Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : At a bottom now for gold? -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (1417)	7/14/1998 2:59:00 PM
From: Ahda	Read Replies (1) \| Respond to of 1911

That is, people won't borrow and create demand deposits as part of doing business if the BOJ lowers rates by buying securities. i think i understand but i am not sure would you help me please?

To: ahhaha who wrote (1417)	7/14/1998 6:37:00 PM
From: Vieserre	Read Replies (1) \| Respond to of 1911

AHHAHA Premise: Japan's economic problems center about bad loans on the books of Japanese banks. My understanding is that as a result of these loans, banks do not have sufficient reserves to lend money, and the banks do not want to write off the loans since they have no off-setting profits. And BIS believes the banks need to be "reformed" (whatever that means) or there is a risk of widening the crisis. Preliminary Question: It is conventional business accounting practice to write-off non performing loans and absorb the loss in the income statement. The loan could still be carried on the books, but at a value relective of its worth. Is this practice different for banks? The only difference I see is that by doing so, the bank may theoretically then have insufficient funds to pay off its depositors, and in Japan, since the customer accounts are not seggregated, this means depositors will not be paid which in turn will cause a serious contraction in money - thus leading to a depression. But if this is the case, is not what is happening a sham, held together by the failure to make a proper book entry, which would not be tolerated by any other business entity. BIS: I understand the BIS position is that if the BOJ creates money supply directly, the additional demand deposits will provide liquidity reserves to the bank and allow them to continue to operate notwithstanding the bad loans - and thus reduce an incentive to "reform" by correcting the bad loans which wll remain (for some reason?) a cancerous sore. And in any event, BIS contends the increase in money supply will not increase demand to which it is directed. I understand your position is that the Japanese reduction in interest rates did not create the demand for money that it was intended as due to the particular state of the economy, no one wants to borrow to buy things or to invest in Japan. (compounded because the banks pay low interest on deposits but ask high rates for loans) . The borrowing that did occur was by the Yen carry trade and the like which invested the funds elsewhere. Accordingly, to further lower the rates would be futile. Therefore, to get the economy moving, you believe the BOJ must create money supply directly to cause an increase in demand which is contrast to the BIS position. Your belief would seem to be correct, unless the Japanese by nature, being savers, would take the money and deposit it elsewhere, ie US bonds, rather than consume it or invest it locally. Is this what the BIS is concerned about? What is your take? The nitty gritty appears to be how to create GDP growth. Which leads to the next question with respect to whether money supply can indeed cause growth. Gene Epstein of Barrons writes: " But even if the Fed could control M2, there would be no point to it, since M2 doesn't play the role the monetarists think it does. In particular, it doesn't cause inflation - and it doesn't drive GDP growth." He explains " Take inflation. An increase in the money supply is supposed to cause higher prices (''too much money chasing too few goods''), but actually, higher prices cause an increase in the money supply. As prices rise, wages and salaries rise, which causes the value of checking accounts to increase. Also, rising prices require businesses to borrow larger amounts, which likewise causes checking accounts to increase. And this increase in checking accounts spreads into savings accounts, CDs and money-market funds, causing M2 to rise. The Fed can stop inflation by hiking the Fed funds rate, but that's because doing so slows the economy, not because it slows the growth of M2." How do you see this? Vieserre