Alejandro Valle Baeza (valle@servidor.unam.mx)
Wed, 20 Oct 1999 11:46:17 -0500
Gerald Levy wrote:
> Alejandro VB quoted _The New York Times_ in [OPE-L:1482]:
>
> > "Prices at the wholesale level surged 1.1
> > percent in September, the biggest increase in nine years, the
> > government said today in a report that sent stocks diving on
> > Wall Street. The Dow Jones industrial average fell more than 200 points
> > shortly after the opening bell as investors focused on the worrisome
> > inflation news and fresh concerns voiced by Federal Reserve Chairman
> > Alan Greenspan that investors could be underestimating the risk of a
> > sudden sharp fall in the value of stocks and other assets. "
> > This is from today New York Times.
>
> Then Alejandro asked:
>
> > It could be the beginning of a US recession?
>
> I wouldn't be so quick to jump to that conclusion. Conventional wisdom has
> it that policies by the Fed (including expectations of changed Fed
> policies and statements by Chairman Greenspan) lead to "adjustments" in
> the stock market. According to this reasoning, Fed policies directly
> influence the activity on Wall Street. But, couldn't it be the other way
> around? I.e. can't investors on Wall Street push the Fed into changing
> policy as a result of their actions ... or even threats to act? Thus, for
> some time large institutional investors and Wall Street economists have
> "warned" the Fed of what might happen if the Fed raised the discount rate.
> And stock market prices have repeatedly plummeted based, so it is
> reported, on "fears" by Wall St. investors of changed Fed policies.
>
Jerry, why is interest rate of US Treasury bonds rising? From New York Times
6th October 1999:
Key Rates
ere are the daily key rates from The New York Times.
--------------------Tuesday------Monday-------Year Ago
PRIME RATE ---------- 8.25 ------ 8.25 ------- 8.50
DISCOUNT RATE ------- 4.75 ------ 4.75 ------- 5.00
FEDERAL FUNDS(x) ---- 5.31 ------ 5.23 ------- 4.65
3-MO. TREAS. BILLS -- 4.71 ------ 4.73 ------- 4.04
6-MO. TREAS. BILLS -- 4.90 ------ 4.87 ------- 4.18
10-YR. TREAS. INF(xx) 4.10 ------ 4.07 ------- 3.53
10-YR. TREAS. NOTES - 6.03 ------ 5.93 ------- 4.19
30-YR. TREAS. BONDS - 6.17 ------ 6.08 ------- 4.73
The difference between discount and 30 Yr. Treas. Bonds rates is not because
reality is pushing interest rates up despite Feds. policy?
> The consequence has been the Fed has been afraid to raise the discount
> rate as a way of forestalling inflation. So, it seems to me that Wall
> Street has at least as much impact on Fed policies as Fed policies have an
> impact on Wall Street. Perhaps the interesting question here is the
> extent to which Fed monetary policies determine what happens in markets
> versus the extent to which what *intentionally* happens in markets
> determines monetary policy. Perhaps we could think of the behavior of
> investors on Wall Street (and elsewhere?) as engaged in a collective
> effort to change state policy, similar to the concept of a "capital
> strike". Or am I all wrong here?
>
"In fact, the U.S. economy’s current prosperity rests on the fragile
foundations of a consumer spending boom based on a domestic stock market
bubble, combined with foreign bankrolling of the U.S. trade deficit. If
present trends continue, the growth in U.S. international debt will not be
sustainable in the long run. No country can continue to borrow so much from
abroad without eventually triggering a depreciation of its currency and a
contraction of its economy. The rising trade deficit and mushrooming foreign
debt are thus warning signals of underlying problems not corrected—could
the U.S. economic boom crashing to a halt in the not-too-distant future.
Addressing the U.S. international debt situation will require action on two
fronts: reducing the trade
deficit and keeping interest rates low in order to reduce the burden of
servicing the debt. Four specific policies that could help to avert a serious
crisis over the next few years include: (1) promoting stimulus policies among
U.S. trading partners with depressed economies in order to promote growth and
to enable them to reduce their trade surpluses with the U.S.; (2) engineering
a gradual depreciation of the dollar; (3)using a fiscal stimulus to keep the
economy growing when the current consumption boom slows down; and (4)
restructuring U.S. trade policy to promote more reciprocal market access and
to stress the interests of U.S.-based producers exporting abroad."
This quote is from:
Blecker, R.A..Economic Policy Institute Brief ing Paper
THE TICKING DEBT BOMB
Why the U.S. International Financial
Position Is Not Sustainable
Blecker shows this figure 2
[Image]
US total net income is negative since 1998. It makes more difficult to
trade deficit; it also implies more negative effects of interest rate on
domestic investment . Hence, I think it is quite difficult to reduce trade
deficit and to keep low interest rates at the same time. It seems to me that
Feds. and Wall Street have relative autonomy and they cannot solve the
reducing trade deficit and external debt service without reducing growth.
>
> In solidarity, Alejandro
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