I just had an odd thought. Gee, how unusual.
According to a news article, we can expect some interest rate hikes as a result of the surprisingly strong job market. My first thought was, okay, that makes sense. But then I thought 'the economy has two components -- a base component that is what it actually produced and consumed, and a flexible component that adds some or a lot to it, as a result of expectations.
Say the economy was expected to produce $100 of goods, but it actually produced $120. This might lead the Fed to say that interest rates, which used to be, say, 1%, are now going to get bumped to 1.1%, to act as a brake. So interest earnings that would have been, say, $1.00 (100 * 0.o1) will now be $1.32 (120 * 0.011) -- and people will put the two together and say 'Hey, things are good - the level of the economy used to be $101, now its $121.32 -- production went up $20.32!' When in fact, it only went up $20 -- the rest is interest, ie, funny money that you can't make forecasts on, because interest levels can be changed at any time.'
So, if you're trying to gauge how the economy is doing, do you take that funny money into account, or not?
2 comments:
Not.
Yeah, I think so, too. But the initial feeling is, gee, the interest I'm earning has gone up, I have more money, things are good! Technically true, but not the basis for saying 'I am wealthier'. That kind of thinking burned me -- and othes -- in the dot com boom, I think.
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