John Law and the Mississippi Bubble

John Law and the Mississippi Bubble

"...Richard Condie's 1978 animated short film, John Law and the Mississippi Bubble, offers up a history lesson about that sensational get-rich-quick scheme, which took place in France over 200 years ago. The film won the Best Film Award at the 1980 International Short Film Festival in Tampere, Finland. With economist John Law at the helm, the plan was to open a national French bank and exchange bank notes for gold at wildly inflated share prices to mask the fact that the country's gold had been depleted in the building of Louis XIV's palace. In the film, when the inevitable rush to cash in the notes takes place, poor John Law is left broke and broken-hearted."

The U.S. households should save more & our Chinese spend more

Zhou Xiao-chuan hopes that “surplus savings will flow to developing countries”

A speech was delivered by Zhou Xiao-chuan, the head of China's central bank, at the first Global Think Tank Summit in Beijing hosted by China Center for International Economic Exchanges. Zhou has expressed his “hope that surplus savings flow towards developing countries.”

Excerpts from the speech ...

“Analysis of balanced adjustment of the global economy.”

“There are several possible situations in which imbalances in the global economy can be re-adjusted. There will also be differences in the policy direction for differing situations.”

“Situation 1 is being discussed quite frequently. That is, U.S. household savings and the total savings rate increases, Chinese personal consumption also increases, and the global imbalance is largely corrected. This is the most ideal of circumstances. ”

“Situation 2, the U.S. household savings rate increases, and the United States does not import so many products from China. China will suffer from even more pronounced overcapacity, the equipment usage rate will fall, and employment levels will fall, which will cause China to enter a period of low-GDP growth. We should strive to avoid this situation occurring.”

“Situation 3, the U.S. household savings rate increases, China's personal consumption rate increases, yet the increase is inadequate. At the same time, investment in urbanization increases, and the combined strength enables surplus savings to fall. ... However, it will require a corresponding reform of urbanization finance and investment methods- such as the municipal government bonds which have been discussed for many years.”

“Situation 4, the U.S. household savings rate increases, and imported Chinese products are no longer required in such large quantities. At the same time, China, by means of investment abroad, shifts part of its production capacity towards developing countries.”

“Situation 5, the U.S. household savings rate increases, yet not smoothly and persistently. Adjustment in China proceeds relatively smoothly, with a partial shift in production capacity to other countries, which achieves a relative balance in overseas trade. Overcapacity will be no longer directed at the United States, but divided between other countries. ”

“Situation 6 is the one which we would least like to see, where adjustments are unsuccessful, and current international economic imbalances persist, while trade protectionism becomes more and more severe.”

“... China increases its strength of reform, expands consumption, and urbanization achieves great progress. However, considering that the high saving rate in China, it is still possible to have overcapacity. However, it can be directed towards other developing countries. Nevertheless, this will require the support of the international financial as well as the monetary system to improve the global production rate and the income distribution.”

http://wongtc.blogspot.com/2009/07/blog-post_04.html

The Saving Motive in China

The Saving Motive in mainland China: Rising Sex Ratio Imbalance and Savings Rates

High savings rates in certain countries are said to be a major contributor to the recent housing price bubbles and the global financial crisis by depressing long term interest rate in the last decade (Greenspan, 2009). The Chinese national savings rate is at about 50% of the GDP in 2007.

The high savings rate in China may have global impact and it may be due to the rising sex ratio imbalance in China as described in a NBER working paper recently.

This paper proposes a saving motive as a new explanation to the problem of property bubbles: "as the country experiences a rising sex ratio imbalance, the increased competition in the marriage market has induced the Chinese, especially parents with a single son, to postpone consumption in favor of wealth accumulation. The pressure on savings spills over to other households through higher costs of house purchases."

The paper has shown evidence to support this hypothesis. The factor can account for about 50% of the actual increase in the household savings rate during 1990-2007. "In 2007, the household savings was about 30% of the household disposal income in mainland China" as said in the Paper.

Is it logicially relevant by the "Paradox of Thrift" in economics (which has the same implication on the "Paradox of Deleveraging") ?

'Thriftiness, while a virtue for the individual, is disastrous for an economy.’

The result of thriftiness as falling of saving is paradoxical because an increase in the desire to save autonomously leads to a plunge in national income eventually and saving drops in turn.

http://wongtc.blogspot.com/2009/06/blog-post_21.html

The US Collapse Of 2009 ! What'll be the next then?

The horrible events of bailing-out in 2008 and 2009 in the US...

It's really trouble that the catastrophic hyper-inflation is coming back!

Op-Ed Columnist - America the Tarnished - NYTimes.com

Op-Ed Columnist - America the Tarnished - NYTimes.com: "Op-Ed ColumnistOp-Ed Columnist"

American Thinker: What President Obama Should Know About Recessions

Great minds usually think alike.

Mr. Earl A Thompson exactly has profound knowledge and penetrating insight about the 2008 economic recession.

He said, "As macro-economies falter and the aggregate demand for labor falls, monetary authorities should automatically expand the money supply so as to quickly restore the original demand for labor and corresponding wage level. Failing to do so invites many workers to erroneously maintain their previous wage demands in the face of a falling aggregate demand for labor and thereby lose their jobs, creating inefficiently low aggregate employment levels......"

By Earl A Thompson, Professor of Economics, UCLA

American Thinker: What President Obama Should Know About Recessions

Response To the Chinese Government Stimulus, M↑& V↑--> PY↑

Chinese Premier Wen Jiabao, unveiling the government's economic stimulating plan for this year, reaffirmed its commitment to a 4 trillion yuan investment program and announced a record budget deficit of about 950 billion Yuan, though confusion remains over the real scale and impact of the stimulus plan.

I think the 4 trillion Yuan is only a rough figure of the spending plan. Actually about 1.2 trillion yuan will be financed by the Chinese central government. The rest will be financed by the local governments. The impact on the economy as a whole should be more than 4 trillion. Assuming the spending multiplier be 2.5, through the multiplier effect, it exerts a significant impact on the GDP. I think it will contribute about extra 2 to 3 percent of economic growth this year. The rescue action should be bold and swift ("出手要快要狠") as asserted by our Premier Wen Jiabao otherwise the unbearable economic pain may persist.

Beside the 4 trillion yuan fiscal impulse, I urge the Chinese decision-makers do aggressively manipulate the fiscal and monetary tools in order to regulate the ailing economy back to its right track in the midst of this global economic tsunami. Further stimulating domestic consumption and preventing deflation expectation hold the key to sustain the current recovery of our Chinese economy. I'm glad to know that the reaction to the stimulus package was the sharp surging in bank lending. The government report shows that she will target up to 5 trillion yuan bank lending this year. I think it can further raise the monetary base (cash and bank reserves) which gives it the right way to boost the economy.

The increase in spending in real estate property and private consumption will also stimulate the economy, as hundred of other related trading sectors will be boosted as a whole. Social security for the vulnerable groups should be enhanced. The Gini Coefficient, the indicator showing the gap between the rich and poor, is about 0.45 that is higher than those figures in Western European countries. Government assistance should help to social stability during this economic downturn. Short and medium term sustainable growth should then be maintained as the confidence be restored by such government effort.

http://wongtc.blogspot.com/2009/03/blog-post_07.html