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-----Original Message-----
From: Peter [ KKD ] <derivatives@xxxxxxxxxxxxxx>
>Bruce
> You are VERY INCORRECT in your assertions of Austrian Economics.
>With all rspect what you have basically described in your views of Austrian
>Economics is "mainstream economic" thinking, which is flawed to a very
large
>extent. I will address the many issues & comments you have made.
> Firstly if you have assumed from my post that my view of the US economy
>is that it will head for a depression , along the lines of what Prechter
has
>proprted for many years, you are totally mistaken.
Well, here's what you said in your original post- "TELL ME .....DOES THIS
SOUND FAMILIAR......JAPAN, ASIA (yen, ringitt, comsumer inflation world
wide) ....& eventually the USA will succumb to this outcome.."
I think most people on this list took that to mean you expect a serious
crash in US markets in the near future. If you're now saying a US economy
will be fine for many years to come, then that's something we agree on.
>I am an Elliott
>technician, & a very successful one at that. However Precheter is not an
>Elliottician, he's a salesman. SNIP
We agree again.
> My market outlook is very bullish on a longer time scale, but what I
>have purported wrt to the US economys depletion of its pool of funding
>remains true. As such the implications of this degeneration will evenyually
>manifest its self in reality by way of depression, but that will not be for
>many decades to come.
Many decades to come? Peter, if you feel doomsday for the US is that far
off, why even bother mentioning that the US will eventually "succomb" to
Asia's outcome? Just for the record, fundamental analysis tells me the US
markets will continue to rise until around 2010. Barring a fundamental
change in the structure of US markets (such as a privatization of social
security), they will then begin a multi-year decline. It will have nothing
to do with Fed policy and everything to do with demographics.
>You must understand the implications of Austrian
>economics wrt time. Just because an economy is in a process of degeneration
>(via a depletion of its pool of funding as is the case with the US) does
not
>imply that economic activity & hence its financial markets will collapse
>during this phase. In fact it implys just the opposite, as the process of
>degeneration & decay is actually instigated by the manipulation of the
money
>supply & interest rates, hence leading to an economic boom lasting many
>years & decades even, low unemployment etc. Only once this manipulation
>ceases , does the economy collapse & the implications wrt asset
>depriciation, capital outflows etc materialise, but until then the economy
>will boom.
You've already described any Fed or government action as "manipulative," and
you're certainly entitled to your own opinion and terminology. However, you
still haven't offered any evidence that this Fed manipulation HAS to end or
at least can't be altered in a way that leads to a "soft landing." With
all due respect, 20th century US economic history strongly supports my
opinion. If you ascribe a large part of the US recession in the early 70's
to the quadrupling of oil prices by OPEC (which caused a supply shock and
had nothing to do with Fed policy), every recession the US has experienced
since the Great Depression has essentially been smaller than the last one in
real terms. Just a coincidence? Hardly. Two important factors account for
this.
The first has been the constant improvement of the Fed in managing both the
money supply and short term interest rates. They have slowly but surely
learned from their mistakes in the past and have improved their ability to
bolster the economy when it is declining and dampen it when growth is too
fast. They have done this to the point that our last recession in the early
90's was barely a blip on the radar.
The second is the dramatic improvement of private industry to manage their
output capacity and inventories through the use of information technology.
While Japan was busy making more factories in the 80's and early 90's, the
US was concentrating on making their existing factories more efficient.
Excess inventories are the fuel of recessions.
This is why I feel that the "mainstream economists," as you describe them,
are incorrect in their prediction of a recession in 1999. Businesses are
simply too good at controlling their inventories relative to future demand
to not be prepared for any slowdown next year. Growth may slow, but the
economy will not contract.
>this is exactly what happened to Japan. It had a major boom with
>the nikkie to 40,000 etc, the manipulation ended, & look whats happened
>since.
All this proves is that Japan's central bank isn't very good at their job.
You say "the manipulation ended." Did it have to end? No, printing money
is easy. The only downside to printing money is inflation (and possibly
currency depreciation). As I stated before, Japan is currently in a
deflationary cycle, so inflation (or the specter of it) is exactly what they
need. Japan's demise in no way proves or justifies a statement that the US
must follow in their footsteps (whether this decade or any other).
> You state that the Japanese economy had stagnant money supply right
>when the economy turned south & that they should have expanded money
supply.
>Your missed the point. The economy collapse precisely because the money
>suppy stagnated.... as thats when the BOJ 's manipulation had ened... thats
>why it collapsed. You seemed to have confused cause & effect, which is what
>mainstrean economists do..
