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Technology Stocks : Stock Swap
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To: Patrick Slevin who wrote (15754)10/27/1998 9:12:00 PM
From: Will Lyons  Read Replies (1) of 17305
 
Sorry about the messy post but my allotted time was
running out. You have raised a question that does not
have a simple answer.

By changing interest rates the Fed effects the present
vallue of a stream of income. If the stream of income
is considered to be certain ? as in the case of treasury paper,
then the present value moves in the oppposite direction
than the change in the interest rate, but if the
stream of income is not certain but thought to be
subject to fluctuations in business, then perhaps
a drop in the interest rate may be the reaction to

a recession in which case the expected stream of
income melts away and eeven tho a dollar of future
income may be highly valued, the low, or even
negative expectations results in low present value.

If interest rates are lowered while the expected
stream of the future does not come down too much
then the increase in the p/e may more than make up
for the decrease in the expected future.

At present the iffy part is that because interest
rates have been kept rather high relatrive to the
rate of inflation [some think rates have been too
high and that the Fed was less concerned with
getting to a fully employed economy than with
the possiblity of inflation ] perhaps the economy
will have been slowed down too much so that businesses
will not respond to the lower rates by investing more. After all if business is slow why borrow to expand?
So that is the dilemma we now face.

Please excuse the length of the senteces. In
economics all short sentences are wrong, including
this one.

Will lyons
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