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Old 05-16-2003, 01:56 PM   #1
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Deflation?

I've mentioned sporadically over the past 2-3 years here that I think the U.S. is about 10 years behind Japan economically. Japan's economic boom of the 1980s is what inspired then-President Reagan's admiration and desired emulation of their economy. After all, the joke in "Blade Runner" (1982) is that Los Angeles in 2019 is overrun by Japanese culture.

For better or for worse, we did create an economy that emulated Japan, with the 1990s being our decade of prosperity--a decade after Japan's prosperity. Most troubling, however, was Japan's fate during the 1990s up to the present: a stock market that plunged from 20,000 to around 7,000 (?) and persistent deflation with interest rates around zero. The lack of economic growth is for so long is being blamed on the large debt amassed during the prosperity. Remind you a bit of the U.S.?

This was my primary objection to the mass deregulation of the 1980s and 1990s. Without regulation, business has had no incentive to operate with any stability. The end of the punitive "windfall profits tax" took away any incentive for a business to reinvest in itself and pay its labor--and, as such, in the pursuit of quick profits, relied on stock investment. All good and well, but the stock market is fickle, as we can see by companies literally being ruined by unsubstantive, panic-driven selling in the last three years.

Our "yes-man" Treasury Secretary, John Snow, had this to say, "I don't think the United States has any risk of being in a serious deflationary period. Any comparison to Japan would be inappropriate." He may, indeed, be correct, but he certainly lacks the credibility of his predecessor, Paul O'Neill, who was fired for being "too honest."

Regardless, it may be too late to stop. Re-regulation is not going to stop the large debt amassment that needs to get paid, and it can't erase the mistakes of the last two decades. Deflation may, indeed, be our future, and we might emulate Japan down to the last detail. I'll be curious to see what the next ten years hold for the U.S. If we are, indeed, emulating Japan, we're just at the beginning of what could be a long and bumpy ride into economic ruin.

Melon
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Old 05-17-2003, 03:29 PM   #2
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Melon,

I'm starting to think you might be right about this one and that we could be headed for some deflation. I just don't think were going to go over the waterfall though like Japan did, but we'll see.

In any event, despite all these problems, Japan as of July 2002 still had the 9th highest standard of living in the world out of 190 different countries according to the United Nations Human Development Report. Switzerland, which has one of the highest standards of living in Europe is at #11, behind Japan. The USA is at #6.
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Old 05-18-2003, 12:32 AM   #3
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Fears grow that US economy faces deflation
By Jenny Wiggins in New York, Peronet Despeignes in Washington and David Pilling in Tokyo
Published: May 16 2003 21:37 | Last Updated: May 16 2003 21:37


Fears of deflation in the US rose on Friday as stock prices fell and government bond yields dipped to 45-year lows after a key measure of inflation dropped to its lowest level in 37 years.


The concerns were heightened by reports that Japan's deflation gathered pace in the first quarter with prices down 3.5 per cent from a year ago, their fastest 12-month drop on record.

The fall may fuel concerns that the Japanese economy could be in a deflationary spiral. Japanese prices have been falling since 1995 at an average annual rate of 1 to 2 per cent. The latest figures showed deflation accelerating in the 2002 financial year to 2.2 per cent, a record for a full year.

In the US the yield on 10-year and 30-year US Treasury bonds fell to 3.49 per cent and 4.45 per cent in early trading.

Longer-dated US government bonds have rallied sharply this week, with investors convinced that inflation will remain subdued, having less of an impact on the value of long-term assets.

The Labour Department reported that the 12-month rise in its core consumer price index fell to 1.5 per cent in April, its slowest 12-month rate of increase since January 1966. Strategists said the subsequent fall in bond yields could, however, be positive for the economy. "This is what the Federal Reserve wants," said Dominic Konstam, head of interest rates products research at Credit Suisse First Boston.

Falling yields mean falling borrowing costs, which make it easier for businesses to borrow and homeowners to refinance mortgages and get extra cash - factors that have helped keep the economy afloat. But the sharp slowdown in inflation has inflamed talk of Japanese-style deflation.

Japan's deflation figures were released along with gross domestic product figures showing that growth in the first quarter fell to almost zero, leading some economists to conclude that the economy was on the brink of yet another recession. Nominal growth fell 0.6 per cent in the March quarter, or minus 2.5 per cent on an annualised basis.

