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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (14248)	2/18/1998 12:03:00 AM
From: Bonnie Bear	Respond to of 18056

ahhh, a sign of bears approaching the tech sector... Kaufmann fund for sale.... biz.yahoo.com

To: Mike M2 who wrote (14248)	2/18/1998 6:24:00 AM
From: Jack Clarke	Read Replies (1) \| Respond to of 18056

Mike, Thanks. It's nice to know I'm not completely alone. But our voices are close to being drowned out by the clamor of the bulls! Is it time to hibernate? Jack

To: Mike M2 who wrote (14248)	2/18/1998 8:32:00 AM
From: Cynic 2005	Read Replies (1) \| Respond to of 18056

To all (especially you - Mike!) A letter in today's WSJ: ----------------- Letters to the Editor The Real Cause of Asia's Crisis Charles Wolf Jr., in his Feb. 4 editorial-page commentary "Too Much Government Control," asserts that the "primary cause of the Asian crisis" is the "legacy" of the "Japanese development model," which gave "widespread insulation from market forces" to the Asian economies. On the same page, Joseph Stiglitz ("Bad Private-Sector Decisions") counters with the claim that "the problems" of Asia "are rooted in private-sector financial decisions." Both opinions are wrong. Absent the massive flood of money and credit emanating from central banks around the world that poured into Asia, the Asian markets would not have crashed. The essential cause of every financial crash is prior monetary inflation and credit expansion. Contra Mr. Wolf, the crony capitalism of the Asian countries has, at most, only aggravated the debacle. Having government officials select investment projects, distort production in favor of certain industries and then hide their failures from outsiders causes inefficiency, lower standards of living and eventually limited bankruptcies, but not massive currency devaluations, stock market crashes, hyperinflations, collapsed banking systems and social disintegration. Only sustained monetary inflation and credit expansion can account for such calamities. If government regulation hampered the Asian economies into collapse in 1997, how could the same systems have given such stellar performances for at least a decade prior to 1997? Monetary inflation and credit expansion are sufficient causes of both the boom and the crash. It is sophism for Mr. Stiglitz to blame private lenders for the "buildup of short-term, unhedged debt" in Asia. When central banks inflate the money stock through the credit markets, they distort the very prices upon which sound loans are made. Interest rates are driven artificially below the levels determined by the supply of credit from savers. Capital values rise, making more capital projects profitable. Entrepreneurs debt-finance projects they would have avoided without central-bank distortions. At first, the credit expansion may fuel less-risky, longer-term projects, but inevitably loans are made for riskier, shorter-term projects. These loans are made at the time because central-bank distortions make them appear profitable to both the lenders and borrowers. Mr. Stiglitz tries to fend off this analysis by citing "low inflation rates" as evidence that the Asian countries have had "relatively stable" macroeconomic policy. But monetary inflation via credit expansion will not increase prices throughout the economy all at once. Only prices for goods and factors purchased with borrowed money rise initially. By increasing profits, this distortion of prices leads to unsustainable buildups of capacity to produce the higher-priced goods. Automobiles and construction are classic examples. Prices will rise generally only when the newly credited money is spent and re-spent across the economy or when expectations of pending price inflation are formed. If the absence of prior monetary inflation accounts for the recent "low inflation rates" in Asia, what accounts for the current hyperinflation? Prior monetary inflation, if in excess of increasing supplies of goods, causes price inflation and, if in excess of the inflation of other currencies, causes devaluation. One need only recall the boom-bust cycle of the American economy in the 1920s and 1930s to dispel any illusions of Messrs. Wolf and Stiglitz. There was a relatively open, free market in the 1920s and Fed monetary inflation and credit expansion did not result in price inflation. Nonetheless, the systematic distortions of interest rates, capital values and production of the 1920s boom made the financial crash inevitable. The interventionist policies of the Hoover and Roosevelt administrations severely aggravated and greatly extended the suffering of the 1930s. But raising taxes and tariffs, hampering the market with regulation and imposing social programs neither caused nor mitigated the Great Depression. Jeffrey M. Herbener Professor of Economics Grove City College Grove City, Pa.