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Unread 18 Jan 2004, 10:35   #1
wu_trax
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Question the state of the us-economy

sorry to annoy you with yet another thread about the us, but:
so, they've got the highest growth per quater in the last decades, the lowest intrest rate since the 1950s and the lowest inflation rate since a few decades.
im wondering: how is that possible, against all market mechanisms?
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Unread 18 Jan 2004, 15:08   #2
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Re: the state of the us-economy

Why against all market mechanisms?

Low interest rates benefit long run growth since firms invest more.
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Unread 18 Jan 2004, 15:25   #3
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Re: the state of the us-economy

low interest rates and high growth = inflation. thats how it usually works, especially if your cdurrency loses 20% of its value during the last year.
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Unread 18 Jan 2004, 15:30   #4
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Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
im wondering: how is that possible, against all market mechanisms?
George Bush is a Dark Lord of the Sith, and is using the Force to control the World's economy.

Either that, or your "against all market mechanisms" statement is inaccurate.

You choose.
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Unread 18 Jan 2004, 15:35   #5
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Re: the state of the us-economy

Quote:
Originally Posted by Proteus
George Bush is a Dark Lord of the Sith, and is using the Force to control the World's economy.

Either that, or your "against all market mechanisms" statement is inaccurate.

You choose.
then please tell me why there is no inflation, if the economy really grew more than 2-3% in the 3rd quater.
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Unread 18 Jan 2004, 15:40   #6
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Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
then please tell me why there is no inflation, if the economy really grew more than 2-3% in the 3rd quater.
I told you. He's a Dark Lord of the Sith.

(But seriously now, if your economic theories predict one thing and reality shows another thing, I'd be more willing to say your theories are wrong than that the US economy isn't working how it should be.)
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Unread 18 Jan 2004, 15:47   #7
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Re: the state of the us-economy

its not like these are only my theories, is it? high growth rates and low intrest rates (and, as a little extra, extreme deficit spending) do cause inflation
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Unread 18 Jan 2004, 15:51   #8
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Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
its not like these are only my theories, is it? high growth rates and low intrest rates (and, as a little extra, extreme deficit spending) do cause inflation
Well clearly, in this case, they don't.
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Unread 18 Jan 2004, 15:53   #9
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Re: the state of the us-economy

Quote:
Originally Posted by Proteus
Well clearly, in this case, they don't.
why why why?
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Unread 18 Jan 2004, 15:58   #10
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Re: the state of the us-economy

Inflation only applies if you have increases in prices/wages. Growth usually leads to both these things.

Since the US workers have been beaten down for the last twenty years, I doubt the average wage increases (excluding the top 5% of earners perhaps) is rising that dramatically.

Where wages are largely flat, and competetion intense, prices wouldn't tend to rise either.

In the US, the segments of growth (i.e. increases in sales, etc) might be due to increasing private/public debt.(but that's a long-term thing).
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Unread 18 Jan 2004, 16:11   #11
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Re: the state of the us-economy

“Inflation is always and everywhere a monetary phenomenon.”
Milton Friedman
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Unread 18 Jan 2004, 16:17   #12
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Re: the state of the us-economy

Quote:
Originally Posted by Dante Hicks
Inflation only applies if you have increases in prices/wages. Growth usually leads to both these things.

Since the US workers have been beaten down for the last twenty years, I doubt the average wage increases (excluding the top 5% of earners perhaps) is rising that dramatically.

Where wages are largely flat, and competetion intense, prices wouldn't tend to rise either.

In the US, the segments of growth (i.e. increases in sales, etc) might be due to increasing private/public debt.(but that's a long-term thing).
oh, well, i have to admit that makes some sence, although i dont think thats especially healthy for an economy. some day someone will have to pay back those debts.
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Unread 18 Jan 2004, 16:25   #13
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Exclamation Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
low interest rates and high growth = inflation. thats how it usually works
Yes, usually. The problem, I think, is measuring the real growth rate. When an economy comes out of a recession, there's always a gap: some slack or unused production capacity. It can be hard to distinguish real economic growth from just taking up the slack. Many factors determine inflation, but all other things being equal, this slack in the economy tends to depress inflation.

Once the real growth rate is known (and once inflation begins to move upwards), I would expect interest rates to go up sharply.

See also, Taylor's rule.
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Unread 18 Jan 2004, 18:22   #14
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Question Re: the state of the us-economy

I wouldn't exactly call basic economic controls 'market mechanisms'.

What exactly are you refering to?
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Unread 18 Jan 2004, 20:04   #15
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Re: the state of the us-economy

my only point was that usually high economical growth means an increasing inflation rate, which for some strange reason didnt happen to the us, at least not yet. and that even with large deficit spending by bush and higher prices for imports.
this leads me to the conculsion that either the economical growth isnt that high or the inflation rate isnt that low.
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Unread 18 Jan 2004, 20:56   #16
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Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
my only point was that usually high economical growth means an increasing inflation rate, which for some strange reason didnt happen to the us, at least not yet. and that even with large deficit spending by bush and higher prices for imports.
this leads me to the conculsion that either the economical growth isnt that high or the inflation rate isnt that low.
Inflation is a monetary phenomenon, the growth rate however is a real variable, as stated in the classical dichometry of the IS-LM-Modell. Inflation may occur if the Fed increases money supply faster than the economy is growing. But as long as the Fed follows an appropriate trade-off policy between tightening (thus increasing interest rates) and expanding money supply, long-term growth can be possible even with relatively low inflation rates.
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Unread 19 Jan 2004, 00:36   #17
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Re: the state of the us-economy

Inflation rates all over the world (well developed countries, excluding ex-command economies) are continually low, because we understand inflation a lot more now and have independent banks and stuff like that, basically what Entium said ^
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Unread 19 Jan 2004, 01:38   #18
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Re: the state of the us-economy

I disagree. We haven't fundamentally escaped the inflationary model through some sort of monetarist insight. Not purely that at least.

