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Strategies & Market Trends : ahhaha's ahs

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To: FR1 who wrote (171)	10/6/2000 9:31:40 PM
From: ahhaha	Read Replies (2) of 24758

Bond return has not been as important as risk capital return since risk has been low and returns have been high. Far more important has been the secure high investment returns available in the US. Teitmeyer, the Bundesbanc's ex-chairman, made a very important statement in '98 concerning how countries should conduct monetary policy. He said they should formulate that policy exclusively on the internal state of affairs unique to a country and not be influenced by what a similar, perhaps neighboring, country may be doing. The advent of the ECB has made that somewhat problematical, but it still holds and it is wise advice. The ECB raised rates to slow the propensity to inflate due to oil import cost factor. They aren't so concerned about slowing final demand to cool off demand for oil as they are concerned about creating an environment that discourages labor monopoly from suing for higher wages. They can't let the wage price spiral start developing and so they have to start early and persist. This is independent of what the FED may be doing or what the Euro may be doing, although the Euro will reflect such actions eventually. Without overt wage cost inflation in place the ECB is engaging in demand management and it is a mistaken policy. Right action is to increase efficiency by lowering taxes across the board, a supply side management, but this would be a delicate engineered attempt to provide incentives to produce and it seems impossible given the ECB nation's preference for the high tax supported social state. The ECB can't wait for the people to implement what must be done. Since the people won't elect to implement the same policy that saved this country, the ECB has the responsibility to protect the integrity of money. The outcome of this loggerhead position will be recession in Europe. In order for rate differentials to become meaningful to currency trends, a 400 basis point difference is necessary. 400 is a function of the absolute level of rates and of the difference in the efficiency of capital between two nations. That difference doesn't exist among the G7 nations.

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