[OPE-L:2384] stock prices and interest rates

Iwao Kitamura (ikita@st.rim.or.jp)
Tue, 28 May 1996 06:23:27 -0700

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Jerry [2373]:

>The rate of interest could be expected to
>increase during the boom as the demand for loanable funds increases. As
>capitalist profitability increases, their demand for loanable funds for
>the purposes of investment ordinarily increases. To the extent that the
>boom also is accompanied by increases in real wages, the demand for
>loanable funds for major purchases in consumer durables also increases.

Increase in real wages due to less unemployment would be a threat
to capitalists profit. This would lower the expected profit rate directly
and decrease stock prioces while actuall is high enough. Contrary, increase in
long-term interest rate affect negatively on stock prices much more through
increasing discount rate rather than expected profit rate of firms.
I agree with your notification of the causes of increase in interest rates.
I would have written, however, like this: Increase in real wages makes
usury capitalists more confidential on consumer credit so that
it expands and increase interest rates.

Jerry [2373]:
>for the inflationary effect, one would also have to consider the role of
>the state and its borrowing and deficit financing. To raise a somewhat
>controversial point, is there a kernal of truth behind the magical
>monetarist mystical shell regarding the "crowding-out effect"?

Heavy enough. Empirically, it is true that I-S balance is a factor
of the determination of longer-term interest rates. But I-S in
public sector alone is not the factor. If export is strong enough
to make current balance (=S-I) positive in spite of a large deficit
in public sector, no crowding-out will occur. (= this is current
japanese economy)
And the problem is to what extent should we calculate I-S. In the case
of Japan, it's not inappropriate to limit the extent to the domestic
economy, because Yen is not yet international currency. But the case
of US $, UK L and DM !

in solidarity,


Iwao Kitamura
mailto: ikita@st.rim.or.jp