Why Japan does not have rising prices.

Economics Economics Questions
1

One of the most common arguments I’ve heard against rising prices in the US is that Japan hasn’t had rising prices despite keeping interest rates low for an extended period.

My “theory” to explain this is very simple. I believe that you should separate the credit supply from the money supply for things to make sense. I think that the true money supply is M0 or the amount of actual printed money. A rise in M0 or printed money is true inflation and what causes permanent rises in prices. From what I understand Japan did NOT print money. They only kept interest rates low. In other words they did NOT increase the money supply only the credit supply.

The US, on the other hand, has almost tripled the true money supply and they are just getting started from what I can tell. They tripled the money supply voluntarily! I believe the true crisis will start when the fed has no choice but to increase the money supply because they can no longer borrow.

2

Why doesn’t credit cause price inflation? Price inflation comes about as a result of a greater amount of money chasing the same, or a proportionally smaller, amount of goods. If credit is being used to buy consumer or capital goods then it follows that if you extend the amount of credit without increasing the amount of goods, the price of the goods being chased will rise. This is why credit expansion causes relative changes in the prices of capital-goods, and this is why credit expansion causes malinvestment.

I’m not sure about Japan’s monetary history, but at least recently there was a time in which the Japanese monetary base was either quasi-stagnate or it was deflating:

3

There’s 2 reasons why I think that increasing the credit supply is not the same as increasing the money supply. One is that I don’t think access to credit is as “powerful” as actually having cash. Here’s a paragraph from an article on this subject:

“Only a central bank can directly affect the base money supply. Yes, commercial banks can expand credit through fractional-reserve banking, but credit is not money. Credit is just access to someone else’s money. If I offered you a $100k check as a gift, you’d be pretty excited. If I offered you this same $100k as a loan, you wouldn’t be. Money and credit are very different beasts, so don’t make the mistake of assuming credit contraction automatically means general deflation.”

The other reason is that the supply of credit is temporary. It seems to me that if you expand credit you will get a temporary increase in prices, or a bubble that will eventually deflate when people start going broke. All things being equal I would think that prices would actually fall below the “equillibrium”. Suppose bread was $1 a loaf. If you expand credit it might drive prices up to $2 a loaf. Eventually though I think the price would fall to $.50 a loaf as credit dries up. If you double the true money supply I think a loaf would permanently rise to $2 a loaf.

P.S. Sorry for the change in fonts. Can’t get it to work correctly.

4

I’m still not sure why you believe that credit is not inflationary. Credit is being used as a money substitute, and is affecting the prices of what it is being used to spend. When a bank extends a loan to Business A, that credit is being used to invest into a line of capital-goods; the price of said capital-goods will therefore be influenced with a shift in demand. The quote you provide seems to agree that credit is inflationary, because credit expansion creates credit bubbles: credit booms will come with necessary credit contractions (although, there will be a permanent rise in prices if during the credit expansion process all sectors are inflated equally, which explains why despite recurring bubbles there is generally a 3% rate of increase in the general price level).

5

Someone might want to fact check me, but I believe the yen is used in a carry trade in other currencies because of the generally held belief that there is massive inflation in the yen.

6

One other point. If the money supply and the credit supply are the same thing then you can substitute one for the other. For every dollar of credit lost we could print a dollar in it’s place. I think you would agree that intuitively this doesn’t make sense.

7

Money has to actually chase some goods in order to raise prices. What is it good sitting in the bank’s excess reserves?

Willingness to increase debt is willingness to spend. If there is no credit expansion, there is no money chasing goods. No inflation.

8

was credit being used as a money substitute or a different form of money - a form that arises on the market differently from the original money, that is.

i read that true-credit was giving up a portion of money and crediting it to someone else - in most cases with an interest return.

i thought a circulating money substitute corresponed to and was used in place of a non-circulating money good. vaulted gold and gold receipt , iow.

9

“The other reason is that the supply of credit is temporary.”

is it? has the inflation of credit ceased or increases in a smaller proportion than base money or cash?

is bank-credit inflation proceeding faster than its destruction?

and if a us dealership buys a toyota fom japan…have the prices not increased?

10

We live in the fiat world. Money is injected as debt. So if debt is not rising, money is not being injected.

11

Why couldn’t we? What is the difference between the Federal Reserve opening a new account for $1,000 and printing $1,000 in bills? The principle difference is who this money goes to, and what the money is used for. But, let’s say that $1,000 in bills is chasing 50 hamburgers, thus each hamburger goes for $20 (simplistic example, assuming no other goods and other factors, such as utility), and the Federal Reserve literally prints $1,000 more, raising the money supply to $2,000. Now, each hamburger costs $40. Let’s say that instead of printing $1,000, it creates $1000 worth of credit and opens an account in the name of those who are using the money to buy hamburgers. There is still $2,000 chasing 50 hamburgers, and so the price of these hamburgers still increases. Credit is inflationary.

According to Wikipedia:

Money is anything that is generally accepted as payment for goods and services and repayment of debts.

