Are We Out of the Woods Yet: Liquidity Trap or Swim in Cash?

1. Are We Out of the Woods Yet: Liquidity Trap or Swim in Cash? Professor Chin-wei Yang

2. Business cycle is the price we pay for having economic freedom • 1492 • Columbus discovered America. • (哥倫布發現新大陸) • 1500-1600: Large-scale Sugar Plantation in South America and Slavery from Africa • 1640-1650: Sugar and Camphor Plantation in Taiwan by Dutch(在鄭成功之前)

3. 1776 • Adam Smith’s invisible hand rationalized colonization. His division of labor ( pin production) led to a quantum leap in standard of living: need foreign markets via gunboat • (看不見的手，理性化殖民侵略。)

4. 1793 • Eli Whitney invented cotton gin: separate cottonseed from fiber automatically: Mass production started. (棉花機使生產力大增，生活水準上升)

5. War with France • 1797-1800 • Panic of 1797. Bank of England suspended payment (UK at War with France, drained reserve, deflation transmitted to the U.S. plus land speculation bubble). • 英國銀行庫銀衰竭，通貨萎縮。 • Revolutionary plus War debt :＄52.8×106

6. Napoleonic War • Depression of 1807 • Embargo Act of 1807 singed into effect by Thomas Jefferson that forbade trade between the US and other counties (to prevent involvement in the Napoleonic War, 封港閉關) .

7. War of 1812 • Panic of 1819 • Cost of the War of 1812 triggered financial crisis in the US. Panic of 1837 • Bank failure, lack of confidence in paper money. Bank stopped paying out in gold and silver.

8. Civil War • Panic of 1857 • Failure of the Ohio Life Insurance Trust Company →5000 US Business failed.

9. Panic of 1873(1873-1879) • After Civil War, the US built a lot of railroad. In 1873, Jay Cooke & Company failed (the largest bank in the US). • Coinage Act of 1873 (鑄幣法案) • No need for US government to base money supply in gold or silver. Step buying silver from mines & public. Price of silver dropped. Money supply plummeted. But it depressed a post-Civil War speculative bubble.

10. Panic of 1893 • US Reading Railroad failed, European investors withdrew their investment (歐洲投資者撤資). • Panic of 1907 • NYSE lost about 50% Run Banks. Post WWI • The Post-World War I Recession (1918-1921): Hyperinflation in Europe which spread to North America. Returning troops face bleak employment.

11. Post WWI • The Roaring twenties (強強滾的1920年代) • jazz music, modernity, a break with tradition. automobiles, moving pictures, radio.

12. Post WWI • By 1927, Henry Ford sold 15 million Model Ts. • Highway, electricity: 1920 suffrage (婦女投票). • Foxtrot, Waltz,Tango, Expressionism, Immigration Act of 1924 forbad Asians and citizen of India from immigration.

13. The Great Depression • From late 1929 to early 1940s (Oct 29,1929 = Black Tuesday) unemployment rate≈25%(1933). • International trade plunged by ½ to 2/3 . • Crop price fell by 60%. • Deflation • Smooth-Hawley Tariff and retaliating tariff (1930.6.17) 50% tariff 1931-1935 Export decreased from 5.2 billion (1929) to 1.7 billion in 1933.

14. The Great Depression Stock exchange trading floor after the 1929 crash Many displaced people moved to California to look for work during the Depression.

15. 二戰時婦女在軍火工廠

16. The Great Depression • M2 shrank by 1/3 from 1929 to 1933. • Hoarding of money. • Nominal interest rate fall and rise in deflation →real interest rate↑, or 0%-(-2%)=2%. • Bank run • Price and Income fell by 20%-50%, outstanding debt become heavier. • Roosevelt still tries to balance the budget. • Unemployment 25% in 1933 • Unemployment 15% in 1940

17. Gold Standard • 1941 US entered into the War. • Unemployment <10% (Dec. 8. 1941) Pearl Harbor.

18. GDP

19. Weed Out the Weak Business • Herbert Hoover: tried to balance the budget. • Federal Reserve tried to defend the gold standard. • Andrew Mellon: liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. Purge the rottenness out of the system.

20. Depression 已成明日黃花 • Robert Lucas, the 1995 Nobel Memorial Prize winner in Economicsgave the presidential address at the annual AEA meeting “…it was time for the field to move on! The central problem of depression-prevention has been solved for all practical purpose. • MC of trivial gain in business cycle < long-term economic growth.

