There is no problem here with (1). Clearly the current expectations in Japan are for deflation, which is actually happening anyway. Thus, the real interest rate is positive, even with zero (or even slightly negative on certain assets) nominal interest rates. This does not kill "textbook finance," despite its weirdness.
BTW, I think that Henry is probably only _almost_ fully hedged. But probably well enough to avoid having to be a slave for Dough, :-). Barkley Rosser -----Original Message----- From: JayHecht at aol.com <JayHecht at aol.com> To: lbo-talk at lists.panix.com <lbo-talk at lists.panix.com> Date: Sunday, March 07, 1999 3:32 PM Subject: The End of Finance As A "Discipline"
>In a message dated 3/6/99 11:02:04 AM Central Standard Time,
>dhenwood at panix.com writes:
>
><<
> Here's a scenario: the Bank of Japan's 0% interest policy finally succeeds
> in relflating Japan, the economy takes off, and Japanese capital returns
> home. Then the European central bank finally gives in, lowers rates, and
> European capital returns home. Suddenly, the U.S. has to confront the fact
> that it's living $400 billion beyond its annual means; the U.S. becomes
> Japan in 1989 and enters a decade of stagnation and international
> humiliation.
> >>
>1) ALL finance texts assume a positive rate of interest to teach the
concpet
>of present or future value. I tell my students when interest rates go to
0%
>there is no reason to take the course. Now of course this flies in the
face
>of their text (e.g. Risk free rate = real rate + inflationary
expectations),
>but the great thing about teaching finance these days is that almost
>EVERYTHING in the texts doesn't match reality. I wonder what Tokyo U is
using
>in their MBA courses (anybody got a web site).
>
>2) I think Doug makes a very compelling argument. All the commercial macro
>econometric models essentially rely on an a modified NC/Keynesian
framework -
>and more importantly - their estimation periods do not have anything like
the
>potential capital exits in their time series'.
>
>Jason
>