Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Deflationists Myth of Japan

Economics / Deflation Jan 11, 2010 - 02:51 AM GMT

By: Gary_North

Economics

Diamond Rated - Best Financial Markets Analysis ArticleIn my previous report in this series, I contrasted the monetary views of the Austrian School of economics with the standard views of Keynesian and Chicago School economists. Despite their deep-seated differences, all of them oppose the views of the handful of forecasters who predict inevitable price deflation. I wrote:


Austrian School economists insist that hyperinflation is always an option, leading to the destruction of capital markets, the breakdown of the division of labor, and a switch to a new currency unit when money dies. They also say that if the Federal Reserve System ceases to inflate and also refuses to intervene to save the banks, there will be a banking collapse leading to monetary deflation and price deflation. Most of them think this is politically unlikely. . . .

Non-Austrian School economists insist that the government and the central bank can always get the economy out of any crisis that previous laws and central bank policies have created. All that it will take to avoid the crisis will be "prudent" economic policies – "prudent" being defined as "what I would recommend if anyone ever asked me." They say that there need not be price deflation. The price of avoidance is mild monetary inflation – a small price to pay, they all insist.

The deflationists have had only one representative economist with experience as a mega-banker and a central banker: John Exter. I devoted my previous report to an explanation of his major error. It was this: he confused rising and falling prices of investment assets with rising and falling prices of consumer goods. He said that the debt load associated with investment assets will someday cause a collapse of asset prices. This will create a collapse of prices in the economy.

I demonstrated that the rise or fall of asset prices do not affect the rise and fall (rare) in consumer prices, except when the fall in asset prices bankrupts commercial banks, and the central bank and the government fail to bail out these banks. Then the money supply shrinks, as it did, 1930–33.

The government and the FED will not sit idly in the sidelines, allowing banks to fail. That was the lesson of September and October, 2008.

To put this in terms anyone can understand, the collapse of Lehman Brothers in 2008 had no effect on the price of toilet paper or any other consumer good. Exter’s intellectual disciples have confused Lehman Brothers with Charmin. They have confused Richard Fuld with Mr. Whipple.

For as long as the money supply remains constant, consumer prices will fall slightly, due to increased productivity. So teach the Austrians and Chicago School monetarists. This is price deflation, and it is a benefit to consumers, Austrians teach. Consumers’ real wealth increases with falling consumer prices, if their wages stay constant, and if they did not have their money invested in bubble assets.

This brings me to the topic of this report: consumer prices in Japan.

WHAT ARE THE FACTS?

First, let me begin with the facts of central bank monetary policy. The Bank of Japan controls the supply of the monetary base. It does so by buying or selling income-producing assets, mainly government debt.

I offer two charts. One is a chart of the Bank’s monetary policies since 1992. The second is a chart of the Federal Reserve’s monetary policies since 1992. These charts are published by the Federal Reserve Bank of St. Louis in its quarterly publication, "International Economic Trends."

The charts may amaze you. What they show is simple to state: the two nations had similar central bank policies until late 2008, when the Federal Reserve went berserk.

Second, consider the year-to-tear rates of change in the money supplies in both nations. For Japan, M1 and M2 are on the same chart. The chart for the money supply for the U.S. in this publication compares MZM, which is a useless predictor of consumer prices, and M2, which isn’t much better than MZM. Both of them overestimate future consumer prices. (Is there an editor for "International Economic Trends"? Or is it an uncoordinated effort?) So, I have used the similar chart of M1 and MZM that is published in another St. Louis FED publication, "Monetary Trends." Ignore MZM.

The results of the respective central bank policies (adjusted monetary base) were similar. If we compare Japan’s M2, which was mildly inflationary (usually under 3%, 1992–2002; about 1%, 2003–2009), with America’s M1, which was also mildly inflationary – actually deflationary, 1996–98 – we see little difference. These two monetary aggregates are the best indicators of future consumer prices in their respective nations.

Let us now look at charts comparing rates of change in the consumer price indexes of both nations. The rate of annual change in Japan has been slightly deflationary, but no greater than 1% in any 12-month period, and rarely that low. In two years, prices rose by 2%: 1997 and 2008.

Conclusion: there has been no systemic price deflation in Japan.

As the earlier chart indicated, M2 rose by very little in Japan, especially 2003–2009. This means that prices declined slightly in response to a mild monetary expansion. This is consistent with the monetary theories of both the Austrian School and the Chicago School of economics. Increased output, when coupled with very low increases in the money supply, will produce falling prices.

Here is the ideal scenario: no monetary inflation and output increasing by 2% to 3% per annum. Consumer prices fall by 2% to 3% per annum. Japan has been close to this ideal for two decades – closer than any other industrial nation.

The Austrian School favors slowly falling prices in response to zero monetary inflation. The Chicago School favors stable prices and a slowly but steadily rising money supply. Japan is more Chicago School than Austrian, but it has been closer to Austrianism than any other nation for two decades with respect to money and prices.

Here is my fundamental point. Japan’s central bank has systematically adopted monetary policies that have produced a Chicago School outcome: nearly stable prices. This indicates that Japan’s central bank has had a goal, and it has achieved this goal. It has not been fighting systemic price deflation. It has produced deliberate price deflation on a minute scale.