21. Depression 已成明日黃花 • A year later, Ben Bernanke, a former Princeton professor said that modern macroeconomic policy had solved the problem of the business cycle – or more precisely, reduced the problem to the point that it was more of a nuisance than a front – rank issue. • Correct?

22. US Recessions After WWII • 1945-1946 • Postwar Recession • 1950 • Recession followed by the Korean War • 1960s • Expansion with the Vietnam War • 1973Recession due to the First Energy Crisis • 1981-1982:2nd Energy Crisis • 1990-1991:Recession with the First Gulf War. • 2001(Mach-Nov)Recession followed by the Second Gulf War • No Depression in 60 year! • 1930+60≈1990 • Is Lucas, Bernanke or Keynesian correct? It seems so!

23. 美國的貞觀之治 • 60年來無大蕭條，並且美國在1990年至2000年是高成長低通貨膨漲的貞觀之治! GDP上升，通膨極低，股市高漲，房地產欣欣向榮，難怪Robert Lucas 說 The central Problem has been solved! Depression 正式退出經濟的學術舞台! • 真是如此嗎?

24. Japan’s Trap • Japan, a creditor nation (債主國) Samurai Warriors, Geisha Girls, Sushi Steel, Automobile, VCR, Semi-conductor, protected by government and banks. • Since 1960, Japan’s growth rate averaged closed to 6% per year. But from 1990 to 1992, Japanese stock price decreased by half! →real estate price collapsed →Bank failed. Bad loans on the balance sheets of the largest 20 banks in Japan added up to 4% of Japan’s GDP.

25. Japan’s Trap (1) If nominal interest rate on bond ≦ 0 , people holdmoney →Welcome to the LiquidityTrap (歡迎進入流動性陷阱)!

26. Japan’s Trap (2) If inflation is positive, nominal interest rate ≈ 0 → real interest rate = (nominal interest – inflation). For example in 1995: S.T. interest rate = 1.2%, inflation = −0.6%. Real interest rate = 1.2%−(−0.6%)=1.8%(太高). (3) Stock Market↓,Real Estate↓(Bubble), GDP↓with deflation →real interest rate↑→ GDP↓……

27. Japan’s Monetary & Fiscal Policy • Monetary Policy • Central bank of Japan would not increase money supply (美國 1981-1982,1990-91,2001年 recession 都增加 Money Supply). • Fiscal Policy: • 1992年竟然有budget surplus=1.5% GDP. • 1997年, Prime Minister Hashimoto竟然increased tax to reduce the budget deficit. Government Spending在1998年才上升到GDP的6.1%(太慢)。

28. Depression 由日本跳到美國 • 日本2003年才復甦。 • GDP↑2%，deflation 消失，inflation 仍小 • call money rate≈ federal fund rate≈0.5%. • 日本大蕭條因為美國在2003年進口大增，中國出口上升，其中用日本零件甚多之故。 • Great Depression 60年後由美國跳到日本去了! 但2007年開始，美國也進入了流動性陷阱，利率 (federal fund rate) →2% ,1%, 0.5%。

29. Subprime loan Crisis • 美國2005年秋天房地產開始下跌。 • Subprime loan Crisis(次級房貸危機): • 消費者沒有資格買房子，經過銀行得到 loan originator 的貸款，loan originator 再把Mortgage loan 集合後再切割賣給Financial Institution，Financial Institution 再切割後，以collateralized debt obligations (CDO或抵押債權)方式賣給investors。

30. 次貸風暴結果 • 產權不清，但順位高的(high seniority ranking for shares) 有風險時，可先得賠。 • 正常屋主付了20% down payment 但overvalue 50%。(即100萬現掉到50萬，雖然付了20%仍有80萬要付，所以要法拍foreclose! )

31. 次貸風暴結果 • Housing bubble ＄8 trillion. • Homeowners lost ＄7 trillion. • Investorlost ＄1 trillion. • 美國有1200萬戶的房子也negative equity. • 銀行呆帳增加，Homeowner 棄屋，GDP下降，失業率上升，銀行不肯融資給企業(企業的商業本票銀行不買)。

32. 最近 US GDP 的走向 • GDP下降: 2008 Q3↓0.5% Q4↓6.3% 2009 Q1↓6.4% Q2↓0.7% Q1≈＄14.178 trillion. Q2≈＄14.151 trillion. 2009 8月≈14.337 9月≈14.358 10月≈14.290 • 失業率≈9.8% • Inflation −1.32% • GDP↓ −0.74% • 最近資料(2009十月底)顯示第三季GDP上升3.5%，但是cash for clunkers (老爺車)佔了約2%。可繼續維持下去嗎?

