I saw this on my friend's facebook feed and left this comment.
Yo this whole thing fascinates me like crazy so I've spent some time researching shit, and I still only understand the crust of it. But since I'm bored, here's what I know.
Alright, so there's two camps. First is the paul krugman camp which thinks that during a recession a government needs to spend like crazy to cause consumption and inflation. Consumption is good since spending has ripple effects on an economy. It's not obvious (and definitely not proven) that deflation is necessarily bad though. The main case is that in a deflationary economy, people spend less and save more since there's a natural yield to holding your money, which in turn can cause more deflation. And since it's hard to cut wages (or they say it is), wages become out of wack with the economy.
Japan is always pointed to as the example of a zombie economy and what could happen to the US. This is the thing though - economists are so fucking caught up in their own theories and numbers that they forget about reality. They mistake symbols for economic growth (indicators) for real well being in a country. Japan is still one of the largest economies in the world, has one of the largest middle classes, lowest income disparity, and lowest unemployment in the world. I frankly can't understand why people keep shit talking Japan's economy as this nightmare when they seem to be doing pretty fucking well. They still MAKE things there like cars and have a nice mix of industry. They don't fit the economist mold of success and despite the reality that they're in many respects doing better than the US, they're the example of the worst case scenario of a deflationary spiral. Fucking academics...
Anyways, back to the point at hand. Even if you believe the krugman camp, it seems to me that all they are really doing is trying to control economic boom and busts and by doing so, only causing more of them. For example, let's say deflation happens - as long as you have an open economy (and the US does) - wages will decrease and eventually people will start spending again. The fact is that spending was way out of wack before and falsely propped up the economy. During the last two booms, the US was the only country where spending was higher than income - or negative savings, which is "good" for the economy by economist's standards, it's clearly something you can't maintain. So rather than let shit calibrate itself and fall in line, the government is like "woah - we need to spend for the people since they wont".
Anyways, capitalism is fun yo.
Oh and I forgot to mention that reading up on this stuff, my respect for economists has fallen like crazy. This is a blanket statement that I'm sure it'll turn out I'm wrong about, but seems to me that economic theory is really just a game of anyone's best guess with the addition of math to make the whole thing look sophisticated, when it's really just one big exercise in false precision and dick measuring.
I remember a college "introduction to economics" class where the professor asserted that in this new technological age, the typical economic cycles of growth and recession were obsolete; that from here on out it was just growth growth growth.
This was in 1999.
This is the basis for my new bubble investment strategy. You wait until you start reading articles about how X is going to go up forever, then you want 3 months, and short X. They said the same thing about housing prices.
Regarding Japan, they had two buffers to prevent complete zombification - they started their deflation with about a 15% personal savings rate (which is now around 2% iirc). And they still had trade surpluses with the US and Europe. Both enabled them to avoid the worst of deflation.
The US is starting at negative savings rates and trade deficits, so we have to find our buffer elsewhere. Apparently QE, more stimulus, and screaming at China to let their currency float to even the trade deficit are it.
According to the BEA, the Personal Savings Rate has increased significantly in the last few years and hasn't been negative in at least the last 6 years.
Does that include personal debt, or just the portion of income people put in a savings account? I checked the site, but don't didn't see anything obvious, and don't have time to dig much further.
Japan exported vast amounts to keep its economy afloat. If it was for the booming world economy of the 90s, Japan would have died. The paradox of thrift is the problem; if everyone experiences deflation, and cuts as a consequence, making debt repayments a bigger percentage of gdp, and the cycle repeating, where does it end? At least Japan had an untold number of trade partners who were willing to buy.
Much of modern economics was influenced by the experience of the great depression, a long period of persistent deflation that led to severe hardship. Its the real worst case. The various theories and mechanisms are attempts to avoid that happening again.
Comments
I saw this on my friend's facebook feed and left this comment.
