From: idfriedm@hertz.uwaterloo.ca (id friedman)
Subject: Re: Business Cycles
Organization: University of Waterloo
Date: Sun, 30 Aug 1992 18:32:08 GMT

In article <113@steiny.com> steiny@steiny.com (Don Steiny) writes:
>idfriedm@hertz.uwaterloo.ca (id friedman) writes:
>
>>In Canada, and to a lower extent in the U.S, inflation has stabilized at levels
>>not seen since the late 1960's. Do economists predict that these levels will
>>stay put for a period of a few years? If so, can we expect interest rates
>>to remain fairly low ( Even though the ** real Interest rate ** is not lower
>>than it was before)?
>
>	In The Economist they have been talking about the effects of low
>inflation.   They seem to feel that the causes of inflation are understood
>and that central banks are committed to stopping inflation (though they
>are concerned about the US).     If the US decides to acutally pay off
>its debt instead of inflating it away, then I think we can look for 
>decades of low or no inflation.     According to The Economist, England
>went for hundreds of years with no inflation at all and high inflation
>has been the rule for just the last few decades.
>
>	As for interest rates, there are long term and short term rates.
>The government can lower short term rates, which are the rates that banks
>charge each other for short term loans, notably the central banks.   Long
>term rates are the interest rates investors require on debt that they buy.
>If you are a government, a corporation, or whatever and you need money you
>can borrow money by selling bonds.   Bonds pay interest.   That interest
>rate has to be such that when you have paid me back, I make a profit.
>If there is high inflation and the value of money decreases year to year,
>I need to charge you an interest rate that takes that into acount.  Thus
>long term interest rates can be computed by the (very rough) formula:
>
>	return on investment + expected inflation
>
>If the investor did not get compensated for inflation, he or she might 
>loose money in the long term because the dollars used to pay back the 
>debt would be worth less that the dollars loaned in the first place.
>
>Long term rates are high right now because investors expect inflation.
>That is because in the past few decades there has been high inflation and, in
>fact, the inflation was so high in the '70s that investors lost money and
>are being cautious now.   
>
>If the US government makes some credible effort to reduce the debt and 
>therefore indicates to investors that it is not going to use inflation 
>as a means to repay the debt, then I would expect to see long term rates
>drop by a considerable amount.     The EEC has demonstrated a very hawkish
>position on and inflation, and our Federal Reserve has too.   Central banks
>are actually lowering inflation and as autonomous non-political entities
>they can be expected to continue to do so.   Let's keep our fingers crosses.
>
>
         
  Why did we have a couple of decades of large inflation? This may be 
  difficult to answer, but are the following factors:

   (1) Vietnam war.
   (2) Oil crisis.
   (3) Central Banks not beefing up interest rates fast enough   
   to counteract inflation.
   (4) Expectations of inflation beef up wage demades. 





>>I read a very good book on investing, Wall Street, etc.. called " A Random Walk
>>Down Wall Street" by a Princeton finance prof. The book is well documented.
>>Has anybody heard of major objections to the book? DO people share my opinion
>>about it?
>
>	I read a highly favorable review in The Economist.   What is your 
>opinion?    The Economist and the Wall Street Journal have said for years
>that the stock market is a gambling game.   
>

  I like the fact that the author backs up his arguments with many facts.
  He claims that the efficient market theory is valid to a large extent,
  but not completely valid.  If it were completely valid, how could the Dow
  Jones have taken a 10 or 20 percent beating in October 1987?

  He claims that over the past 50 or so years the following investments, ***
  on average ** yielded the highest rate of return: Stocks of growth companies
  followed by blue-chips and bonds.  

  The discusses the Beta theory pretty well. He claims that on average,
  most of the analysts didn't even beat the Dow Jones average.


  I am impressed with the book.
  


  
>
>-don
>
>PS:  The Economist is a 150 year old Bristish magazine that is totally 
>independent.    It is incredibly well written, its writing standard is 
>very high.   It covers news, arts, science, as well as finance, business.   
>Besides that it often has lessons on Economics, Management, or other 
>interesting topics.   It is a weekly.   I canceled Time, Newsweek, and so on 
>because the Economist is 100 times as good.   People accuse it of being 
>conservative, but I think it is more dialectic.    They seem to generally 
>support Clinton over Bush, they favor the legalization of drugs, they are big 
>on the carbon tax, all positions that in the US are considered slightly to very 
>left-of-center.    They will often have articles with opposing points of 
>view without explaination.   In a typical US magazine or TV new show, 
>they will say: "And now for two opposing points of view."  In The Economist
>they will just merrily print an article with one point-of-view one week and
>another the next (The Wall Street Journal does this in their Editorials
>section).   The Economist is often funny, and has no respect for Economists.

 I like the Economist also.


>-- 
>Don Steiny
>Don Steiny Software
>Santa Cruz, CA 95060
>(408) 425-0382

Ishay
Newsgroups: sci.econ