33. 治療方法 • Stimulus Plan (目標增加就業300萬人) (A) 825 billion in increased spending 31 billion on federal building聯邦大廈 30 billion on 公路 19 billion on 清潔水源 41 billion on 教育 10 billion on 有效能源 10 billion on GI Bill 退休軍人念大學補助

34. 治療方法 (B) Tax cut 2009年每人退稅＄500，一家＄1000加上其他退稅。 (C) TARP Fund (Troubled Asset Relief Program) ＄700 billion. Fed Reserve買入difficult to assess value的資產(流動性很低)，待景氣好轉，房價上升後，銀行或Financial Institution 再還款。

35. 治療方法 • 嚴防Deflation，增加流動性資產(現金)。 MV=PQ M=貨幣供給量 ,V=Velocity ,Q=GDP • M↑ P↑. • P↑可防deflation(人們不敢花錢)。 • Inflation 可迫使有錢人花錢投資(黃金，石油，使有效需求上升)。

36. 治療方法 • Fed 直接購買大小公司的commercial paper，待公司賺錢後再從聯邦銀行買回。 • 整頓金融衍生性商品交易法規。銀行不可隨便貸款。(Improve Banking and Financial System →increase aggregate supply) • 大量發行鈔票，使美元貶值有利出口上升，使握有大量美元的國家(如中國、日本)的實質債權下降。 • 協調G20各國同步救市。

37. As of July 2009 GDP = C + I + G + ( X − M ) 14.143(2008) budget deficit trade deficit ≈0.5 trillion ≈0.5 trillion T = 兆

38. 美國經濟明天會更好嗎? • National Debt:11.8 T 大約是GDP的82.5%(August ,2009), capped at 12.1T. It needs to be recapped at a higher level. • 11.8T National debt: some are from the very rich in the US; some are from foreign countries like China, Japan, Taiwan, OPEC. • 美國的國債大約40%由中國、日本、OPEC、巴西、亞洲四小龍買單，免驚啦(Don‘t worry)!

39. 美國明天會更好嗎? • 每年budget deficit + trade deficit 大於一兆美元。由發行鈔票(世界貨幣)經過中、日、OPEC、四小龍購買US Treasury Bill or Treasury Bond (TB)來解決。當大量購買TB時，TB價格上升，有效利率下降，經由Fisher Hypothesis: Nominal interest rate increase one for one with inflation in the medium run by the Phillips Curve.

40. 美國明天會更好嗎? • 美國1991-2000年的低利率、低物價、GDP大於GDPN ( Natural rate)的貞觀之治得力於中、日、OPEC、亞洲四小龍等部段買入TB，經由Fisher Hypothesis 使利率下跌、通膨下跌。 • Greenspan的豐功偉業:低利率造成 a.通膨下降 b.有利房地產升值(Bubble) c.有利股票投資(Bubble) d.促進消費(寅吃卯糧，負儲蓄) e.使美國國債的利率成本下降 • 國債=GDP x 82.5% ,國債利率2.5%，國債利息成本82.5% X 2.5%=2.06%小於經濟成長率(約3%) Don’t worry! 台灣國債GDP X 38%，國債利率大約5%，國債的利息成本28% X 5%=1.9%小於經濟成長率 Don’t worry!

41. 預測 • 美國繼續大量挹注貨幣供給 • 美國繼續大量增加政府支出 • 美國繼續美元貶值增加出國 • 但是有錢人不肯消費投資，用通膨來嚇有錢人，因為通膨使錢不值錢。 • MV=PQ 橫空出世，因為利率太低起不了作用，M上升大、V變動不大、Q上升不大，所以P必定大量上升，名目利率也會上升，Swim in Cash，跳出流動性陷阱，宜速投資期貨，稀有金屬，石油，基層面較好的股票及undervalued 的房地產，不可買長期債券以防被套牢。

42. 結論 • 希望諸位利用劍橋方程式 • MV=PQ • 明年財源滾滾通四海

43. 謝謝聽講