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To: Dooker who wrote (66453)	2/10/2000 8:09:00 AM
From: Jon Koplik	Respond to of 152472

Re : where should U.S. interest rates be (if "correct"). Because my mind has been subjected to far too many economics courses (and Finance theory courses), I assume that (ultimately) prices of things (an interest rate should be considered the price of obtaining money) SHOULD reflect supply and demand things, marginal cost things, marginal propensity to (whatever) things, ... etc. A couple of examples of things (right now) that make no sense to me : 1. Short rates in Japan are now about 0.10%, long rates 1.75% Anyone who wants to -- can switch from having their wealth in J-Yen or U.S. dollars, and earn the corresponding interest on the currency. If rates are WRONG here (too high), there will be a capital flow into dollars, raising the foreign exchange value of the dollar way up, which (the high foreign exchange value of the dollar) is DEFLATIONARY (due to un-deniable simple concepts of trade theory). This should cause rates to go down here. 2. If short-term rates in the U.S. remain around 6%, and inflation does not go up a lot, then owners of T-bills will be increasing their inflation adjusted wealth (both on a before tax and after tax basis) by means of owning the ultimate "risk free" parking place for their money. This would contradict common sense (and the work done by Professor Eugene Fama of the U. of Chicago Business School on just where U.S. T-bill rates have been over the course of all recorded U.S. financial history). Regarding point 2 : maybe "this time it's different" -- but I doubt it. Jon.