The problem in Japan was that too much money was invested in production capacity and real estate. And China is going through the same mad CAPEX expansion today as Japan in the 1990s.

No, I don’t have any formal training in economics, but it is a passionate hobby of mine and I have been studying the subject for years.

Keep in mind that it’s not as if the “professionals” know what is happening. In polls the The Wall Street Journal conducted in 2007, not ONE economist who predicted an economic contraction in 2008, and none of them felt that we could experience deflation for even a short period of time.

Professionals, involved with a given industry, are often the last people to recognize when big changes are imminent. It takes outsiders to be able to see the big picture.

If nothing else, I hope my articles (and podcasts) generate a healthy discussion.

It depends on how you define “third world”. Countries that have subsistance level economies will likely see little change due to the global depression. However, nations like Indonesia, India, Vietnam, South Korea, Peru and Egypt are NOT subsistance level economies, and stand to hurt a great deal.

Heck, even nations like Bolivia are going to feel a lot of pain. Bolivia has had a growing reliance on both energy and cocaine exports. In both cases, the market prices for these commodities are going to tank, which will hurt Bolivia a lot. Angola and Zambia are in similar situations (i.e. depending on natural resource exports).

The nations that might have no impact would be places like the Congo or Myanamar. In these cases the nations have been living at such a LOW level, often with on-going wars, that things are unlikely to get worse. In Congo’s case things might even improve with a global depression since there would be less interest in various parties to fight over the nation’s natural resources.

I’m asking if the third world will fair better than economies built on credit like the United states and Europe. I’m thinking they will because they are further removed from what I call paper profits. Economies in poor countries can still barter if allowed a flow of goods.

I gotta go to work, but I’m just asking.

I like your presentation of charts.

Her is an excerpt of Marc Faber from a 2005 interview.

“And I would argue in Japan we had deflation – that is true, between 1990 and recently, real estate prices went down, stock prices went down and also consumer prices went down – but in general this period of deflation in Japan was beneficial for the average household. The reason being, that it became affordable for the average household to buy goods and to rent an apartment and to buy equities. In other words, in this period of deflation in Japan we had a kind of deflationary boom, in the sense that someone who had $1000 in 1990, today, with the same $1000, can buy a much larger basket of goods. I cannot say that of the $1000 you have in the US. You cannot buy with $1000 today in the US a much larger basket of goods than you could buy in 1990, because real estate prices are much higher, stock prices are much higher, and consumer prices – if you measure them properly – are much higher than in 1990. But the deflation can have, in some countries like Japan, if it’s not a totally deflationary collapse, actually a beneficial impact on the typical household.

But of course, deflation, if you think of it, is disastrous for the rich people, because it means stock prices go down, it means real estate prices go down, so the rich class benefits the least. And as I mentioned in Japan: the rich got hit. I mean, if you look at the pattern in Japan and if you go, today, to Japan you would think that Tokyo is a boom town: you would never think that the stock market is down 70% from the highs in 1989; and you wouldn’t think that property prices are down 70% from the highs in 1989. But a normal family, their wages are the same as in 89, 90. Maybe their wages have actually even increased by 1 or 2% per annum, but they can now rent an apartment 50% cheaper than at the time; they can join a golf club for 80% less than in 1990; and they can buy consumer goods cheaper, because of cheap imports from China and so forth. So, actually, the typical Japanese household isn’t complaining about this deflation, and it’s cash money, and that you have to see.”

http://globaleconomicanalysis.blogspot.com/2009/01/is-big-inflation-coming.html

Mish

From the article you cite:

“Consider this example. You live in a small town in rural Texas with 10k people and 3k houses. A small local explorer discovers a gigantic new oilfield, an elephant. Within months your town’s population swells to 20k as a major oil company partners with the explorer to start developing the find. House prices skyrocket as 20k people compete for only 3k houses. Is this inflation? No, it is pure supply and demand. Its driver was not monetary in nature.”

I don’t see why the example above does not represent inflation. After 10K new people moved into town, didn’t inflation occur when increased money bid for finite goods? I would think a supply and demand issue would occur if the town water table dropped by 3 feet, and oil was never discovered. The same number of residents would be forced to conserve water based upon how much they could afford to pay for the now higher priced scarce water available.

Interesting… So far, it’s the inflationists who are having the rude awakening. A year ago the inflationists were SO certain that oil prices would just keep heading to the moon.

I also take comfort in the fact that there are only a handful of deflationist believers out there (good ‘ol Mish included). With everyone on the other side of the trade, the prospects for deflation look very good…

http://www.safehaven.com/article-12403.htm

I’ll give Mish another year or so before he has to shut down his blog due to lack of credibility.

I like your analysis though..just don’t agree with your forecast or definition of deflation.

Al

Inflation needs demand as you note, and restricted supply. Slack demand, extra capacity = no inflation. The money supply doesn’t matter until people are willing to bid the money for goods and services.

So does the extra money exist? Not Yet!

Good job on the presentation.

I don’t think there is much in the way of a substantive difference. Both nations have cut central bank interest rates to the bone and provided oodles of liquidity to the banking sectors. Both nations are (or planning to) spend heavily on public works and infrastructure stimulus. Both nations are acquiring “bad” assets.

Some of the details may vary, but nothing that really matters.

Thanks

I agree with defaltion, it is a good thing, and bail outs in the United States economy are a very bad thing. The United States has money, the people have money, we have food, resources and infrastucture. The best thing Obama said is that we all need to go to work. The days of financial engineering our economy are over. We need to, and have the ability to, work and pay off debt.

Every one in the United States needs to become familiar with the Third World. It’s one thing to talk about Japan and another to talk abiut El Salvidor or Palastine.