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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Sam who wrote (5248)	7/22/1998 2:22:00 PM
From: Robert Douglas	Respond to of 9980

Sam, You make a point that I have been making for about 15 years, that international competition helps control inflation. Unfortunately it cannot do it all by itself. Manufacturing makes up only about one-fifth of total output in America and the most susceptible products have already moved abroad. The brunt of the output is in the service area which does not experience the disciplining foreign competition you mention. Furthermore much of the domestic manufacturing that remains is highly competitive or has limited foreign competition. You made the statement: They make our clothes, our shoes, our electronic gear, our toys, our appliances, gadgets and widgets of every stripe that we buy and use everyday, and they NEED our cash. Why do they need our cash? Simply stated, they want something we make or want something we own. The US still dominates the world in capital equipment, medical products and technology. Developing countries need desperately the things that the US makes to advance the development of their countries. They also have a huge demand for our assets as a way to safeguard the wealth that they are beginning to accumulate. This has been a symbiotic relationship that has gone on for a number of years now. Unfortunately it is getting out of whack, as the huge current account deficit reveals. The correction to these imbalances lies down the path of a lower dollar. This will only add to the inflationary pressures that began this discussion. As for monetarism, I believe it is practically useless in its' attempts to explain inflation. The monetary aggregates are useful tools only to the extent that they correlate with demand for goods and services. If the Fed buys a T-Bill you or your bank owns (a common Fed practice) and increases the money supply, it only effects the "real output" if it is spent or lent to someone that spends it. Otherwise the Fed is just "pushing on a string". I am not suggesting by all of this that inflation is going to make a roaring comeback. As soon as it raises its' foul head, the markets and the Fed will chop it off. Unfortunately the chopping tool is higher rates which will do a lot of collateral damage (pun intended) as it fells its' victim. My opinion only, Robert