Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: NOW who wrote (3453)	11/7/2001 1:51:21 PM
From: ahhaha	Respond to of 24758

Where is the wagging? The FED or the free market determines the short interest rate. When the free market has exclusive control and is allowed to find the appropriate equilibrium between demand and supply of loanable funds, there is no accumulative interest rate residuals. Interest rates remain remarkably stable and low because they always adjust for imbalances instantaneously. The market clears intraday. Not so when FED interferes. Then errors in their actions cause carryover residuals. FED bases action on what they observe has occurred in the past. The market doesn't do that at least consciously. The market prices based not only on what is known, but also on what isn't known, on fear, and so the market intraday fluctuates far more than when authority has it by the tail. So by going to an extreme intraday based on what isn't known, and then reacting to the recognition that it is an extreme perception and retracing, the market accidentally discovers the natural equilibrium. Whether it is the bad mechanism or the good mechanism that is determining short term interest rates, is independent of how the TBond market will respond. The TBond responds to the economy. Monetary policy certainly affects economy, but so does fiscal policy. A free market in money would maintain good interest rate policy which would preclude inflation, but if taxes are so high as to kill economic growth, eventually the TBond becomes worthless. Economies must grow or die. If the economy dies, government can't collect taxes. If government can't collect taxes, there will be no interest paid on TBonds and return of principal becomes doubtful. So there exists circumstances where right monetary policy is in place, but the TBond is wiped out. The TBond is a creature of the private lending market, and is off limits to FED intervention. FED in the distant past did do operations in the TBond market in order to implement policy. They discovered it precipitated disasters, so all monetary actions are taken in the short market. The result has been the TBond market reflects economic expectations and is a result of monetary policy taken in the past, but the TBond market doesn't reflect short term interest rate actions except to the extent that it can guess how such actions impact economy. That's to a degree far less than say, FED direct intervention. The FED is the dog of interest rate policy and the TBond market is its tail. The tail does not wag the dog.