Re: PKT digest 966 no brainer

["Alan G. Isaac" <AISAAC@xxxxxxxxxxxx>]

Well Randy, we will just have to call it quits here.
You label my views "conventional" as if a label can
dismiss my arguments. This is very weak rhetoric,
even if it were true. I hope for consistency you will
take Roy to task for his "conventional" last post.
Oh, and I suppose Bruce must be suspect for allowing
that the availability of an inflation hedge would
"affect behavior". Come on now . . .

You say presumptuously that I have misunderstood the
problem I posed, when your every observation about it
is contained in my original post. I remain puzzled why
you find such rhetorical ploys interesting. Rather we
disagree on something fundamental, and you won't be able
to just cite Keynes to get your way here (even if
appeals to authority were interesting rhetoric).
You are saying that even given the chance to pay
attention to the variance of real returns, you would
pay attention only to the variance of nominal returns.
Well, how can I deny you this privilege? But you
will stand alone, I suspect, for this is silly behavior.

You note again that you will have a higher expected
return by plunging into the nominal bond. I noted this
in my original post. The point, again, is that you achieve
this higher expected return only by taking more real
risk. ON WHAT GROUNDS DO YOU ARGUE THAT THE RISKINESS OF
YOUR CONTROL OVER YOUR CONSUMPTION GOODS IS IRRELEVANT
TO YOUR ASSET CHOICE DECISIONS?????????????????

Finally, I can hardly believe that you persist with the
silly story that high inflation countries have high
nominal rates because central banks run increasingly
restrictive monetary policies as inflation rises.
As I have noted n times (n large), even when central
banks adopt a policy of suppressing nominal rates,
we find high rates in the parallel markets.

There is a world to be explained, and denial is not
a very interesting strategy. (In fact, it seems rather--
ahem--conventional.)

--Alan

On Sun, 3 Mar 1996 15:50:10 -0700 (MST) Randy Wray said:
>Sorry, Alan, it is still your unlucky day. You misunderstood your
>game. My bond has the highest expected return AND THE MOST STABLE
>RETURN; it is 6% always. Yours has the lower expected return and a
>return that varies each year over the 10 yrs from large negative
>numbers to large postive numbers. Diversifying will only help to
>reduce the gap between the expected return you receive and that I
>receive; but I will still win.
>I really don't understand your hocus pocus on central banks. Why do
>countries with higher inflation have higher interest rates? Because
>higher interest rates are the way central banks fight higher
>inflation. Give one shred of evidence that the Fed does not fight
>inflation. Your hypothesis might stand up if it were true that tight
>policy quickly lowered inflation--something that cannot be verified
>empirically. so as inflation rises, tighter and tighter policy becomes
>"necessary" in the name of fighting inflation. Unfortunately, this
>raises inflation (you did not understand my point about tight money
>causing inflation_), leading to perverse policy. I know this will all
>go against the conventional wisdom you prefer.
>When inflation finally does come down, the central bank loosens; the
>lower the inflation rate cross sectionally, the lower the central bank
>believes it can push the overnight rates.
>
>randy wray