"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

320 Miscellanea
People are worried about the economic situation. They see people who are
unemployed, a condition they have not seen for awhile, and they begin to be concerned
that this may happen to them. The apprehension leads them to spend less,
and that certainly has been an important phenomenon.
We have seen that the recovery phenomenon began in 1992. It appeared as
though the economy was on its way, except that recovery began with a fairly
severe contraction following which recovery petered out, essentially died, and
almost became even negative. Economists love to call this situation a “double
dip”, where you go down, then you go up, and you go down again. Of course
you can have triple dips but they are seldom seen.
We got down to almost zero growth, then we picked up again, and now the
economy is moving. There remain many negative indications, so that one cannot
be absolutely sure that we are through, but, and I think this is the prevailing view,
we are growing something like 3 percent, not a good growth but almost adequate.
This is the case of the U.S., where consumption is reinforced as a result of speculative
phenomena.
We have had, in the 1990s, an overbuilding of office space. This speculative
activity caused damage to banks. Many banks reached the verge of collapse,
which in turn has made the present contractions more serious because the banks
are reluctant to lend to business but are willing to lend on regular long-term projects.
All these conditions are self corrective—I don’t think that the expectations
can continue to worsen. Once the situation stabilizes, you can only go up.
Now from the U.S., look at the case of Germany. Their case is of course all
related to the reconstruction of East Germany that led to very large, very high
expenditure, and a large deficit. Germany, as you know, thinks that there is
nothing worse than inflation—not even debt is as bad as that. The banks began
to tighten, creating a situation of very high interest rates that discouraged investment.
In Germany there has never been significant fear of going down for
any length of time, but they did experience a marked slowdown which is still
underway.
The case of Japan is, again, totally unrelated to the situation in Germany. Fundamentally,
what is wrong with Japan is the stock market. The stock market was
a bubble, an unsustainable situation. Some people claim it can be accounted for,
but those who say so can do this only by taking into account the overpriced land.
The sharp decline in the market, and the uncertainty as to how far this may go,
has resulted in a number of consequences. It has discouraged investment, in part
because of pensioners and in part because of loss of capital. It has to sell more
stocks in order to get more money, which has discouraged investment.
The people of Japan are now responding to the foreign market by consuming
less and by rebuilding the capital they have lost. High savings would serve this