Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: Investor2 who wrote (49440)	6/25/1999 12:45:00 PM
From: Defrocked	Read Replies (2) \| Respond to of 86076

RE:"However, what I charge for loans has little to do with the "real" interest rate that I receive. For example, consider this case: I expect future inflation to be 3% and I charge 6.5% for my loan. Time passes and actual inflation turns out to be 6.5%. My "real" interest rate is 0%." Again, the relevant equation is the expected real rate equals the current nominal rate less the expected inflation rate. In the above example nominal yields would probably have increased to 10%(6.5%inflation+3.5%real rate)during the term of your loan. You lose your ass but the marginal sellers are constantly marking down prices, increasing rates because of an increasing inflation environment and trying to achieve a 3.5% real rate. Boy, you sure guessed wrong about inflation didn't you?<G> If your expected ex post real rate had been more accurate I bet you would have charged more for the loan???<g> Maybe 3.5% more???<g> Economic theory asserts that the market's marginal expected real rate causes consumption and investment to rebalance in order to maximize the present value of wealth. So next time charge more for the loan or go out and buy stuff before inflation drives up prices, store it, and resell it at higher prices later. Now if we only new real rates with certainty as some economic theorems assume.<g>