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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (44942)	11/4/2003 4:38:20 AM
From: IQBAL LATIF	Read Replies (2) \| Respond to of 50167

INFLATION-DEFLATING DEFLATION ;; bullmarket.com Just several months ago Wall Street was buzzing with the notion of deflation, where prices for goods and services decline in price over a period of time. The problem is that when prices fall, corporate bottom lines are squeezed, and laborers either take pay cuts, or are laid off. Less employment with fewer dollars per worker translates to less money added back into the economy. To combat deflation, the Fed took notes from the Japanese economy and quickly pushed interest rates to 45-year lows (June 2003) in an effort to jumpstart demand. Japan has been dealing with economic problems for over 10 years, as the country chose to slowly chip away at interest rates in the early 90s, instead of making large successive cuts. The aforementioned strategies are highly debatable by economists, though for now the latter is the preferred method of "popping the economic clutch." In 3Q, the economy heated up with a 7% growth rate; investors are now talking about inflation, not deflation. Generally it is presumed that monetary policy takes roughly 12-18 months to have its full effect. Many (dare we say the dirty word) "economists" are expecting a large hike in inflation over the next year. The problem is that the Fed is now playing a game of inflationary "chicken" with the economy, and raising interest rates is the only way to pull off the road. However, if the Fed raises rates too soon, then the economy may be the one to tumble. Long story short, deflation has had its moment of glamour, and now inflation is the old/new celebrity Wall Street has to worry about! INFLATION-DEFLATING DEFLATION Just several months ago Wall Street was buzzing with the notion of deflation, where prices for goods and services decline in price over a period of time. The problem is that when prices fall, corporate bottom lines are squeezed, and laborers either take pay cuts, or are laid off. Less employment with fewer dollars per worker translates to less money added back into the economy. To combat deflation, the Fed took notes from the Japanese economy and quickly pushed interest rates to 45-year lows (June 2003) in an effort to jumpstart demand. Japan has been dealing with economic problems for over 10 years, as the country chose to slowly chip away at interest rates in the early 90s, instead of making large successive cuts. The aforementioned strategies are highly debatable by economists, though for now the latter is the preferred method of "popping the economic clutch." In 3Q, the economy heated up with a 7% growth rate; investors are now talking about inflation, not deflation. Generally it is presumed that monetary policy takes roughly 12-18 months to have its full effect. Many (dare we say the dirty word) "economists" are expecting a large hike in inflation over the next year. The problem is that the Fed is now playing a game of inflationary "chicken" with the economy, and raising interest rates is the only way to pull off the road. However, if the Fed raises rates too soon, then the economy may be the one to tumble. Long story short, deflation has had its moment of glamour, and now inflation is the old/new celebrity Wall Street has to worry about!