« Autos, Electronics, Software, and Medicines | Main | Howard Dean Is A Miserable Failure »



How did we break so quickly out of threats of deflation? And what did we do differently than Japan, who also lowered interest rates to near zero but ended up mired in a decade-long slump? (I'm making the assumption that we are out of our slump, given the latest numbers on GDP growth.)

Dominic Schmelzer

Daniel, that was a perfect evaluation and answer to the question on whether the stock market is overpriced or not *at the moment*. Using this formula should certainly aide one building up his long-term investments, and I can only say "respect" to the clairity of your explanation.

Both what Mom and tso are asking, probably as are most people thinking about the "big questions" in the economy, is where the bus is going to take us and whether we've got control of what is going on. We want to know whether the situation is going to be better or worse in, say, two years - not whether the stock market is properly priced at the moment.

All I can say here is, "all hail Harry S. Dent!" who predicted that the '90s were going to be years of rapid expansion and that the '00s were going to be likewise very positive for the US. Why? Because we have the right people (the baby boomers) at the right age (peak of births was 1957-1961, meaning that the bulk is presently just turning 45), doing what they usually do in this stage of life - spend lots of money. The US has consumers buying big things, spending more money than they ever have, driving an already consumer-oriented economy to new hights. This situation is *not* deflationary, at least not yet. If we were to consider the timing, this situation will change in 3 to 4 years as this group of people leaves the age of peak spending, which will truly create a comparable deflationary environment which Japan experienced in the '90s and which it should be leaving about now. Btw, Japan's economic development was predicted by Dent in 1992 (if I remember correctly) based only on demographics.

We hardly need to look at the High Priest Greenspan to wonder what's going on. Looking at demographics, innovation and social structures will get us much further.

Daniel Schmelzer

I don't agree with the assessment that we will have a comparable deflationary environment to Japan of the 90s. For one, Japan had larger swings in population among different age groups. Also, Japan allowed more dangerous economic imbalances to build up over the course of the 80s than the US has during the 90s and 0s, even though the US imbalances are substantial.

Perhaps I will go more into this in more detail in a future post, but discounting Greenspan's importance in the economy isn't a wise thing to do, since he and his cohorts control one of the law of gravity in the economic world -- interest rates. Even an Austrian school economist would allow that they can distort interest rates, if not set them outright.

Dominic Schmelzer

please view my posting at

Dominic Schmelzer

The link is: .


Compelling. I'd never heard that Japan had a demographic problem but then I'm not that well-versed on Japan. I just figured the Japanese were "too good" at saving, and that their culture became deflationary as a result.

I played the "demographic angle" with respect to the US stock market much to my regret. I figured that baby boomers wouldn't start retiring enmasse until 2010. So they wouldn't begin pulling their money out of the stock market until 2007 (since they want to retire as soon as possible and stocks are the only way to get there fast - I counted on their greed). So I figured that the market would be bullet-proof until around 2007. Valuations were crazy, but boomers had no where else to put their money.

Obviously the moral of the story is that valuations matter.

Daniel Schmelzer

Yes, valuations do matter, since they imply expectations of future economic growth. Keeping in mind that economic growth equals productivity growth plus labor supply growth, only about 1/3rd of the future economic growth picture in the US is made up of demographic factors (2% trend economic growth plus 1% labor supply growth).

From an investor's viewpoint, this is where demographics begins and ends, since if retirees are pulling their money out of funds, then valuations should be lower and investments more lucrative. It is important not to double-count the demographic impact, otherwise you will start thinking that demographics is the only thing that matters.


Yes, valuations do matter. But they do not dictate even mid-term stock prices, although they are important. They even say less about the timing of big stock market movements. This is the lesson we learn from every bubble. Dow (of Dow-Jones), for instance, warned that the markets were far overpriced and could collapse at any moment in the spring of 1927. He was only a year and a half (and many index points) off!

Daniel, your supply-orriented definition of economic growth is just that. But where are the consumers? If you look at my comments on demographics, you will notice that I am dealing with the demand side of the equation, the side that Chicago has forgotten during the past sixty years of healthy increases in (also demographically generated) demand. What happens when productivity rises and demand falls? What does Chicago say to that? Would this not be a definition of the non-monetary development at the end of the 1920's?

Btw, I'm very interested in what you have to say about personal debt. I've never seen it as more than a secondary factor. Perhaps I'm wrong.


Btw, who is the Austrian School? Schumpeter?

Court Johnson

Interesting...but the stock market is the sum total of "herding". Expectations, fear, and greed, drive stock prices. As market prices increase, more investors assume greater risk fearing the loss of return if they don't invest. Tops can be predicted by New highs relative to new lows (individual issues) and trading days with large swings in the common indices. Obviously, as markets become overextended investors are fearful of losing their gains and are willing to sell. Fear becomes the driver; usually triggered by and outside event.

Daniel Schmelzer

Yes, in the short term, the market has an aspect of herding. However, in the long-term the market acts as a scale with fairly high precision. That's why investors can make money in the market over the long term, even if the market is full of speculators.

Dominic Schmelzer

well said.


На нашем ресурсе лучшие
[url=]игровые автоматы играть бесплатно[/url] без смс и без регистрации.

The comments to this entry are closed.