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Gold/Mining/Energy : Gold Price Monitor

GDXJ 97.99

+0.3%

4:00 PM EST

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To: Mark Bartlett who wrote (43697)	10/25/1999 3:31:00 AM
From: ahhaha	Read Replies (2) of 116753

By demand oriented regime I mean an economy where interest rates are inversely related inelastically to a rise in money supply. The central bank adds extra reserves to the banking system and the people borrow all of the extra fractionated money supported by the reserves added. A supply regime is the converse where interest rates are inversely related elastically to a rise of money supply. People won't borrow to their ability in order to spend and tend to save money in a non-risk form. Most western countries are demand oriented. Since the time value of money is positive a supply regime can also experience interest rates which are directly and negatively related to money supply so that a rate asymptotic approach to zero or constant approach geometrically to zero over time results in a fall in money supply. The latter is similar to the classical liquidity trap. The notion of demand or supply regime also assumes that there is an approximate equivalence between extra money supply and extra output. Macroeconomic conditions can exist which refute the strength of that connection. Even though the countries of Europe have been demand oriented the EMU unification is causing a profound change there so that in 10 years they are likely to become supply oriented. The constructive factors are all in place. The most important is that the people of Europe know they have to be competitive. They know this the way the Chinese know it and that means far better than Americans are appreciating it. The ECB only needs to remain neutral in monetary policy as rates on dollar denominated securities continue to rise, but they have the latitude to do more. This is a counter view to the capital flows theory which holds that ECB must defend rates on Euro deposits to avoid a drop in the Euro's conversion rate. US rate increases will cause rate increases in ECU countries and the ECB can "neutralize" the effect by pushing down the overnight rate by direct infusion. The added stimulus increases EU output and causes the Euro to rise. This wouldn't be the case if Europe was supply oriented or had firm inflation. Any country with a superior competitive position due to wage restraint can stimulate in this way without fear of monetarily induced inflation. In fact, all such countries inevitably will discover that this strategy is necessary. Institutions should diversify into Euro denominated assets. If the ECB raises rates next month, they should move back out. The US experienced wealth growth inflection on 9/1/98 which was the end of intrinsic deflation. The will is weakening to put out the greater effort necessary to prevent the growth of wealth from going negative. This is similar to the US in 1965. Wealth went negative in 1968.

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