It's just in pretty much every country wage demands are frustrated because collective bargaining has broken down. Wages and welfare for a good proportion of the population has been scarily stationary with growth being skewed for the top 10% of the population. It's no coincidence that this less-inflationary period was accompanied by both a breakdown in the Keynesian welfare state model & the drastic decline in the trade unions.
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Unread 19 Jan 2004, 10:22   #19
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Re: the state of the us-economy

ofc central banks can try to counter inflation, after all thats part of what they are there for.
my point was that you usually dont get high growth, low intrest rates and low inflation at the same time.
if you have high growth, you get high demand for goods, which means rising prices (and because of that rising interest rates)
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Unread 19 Jan 2004, 12:12   #20
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Re: the state of the us-economy

I think the causality has changed between interest rates and inflation.

Before - interest rates were high to compensate ppl for the loss of monetary value, now we have high interest rates to stop ppl spending.

Yes I know this is over simplification.

Plus - lets not forget things like the very weak dollar, trade deficit etc.
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Unread 19 Jan 2004, 17:06   #21
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Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
my point was that you usually dont get high growth, low intrest rates and low inflation at the same time.
if you have high growth, you get high demand for goods, which means rising prices (and because of that rising interest rates)
Well, this doesn't have to be true.
The low interest rates might tell us, that people have saved a bigger fraction of their additional income (out of the high growth) rather than spent it on goods and services. This might be out of uncertainty of the future, the war in Iraq or the high US debt, which might expect people that the government will have to raise taxes again eventually.
Further, there's still no direct correlation between high growth and rising prices. Higher demand might in fact rise prices, but the high investment (because of low interest rates) and the high growth also raise the supply of goods, which tends to lower prices.
At last, theres still the Fed, which, as has been already said, might and will alter the monetary supply (say raise it, thus shift the LM-curve to the right) in order to keep prices stable.
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Unread 19 Jan 2004, 17:39   #22
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Re: the state of the us-economy

Quote:
Originally Posted by wu_trax
sorry to annoy you with yet another thread about the us, but:
so, they've got the highest growth per quater in the last decades, the lowest intrest rate since the 1950s and the lowest inflation rate since a few decades.
im wondering: how is that possible, against all market mechanisms?
i would see interest rates being loosely tied to inflation, so a low interest rate would cause and be caused by low inflation.

i see no direct relationship between economic growth and inflation. two indirect relationships: one, as dante said increasing wages often occurs with econ growth and could cause inflation. but there isn't wage growth, so that's out. two, other countries buying currency would probably be more inclined to get money from countries with healthy growth. but this would mean high growth would lead to lower inflation.

Quote:
Originally Posted by Entium
Low interest rates benefit long run growth since firms invest more.
that's like saying high prices cause people to buy more.
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Unread 19 Jan 2004, 17:56   #23
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Re: the state of the us-economy

Quote:
Originally Posted by acropolis
that's like saying high prices cause people to buy more.

At low interest rates capital is cheaper, thus firms will demand more capital to make investments. Where is the problem?
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Unread 19 Jan 2004, 18:00   #24
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Re: the state of the us-economy

Quote:
Originally Posted by Entium

At low interest rates capital is cheaper, thus firms will demand more capital to make investments. Where is the problem?
you are saying that firms will borrow more, which is the opposite of investing.

but i can see what you are saying now, 'invest in themselves etc.'
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Unread 19 Jan 2004, 18:04   #25
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Re: the state of the us-economy

Quote:
Originally Posted by acropolis
you are saying that firms will borrow more, which is the opposite of investing.
Well, it's very unlikely that firms have all the money they need to make an investment (in terms of a new facility etc...) by themsself, isn't it? Thus they need to borrow money (say from banks etc.) which obviously they prefer to do when interest rates are low...

Simple long-term growth theory.
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Unread 19 Jan 2004, 19:19   #26
wu_trax
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Re: the state of the us-economy

Quote:
Originally Posted by Entium
Well, this doesn't have to be true.
The low interest rates might tell us, that people have saved a bigger fraction of their additional income (out of the high growth) rather than spent it on goods and services. This might be out of uncertainty of the future, the war in Iraq or the high US debt, which might expect people that the government will have to raise taxes again eventually.
Further, there's still no direct correlation between high growth and rising prices. Higher demand might in fact rise prices, but the high investment (because of low interest rates) and the high growth also raise the supply of goods, which tends to lower prices.
At last, theres still the Fed, which, as has been already said, might and will alter the monetary supply (say raise it, thus shift the LM-curve to the right) in order to keep prices stable.
but noone in the us is saving money. in fact they do the exact opposite and spend more than they have. they do that with capital from outside the country. what will happen if that money supply stops i dont want to imagine.
anyway, we have more money, low intrest rates, a higher demand and more expensive imports because of the weaker dollar (remember how much inflation the weak euro caused at the beginning? and the euro-zone imports less and exports more than the us, so that the influence should be even stronger on the us).
so where did all the inflation go?
and yes, there is a corralation: why should anyone invest if the demand didnt increase? the demand has to incresase first, then the prices have to rise and after that the investments will increase. you dont just increase your capacities and hope demand will follow
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