[PEN-L:3962] Re: Say it ain't so, Max

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

At 09:59 PM 2/27/99 -0800, Michael wrote:
>Some time ago, I asked Max S. to what extent the surplus depended on
>capital gains in the stock market.  He dismissed my concern.

I would say that what's more important is the interest rate (and inversely,
the price of bonds). If the interest rate goes up (because the Fed tightens
or because of a financial crisis that raises the demand for money), the
government's deficit will soar, because it has to pay interest on the
outstanding debt (which turns over very quickly so that the i-rate on the
outstanding debt changes with market rates).

and when stocks fall, bonds tend to fall, raising rates.

a recession would also end the surplus (raise the deficit) by lowering tax
revenues and raising transfer payments.

Jim Devine jdevine@xxxxxxxxxxxxxxx &
http://clawww.lmu.edu/Faculty/JDevine/JDevine.html