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To: Cary Salsberg who wrote (6783)	11/7/2002 10:37:34 AM
From: Sarmad Y. Hermiz	Respond to of 95616

>> Lower rates mean lower dollar and higher inflation? Lower rates mean consumers will buy more imports from China and more demand will increase prices? Please elaborate. << Cary, good points. But I've been mulling that over lately, and will answer later in the evening when I have time. Sarmad

To: Cary Salsberg who wrote (6783)	11/7/2002 10:04:47 PM
From: Sarmad Y. Hermiz	Read Replies (1) \| Respond to of 95616

>> Lower rates mean lower dollar and higher inflation? Normally that's the case. Because lower rates are accompanied by increased borrowing which results in higher supply of money. Therefore higher inflation. That's normally, but not now. Since inflation has been absent the past two years, there must be some other links in this chain that are not in the model. I think the extra dollars are being used as currency in many parts of the world. So they are not yet chasing American goods and raising prices. In fact if the Fed did not lower rates, the absence of these dollars would be felt as deflation. So the rate cut was essential. ----------------------------- >> Lower rates mean consumers will buy more imports from China and more demand will increase prices? It seems this model is also missing a link or two. The limited supply part. The assertion that increased demand causes a price rise breaks down when 20 million new people are flooding into China cities every year looking for work. So again, no immediate inflation. The US wants to do its part in supporting the Chinese government. Reducing rates will allow the current pace of US consumption to continue for at least another year without igniting inflation. And it will buy-off the Chinese for a while longer. ---------------------- Of course there is a cost being paid. Americans will be spending from their wealth. Home finances will be weakened, etc.... But that piper will not come a-calling for a year or two at least. Sarmad