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Strategies & Market Trends : Asia Forum

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To: Rmn who wrote (405)	1/3/1998 11:49:00 PM
From: Rational	Read Replies (1) of 9980

Ramsey: << This places the U.S. in a very precarious positon if interest rates should rise. >> Greenspan says (and I agree) that the real rate of interest will rise due to deflation. This can be serious because IRS will collect less taxes due to low corporate profitability and more unemployment, magnifying the impact of deflation on the govt -- more interest out flow than should be and less revenue. If deflation is really high, rational nominal interest rates could be negative, but negative rates cannot be attained because that will be like selling NEW government bonds at a premium to replace the existing debt -- but such bonds will have no demand, given opportunities elsewhere. If new bonds should carry a negative (or a small) rate of interest, where will the capital flow? Obviously, from the US to whereever investors can get more. A fall in the US$ value is incidental; it is a mere adjustment to other real phenomena emanating from deflation. If the FED artificially raises the interest rate to prop up US$, that will be a distortion and I know the Fed will not do so. Sankar

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