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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: VS who wrote (17206)	3/22/2002 12:08:12 AM
From: GraceZ	Read Replies (2) \| Respond to of 74559

Leaving supply and demand out, let's go over the other points. Remember my original statement was saying that long rates are determined primarily by inflation expectations, not by supply and demand. Re: long term interest rates: Risk premium: The market has inflation expectations, but cannot say with certainty what inflation will be over 30 years. So, it attaches a risk premium to long term bonds in case inflation will be higher than it expects. This is essentially saying that inflation expectations and the attendant uncertainty surrounding these expectations determine the rate. Which is pretty much in agreement with what I said. Time value of money: If you are going to lend money (buy bonds) for a 30 year period instead of a 3 month period, you will ask for a higher rate in return. Thus, long term rates tend to be higher than short term rates. We're talking about the yield on a long bond. TVM has two variables, interest rate and term. We've agreed on the term, so the other variable is interest rate. You can't say the TVM determines the variable because the variable is what determines the TVM. Understand? Availability of capital: Ever hear of liquidity crunches, contraction in the money supply? Of course, and these have a profound effect on short term rates. Govt surpluses/deficits: Here is the logic; there is a given pool of capital in the economy. In a surplus, the govt is adding to this pool, so interest rates are low. In a deficit, the govt is competing with the private sector for this capital, so interest rates are higher. Show you a period of time when this has happened: How about the entire decade of the 90's. Growing surplus-lower rates. The deficit ballooned in the mid 80s and rates declined as well (along with inflation). In fact you can see from this chart that long rates while doing something of a zig zag have been in a downtrend for two decades: mywebpages.comcast.net And the public debt, surplus and deficit not withstanding never dropped a dollar in any year but has grown continuously: mywebpages.comcast.net Now what else is it that has been in a downtrend for two decades......-ggggg-