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To: NOW who wrote (35392)	11/8/2000 10:10:15 PM
From: UnBelievable	Read Replies (3) \| Respond to of 436258

What Is Going To Happen, Will Happen, Regardless Why Do People Think $COMPX 2600 Is So Far Down, When We Were Just There Last October As I believe as been pointed out <gg>, at this time Uncle Al has a bit of a problem. Any positive effect of a rate cut, or further expansion of the rate of growth of liquidity will be more than offset by the negative effects. These effects will include: - the domestic inflation which occurs when (and only when) the monetary aggregate grows at a faster rate than the growth in real goods and services, and - the devaluation of the dollar. The devaluation of the dollar will be particularly troublesome. Among the consequences of a dollar devaluation will be: - a reduction in the willingness of foreign nationals to invest in the US capital markets. This is attributable to the exchange cost which they can expect to incur when they wish to repatriate their capital. In addition foreign investors are coming to understand that it is very unlikely that the rate of growth which they had been experiencing in the US equity markets will continue into the future. These factors will cause the foreign investment in the US stock market to decrease. When the demand for stock decreases it can be expected that the price of stock (stock price) will decline (given any particular level of supply). - An additional inflationary element in the US economy associated with the cost of its imports. As you are aware the US is a significant net importer, we have, and continue to accrue, a substantial trade deficit. The devaluation of our currency will mean that all imports will become more expensive to US corporations and consumers. The other limitation of any further rate reduction lies in the fact that neither companies nor consumers have the ability to service additional debt even if it is marginally less expensive due to a lower interest rate. This is a problem which will get worse as pressure on corporate profits and household incomes becomes greater as the economy begins to slow. This fact is clearly illustrated by the experience in Japan where even eliminating interest totally did not result in an economic stimulus for that country. Consumers, faced with the reduction of wealth associated with the stock market decline will be willing to spend less. Baby Boomers particularly will need to balance their consumption/saving behavior to offset the expected value of the assets they thought they would be able to depend on during their retirement. And even if people and companies want to take on additional debt, lenders will be unwilling to extend such credit because of the risk of default which over extended borrowers present. The bottom line is, even though Americans are used to having someone they can point to and say "fix it" such is not the case in the current situation. There is nothing that the central bank will be able to do with regard to monetary policy which will remedy the problem, nor is there anything the Government can do in terms of fiscal policy (either tax cuts or federal spending increases) which will help. Although I assume that attempts to correct the problem with both of these tools will be made, with the result being things are made worse. Understanding is simple if you focus on the essence of the problem. The United States will have less "stuff" than the people want and expect. We will have less stuff because of the massive malinvestment associated with the stock market bubble, which meant that the investments which needed to be made in things that make stuff were not made. We expect more because we have been used to using about two years of stuff every year, and growing, and have gotten quite used to it, thank you. Well there just isn't going to be the stuff there. People will have to change their expectations while we go through the process of living on one year's worth of stuff per year, or actually less, since some of that will have to go into capital formation. Its not the end of the world. I doubt that we will see the standard of living in the US even approach that which the vast majority of the world's population currently experiences. But it will be different, and probably quite a few people will be very grumpy until they get used to the idea. And it is going to take a whole lot longer than folks will believe to resolve, since it will require from 1 to 3 decades. So as we begin the next stage in our journey, as solutions to the problem are suggested, such as reduce interest rates, the question to ask yourself is this: How is this going to allow us to have more stuff? BTW - Crash's don't happen because anyone wants them to. They happen because they can not be prevented.