Posted on 08/18/2002 9:05:42 AM PDT by Axion
The reasons offered here are reasonable and plausible.
I think it is interesting how this article discusses the importation of deflation from China and Japan (and, presumably, other lower-cost producers) yet views adherence to free trade principles as part of the solution. I don't see how increasing US deflation builds the US economy -- but I'm willing to listen if there is an argument for such a dynamic.
I confess to being somewhat agnostic on free trade. However, I find it interesting how many of the people who characterize the reinstitution of a gold standard in the US as idyllic but impractical ("sure, it would be great for the world economy if everyone did it, but it would destroy the US economy if we are the only one on it") do not perceive the same dynamic as properly applying to free trade. Nor am I impressed when countries which purchase next to nothing from the US assert their willingness to remove any and all trade barriers if we do the same (without even reaching the issue as to whether such representations are even credible).
On the other hand, I like lower prices and greater choices, and have no desire to subsidize inefficient local producers. Thus my conflicted stance.
Normally, that would show up as inflation. But if the dollars aren't really in circulation, because they're sitting in a money market account, or if they are overseas chasing goods there, we might not feel much affect. That appears to be case today.
Richard W.
Richard W.
Worth repeating.
It would be extraordinary and extremely inflationary.
If the supply of goods and services remains constant: When MV goes up, we have inflation; when MV goes down, we have deflation.
Two reasons we don't have inflation now--one, the consequence of export of the liquidity (not only the cash that went to Argentina, Brazil, Russia and other places but also credits for imported goods that were not repatriated in the investment markets but instead used overseas for other purposes) is to expand the goods and services in the dollar market, thus not resulting in measureable domestic price level impacts; and, two, V is going down like a rock--it is going to be cheaper next year so put the money in a money market and buy next year at a lower price.
Japan has little or nothing to do with any of this analysis as far as the economic substance is concerned. It is an example in the monetary policy analysis--making ever cheaper liquidity available did nothing to engender economic expansion.
To cause the economy to expand what we need to do is incentivise the creation of capital asset formation--ie provide the reasonable expectation of an after tax return on capital investment in equity. We don't have that now; until we get it, the economy will continue to shrink. The necessary dose is substantial--deduction of dividends (or making dividend receipt tax free which is better but less likely) would help but what is really needed is complete rewrite of the tax system coupled with creation of a more stable reliable money system (like gold).
However, we desperately need some sort of tax incentive in the short term, coupled with a complete overhaul of the tax system. If we did that, this economy could truly soar.
For all intents and purposes, this money is not in the US monetary base. It has gone AWOL. That is not to say it could not come back, but the circumstances which would cause a mass flight from US dollars to Brazilian reals or Russian rubles are difficult to imagine.
Is it really so hard to imagine massive selling of the US$? The dollar rose dramatically during the late 90s. A return to the mid-90s level would represent a huge loss for foreign holders. If the dollar continues to fall, why would foreigners sit around and hold onto a declining asset? If the move is significant enough, they will find an alternative- local currency, real estate, gold, whatever. Once the move gets started, it is self-reinforcing.
We don't need foreigners pulling money out of the US to get things started; we merely need a reduction of the flow into the US due to our enormous trade deficit. With US market risk relatively high and our economy shaky, it will be harder to maintain the constant influx of foreign funds needed to finance the trade deficit. This puts pressure on the dollar, which could create the cascading effect mentioned above. That's how I see it, anyway.
I get confused here. For every seller there is a buyer. How does MZM increase as people sell stocks, assuming margin is not being used by the buyer?
I've been wondering what happens when you include the trade deficit into the equation. Does that add an additional 4% into the supply of goods? Then you add in GDP growth, inflation (maybe adjusted upwards a bit to account for some of the gaming that has gone on) and does it all balance out with relative to growth in the money supply?
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