Credit is good for all of this. Ludwig von Mises deals with credit and money in his book, The Theory of Credit and Money. I, unfortunately, have never read the entire book.

12

If someone deposits 100 in the bank and 50 of it is loaned out, is the amount of money chasing goods going up by 50%? It seems to me that the original depositor no longer has access to that 50.

13

I believe that credit is a money substitute, since it is a claim on a tangible asset. Money is a tangible asset.

14

This is the problem with fractional-reserve banking. When someone deposits $50 in a time deposit, and the bank lends it out within the time that its ownership has been transferred to the bank, then the depositor loses claims on that money. When a bank is lending from non-savings account (this includes " savings accounts" where you can remove the money at will and spend it, without repurcussion) then what occurs is that there are two simultaneous claims on the money, and thus this constitutes monetary expansion. It is a book keeping error, in which indeed the money supply does increase and the relative price of goods change and therefore distort the processes of production.

15

you believe that credit is a money substitute?

when someone in japan credits someone with money, are they giving up money themselves to lend or are they crediting money to someone (lending) and then creating bank-credit (thats what i have read goes on in the fractional reserve system in the us)? is that incorrect?

is japans ( a modern nation with a central bank??) money system different then the us?

16

You can pile up reserves all you want in a bank, it doesn’t become money (and therefore affect prices) until it’s lent out.

I’d also suggest examining productivity gains in Japan. Throughout the 1920’s we did indeed have massive monetary expansion, however productivity gains masked this by preventing rapid price inflation.

17

Bob Murphy explains why prices aren’t rising in Japan:

Japan’s monetary base went up by about 90% from 1997 to 2005. That’s a growth rate of about 8.4% per year. In contrast, under Bernanke the monetary base almost tripled in a little more than a single year.

18

To be completely consistent, banknotes and all types of fiat money are money substitutes, as well. They are claims on tangible assets. Money, strictly defined, is a tangible asset (i.e. commodity money, such as gold coins). Therefore, credit is a money substitute; see: Mises, Ludwig von, The Theory of Money and Credit, pp. 63–81(Liberty Fund edition, not the new LvMI edition).

As per your second question, I am not exactly sure what you’re asking (is it related to the first question?). When a bank extends a loan it can do so by extending the loan in the form of any type of money substitutes or actual money—there is no difference. The power of credit and fiat money (or money substitutes) is that it allows the bank to preform several accounting “tricks”. Whilst with commodity money it is hard to reproduce the money, meaning that the bank cannot easily increase the supply of money (except through debasement or by mining gold and minting coins), this is not true of money substitutes. It allows for far more tomfoolery to take place: it can extend credit to one customer, and then fulfil the demand for money of another. This is what allows credit expansion, or monetary expansion, to take place.

19

www.economagic.com shows m2 from 1990 at about 3.2 trillion and in 2009 at 9 trillion

for the same period it shows currency in circulation (cash i assume) to only have reached 1 trillion in 2009…only in the hundreds of billions up until current.

250 billion in cash in 1990 from 3.2 billion in m2 is right at 3 trillion in non-currency in circulation money.

1 trillion in 2009 deducted from 9 trillion in m2 leaves 8 trillion in non-currency in circulation money - some form of bank-credit i guess. unless the econmagic info is false.

currency in circulation quadrupled and non-currency in circulation credit forms tripled over nearly twenty years.

there probobly isnt much difference economically in making numbered pieces of paper cash and bank-credit forms these days - if that actually happens.

a couple of cents to make a 1 million dollar bill if they wanted.

i thought mises called it fiduciary media…not a claim on goods but a claim on a promise to pay money. and that seems differnet to me. the money good wasnt actually sitting somewhere to be redeemd…it was based on a promise of future but unrealized promises.

"The money supply has

increased by the precise amount of the credit—$80,000—expanded by the fractional reserve bank. One hundred percent reserve banking has been replaced by fractional reserves, the fraction

being $50,000 $130,000 or 5/13. Thus, fractional reserve banking is at one and the same time

fraudulent and inflationary;…"

“Put another way, a bank is always inherently bankrupt,”

" fractional reserve banking is at one and the same time fraudulent and inflationary; it generates an increase in the money supply by issuing fake warehouse receipts for money…" can a fake claim for money be a claim for money??

http://mises.org/Books/mysteryofbanking.pdf

is a promisory note a claim for money too and how does it differ from bank-credit/fiduciary media/,e tc?

does something negative occur within an economy (japans or otherwise) by issuing claims in excess of goods to be claimed?

“when prices are adjusted for inflation, Americans today spend '40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s.” is this true?

http://blog.mises.org/archives/010741.asp

did the mises differ with the rothbard on the above issue?? is the above info false??

20

Fiduciary media are money substitutes. From The Theory of Money and Credit:

We shall use the term money certificates for those money substitutes that are completely covered by the reservation of corresponding sums of money, and the term fiduciary media for those which are not covered in this way.

Like I said above, money substitutes is a general term. Fiduciary media is a money substitute which is not covered by its value in money or tangible assets.