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To: Gabriela Neri who wrote (11180)	5/3/1998 6:46:00 PM
From: Abner Hosmer	Read Replies (2) \| Respond to of 116906

In the US, I think conditions in the labor markets, the increased pace of consumer spending, plus the growth in the money supply indicate that inflation may be bottoming. Counteracting inflationary forces domestically is the efficiency of industry in continuing to produce goods at a cheaper price. Just look at anything from consumer electronics to refrigerators and washers and dryers. I can buy a better stereo cheaper now than I could 20 years ago, and that is just in nominal dollars, not considering inflation at all. Agriculture is another competitive industry that has continually improved yields and costs. Eggs, chicken, beef also, all plentiful and relatively cheap. Oil, all through history we have kept going farther, deeper, using improved technology to locate and extract it, and the process still continues. What I am saying is that even if inflation has bottomed, it may not run rampant overnight. The danger from Japan, I think, is the effect that a contracting Japan may have on growth in the rest of Asia. Perhaps the effect on growth in the US and Europe at this point is negligible, but what if the contraction continues and gets worse. Can we really say that it will have no effect on us if Asia experiences a widespread deflationary collapse? I tell you, one thing that puzzles me is the yen. A year ago, I was wondering how a currency tied to .5% rates that had resulted in countless yen being pumped into the world economy in search of greater returns, could avoid becoming a useless piece of garbage. I think we are still seeing that played out. I don't think the low interest rates in Japan were the result of unparalleled Japanese industrial efficiency. I think it was a deliberate policy response to the collapse of real estate prices and the need to re-inflate the banks, ie by providing incredible liquidity and also giving banks the opportunity to obtain yen cheap and seek greater returns offshore. I think this policy is coming back to haunt Japan and may serve to give others cause for concern as well.