Yesterday, i pointed out how the Federal Reserve was responsible for a large transfer of wealth from the poor/middleclass to the wealthy and China.  What follows is the first of two follow-ups regarding that issue.  It is something that i posted on Talkmarkets more than a year and a half ago--and does much to explain why in globanomics Business people are considered more important than Economists, including those touted economists at the Federal Reserve.

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Yesterday i mentioned the issue about interest rates and Middle America.  I want to add something further on that subject that might help clarify why i am down on the Economists at the moment.

I went to Wharton from the fall of 1981 thru to the spring of 1983 (M.B.A.-83).  At the time we were given our Bible in Business Finance.  That Bible was called, Principles of Corporate Finance, written by Richard Brealey and Stewart Myers.  It was from this Bible that all the basic financial wisdom that we were given came from.  I still have in my possession today--the Bible that i was given at Wharton.  I went down in the basement this morning to find it, so i could offer a verse that i think is well worth considering in these rather changing times.

The verse can be found in section 21-1, (entitled "the classical theory of interest", page 453).  That verse says the following:

"Fama's data also suggest that changes in inflation expectations are the principal causes of changes in nominal interest rate.  If you want to work out what the Treasury bill rate will be next year, you should start thinking about what rate of inflation economists will be predicting next year.  If, on the other hand, you want to predict inflation, a good place to start is by observing government bond yields and subtracting historical average real interest rates."

Back in 1983, inflation was about 3%, and government yielding bonds were about 18%.  Go figure. 

And it took Economists another thirty plus years before they did what our Bible told them to do.  And the words from the Bible of Business Finance that i mentioned above came from a Nobel Prize Winner in Economics.  The question becomes then: who should you really believe--our economists or one of their Nobel Prize winners.  And to think we used to put Greenspan on a pedestal.

We funded China's startup with our own debt--the Middle Classes (MBSs) and the nations (Treasury Bonds).

Based upon recent events and the above i am beginning to believe that Investment and Debt might mean different things in globanomics than they did in finance and economics.  It's early, but i don't think certain things are coincidences.

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