Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, March 07, 2005

Why Are Stock Indices Rising??

Beats me.

I see massive U.S. deficits and rising U.S. interest rates in the future, either through a tightening of the money supply or, more likely over the next year or so, through the effect of inflationary expectations on nominal interest rates (the Fisher Effect). I'm not the only one with these concerns. Here's what Walter Jacobs of the Wall Street Examiner says:
Consider what has to happen now for investors to make money. Either risk spreads have to contract further from all time lows in many cases, or the situation for companies must improve. That would mean labor must remain quiescent, tax breaks must continue, homes continue to be leveraged for current consumption, and commodity prices stop escalating. These are possible, but are about as likely as a beach day in Maine this time of year.
The situation in Canada is only slightly different. We do not have massive federal gubmnt deficits (yet), and we do not have substantial underlying inflationary pressures (yet). However, our unemployment rate is probably two or three tenths of a percentage point below the natural rate, which means we are over-heated a bit, and both M1 and M2 have been growing at double-digit rates. I don't see how these phenomena can persist for a long time without having some impact on inflation, inflationary expectations, and interest rates in the future.
Who Links Here