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To: LLCF who wrote (107095)	6/6/2001 10:48:45 PM
From: GraceZ	Read Replies (1) \| Respond to of 436258

Just out of curiosity, what's wrong with falling prices?? Nothing, for some things, I love the fact that the same amount of Ram I paid $4,000 for years ago is now going for $29. But, imagine for a minute that you just signed a thirty year mortgage on a house. The house sold for $250K and you borrowed $200 at 8%. At what point would the house be worth less than the mortgage if you have a modest deflation rate of say 4%? or 2%. I suppose interest rates wouldn't be 8% in a deflationary environment now would they. Maybe they'd be negative like they had in Japan. You make a little less money every year but so what? Everything is a little cheaper. That pesky mortgage payment stays the same though and now you can buy the same house for less than the mortgage left on the one you are in. Better yet, ask someone in Japan why they don't want to borrow money even when the interest rate is close to zero.

To: LLCF who wrote (107095)	6/6/2001 10:52:33 PM
From: Ilaine	Read Replies (1) \| Respond to of 436258

>>what's wrong with falling prices??<< Depends on who you are. If you own a house, and you expect to sell it and make a profit, falling real estate prices are not a good thing for you. But if you don't own a house, and want to buy one, it's a good thing. Same thing for any asset class - closely held businesses, shares of stocks, commodities. Let's assume you are a farmer. You bought an acre of land that is ideal for growing wheat, with the expectation that wheat will fetch $3/bushel. The land yields 60 bushels an acre. After you pay for fertilizer, herbicide, lime, fungicide, machinery and machinery upkeep and repair, labor, operating capital and interest, you're clearing maybe $30/acre/year. If you took out a mortgage to buy the land, it had better be less than $30/acre/year or you'll go broke. What happens if the price of wheat drops to $2.50/bushel? And if you throw in the towel, and default, and the bank forecloses and sells the land at auction, but the price of the land went down, what happens to the bank? How many losses can it eat before it's insolvent?