Ingemar, you are very much mistaken in your analysis. Dirk's was correct
given present conditions, and should be read sequentially.
LOWERING INTEREST RATES
Where do you believe that lowering interest rates reduces inflation? The
opposite is _generally_ true, but especially in America, which is a
consumer-spending and consumer-debt driven economy. Lowering interest rates
stimulates demand on both the consumer and commercial fronts. On the
consumer front, it reduces the cost of carrying credit card debt and more
importantly home mortgage debt. Consumers refinance their mortgages and
spend the difference, thereby stimulating demand. Business spends more when
interest rates are low because a factory that is not economical to build at
100rime is quite economical to build at 40rime. Therefore capital
spending by business increases. With both consumer and business demand
strong the economy takes off as business hires to cope with the increasing
demand in all sectors, which of course stimulates further demand as
unemployment falls.
Equities markets move higher anticipating increasing corporate profits but
also as bond yields fall making fixed-income assets less attractive.
Of course one can have a situation where consumers are so afraid to spend
that no amount of lowering rates is stimulative--note Japan where interest
rates are effectively zero.
INFLATION
Inflation occurs when too much money chases too few available goods and
services. Reducing interest rates when the economy is running full steam
(as it is now) will only increase demand to an unsustainable level. That is
why factory capacity utilization is one of the statistics the Fed uses
most. So often the cure for inflation is, you guessed,
HIGHER INTEREST RATES
Raising interest rates takes money out of the pockets of consumers and
reduces business investment. So it will not increase inflation as you say,
it reduces it by taking demand out of the economy. And of course it induces
a recession, that's the point.
However it should be noted that the Fed does not control long-term interest
rates, only short-term. Bond traders and investors control the yield on the
30yr bond. So if they feel the Fed is lax about raising rates to control
inflation, you can have a scenario where inflation rises, short term rates
fall, but long bond rates soar (along with consumer mortgage debt) because
the markets feel the Fed is not doing its primary job, which is to keep
inflation in check. That is why the credibility of the Fed chairman is so
important and why no one from Carter to Clinton has dared appoint a Fed
chairman who is seen as weak on inflation.
As another aside, it should also be noted that the only way for worker
salaries to rise _without_ creating inflation is for their productivity to
rise. And this is what is finally happening in the American economy.
For a further overview of Greenspan's thoughts on the 'new economy', the
stock market bubble, inflation, etc etc read the speech he gave last night,
which just about covers the gamut. Try www.wsj.com , it was there this morning.
Gree
At 07:16 PM 1/14/00 +0100, you wrote:
> a) lower interest rates, which will result in:
> i) higher inflation
> ii) overheated economy
> iii) stock market downturn
> iv) recession
Hey, wait a minute!
If you lower the interest rates, you will also lower the risk of inflation.
Yes, if you lower the interest rates, you *might* overheat the economy. For
sure it will be a positive effect to the economy to lower the interest
rates.
The stock market will only respond positively to lower interest rates.
There will be the opposite of recession - a boom, or at least a boost.
High interest rates are only to the bad for any economy, and it only appears
when the economy is sick.
High interest rates will increase inflation, recession the economy, make the
stock market go down and higher the unemployment.
________________________________
Regards,
Denton Taylor
Photogallery at www.dentontaylor.com.
Panoramas and Immersive Imaging at
www.threehundredsixty.com
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