Re: Gen. Theo. Sem. response to Basil Moore

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

Warren

I agree wholeheartedly that we must find an explanation for Japan. Why is
it that low rates there have not induced the private sector to deficit
spend, so that the government must do it?

I have a student working on this, and think one reason may be asset deflation:

Stock prices fell sharply from 89 to 91, but land prices did not. (My
student is trying to find a series for Japanese land prices. Have you seen
one?)

I have heard that land prices are still falling, but relatively slowly, say
10-20 % per year. Given the high price of land, (1 Million US$ a lot), and
the expectation that land prices will be lower next year, these
expectations serve to deter spending. Asset deflation may be viewed as is
deflation generally, as raising the real rate of interest on loans. This
was the case in the late 30's in the US, when expectations of further falls
in the goods and asset price levels were prevalent?

Comments?
Basil

Another reason may be that people do not trust that the banks will remain
solvent, since they suspect that they would have negative net worth, if
assets were valued at market. As a result they just save, as a precaution
against future losses on deposits.





At 11:44 PM 12/18/99 -0500, you wrote:
>
>
>Clifford Poirot wrote:
>
>> > Reads well, but as you know I've been questioning whether interest rates
>> > really
>> > do alter the exchange value of a currency.  Note Japan has had near 0
>> > rates for
>> > a number of years and the yen is arguably the strongest currency in the
>> > world
>> > and investment hasn't boomed, either.  And, with interest rates plus or
>> > minus
>> > 100%, Turkey's lira is arguably one of the weakest, and until recent years
>> > when fiscal balance was attempted, investment and growth was reasonably
>> > high.
>> >
>>         [Clifford Poirot]
>>         My problem is you are not specificying "real" vs. "nominal" exchange
>> rates and interest rates. The 100% interest rate in Turkey is the rate on
>> lira denominated assets, in an economy with at least nominal depreciation of
>> the currency and relatively high domestic inflation. If I buy a bond of the
>> Turkish government at 100% interest with my dollars, I will certainly not
>> earn 100% rate of return in dollars, nor will I earn a "real" rate of return
>> of 100% interest in lira.
>
>Yes, that is the point.  Even a very high nominal rate doesn't necessarily
seem
>to support a
>currency.
>
>> Of course, I can hedge against the exchange rate
>> risk but I could predict rightly or wrongly about the future rate of
>> inflation and depreciation. I might get lucky and get a windfall, or I might
>> not.
>
>If you hedge a fixed income security by selling the currency forward you
simply
>wind up with a nominal libor return in the currency you hedged to.
>
>>
>>
>>         Your point about Japan however, raises some interesting paradoxes.
>> It could be explained through analysis that some might consider "orthodox".
>> Though that is not really my intention. I was simply, in an earlier response
>> to a post that started this thread, pointing out that even conventional
>> analysis does not make the very strong link between fiscal deficits and
>> current account deficits that someone's colleagues said it did.
>>
>
>I can give an example of that link.  Imagine the introduction of a new
>currency.
>
>The government, for this example, levies a head tax that totals, say 1,000,000
>units of the new currency, and then only spends 900,000 units of that currency
>in the market place on items offered for sale by the non government sector, as
>that sector strives to attain that which it needs to pay its tax liabilities.
>Note that
>the non government sector (which can be further subdivided into
>business/consumer
>and domestic/foreign if it serves a purpose to do so) is still 'short' 100,000
>units
>and many tax payers will be in default unless the govt. spends or lends the
>shortfall.
>(And, if we allow that some individuals are hoarding units, or lost some, the
>required
>shortfall to prevent tax defaults could be higher.)  I would now expect the
>local
>economy to be in a deflationary spiral as individuals offer goods and services
>to
>each other at lower and lower prices as they attempt to get the units of
>currency needed
>for tax compliance.
>
>At this point the government could announce that additional units of its
>currency are
>available in exchange for a foreign currency.  That would *force* private
>sector
>agents
>to then offer goods and services for sale in exchange for the foreign currency
>that the
>government is now offering to purchase.  We call the sale of domestic
goods and
>services in exchange for a foreign currency 'exports.'
>
>With a history of govt. budget deficits a budget surplus may not immediately
>result
>in net imports.  The above example is from inception.  Also, if the government
>is
>willing to loan units of its currency in return for collateral, that route
>might
>be chosen
>rather than exports.  Even in that case, however, they collateral the
>government
>demands
>could be foreign currency, again forcing exports.  Lastly, the taxpayers could
>borrow
>foreign currency rather than 'earn' it through the sale of goods and services.
>When/if they
>had to pay it back they would be exporting.
>
>That leads to another interesting situation.  Yes, foreigners, including CB's,
>hold US Tsy
>secs.  (This has led many to proclaim the US a debtor nation.)  But note that
>over
>the years most of the world has accumulated large amounts of (external) $US
>debt
>
>at the national level.  As in the above example, the $ necessary to service
>this
>debt
>come through exports to the US to obtain the needed $US.  The other source is
>through refinancing, which I suspect has slowed down considerably during the
>last two years.  This could explain the combination of the relatively strong
>$US, low inflation,
>and the relatively high trade deficit.
>
>>         The more interesting issue (to me, and I hope to others) is how
>> would PK analysis explain the situation with Japan? My own first guess,
>> would not necessarily be Post-Keynesian per se, but more structuralist
>> Keynesian. I would be curious as to your view, and that of others on the
>> list.
>>
>
>Govt. deficit has been too small.
>
>>
>>         Unfortunately, for reasons of time and brevity, I cannot address (at
>> least not now) the remainder of your post.
>
>http://www.warrenmosler.com
>