Once again, you say "the money supply stagnated," as if this was a
pre-ordained event that the BOJ had no control over. Peter, it was simply a
BAD POLICY DECISION. If the money supply had been significantly expanded
once the Japanese financial markets has turned south, about 80% of the
economic problems that ensued could have been avoided. What is my evidence?
Once again, the US in 1987. After the market collapse, the Fed temporarily
expanded the money supply and the economy went on growing without harm. I
say 80% of the problems because the demographics of Japan were turning
bearish at the same time (as ours will around 2010), so some economic
slowdown was inevitable.
>Ever since then the BOJ has been lowering
>interest rates (which is what you say will save the economy & is the
correct
>thing to do), but in actual fact they should allow interest rates to rise,
>not decrease.
Peter, you better read my message again. Here's what I said on the subject:
"Manipulated interest rates are not the problem in Japan, and never were.
The primary problem has been the stagnation of Japan's money supply." In
other words, I said the COMPLETE OPPOSITE of what you just attributed to me.
Lowering short term interest rates is useless without expanding the money
supply at the same time. If the BOJ had done this several years ago,
Japan's current problems would be a fraction of what they are. The problem
now is consumer sentiment in Japan has fallen so low that significantly
expanding the money supply won't help much anymore. The Japanese government
needs to PRINT MONEY AND SPEND IT until the deflationary cycle ends. That's
when Japanese consumers will start spending on their own. This will
depreciate the value of the yen in the short term, but their positive
balance of trade will more than offset any negative ramifications of this.
>The japanese are caught in a liquidity trap. By lowering
>interest rates to "save" the economy (as I state below in the next
>paragraph is the "normal" thing they do), they actually further deplete the
>pool of funding & exacerbate & prolong the economic misery. They can only
>be saved by actually allowing increasing interest rates.
Totally untrue. Japan has trillions of dollars in private savings and the
largest holding of foreign currency reserves in the world. Raising interest
rates would certainly draw in foreign investment capital (and cause Japanese
citizens to repatriate their overseas investments in a search for higher
yields), but that would only make their problems worse. What you don't seem
to grasp Peter is that the biggest long term problem facing Japan right now
is excess production and a lack of consumption.
Japan has spent too much of its wealth on expanding capacity and too little
on consumption to absorb the output of that capacity. They were counting on
exporting 100% of this surplus, but it didn't work. How do I know this?
Because the result of excess production relative to consumption is
deflation, and that's exactly what Japan is experiencing right now. Raising
interest rates and expanding the pool of invement capital would do nothing
to expand consumption, and would only give Japanese industry access to more
money to expand output even further. This would only add fuel to the fire.
Japanese consumers will not come to the rescue until the deflationary cycle
is broken, and that won't happen until the government... well, you know the
rest by now.
>This course of
>action will make the economy collapse quicker but it will bring about the
>end of the economic mailaise in the country very very much sooner. This is
>the optimal course of action
Oh raising interest rates will make the economy collapse quicker alright,
and it will make the long term problems even worse.
> Therefore, the superficial traits of a (positively) manipulated economy
>is that there is an economic boom in which the reserve bank has shown its
>head from time to time. The boom you witness is actually a wealth
depleting,
>unsustainable economic activity. This artificial lowering of interest rates
>eventually causes the meltdown once the reserve/govt policy stops the
>manipulation, BUT what happens then is the the reserve actually keeps on
>lowering interset rates &/or expand themoney supply once the economy falls
>into recession in order to "save" it. They should actually be increasing
the
>level of interest rates to return to availablity & alllocation of capital
in
>the market place back to its natural level.
This is exactly what the Fed has been doing. They lower interest rates and
expand the money supply when the economy slows, and take the reverse action
when growth reaches the point that it begins to put inflationary pressure on
consumer prices. They take their cue from long term rates, which are
determined by the free market and are much more susceptible to future
expectations of inflation. They've gotten better at this job with every
passing decade.
> Boom-bust cycles occurr because of reserve bank manipulation.
>Activities in the economy are "funded" by loose moinetary policy that do
not
>accord with the preferences of consumers.
Yes, in other words booms and busts are caused by the Fed doing a poor job.
When it does a good job, the economy can expand until demographic forces
overwhelm even the best of Fed efforts.
> As the policy of artificially lowering of rates intensifies, it
>attracts more & more activities that are not approved by consumers, hence
>the greater the degeneration, & harder the "economic bust" once liquidation
>occurrs.
> This is what happened in 1987. You state/imply that when the fed
>"flooded" the economy with money it "saved" the economy. No, incorrect.
