes, so they do the same as the FED. They restrain demand stimulus when they should be increasing it, and obversely, the FED increases supply when the FED should be curtailing it. The free market would have slowed money supply growth by raising interest rates far earlier than FED did. FED pumped nonetheless and resisted the market's attempt to set a higher fed funds rate by manipulating the fed funds market at the margin through RP management. They did this because WinXXX productivity led them to believe that they could and because they are worried that if they don't supply enough money, deflation occurs. Unfortunately for us none of them have a solid basis in classical economics. They are brainwashed by the expediency techniques of the 20th century. One has to remember that you can lead a horse to water, but you can't make it drink. Or, you can lead a horse away from water but it will wander back to drink some more. This means that interest rates and money supply aren't inversely proportional, they are only inversely related up to some "cut-off".