With this as background, I will survey some statements from deflationists regarding Japan.

CONFUSION AMONG DEFLATIONISTS

I searched Google for "systemic deflation" and "Japan."

Here is the result of this search.

The good news is that there are not many examples of this: fewer than 400 links. I found no examples of the more famous deflationists using this phrase with respect to Japan.

If you search for "systemic deflation" and leave out "Japan," you still do not find a lot of examples, and numerous links are to statements by analysts who oppose the idea that deflation will be systemic. I found fewer than 1,000 links.

Some of my readers have been concerned that the United States may be facing a systemic deflation comparable to what Japan has experienced. They did not get this idea from the more famous deflationists’ explicit warnings about systemic deflation. Whatever the warnings have been, the better-known deflationists have avoided the use of that terminology.

They have used the term "deflation." They have used it often enough so that some readers have gotten the impression that the deflationists have used the stronger term: "systemic deflation."

If you search Google for "deflation" and "Japan," you will get over a million hits. There is no doubt that Japan is associated with deflation. Some of these articles are Keynesian hand-wringing. Here are two examples.

The Economist:

The BoJ can start by being more assertive. It is almost as if it is so exasperated by the flaky achievements of its previous anti-deflationary efforts that it would rather sit back and wait for a recovery. But that is a defeatist attitude. If nothing else, it should publicly revive discussion of alternative plans to reflate the economy. That could include increasing government-bond purchases, or setting itself a monetary target not just based on a positive inflation rate, but on robust growth of nominal GDP.

British Broadcasting Corporation (BBC):

To the man on the street, deflation does not seem like a bad thing – prices are falling, so what can be so bad?

However Japan has been through the experience of deflation, in the late 1990s, and has a different tale to tell.

It came after the country had first gone through a banking crisis meltdown, when the government had to take unprecedented measures in what was then "the field of the unknown."

Then, just when it seemed the worst was over, at the end of the decade deflation gripped the economy – and its effect filtered through all sectors of society affecting all parts of life.

This is the standard Keynesian Party Line: the evils of falling consumer prices.

Then there is a statement from a hard-core deflationist: a follower of Elliot wave theory.

Elliot Wave International:

One argument inflationists make is that the U.S. can’t have deflation because it will simply print enough money to counteract it. But the Japanese tried that and failed, but interestingly, it did succeed in holding up one economic statistic – the GDP number. Even as Japan’s stock and real estate bubbles imploded (commercial properties fell by 87%!), Japan’s GDP continued to press higher, as seen in the chart.

Note: this example has to do with falling asset prices, not falling consumer prices. This was John Exter’s mistake: he focused on the bubbles and busts of asset markets, not the effects of these events on the price of consumer goods. There were no effects on the price of consumer goods.

Furthermore, this article provides a chart of the increase in Japan’s GDP during these two decades It rose from about 500 to 800 in real terms – factoring in output and prices. That is an increase of 60%. That is an increase of 2.5% per annum. This is quite respectable. It is consistent with the growth rate over the last two centuries in the West.

Then why the hand-wringing over Japan’s price deflation? It makes no sense.

People who lack background in economic theory, money and banking theory, and economic history are easily manipulated by journalists who are not much better informed, but who have an axe to grind or a hobby horse to ride. I wish they would take their sharpened axes and hack the hobby horses into kindling.

CONCLUSION

Let me list what is demonstrably true from the available statistics.

  1. Consumer prices in Japan fell little, 1992–2009: no more than 1% per annum in most years, if at all.
  2. In some years, they rose by 2%.
  3. Output increased at respectable rates.
  4. Per capita output increased.
  5. The M2 money supply barely rose.
  6. The Bank of Japan did not inflate the currency in order to overcome systemic price deflation, which did not exist.
  7. The Bank of Japan pursued a policy that kept prices close to stable.
  8. The collapse of real estate prices did not lower consumer prices.
  9. The collapse of the stock market did not affect consumer prices.

Let me list what is true, based on Austrian School economics.

  1. Rising prices are a monetary phenomenon.
  2. Stable money and increased output produce slowly falling consumer prices.
  3. Stable prices indicate a mildly rising money supply.
  4. Central banks control the money supply through the loan markets.
  5. Central bankers do not need to worry about price deflation that might become systemic, as long as the governments and fiat money bail out fractional reserve banks.
  6. Any future price deflation will be the result of central bank policy: refusing to bail out busted banks and refusing to buy Treasury debt.
  7. As long as the FDIC bails out depositors, there will be no decrease in the money supply due to busted banks, as there was in 1930–33.
  8. Central banks control the lending practices of commercial banks through (1) the monetary base; (2) the legal reserve ratio; (3) by not imposing an excess reserves fee on commercial banks holding excess reserves rather than lending them in the form of fiat money.
  9. The FED is not powerless to prevent price deflation.
  10. The FED can increase the total money supply at any time by imposing a fee on excess reserves.

If you keep in mind the facts of Japan’s experience and the facts of Austrian economic theory, you will not be deceived by journalists who predict inevitable price deflation based on some variant of John Exter’s mistake.

    Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    http://www.lewrockwell.com

    © 2010 Copyright LewRockwell.com / Gary North- All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in