Paul Sheard, economist at Lehman Brothers, said: "If you look at the chart it looks horrible. It looks as though deflation is going through the floor." However, the headline figure exaggerated the picture, because the GDP deflator in the first quarter of 2002, when Japan began pulling out of recession, was positive, he noted. "It's something of a statistical fluke, though deflation is deflation and it is not a good sign." Most economists in the US have dismissed deflationary risks as marginal. But the Fed said recently that odds of an "unwelcome substantial" slowdown in inflation were now stronger than that of a rebound. "We continue to believe that inflationary pressures are building," said Brian Wesbury, an economist with Chicago-based, bond-trading firm Griffith Kubik, Stepehens and Thomson, but "it is getting harder and harder to argue against the deflation story".

Concerns have also grown about a global-wide deflation which the US could import, as western Europe flirts with recession and Japan looks more likely to enter a deflationary spiral.
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Old 05-18-2003, 01:33 AM   #4
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Deflation may be inevitable, merely because the "growth" of the 1990s merely happened too fast and was built on no foundation (i.e., internet stocks). One area I know is on the brink of deflation, for sure, is Boston-area real estate. The fact that houses around here are easily around $700,000+--and, mind you, houses that would be no more than $150,000 where I was from in Michigan--I cannot imagine it being sustainable. These expensive prices translate into the rental market, where, to be honest, I could find an apartment in Manhattan cheaper, for God's sake!

Like I said earlier, in my opinion, this is the end result of poor business models over the past twenty years, encouraged by deregulation to gut out personal reinvestment and slash labor wages. It was only a matter of time where this would come back to bite us--it's illogical to expect the working class to continue spending at record paces year after year, with less and less money to work with. After all, credit only goes so far.

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Old 05-18-2003, 08:14 AM   #5
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My house is now approaching 200,000 more than I paid for it. The problem is, I can't find anything I can afford in this market.

Peace
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Old 05-19-2003, 10:16 PM   #6
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Ahh...substance! I love reading about finances and the state of our fragile, little economy. It's beautiful.

And, no. I'm not being sarcastic.

I may be too young to remember the so-called Glory Days when the American Dream was still considered a reality, but during my first 23 years on this planet I've seen some of the most selfish, greedy, egomaniacs destroy their credit for decades to come, because they wanted to be something they were; rich.

I believe the most intellegent thing for Americans to realize is that they should save their money by downsizing their spending habits, drive affordable cars that get the maximum miles/gallon, and rejuvinate smaller, tightnit communities where the grocery store in within walking distance and hopefully their workplace as well.

If we can conserve our paychecks rather splurge our earnings on such things as SUVs, over-priced condos, designer fashions, and crappy entertainment ("Matrix: Reloaded" should have been called "Shit: Reloaded") we can get ourselves through the upcoming recession or dare I say, depression. All it takes is a little will power and the ability to break the chains of slavery that pressure us to buy materials we honestly do not need.

Melon, Thanks for bringing up this issue....Dreadsox, you may good points....Sting2, I can't believe we live better than the Swiss?!?!?!
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Old 05-19-2003, 11:47 PM   #7
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Quote:
Originally posted by Danospano
If we can conserve our paychecks rather splurge our earnings on such things as SUVs, over-priced condos, designer fashions, and crappy entertainment ("Matrix: Reloaded" should have been called "Shit: Reloaded") we can get ourselves through the upcoming recession or dare I say, depression. All it takes is a little will power and the ability to break the chains of slavery that pressure us to buy materials we honestly do not need.
But when you have an economy that is based on spending everything you've got plus money you don't have, while paying people as little as humanly possible, that's the last thing that will save our economy.

(60% of our economy is driven by consumer spending.)

Melon
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Old 05-20-2003, 01:40 AM   #8
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Danospano,

"Sting2, I can't believe we live better than the Swiss?!?!?!"

The United Nations Human Development Report which measures standard of living has the United States at #6 in the world for the year 2002.

