[ExI] Psychology of markets explanations

[painlord2k at libero.it]

Il 05/06/2009 13.48, Stathis Papaioannou ha scritto:

> Then why does every country have a central bank?

Not every contry. A few use someone else currencies (like Ecuador using 
the US $ or Vatican using the €).


> If they just muck things up you would think that over time a country
> that tries out an economic system without a central bank would
> prosper, and its neighbours would either take note and copy it or
> else fall further and further behind. The US did not have a central
> bank in the 19th century, and experienced multiple boom/bust cycles,
> more than in the 20th century.

There is not such thing as a "country" in economics.
There are only individuals.
So, the right question is "What type of individuals benefit by a central
bank creation and continual existence?"
The answer is simple, government types.
Without a Central Bank and its tools, a government have a single way to
extract wealth from the people governed, taxation. And taxation is
unpopular, always.

>> Does this make sense?

> Yes, it makes sense, except when it doesn't work that way. Japan in
> the 1990's lowered interest rates to near zero, printed money, and
> went for big time government deficit spending. This might have been
> expected to caused inflation, maybe even hyperinflation, and a
> collapse in the value of the yen. Instead, Japan had continuing
> deflation and the yen remained strong. But perhaps the recession
> would have been even worse in the absence of these policies, and
> perhaps a tighter monetary policy might have prevented the Japanese
> asset price bubble from inflating to the extent that it did.

Japan have an huge quantity of private saving and they save much more
than Americans. The public debt can be huge, but the people is not in
debts. This is different from the US and the UK. It is more like in
Italy, where a large public debt is paired by a large saving from the
individuals.

My supposition is that Japan rates are near zero for the institutional
actors, not for the common people. Then there is the problem on how the
demographic profile is impaction the economy. Older population have not
much to spend or invest into, so zero interests could not create the
demand for the same loans. Then there is the problem of  how easy is to
obtain a loan. Rate, in Italy, are now all time low. But obtaining a
loan or a mortgage in Italy is not easy. Substantial downpayments are
required and the bank will want to know also how much hairs you have
over your lower back.

Single numbers rarely tell all and explain all.

> In general it is what we see, but it also depends on the population.
>  The aforementioned Japanese seem constitutionally less inclined to
> borrow money for consumer spending than Americans are, no matter how
>  cheap and easy it is to get a loan.

This is a part that can be influenced by culture, demography and other
factors. Italians, like me, that lived in the '70 and '80 when inflation
reached 15% yearly are primed to be resistant to take loan for frivolous
reasons or to be repaid onto a too long time period.
This is because, in Italy, people prefer so much an higher but fixed
rate on mortgages. It could cost you more, but if things go belly up,
this is a problem of the bank, not your.

Mirco






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