吳聰敏老師的討論區

[tienchien]

Hi Professor Wu,





Your article on China Times leads me to your web site and this board.





http://news.chinatimes.com/Chinatimes/newslist/newslist-content/0,3546,110503+112003072800028,00.html





Your comments on education are very good. I also believe it's the way to go for Taiwan's educational system.





Now back to my question on deflation. US Central Bankers have been very cautious on the possibility of unwelcome "disinflation" after contiguous below-target CPI in the past several months.





Greenspan, testified in US Congress last year, said the Great Bubble in Y2K is not avoidable. What about deflation? After lessons learned from Japan, do you believe the deflation can be prevented in Taiwan & US?





Thanks.
_________________
- Tien-Chien Yu
An Amateur in Economics

// Please excuse me for typing in English only.
// I do read & write in Chinese.
// However, my Chinese typing is very slow.
// Reply in Chinese or English are both welcome.

[tienchien]

Professor Wu,





Thanks for your response. I would like to throw in some of my observations as follows:





Last year, Wal*Mart tops the US retailer list again. Its revenues are greater than the sum of No.2's to No.6's revenues on the list, and growing at a faster pace. (As you know, in US, Wal*Mart means "cheaper goods".)





https://www.stores.org/archives/TopRetailers.asp?year=2003





The same "cheaper->growing faster" phenomenon can be found on DELL Computer, too. Actually, another study shows Wal*Mart's goods price is also falling.





I heard many stories on CNBC TV (a finance channel in US) that businesses don't have the pricing power in the past few years. I was wondering why?





Many people point their fingers to China. I partly agree China's over-production contributes to the falling price worldwide. However, one report, according to CNBC, shows Japan's deflation occurred in the 4th year after the bubble burst in 1990, i.e., it started in 1994. At that time, China has limited impact on Japan's deflation.





http://finance.yahoo.com/q?s=^N225&d=c&k=c1&a=v&p=s&t=my&l=on&z=l&q=l





Coincidently, during the Great Depression, a serious deflation also occurred in 1931-1932. Although it didn't last as long as what happened in Japan.





ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt





According to the CNBC report, this is why the US Feds are so nervous in the 1st half of this year. As a matter of fact, they still are.





http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/default.htm





In my view, advances in computers and communications in the last 10 years is another major force that fuels the deflation flame further more.


- The great improvement in efficiency/productivity results in a jobless economy, which limits the demand-side growth.


- The internet is another big problem. With the speed of information flow improved dramatically, people are now easier to find the best available price in the market with a few clicks, which makes the pricing power even worse. Actually, this was observed by Warren Buffett back in 2000.





http://www.fool.com/boringport/2000/boringport000605.htm





Another interesting CNBC report I watched explained the deflation in a historical view. In the late 19th century, the deflation was welcome in US. It was actually the driving force behind the expansion of US economy. However, there was little development in the credit market back then. Today, with a highly complicated finance market/system, a serious deflation would be unwelcome - since the Feds worry that it could shut down the loan market, and they have very little experience to deal with this problem.





I got a background in computer networking. I used to apply self-similar process to analyze the aggregated computer network traffic, which exhibits a strong degree of correlation in time series analysis. After having witnessed the Y2K bubble, now I am more interested in economics, which seems more dynamic and much harder to forecast.





I am still scratching my head to figure out how the world economy will turn in the next few years. ?
_________________
- Tien-Chien Yu
An Amateur in Economics

// Please excuse me for typing in English only.
// I do read & write in Chinese.
// However, my Chinese typing is very slow.
// Reply in Chinese or English are both welcome.

[Sunflower]

As I read many textbooks about macroeconomy,they say that what macroeconomy aims at is growing. As the simple natural law says that in a pool , the fish population can not grow without any limitation so does the world economy. When it goes up ,then it will go down latter. This is so-called business cycle. Since inflation occurs then deflation occurs. Deflation is not a bad thing. It is a good way to adjust the allocation of resources and structure of world economy. When economy is good , people spend a lot then inflation happens but when economy is bad ,people have wage cut or no job and deflation happens. I think the most important thing is to think about how to hedge (such as social insurance and welfare) the suffer of this bad economy.





In recession time , we should think about what roles we will play in the re-ordered economy structure. What is our competitive advantage? As you say that China's over production is the root. I think any country want to survive in this world should have it own way. Maybe today it is China to over-produce but another day it might be India or Russian. We got to think about why we are expensive(wealthy) than other nations. This competition is very clear between Taiwan and China. Some countries do not adjust so well than get into very bad situation like Philippine.





This is my little opinion. Hope you all can give me some comments.





Thank you....

[tienchien]

Hi Sunflower,





When deflation occurs, certainly consumers will benefit from it if they still keep the job. The economy could benefit from it, too, provided that the increased spending, stimulated by the cheaper goods, offset the falling price, so the economy (GDP) keeps growing. That's what I heard about the US economy in the late 19th century.





However, if the deflation prolongs, or the rate of change in price is too high, it could have negative implications on the liquidity in economy:





1) Consumers will tend to delay their purchases of luxury goods.


2) Banks will likely tighten their loan operation. In addition, the bad/non-performing loan will likely increase due to the falling value in collaterals.





Certainly, the deflation will end some day, just like the inflation. What Greenspan worries is they have little experience about deflation. From Japan's lesson, once it occurs, it is very hard for the Feds to pull the economy out of the mud. Once the interest rate is down to zero, the monetary policy is no longer effective, and they have to use non-traditional methods, such as buy back the long-term treasuries to bring down the yield curve, or de-value the currency, to fix the problem.





Regarding the cause of deflation, I still believe it's a post-bubble phenomenon in nature - a process to correct the production and the consumption. China's over-production and the Internet factor, as I mentioned previously, make it worse this time. The complex financial system and increased global trades make it hard to fix today.





I don't know whether China will do good or bad to the world economy. From Greenspan's testimony to US Congress in early July, he believes bringing China to participate in the world economy has more positives than negatives in US interests.





Regarding the competition between China and Taiwan, US also face the same problem - in losing manufacturing jobs and investment capitals to China. However, Greenspan is still optimistic for the future, since this is not the first time that ever happened in US history. He believes the US economy and the society has fairly good system and flexibility to move forward in innovation. Right now, it's just transitional.





I am very confident in Taiwan's fututre. Why? Because the democracy and the freedom (by the way, I am a fan of Milton Friedman). If China don't evolve towards the democracy, even they win the battles today, they will still lose the war tomorrow. The only thing, in my view, that pulls back Taiwan's growth is the increased talk on native-Taiwanese and non-native-Taiwanese, I think it's the root cause of all problems. Although it has a historical reason, the damage it caused to Taiwan today is mainly operated by the interests of politicians. US has history between Black and White, Caucasian and Latino, too, but few politician will escalate this kind of topic and try to benefit from it, because it won't work. I hope all people living in Taiwan will learn the truth about it some day. Talking about race will hurt the society more than help it.





If Taiwan can get back to the right track on politics, education and justice, hopefully by democracy, then rebuild a robust but flexible economy and society, China is not a threat at all in the long run. We will see Taiwan still stay up high in the food chain.
_________________
- Tien-Chien Yu
An Amateur in Economics

// Please excuse me for typing in English only.
// I do read & write in Chinese.
// However, my Chinese typing is very slow.
// Reply in Chinese or English are both welcome.