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To: Bid Buster who wrote (275551)	1/29/2004 10:41:46 AM
From: Jim Fleming	Read Replies (1) \| Respond to of 436258

bb Again higher rates are inflationary as long as you can pass the cost on. When you can't pass the cost on the party is over. The breaking point will be a lot lower than the double digits of twenty years ago. Jim

To: Bid Buster who wrote (275551)	1/29/2004 10:57:56 AM
From: zonder	Respond to of 436258

In theory higher costs of borrowing reduces demand for borrowing, but it didn't stop the borrowing frenzy in '99-'00 with rates at 9.5% did it? That is a singular event that has much to do with the stock market financing frenzy, and the Y2K credit growth frenzy. It is a bit long to explain. Just take my word for it, it wasn't because the rates were real attractive that telecom firms kept borrowing money to invest in optic fibres :-)

To: Bid Buster who wrote (275551)	1/29/2004 3:08:13 PM
From: gpowell	Respond to of 436258

In theory, increased demand for borrowing raises the real rate of interest and the increased cost of borrowing lowers the demand for borrowing. The real rate of interest balances intertemporal consumption and investment, therefore as prospects for future returns increase the real rate should rise. These posters are only considering one side of equilibrium. Higher rates of real interest are not inflationary. Price often rises with real rates because the prospect for future growth induces increased present consumption yet the current supply of consumables is fixed. This is not inflation though – just price adjustment. There are only two ways to get inflation. Direct monetary inflation, meaning unilateral increases in the money supply greater than productivity growth, and demands for compensation greater than productivity. The latter only works when the Fed accommodates through monetary inflation. Yet inflation need not arise even with direct money supply increases. Read up on a liquidity trap. Under the current Fed mechanism, the monetary base increases whenever the fed funds rate is below the natural rate of interest.