car news japan image
Pelendra
I'm picking a topic for a paper on Macroeconomics, and I've read a lot about the Japanese economy in the news recently. Unfortunately, these articles only tell me about the current situation, without giving me much background information.
Answer
First, deflation does NOT devalue the currency -- just the opposite, it makes the currency more valuable compared with other things.
Deflation means that prices are going down, and things will be cheaper in the future than they are today; it also means that cash itself becomes more valuable and is therefore a good investment. And those two factors cause problems.
Think about it: why would you buy things you don't absolutely need today, such as an iPod or a new car or extra clothes, when you know they'll be cheaper next month? It's like finding out there will be a big sale at your favorite store next week -- you won't buy stuff today, you'll wait to get the better deal later. Deflation causes this effect in the wider economy: people put off buying stuff becuase they know it'll only get cheaper if they wait ... and wait ... and wait. The result is a fall in consumer demand and slower or negative economic growth.
It's not just that growth numbers will look bad. What happens if you're a business and you realize your sales are falling, both from prices falling and from lack of demand? You lay people off. So deflation causes higher unemployment. High unemployment means people have less spending money -- which further reduces demand. Falling prices, lower demand, and unemployment all feed off each other and amplify each other -- it's a death spiral.
Meanwhile, falling prices and shrinking business means interest rates will fall. In Japan they literally fell to zero (actually negative). This harms investment: no one wants stocks because companies are doing poorly; no one wants bonds because interest rates they pay are near-zero and do not compensate for their risk. So it's best just to stash cash in your pillow case -- cash is the best investment. But this is bad for the economy because it means that the few companies out there willing to try to expand their business may find it hard to borrow money -- there is less capital available. So borrowing rates are low, but you can't get qualified for a loan. All and all deflation is absolutely a bad thing -- and actually Japan is lucky things didn't get worse for them.
First, deflation does NOT devalue the currency -- just the opposite, it makes the currency more valuable compared with other things.
Deflation means that prices are going down, and things will be cheaper in the future than they are today; it also means that cash itself becomes more valuable and is therefore a good investment. And those two factors cause problems.
Think about it: why would you buy things you don't absolutely need today, such as an iPod or a new car or extra clothes, when you know they'll be cheaper next month? It's like finding out there will be a big sale at your favorite store next week -- you won't buy stuff today, you'll wait to get the better deal later. Deflation causes this effect in the wider economy: people put off buying stuff becuase they know it'll only get cheaper if they wait ... and wait ... and wait. The result is a fall in consumer demand and slower or negative economic growth.
It's not just that growth numbers will look bad. What happens if you're a business and you realize your sales are falling, both from prices falling and from lack of demand? You lay people off. So deflation causes higher unemployment. High unemployment means people have less spending money -- which further reduces demand. Falling prices, lower demand, and unemployment all feed off each other and amplify each other -- it's a death spiral.
Meanwhile, falling prices and shrinking business means interest rates will fall. In Japan they literally fell to zero (actually negative). This harms investment: no one wants stocks because companies are doing poorly; no one wants bonds because interest rates they pay are near-zero and do not compensate for their risk. So it's best just to stash cash in your pillow case -- cash is the best investment. But this is bad for the economy because it means that the few companies out there willing to try to expand their business may find it hard to borrow money -- there is less capital available. So borrowing rates are low, but you can't get qualified for a loan. All and all deflation is absolutely a bad thing -- and actually Japan is lucky things didn't get worse for them.
What is the reasoning for the FED not adjusting the interest rate this week?
Justin H
The news said the FED had been considering a rated cut but decided to hold steady. With some banks hurting right now, why wouldn't they raise interest rates to encourage saving? Is it more important to keep people in the stock and bond markets right now?
Answer
About 70% of the US economy is based on consumer spending. And if these consumers start saving more and spending less. Then the economic recession will become even worse.
Also, a lot of people in USA have a lot of debts, including mortgages, car loans, and credit card debts. And if these people have to pay higher interest rates. Then many of them would go bankrupt.
Perhaps the Fed is afraid to lower the interest rate now just like before. Because you can't lower the interest rate below zero. And it isn't that far from the present 2% down to 0%. Once they lower the interest rate down to zero. Then there is nothing more the Fed can do. And USA will end up in the same situation that Japan ended up in when it lowered its interest rate all the way to zero.
Japan ended up in a long deflationary cycle with falling prices and wages and not much economic growth. And the same thing can happen in USA.
The Great Depression was basically a long deflationary cycle. And it can happen again.
About 70% of the US economy is based on consumer spending. And if these consumers start saving more and spending less. Then the economic recession will become even worse.
Also, a lot of people in USA have a lot of debts, including mortgages, car loans, and credit card debts. And if these people have to pay higher interest rates. Then many of them would go bankrupt.
Perhaps the Fed is afraid to lower the interest rate now just like before. Because you can't lower the interest rate below zero. And it isn't that far from the present 2% down to 0%. Once they lower the interest rate down to zero. Then there is nothing more the Fed can do. And USA will end up in the same situation that Japan ended up in when it lowered its interest rate all the way to zero.
Japan ended up in a long deflationary cycle with falling prices and wages and not much economic growth. And the same thing can happen in USA.
The Great Depression was basically a long deflationary cycle. And it can happen again.
Powered by Yahoo! Answers
No comments:
Post a Comment