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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: el paradisio who wrote (54182)	6/15/2000 3:36:00 AM
From: UnBelievable	Read Replies (1) \| Respond to of 99985

You Are Correct - The Economy Will Cool Without Interest Rate Increases It is important to draw a distinction between cyclical business influences and inflation. The cyclical nature of business growth is a natural and healthy feature of free capitalist economies. The cycles represent the resolution of supply and demand. Inflation is a monetary problem. It occurs when the growth in the money supply, be it government money, gold, or other monetary surrogates, does not match the growth in real goods and services. When the Central Bank speaks of raising interest rates, they are really talking about changing the growth rate of the money supply. Money being not only that which is printed but also that which is created by banks when they lend more money than they actually have. Changing the interest rates, reduces the amount borrowed and thereby curtails the growth of money. Raising interest rates is only one of the ways in which the Central Bank can regulate the money supply. It is not the role of the Central Bank to attempt to change the business cycle, although this point is frequently forgotten, even by the Central Bank <gg>. The free market takes care of that, and improved information technology should enable the amplitude of the waves to be minimized. The situation which we now are facing is the result of the ending of a particularly strong growth wave at the same time that it is being clearly seen that the money supply has been allowed to grow much faster than the growth in real goods and services. The consolidation part of the business cycle will unfold regardless of changes in the money supply, though as has always been the case, people will appreciate the growth portion of the cycle more than they will the consolidation portion. Unanticpated changes in the rate of inflation have a negative impact on business and consumers because such changes both diminish the amount of capital people are willing to invest for extended periods of time, and increases the cost associated with such borrowing. In fact, to the extent that the Fed acts firmly now it will make it easier for the economy to transition through the consolidation phase into another growth phase. Unless inflation is, and is experienced as being, under control, it will be much more painful for both consumers and business. The reason for this is that without price stability it will take much longer to develop the necessary pool of real capital to fuel further growth. To the extent one wants to place blame, the Fed is appropriately blamed for the prior excessive growth in the money supply which now requires a curtailment. (Although few people complain during the period of time when the actual damage is being done.) The ebb and flow of the business cycle has been with us ever since we moved on from the hunter gather days. Even then it probably existed in the cyclical nature of weather.