Don't know much about economy

[question everything]

let me see if I understand this:

we have more jobs, people have more money, they spend it and create demand. Demands causes prices to rise and this causes inflation, resulting in increase in the prime rate and in the cost of credit?

Stock market tanks, wiping the values of retirement and saving funds..

The increase in cost of credit means expenses are higher for employers so... they let people go, unemployment rises, prime rate is lowered as is the cost of credit?

What am I missing?

[liberaltrucker]

1. Velcome to ze vonderful vorld of capitalism

:puke:

[Inland]

2. Not much.....

but the increase in interest rates is from two things, inflation and demand for money.

Money, like everything else, is in limited supply. A hot economy naturally creates demand for capital to build factories and businesses and buy goods for resale, demand for capital drives up the price. Interest is the price of capital, of money.

The NOMINAL interest rate takes into account the price of money and inflation. The REAL rate is the interest rate less the inflation rate.

[question everything]

5. Thank you

thus, in the past few years we needed a recession to reduce interest rate - and to allow many people to become homeowners - and perhaps for too many to live beyond their means with cheap credit.

But now that the economy is expanding and many jobs were added, it will have to shrink with the drop in the stock market and with the cost of money.

Good thing that more jobs were added. People will have to come with more money to pay for their loans.. or to supplement their nest eggs.

[cliss]

9. Now....here's an ugly little secret

that many people don't know about. Inflation is bad. when you have too many dollar bills circulating around the economy, prices start to go up. You want to avoid this if you can.

Ronald Reagan bragged to his "inside" friends that he created a lot of poor people in this country during his years as president. Why you ask? Reagan bragged that if you have a lot of poor people, they won't spend any money (because they don't have any) and prices will stay at a good level.

That's exactly what Bush is doing, by the way.

[hfojvt]

12. there's that monetarist theory again

It's like a virus. :banghead:

Krugman was more worried about deflation a couple years ago. I think he said that the economy works better with a little bit of inflation.

Inflation certainly is not about the dollar bills since most of the actual money supply is in checks, and credit cards and electronic storage. Paper money, legal tender, is a very small part of it, although arguably the core part.

Also, as Truman said, every economist has to say "on the one hand" followed by "on the other hand". There are always winners and losers. If prices go up that is bad for buyers, but good for sellers and bad for savers but good for debtors. The oil companies, for example, are not unhappy about recent price increases.

[hfojvt]

10. the job market does not necessarily follow the stock market

today's drop was a mere bagatelle anyway, not even a molehill.

We did not need a recession. Contrary to what the Bush admin advertises, homeownership grew more under the eight years of Clinton expansion than it has in the Bush recession. It stands to reason that lower interest rates mean nothing to people who have been downsized. They are drawing down their savings and have no income to buy a house no matter what the rate is.

As far as more jobs being added. Again, do not believe the Bush admin hype. It has not been impressive for a recovery. The economy created more jobs in one year under Clinton than it has in 18 months of Bush. Bush brags about two million jobs created in a year and a half whereas Clinton had 2 or 3 years where the economy created over 3 million jobs in a single year!

As Krugman has repeatedly pointed out, the economy needs to create about 150,000 jobs a month just to keep up with our growing population, and that probably does not even take illegal immigration into account.

[unkachuck]

3. I don't know what you're missing...

....but I know what I've found....Adam Smith's invisable finger checking my protate again....just go on the assumption we're getting screwed....because more than likely, we are....

....it's us getting screwed that makes this shell-game work....

[Fredda Weinberg]

4. It's called the business cycle

Like the seasons, a closed economic system changes. With each global change, the parameters move but the basic cycle remains.

[question everything]

6. I suppose so. As the rise in interest rates hurt borrowers

it is good for retirees who rely on their savings.

[hfojvt]

7. about a billion things missing

There are trillions of transactions going on in this economy. Are you trying to understand it with a simple model? To what ends? So you will know how to advise your rep?

Look at the simple model you have outlined. You said "demand causes prices to rise and this causes inflation". No, inflation is when prices rise (whatever 'prices' are). Second, that is a monetarist explanation of inflation, and for one thing monetarists are evil SOBs from the Chicago school and they hate the working class.
(Personally I think the whole 'supply and demand' concept is a crock made up to justify a higher "plus" in prices which are in fact SET by those with power to make their share of the "plus" in cost plus pricing bigger. But that is a whole other story.)
Inflation, in today's case, is being driving on the supply side. The supply of oil is deliberately limited by OPEC to maximize their profits. It was not a sudden jump in the demand for oil (at least not in this country) which caused the price to go up.
Third, the prime rate does not go up automatically, although there is some question of whether the FED (short for Federal Reserve Board) is setting the market or following the market. The FED deliberately raises rates in order to reduce the supply of money and control the rate of inflation.
Fourth, credit is not so much a cost of doing business as it is a cost of expanding business or starting new businesses. Higher rates should slow expansion. It will perhaps have a greater impact on the demand side as many items such as houses, cars, computers, furniture, appliances, big screen TVs are bought on credit. Businesses are more likely to lay people off when demand slacks and they are filling their warehouses. The FED lowers rates when the economy slows in order to encourage business expansion and stimulate demand.

[question everything]

8. Thank you. Having gone through several cycles of

unemployment, both of us, I am sensitive to news that the Stock Market had a huge drop which was caused by inflation. At least, this is what it said in the news (I am not an economist).

Remember last year, or the year before, we've heard about the "jobless expansion." The economy was expanding but businesses chose to wait and see before they hired more people, before they expanded.

And our economy is now 80% service oriented. Which means that all the purchases that people do on credit, as you listed, as well as paying for financial services, will decline and this will lead to loss of jobs. After all, we've heard that the sale of monstrous SUVs has dropped since gas prices went up.

Thus it is sad to think that after finally expanding the job market, that it may shrink, again.

Did not understand your first comment about advising "my rep" - whoever s/he may be, but thank you for the explanation.

[hfojvt]

11. well the stock market is more about investment and finance

than economics, at least the way I studied economics.

Again, today's relatively small drop does not mean much, unless the bears stampede or something. Black Monday of 1987, after all, was preceded by Black Friday. This is nothing like that, or like the drop after 9/11 which the market bounced back from.

The drop is not caused by inflation. However, since inflation was reported investors get nervous that the Fed is going to increase interest rates, which both investors and I think is a bad idea at this time. Even the last rate increase was a bad idea IMO. Higher interest rates make bonds a better investment relative to the stock market so stocks go down as people sell them and switch to bonds.

Well, there could be a silver lining if a bad economy heading into November helps Democrats :evilgrin: then it will be good for the country in the long run.

By 'your rep' I meant your Congressperson, and you had better know who that is or Randi Rhodes will be all over you.

[leftofthedial]

13. that's capitalism

when things are good, you are screwed

when things are bad, you are screwed