Hi Grace, just saw your note. You bring up some good points, I'll repeat that we differ more on terminology than substance.
Re: Supply & Demand. What I think is that in the absence of a central price fixing authority, supply and demand is the only way prices are set in an open market. There are a multitude of factors affecting supply & demand, which change constantly. If I'm wrong & you're right, so be it. Different opinions make for a healthy market!
Re: long term interest rates:
Risk premium: The market has inflation expectations, but cannot say with certainty what inflation will be over 30 years. So, it attaches a risk premium to long term bonds in case inflation will be higher than it expects.
Time value of money: If you are going to lend money (buy bonds) for a 30 year period instead of a 3 month period, you will ask for a higher rate in return. Thus, long term rates tend to be higher than short term rates.
Availability of capital: Ever hear of liquidity crunches, contraction in the money supply?
Govt surpluses/deficits: Here is the logic; there is a given pool of capital in the economy. In a surplus, the govt is adding to this pool, so interest rates are low. In a deficit, the govt is competing with the private sector for this capital, so interest rates are higher.
Show you a period of time when this has happened: How about the entire decade of the 90's. Growing surplus-lower rates.
Again these are just my opinions. I could be completely wrong. As I said, makes for a healthy market!
Cheers,
Vince |
