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To: Rarebird who wrote (55151)	6/26/2000 2:50:00 AM
From: d:oug	Respond to of 116820

To: UnBelievable From: George S. Cole June 25, 2000 Double Bubble cepr.net Executive Summary The stock market is over-valued by close to 50 percent..... The dollar may be over-valued by 30 percent, or more..... These over-valuations present extraordinary misalignments, in which major markets are seriously out of line with their long-term values..... ... the conclusion that the stock market must decline by close to fifty percent rests on only two assumptions. First investors will demand some compensation for the risks associated with holding stocks compared with relatively safe assets like government bonds. Second, that the ratio of share prices to corporate earnings cannot rise indefinitely..... ... the stock market must decline by close to fifty percent. ... then stocks be able to provide their historic rates of return. ... important to recognize that a decline in the dollar is the only plausible way for the nation to move towards a more a manageable current account deficit..... The Impact of a Dipping Dollar The impact of the falling dollar on the economy is likely to also be large, although not compared to a stock market crash. The basic story is quite simple: a falling dollar will result in an increase in the rate of inflation. The arithmetic on this is straightforward. If the dollar falls by 20 to 30 percent, then the price of goods imported into the United States will rise by 20 percent, other things equal. ... other words, if the current rate of inflation is 3.0 percent, it will rise to between 4.4 to 5.1 percent as a result of the decline in the dollar. To a significant extent, the Federal Reserve Board's response will determine who is forced to absorb the impact of the lower dollar and the higher import prices. If the Federal Reserve Board raises interest rates, slowing demand and raising the unemployment rate, then workers will probably be forced to absorb most of the impact in the form of lower real wages. On the other hand, if the economy is allowed to continue to operate at a high level of output, then it is likely that firms will absorb a portion of the higher import costs out of profits. The Interaction of Bursting Bubbles If the stock market and dollar bubbles burst at roughly the same time, as seems likely, there will be both positive and negative interactions. On the positive side..... On the negative side.....