Yo this whole thing fascinates me like crazy so I've spent some time researching shit, and I still only understand the crust of it. But since I'm bored, here's what I know. Alright, so there's two camps. First is the paul krugman camp which thinks that during a recession a government needs to spend like crazy to cause consumption and inflation. Consumption is good since spending has ripple effects on an economy. It's not obvious (and definitely not proven) that deflation is necessarily bad though. The main case is that in a deflationary economy, people spend less and save more since there's a natural yield to holding your money, which in turn can cause more deflation. And since it's hard to cut wages (or they say it is), wages become out of wack with the economy.
Japan is always pointed to as the example of a zombie economy and what could happen to the US. This is the thing though - economists are so fucking caught up in their own theories and numbers that they forget about reality. They mistake symbols for economic growth (indicators) for real well being in a country. Japan is still one of the largest economies in the world, has one of the largest middle classes, lowest income disparity, and lowest unemployment in the world. I frankly can't understand why people keep shit talking Japan's economy as this nightmare when they seem to be doing pretty fucking well. They still MAKE things there like cars and have a nice mix of industry. They don't fit the economist mold of success and despite the reality that they're in many respects doing better than the US, they're the example of the worst case scenario of a deflationary spiral. Fucking academics...
Anyways, back to the point at hand. Even if you believe the krugman camp, it seems to me that all they are really doing is trying to control economic boom and busts and by doing so, only causing more of them. For example, let's say deflation happens - as long as you have an open economy (and the US does) - wages will decrease and eventually people will start spending again. The fact is that spending was way out of wack before and falsely propped up the economy. During the last two booms, the US was the only country where spending was higher than income - or negative savings, which is "good" for the economy by economist's standards, it's clearly something you can't maintain. So rather than let shit calibrate itself and fall in line, the government is like "woah - we need to spend for the people since they wont".
Anyways, capitalism is fun yo.
Oh and I forgot to mention that reading up on this stuff, my respect for economists has fallen like crazy. This is a blanket statement that I'm sure it'll turn out I'm wrong about, but seems to me that economic theory is really just a game of anyone's best guess with the addition of math to make the whole thing look sophisticated, when it's really just one big exercise in false precision and dick measuring.
I remember a college "introduction to economics" class where the professor asserted that in this new technological age, the typical economic cycles of growth and recession were obsolete; that from here on out it was just growth growth growth. This was in 1999.
This is the basis for my new bubble investment strategy. You wait until you start reading articles about how X is going to go up forever, then you want 3 months, and short X. They said the same thing about housing prices.
Nice. That sounds like a professor that shouldn't be listened to. I wonder how much of his retirement money got lost in the .com bubble?
Regarding Japan, they had two buffers to prevent complete zombification - they started their deflation with about a 15% personal savings rate (which is now around 2% iirc). And they still had trade surpluses with the US and Europe. Both enabled them to avoid the worst of deflation.
The US is starting at negative savings rates and trade deficits, so we have to find our buffer elsewhere. Apparently QE, more stimulus, and screaming at China to let their currency float to even the trade deficit are it.
According to the BEA, the Personal Savings Rate has increased significantly in the last few years and hasn't been negative in at least the last 6 years.
http://www.bea.gov/briefrm/saving.htm
Does that include personal debt, or just the portion of income people put in a savings account? I checked the site, but don't didn't see anything obvious, and don't have time to dig much further.
Japan exported vast amounts to keep its economy afloat. If it was for the booming world economy of the 90s, Japan would have died. The paradox of thrift is the problem; if everyone experiences deflation, and cuts as a consequence, making debt repayments a bigger percentage of gdp, and the cycle repeating, where does it end? At least Japan had an untold number of trade partners who were willing to buy.
It all must be viewed in context.
Much of modern economics was influenced by the experience of the great depression, a long period of persistent deflation that led to severe hardship. Its the real worst case. The various theories and mechanisms are attempts to avoid that happening again.
I mostly agree with your last paragraph though.