Here are the only countries that live better than the United States:

1. Norway
2. Sweden
3. Canada
4. Belgium
5. Australia
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Old 05-20-2003, 01:49 AM   #9
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how many of those were in the coalition of the willing?
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Old 05-20-2003, 02:24 PM   #10
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Australia was and currently has troops on the ground in Iraq. What is the point of your question though?
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Old 05-20-2003, 05:41 PM   #11
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Buffett slams dividend tax cut

One of world's richest calls plan 'voodoo economics,' says it puts burden on low-income families.
May 20, 2003: 10:41 AM EDT

NEW YORK (CNN/Money) - Renewing his criticism of the dividend tax cut laid out by the Senate last week, Berkshire Hathaway's Warren Buffett called the proposal "voodoo economics" that uses "Enron-style accounting."

The Senate's plan for dividends to be 50 percent tax free in 2003, 100 percent tax free in 2004 through 2006 and then face the full tax in 2007 would "further tilt the tax scales toward the rich," Buffett wrote in an opinion piece in the Washington Post.

Buffett posed a hypothetical situation in which Berkshire Hathaway, which does not currently pay a dividend, paid $1 billion in dividends next year.

Through his 31 percent ownership of the company, Buffett said he would receive an additional $310 million in income that would reduce his tax rate from about 30 percent to 3 percent, while his office secretary would still have a tax rate of about 30 percent.

"The 3 percent overall federal tax rate I would pay -- if a Berkshire dividend were to be tax free -- seems a bit light," Buffett wrote.

Instead of the Senate's tax cut plan, Buffett proposed that it provide tax reductions to those who need and will spend the money in the form of a Social Security tax "holiday" or a tax rebate to lower-income people.

"Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets," Buffett added.

He closed the piece by saying that the "government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party."

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Old 05-20-2003, 10:09 PM   #12
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Two of America's Richest Assail Bush Tax Cut
Tue May 20, 5:23 PM ET Add Politics to My Yahoo!

NEW YORK (Reuters) - You would think two of the wealthiest Americans would have no problem with a tax cut that would put thousands, if not millions, of dollars in their pockets.

But billionaire investors Warren Buffett and George Soros, Nos. 2 and 24 on Forbes Magazine's list of the 400 richest Americans, both railed on Tuesday against President Bush's plan to deepen income tax cuts and eliminate taxes on corporate dividends.

Bush, who has campaigned around the country touting the plan as a way of creating jobs and boosting stock prices, is pressing for final agreement this week as Congress wrangles to fit the package into a $350 billion limit set by the Senate.

In an opinion article in the Washington Post, Buffett, the chairman of holding company Berkshire Hathaway, said he already pays about the same income tax rate as his receptionist -- about 30 percent.

But Buffett said with the planned dividend tax cut, he conceivably could pay a mere 3 percent in income taxes. Recalling President John F. Kennedy's declaration that Americans should "pay any price, bear any burden" for the country, Buffett said a 3 percent income tax rate "seems a bit light."

"Supporters of making dividends tax free like to paint critics as promoters of class warfare. The fact is, however, their proposal promotes class welfare. For my class," wrote Buffett, whose wealth is estimated at $36 billion.

Soros, renowned for both his swashbuckling speculative bets on currencies as well as his philanthropic work, dismissed the tax cuts. He said they would not revive the U.S. economy in the short-term but were only aimed at helping the rich get richer.

"This move is designed not to have much impact now. It's designed to have an impact over an extended period and it's basically using the recession to redistribute income to the wealthy," Soros said in an interview with financial news network CNBC.

"I think that is really not a very effective way of using a deficit," said Soros, whose wealth is estimated at $6 billion.

Melon
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Old 05-20-2003, 11:01 PM   #13
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Buffet wrote a very good article a while back.

He is a very sound American investor who is more credible than any appointed official or politician.
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Old 05-21-2003, 05:17 PM   #14
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Quote:
Originally posted by melon
"This move is designed not to have much impact now. It's designed to have an impact over an extended period and it's basically using the recession to redistribute income to the wealthy," Soros said in an interview with financial news network CNBC.

"I think that is really not a very effective way of using a deficit," said Soros, whose wealth is estimated at $6 billion.

Melon
Bush's tax cut proposal really bugs me. To me, it is so obviously not a policy to worry about right now. If doesn't benefit the majority of the taxpayers that need help getting by as they lose their jobs or lose some of their income to pay for all of the increasing expenses caused by tax cuts.
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Old 05-23-2003, 11:10 AM   #15
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This may be naive, but I don't understand how one can claim to be prosperous while amassing debt. If a country is so prosperous shouldn't it pay off debts to promote the long-term growth?
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