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Peter, You've already mentioned you're a follower of Elliot wave theory, and
one thing I've noticed about 'wavers" is that often a preconceived notion of
what the market should do is reached, and then economic fundamentals are
"interpreted" to fit the theory.
Prechter's most recent mailing is a perfect example. He has about nine
charts of huge price runnups in various markets throughout history that
eventually crashed. He then states because of this evidence, it's almost a
foregone conclusion that the US markets will be next. In other words,
there's absolutely no way the current US economic environment could be
different from these other situations, and therefore we must follow in their
footsteps.
I'm an adherent of the Austrian school of economics myself, but I have to
take issue with your analysis of the Asian meltdown and its lessons for the
future of the US economy. Comments are inserted below, and are aimed
primarily at what the future holds for the US:
>Specifically, in japan , whats refferred to as the "pool of funding" has
been >depleted in japan over the last 30 or so years. The "pool
>of funding" basically encmpasses the net wealth of a nation. This net
>wealth is eroded by the artificial manipulation of economics areas of
>interest, primarily interest rates. In japan specifically, what people
>referr to as the "bubble economy of the 80's" was the climax of this
>manipulation of the pool of funding..Once manipulation occurrs, the short
>term (prehaps many years) benefits of reduced unemployment, high eco growth
>rates etc are not sustainable & the economy must collapse & return to
>the mean. All gov't policies are manipulation. It is basically the
>misallocation of resources.
There are some problems with this thinking. Manipulated interest rates are
not the problem in Japan, and never were. The primary problem has been the
stagnation of Japan's money supply. Right when the economy turned south,
Japan actually froze the money supply at the very moment they should have
been expanding it. Believe or not, they actually made the same mistake the
Fed made in 1929. The stock market crash did not cause the Great
Depression, the money supply contraction did. The Fed lowered interest
rates back then too, and it did no good without more printed money (although
the Fed back then had a good excuse- the US was on the gold standard and
they were required to defend the value of the dollar relative to gold, no
matter what the economic consequences).
There is no free lunch, and the downside to printing money is inflation, but
Japan is currently caught in a deflationary spiral, and inflation is exactly
what they need! Japan as a nation is producing too much and not consuming
enough. Deflation causes conumers to put off spending because they know
they will be able to buy the same product in the future for less money.
Inflation does the opposite.
Luckily, the Fed learned from its mistake. After the market crash of 1987,
the Fed immediately flooded the economy with money, and the crash never
spilled over into the overall economy. Now granted, this qualified as a
"manipulated" move in money supply, but it was done for such a short
duration that the positive greatly outweighed the negative. If you're
waiting for a Japan style meltdown in the US, you're going to be waiting for
a long time...
> The lowering(or increase) of interest rates by reserve banks is a
>wealth consuming activity to a nation which, because it dosnt correspond to
>consumers decision to save more, implies that there isn't an increase in
the
>allocation of the means of sustence ( ie productve resources) in the
>economy.
I'd be interested to know where this information came from, because it
doesn't comply with anything I ever learned about Austrian economics.
Interest rates are simply a measure of both the supply and demand for
capital (money). The Fed only controls short term interest rates. Long
term interest rates have been falling for years now because America has
entered a demographic cycle where both savings and spending are greatest
(the baby boomers are now in the peak earnings period of their business
careers). This increase in the pool of savings has increased the supply of
capital (the savings rate figures released by the BEA are completely bogus,
which is a topic for another day...), therefore interest rates have fallen.
This was a clear signal from the free market to Greenspan to cut short term
rates, because the spread between long and short rates had fallen to
virtually zero. The fed was not the leader (nor the manipulator), it was
the follower.
>So capital (hence eventually other economic resources like labour
>etc.. hence lower unemployment rates in short term) is diverted to less
>deserving ventures in the economy which otherwise would not have taken
place
>(were it not for the artificial lowering of interest rates by the reserve
>bank)......
Once again, I think you're confusing interest rates with money supply. No
matter what the interest rate, the supply of investment capital will always
flow to borrowers ranked from most promising to least, just as the supply of
labor will flow from the most promising jobs to the least. As you know,
Austian economics assumes all entities (borrowers, lenders, workers, etc.)
in a free market are profit maximizers / loss minimizers.
It is when the money supply is expanded above and beyond what the productive
capacity of a nations's economy justifies that borrowers who did not
"deserve" investment capital will receive it, as will financial markets.
The US money supply as indicated by M3 has been growing, but a large
percentage of this money growth (dollars) has flowed overseas and is being
used as the medium of transaction in countries where there has been a lot of
economic instability. The "true" monetary level in the US is very stable.
>this in essence is "fat" in the economy. Eventualy to support
>this "fat" (ie economic booms in stockmarkets) the reserve needs to keep
>lowering interest rates etc, otherwise it will all collapse. This is what
>happened in japan, & recently asia.
As indicated above, this situation doesn't apply to the US, but it is
important to remember that the problems of Japan are completely different
from those of the rest of Asia. Japan is caught in a deflationary cycle,
whereas the rest of Asia is in an inflationary environment due to the
collapse of the value of their domestic currencies.
> The greater the manipulation the harder the fall & economic problems,
&
>hence the longer it takes to restorethe economies natural resource
>allocations levels
Agreed, but again the manipulation you refer to is not evident in the US
economy.
> In japan Money supply grew to such an extent by the artificial lowering
>of interest rates that in order to keep supporting the economy
(stockmarket)
>the govt had to keep printing money, but this is only possible for so long,
>so then what happens is you have asset deflation (leading to recession),
>(eventually you get consummer deflation as incomes dwindle) & due to the
>excessive money supply, coupled with the massive exsodus of capital from
>the country due to the asset deflation you get exchange rate depreciation.,
>this ofcourse raises riskpremiums in the country & interest rates to
attract
>the badly need capital for economic activity........ ie credit crunch.
The problems of Japan are obviously numerous and complex, but in regards to
money supply policy, the history is indisputable. A chart of Japan's M3
money supply clearly shows that the level was increasing during the boom and
was held flat / contracted over the past several years as their economic
problems have worsened. I will agree with you that the absolutely morbid
consumer sentiment in Japan now makes a government induced economic
stimulation difficult, but that is only because they let the problems go on
for so long.
>TELL ME .....DOES THIS SOUND FAMILIAR......JAPAN, ASIA (yen, ringitt,
>comsumer inflation world wide) ....& eventually the USA will succumb to
this
>outcome..
Almost as much of the world is currently experiencing disinflation /
deflation than is experiencing inflation. With all due respect, you still
haven't offered any specific proof that the US will "succumb to this
outcome" of other nations.
All the evidence indicates that the US economic AND stock market boom are
completely real and justified because the demographic forces behind them are
real.
Bruce
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