From: steiny@steiny.com (Don Steiny)
Newsgroups: sci.econ
Subject: Re: Business Cycles
Date: 29 Aug 92 16:55:23 GMT
Organization: Don Steiny Software, Santa Cruz CA

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.


>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.   


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