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

To: Gersh Avery who wrote (6233)	9/7/1998 10:28:00 PM
From: Carl R.	Read Replies (1) \| Respond to of 9980

Each country has its own problems, and what is right for one is not right for another. Looking at 1929, the Fed was concerned about excessive speculation in the market, most of it on margin. They tried to keep interest rates high and even encouraged banks not to loan to speculators. They drove the call loan rate first to 12% and then tried to push it to 20%, but corporations flush with cash poured their money into the call loan market at 12%, outside the control of the fed. When the market finally started down, the excessive leverage came home to roost, and the fall was dramatic. Such a large fall was enough to push the country into a recession, from which it could have recovered. The fed was slow to lower interest rates (unlike 1987 where the fed acted quickly to pump cash into the system). Then the country began to make mistakes. Hoover was a businessman, and reacted as a businessman would, by balancing the budget and erecting trade barriers. These things turned the recession into a depression. Had international trade continued unhindered, and has the government kept spending, and the had the fed been quicker to lower rates, the depression could have been avoided. By the mid-thirties interest rates were extremely low, but no one would borrow as businesses knew there was no market for increased goods and services and consumers were too cautious to go into debt, giving rise to the old expression "you can't push on a rope". But had interest rates plunged earlier, before things became more tragic, the fed could have probably prevented the huge contraction in the money supply that took place. Fiscal and monetary policy working together could have done a lot, whereas fiscal policy that was at odds with the monetary policy helped to assure that the monetary policy couldn't work. An interesting side note is that in the last couple elections we had as a serious candidate a successful businessman who advocated policies that were an exact duplicate of the policies of Hoover. Had Perot been elected, it would be indeed interesting to speculate as to what would be happening at this juncture. This time around things are much different. For one thing, the Fed has permitted the money supply to grow at a very fast rate for the last year. For another, they are ready and willing to lower interest rates in response to a downward move in the stock market, once they believe the valuation is no longer excessive. I believe that this will happen if and when the market reaches the 6600-7000 range. And finally, while margin loans still exist, the bulk of the money in the market is pension money that is not margined, and tends to be fairly stable. The bottom line is that while a drop in the US market is likely, and a recession may well be in the cards, a US depression is unlikely. It is more likely that the US will continue to function as a locomotive to pull other struggling (but responsible) countries out of their recession. As far as what is right for Malaysia, I have no idea what is right for them. I am not aware of their exchange rate trends, their money supply changes, their inflation rate, etc. Carl