Sunw vs. inflation vs. interest rates
Gottfried,
>No argument with YOU, but they raised interest rates. Higher interest
rates increase cost of living, which is called inflation. But the Fed
wanted to PREVENT inflation. Am I too simple minded? Can someone explain this to me?
This is not a simple minded question. The Federal Reserve has very few tools with which to work. Their most potent one (they hope) is the discount rate charged to member banks. This is the rate banks pay to get money which they lend out to their customers (other banks and large corporations, etc.)
Things just costing more is only a small part of inflation. More important is the relationship to how much people have, to how much they can purchase - disposable income. The demand for things becomes greater than the supply, which causes prices to rise. (A restaurant is packed, people are waiting an hour to get a table. Raise the prices - less people waiting, but more profit.)
The Fed concentrates on the larger picture, money supply. They feel that if they reduce the amount of money circulating they can reduce too much money chasing too few goods (inflation). The problem is, this is all theory. No one can measure these thing accurately. And a lot of economics is psychological - how do you feel about the economy. If you feel good, optimistic, you probably spend more. If you feel pessimistic or fearful, you will probably pay off your debts and spend less.
"But higher interest rates make things more expensive too, isn't that inflation?"
Again it is the money supply, the larger picture. Credit creates money (not currency). Buying stock is a great example. If I have a $1,000 to invest, I can buy $2,000 worth at margin. I have in all ways, doubled my buying power. Real estate is even more dramatic. $10,000 down purchases $100,000 worth of property. If interest rates become higher, I can not afford the payments on the $90,000. So I must borrow less and get a cheaper house. Less money is spent, less money in the big picture, less buying power, less pressure on too few goods; perhaps even forcing the seller to drop his price so I can buy his house.
Stock market investments become less attractive in inflationary times. A stock going up 7% per year isn't too great if inflation eats away my buying power at 8% per year. In effect I loose 1% of my value on my investment. So, many investors leave for greener pastures at the threat of lower yield, which they are doing right now. Of course, in selling off they also are creating the dropping prices, as we see in our beloved Sunw.
I think sunw is very cheap today (27 something) but I have no more loose change, to buy. I hope others see the value and help our battered stock.
Good luck too all.
Jay
ps. In economic theory as with all things, the future is unknown until we get there, and then it's gone. |
