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Politics : Ask Michael Burke

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To: Freedom Fighter who wrote (71402)	12/3/1999 2:40:00 PM
From: Don Lloyd	Read Replies (1) of 132070

Wayne - [[...But then I started thinking that perhaps as inflation rises there is also a greater demand for capital to replace warn out stuff at higher prices and grow businesses in general. If so, perhaps the inflation component is captured to a large degree from the higher demand for capital without anyone actually going thru some sort of calculation about inflation compensation. I have no real theory or proof here. It's an intuitive idea I'm sort of tossing around. I'd appreciate input.]] Investments are made in production equipment to satisfy expected future consumer demand. To the extent that business perceives upcoming inflation, that is also an expectation that future real consumer demand will be constrained. This is likely to bias investment towards assets that will withstand inflation, rather than expand production capacity to meet a need that may not materialize. In an inflationary environment, everything else being equal, there is less need to improve efficiency, as price increases tend to stick as there is an urgency to buy today to avoid tomorrow's price increase. JMO. Regards, Don

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