Yes, it did. Greenspan's expansion of the money supply kept the negative
effects of the 1987 market crash from spilling over into the economy as a
whole. While the mainstream economists were predicting a recession
following the crash, the economy kept growing for over four years. The mild
recession we eventually had in the early 90's was caused by the largest tax
increase in US history, and had nothing to do with Fed policy (although Bush
blames his defeat on Greespan for not lowering rates soon enough...)
>What
>that was, was the Fed being manipulative further deplateing the pool of
>funding in the US, because it not only supported the "unauthorised"
business
>ventures at the time but actally has promoted more such ventures because
of
>the increase in money supply.
Yes, by your definition of manipulation it was, but I prefer to call it a
responsible action on the part of the Fed after learning from past mistakes.
>Sure the economic boom continues, but thats
>all it is, just a boom, it aint sustainable & will force a massive econimic
>contraction eventually An increase in money supply manifests its self in
>a booming financial market, increasing GDP, increasinging incomes &
>consumer expenditure etc as it has done, & gives the impression that all
is
>hunky-dory. The FEDS 1987 ACTION WAS JUST A CONTINUATION OF THE
>MANIPULATION.. Interset rates should have been allowed to rise inorder to
>"kill off" the economic fat & return the economies capital allocation to
its
>proper levels. The short term pain of such action would greatly outweigh
the
>disastourous effects of the latter collapse as it would be bigger & herder
>eventually. Look at japan.
Peter, you should ask Santa Claus for a book on contemporary US economic
history. INTEREST RATES WERE RISING BEFORE THE 1987 CRASH. If you have a
long term US T-Bill chart handy, you'll see short term rates rose from about
5% in January to almost 6.5% in September of 1987. You're entitled to your
opinions and I don't mean to mock you, but you should at least get your
historical facts straight.
> You seeem to support reserve bank intervention in a qulaified way, such
>as in 1987, but this is flawed main stream economic thinking again.
>Reserve banks cannot navigate economies, they can only disrupt the normal
>allocation & flow of consumer preferences & dictates,
Yes, reserve banks can navigate economies. They (in theory) try to moderate
the good times and shorten the duration and magnitude of bad times. Some
central banks are better at it than others. The Fed is pretty good and is
getting better...
SNIP > If there was not gov't interventoion at all , there will
>be no boom-bust cycles, just consistent, sustainable, indefinate wealth
>creation.
No, demographic forces always have been and always will be the ultimate
determinates in the direction of any given economy, but as an eternal
optimist, I do leave the door open to the idea that technological advances
and gains in productivity may someday negate the negative effects of
demographic cycles.
> Further your remarks justifying Greenspans actions due to your naive
>"baby boomers" statement is false. Earnings, incomes etc are
representative
>of wealth creation, they are readily the by-product of money supply
>manipulation. eg, losse monetary policy in displayed by rising corporate
>profits, earnings, & supposedly "healthy consumer indicators. That 's not
>wealth creation, thats just paper money.
No, real wealth is being created in vast quantities in the US every day.
Once again, baby boomers are in the peak earnings phase of their careers.
Their REAL spending fuels the economy, and their REAL savings flow into and
fuel the financial markets. They do have paper profits on their stock
holdings, but that has nothing to do with the REAL money they receive every
two weeks in their paycheck and pour into their 401Ks. They do this because
they have made the rational, intelligent decision that having money in
stocks is the best long term investment, and that more people have LOST
money by being OUT of the stock market than by being in it- a principle
known to both "mainstream" and Austrian school economists as opportunity
cost.
> It may come as a shock to you seeing as you support manipulative
>reserve bank practices in "saving' economies, but the absolute financial
>system is one which is based upon a PURE Gold standard. The prior gold
>staandard that as present this century was not Pure. In this way absolute
>market efficiency can prevail & inflation in economies will be
non-existent,
>hence allowing for solid sustainable long term wealth creation.
Peter, there were numerous periods of both inflation and deflation in
economic history long before central banks and paper money were even
invented. The British have charts of consumer prices going back hundreds
of years, I'll dig one up for you to prove my point. I'm sorry, but the
historical evidence simply doesn't support your conclusion. We can debate
the merits of a gold standard privately if you wish (I'm against it, but
support a similar idea), but let me ask you one question. If I had taken
all my paper money in 1989 and converted it into gold, would I be better off
today if I had just stuck the cash under my mattress? Which has lost more
of its value? The times they are a changin'.
> This discussion has deviated substantially from trading, & i thinkit
>best to leave it there
Probably true, but it's nice to take a larger view of the economic forces
affecting the markets now and then, and you can't post a message of this
size and scope and not expect a response...
Regards,
Bruce
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