If It Quacks Like Japan

Millennium Wave Online ^ | August 16, 2002 | John Mauldin

[imawit]

"Once the move gets started, it is self-reinforcing"

Just like short covering when an imagined bottom is reached and it later turns out to be a false bottom because it was based puely on emotion & speculation.

[Dog Gone]

Many of my co-workers are finally getting around to making adjustments to their retirement accounts, cashing out of mutual funds and putting it into cash equivalents. Of course, they should have done this a couple of years ago, but that's beside the point. I see it now and I didn't see it even after 9/11. I am talking some pretty enormous sums of money that I know of personally.

Granted, this isn't money that those individuals could otherwise use to generate income. You can't start up a business with your 401(k) while you're still contributing to it. But it does help explain why you're seeing more money in those types of accounts. The outflow of money from mutual funds is fairly high, and I doubt the July numbers will look any better than June's.

It's a fascinating situation. Everyone is sitting on their cash, yet the yield from cash and it's equivalents is horrible in historical terms. Why on earth is anyone happy with less than a 2% return before taxes?

The only answer that makes sense to me is that cash is more valuable than assets right now. Certainly the stock market has something to do with that, but it's a perception of deflation, something which is certainly a reality in many sectors.

[jwh_Denver]

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).

Amen! And I'll raise you a big cut in capital gains.

[#3Fan]

Good article, but I disagree with this:

"This is well over half a trillion dollars in 18 months. Much of this money is "poofed." Someone loaned a company or individual money, and now they are only going to get a portion, if any, of that debt back. That is dollar destruction and deflationary. It takes money out of circulation. "

The money loaned didn't go out of circulation, the borrower spent that money. The bank simply has to change their figure from an "account receivable" to an "expense".

This was excellent:

"They raised taxes, ran huge deficits and funded pointless work projects. Just about everything you could do wrong, they did. In fact, they acted much like the US Fed did in the 1930's where it was a case of wrong policies and then of too little, too late."

I believe that the socialist Democratic policies of the 60s and 70s led to an America that became uncompetetive and lazy. Japan capitalized, then when Reagan got this country back on the right track in the 80s, Japan lost their dominance and have been struggling to adjust to their rightful percentage of world manufacturing ever since. Once they reach that point, they will see improvement along the lines of worldwide productivity gains.

[#3Fan]

MV = PT: The money supply times velocity equals the price level of all goods and services in circulation at the time of measurment (T).

Do you have links to sites that go into theories surrounding money supply and velocity, etc.? It's something that has sparked my interest in the last few weeks. I've found a few sites that give their meanings, but no really good sites that go into theory as to their behaviour toward each other as change occurs. Thanks.

[Travis McGee]

Thanks for the ping. The more I study the less I know about economics.

[Moonman62]

I have been puzzling for several months as to why the explosive growth in the money supply hasn't resulted in serious inflation.

Steve Forbes has been giving the same explanation for years.

I think the CPI understates the inflation rate, but at least it's a consistent measurement.

You're right about it being consistent, but most believe it overstates inflation. There are a lot of politically senstive cost of living adjustments dependent on it. The cost of votes keeps going up.

[Moonman62]

The author seems to be saying inflation isn't the enemy, but we must still battle inflation. Well, guess what, that's what the Bank of Japan has been saying all these years, too.

[#3Fan]

Funny you posted this two weeks ago and it was the last thread and I didn't get to it. I went on a two week binge looking up statistics for the money supply, interest rates, etc., after I found that there is a monthly cycle to the amount of money in M1. I had noticed remnants of this cycle before and didn't know what was causing it, I thought maybe it was the moon or the sun's 30 day rotation send electrical plasma waves affecting people's behaviour like it does to animals. LOL