On Mon, Jun 30, 2003 at 01:11:47PM -0000, iaamoac wrote: > If you are looking at the stock market in isolation, the effect of > what you describe should only change the nominal price level of > stocks, not the actual price level.
Why do you say that? In isolation, it should definitely affect the real price level. If you are stranded on an island using gold as your medium of exchange (i.e., real and nominal prices are identical), and one guy sells cans of soup he managed to salvage for 2 ounces of gold per can, and then another guy washes ashore with cases of soup cans to sell, then the price of a soup can will go down to, say, 1 ounce of gold per can. This is a REAL decrease. Now if you look at a floating currency, when supply increases with constant demand, the REAL price will decrease, as will the nominal price. This must be the case, since increased supply is a *real* effect. > This is what I referred to before when I noted that monetary policy > can be used to counteract the shifts brough about by this demand > shock. While monetary policy can create a temporary surge in demand, I don't see how it can create long-term demand out of the blue. Maybe monetary policy could prop up demand for a year or two, but I don't think it can possibly counteract the large, long-term trends we are talking about. You can moderate the speed of your car up and down hills by using the gas pedal and the brake, but you are never going to get your Geo Metro up to 175mph nor will it run on an empty gas tank if you push the accelerator harder. > Moreover, all that money being withdrawn from the stock market is now > going to go towards consumption. That effect, at least, is arguable > beneficial for business, as it would produce a positive demand shock > for their products. But it is unlikely that aggregate consumption will go up, since the consumption of the boomers was already included in the economy, except previously it was funded with wages. Most retired people will keep constant or decrease their consumption from what it was in their working years, but now it must be funded by selling their savings. So, overall, consumption will go down as people retire. As a result, we are looking at, simultaneously: reduced GDP due to fewer workers (unless EVERYONE delays retirement or productivity of the remaining workers grows incredibly quickly), reduced consumption (leading to lower corporate earnings), and increased supply of capital/equities (leading to lower multiples on stocks). The stock market will be hit by a double whammy: lower earnings AND lower multiples. The only missing ingredient for a depression is high unemployment -- which may or may not occur (I think that one is hard to predict, but with earnings decreasing, I suspect corporations will try to cut costs by laying people off and looking for cheaper labor overseas). -- "Erik Reuter" <[EMAIL PROTECTED]> http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
