[OPE-L:109] [OPE-L:345] RE: Re: RE: Re: a slaughtering of capital values

Wed, 18 Nov 1998 16:57:46 -0000

I am not particularly clear myself how bankruptcies will help; but I
think the argument that has been made (e.g. last issue of The Sunday
Times) is that there is too much debt hangover in the Japanese economy.
If a bank or firm goes bankrupt then it no longer has any debts, nor is
there any expectation that the debts will ever be paid off. They are
liquidated. Obviously this has very painful and risky knock on effects
throughout the economy but it could be argued that this needs to happen
in order to solve the problem (within the confines of liberal

In view of the problems of the Japanese economy with no room for lower
interest rates and ineffective Keynesian spending programmes, then
Krugman's suggestion of a little inflation seems to be rather
ineffective given the gravity of the situation. Surely what is really
required is a socialisation/nationalisation of the debt so that it is
internalised withing society.

(Thanks Allin for the Krugman reference which I will follow up)

Andrew Trigg

> -----Original Message-----
> From: Allin Cottrell [SMTP:cottrell@ricardo.ecn.wfu.edu]
> Sent: 17 November 1998 17:56
> To: ope-l@galaxy.csuchico.edu
> Subject: [OPE-L:340] Re: RE: Re: a slaughtering of capital values
> On Tue, 17 Nov 1998 A.B.Trigg@open.ac.uk wrote:
> > Isn't this the problem with Japan, that there needs to be a
> > slaughtering of capital in order for the crisis there to be
> > overcome? Unless some banks in particular are allowed to go
> > bankrupt then there is no way out.
> Like Jerry, I'm not clear on the mechanism whereby bankruptcies
> are supposed to be helpful.
> > A Keynesian analysis would seem particularly irrelevant
> > here...
> Paul Krugman (http://web.mit.edu/krugman/www/) has an
> interesting analysis of Japan: he reckons it's in a "classic"
> Keynesian liquidity trap. Nominal interest rates are just about
> zero, so they can't be pushed any lower, yet investment is not
> sufficient to absorb full-employment saving. He reckons that
> Japan needs inflation (to generate a negative real interest
> rate), and is suffering from its "success" in lowering inflation
> to around zero.
> Allin Cottrell.