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i was hoping if someone how could help me understand how this all works..how they are correlated...how housing commodities affect interest inflation and the stock market

2006-06-26 04:55:27 · 5 answers · asked by Anonymous in Business & Finance Investing

I apologize for not being clear..i was just pasting what someone has said...i am not stating anything...i was trying to understand how it all works

2006-06-26 06:33:04 · update #1

5 answers

It would take a whole course to give you a comprehensive response. You might consider signing up for one at a local college.

Meanwhile, in a nutshell, here's what's happening at this time in the economy: The Fed is always concerned with keeping economic growth at an acceptably high level and keeping the rate of price inflation at an acceptably low level.

When the economy gets cooking, the money supply expands (that's actually what inflation is). The business community spends more to satisfy their higher level of business activity, and consumers feel rich so they spend more.

The US economy has been on a five-year expansion. It's reaching the level where inflation is becoming a serious problem. So the Fed has been raising interest rates to try to keep growth from getting too fast. But consumers have borrowed huge, huge amounts, including in mortgages, so if the Fed "slams on the brakes" too hard by raising interest rates too much, the risk is that a severe recession or worse could set in, triggered by that mountain of debt.

Meanwhile, other economies, especially China and India, have been growing at very high rates. They are gobbling up all of the commodities they can find - oil and gas, lumber, base metals, etc. That adds to inflation.

We are in the midst of a commodities boom. Mining and energy stocks have come a long way up but have a long way still to go. Many companies have done poorly for several years because they don't operate well in a higher-inflation environment (their costs go up faster than they can raise prices).

That's a lot of information in one short message. As I said, look into taking an economics course. I was a chemist once, but enrolled in business school and loved every minute of it because of the fascinating and useful things I learned.

Best of success.

2006-07-05 08:33:33 · answer #1 · answered by Thinker 5 · 1 0

First of all, the causality does not necessarily work in the direction you specified. For example, interest rates affect house prices, not the other way around...

Usually, a good place to start thinking about those things is to ask a simple question, "how does this change affect my economic behavior as a consumer, a saver, or a worker?" Then you could multiply the effect times 100 million (number of households in the U.S.), and some understanding may occur. :)

So, commodities and inflation. Inflation is the change in the price level. If the price of some commodity increases and other prices remain unchanged, overall price level goes up somewhat. So increase in price of oil drives up the overall price level.

Interest rate and housing. Most homes out there are purchased with mortgages. When shopping for a house, people don't really care for the price. They care for how much the monthly mortgage payment would be. And the monthly payment depends on both price and interest rates. As interest rates go down, homes become more affordable (because the monthly payment goes down), so more people can afford to buy larger homes. Sellers notice the increase in shopping activity and start offering houses at higher prices.

Interest rates and the stock market. Companies borrow money to buy equipment and materials. Consumers borrow money to buy what the companies make. Higher interest rates mean that there is going to be less borrowing and, therefore, less buying. So increases in interest rates are usually thought to have a cooling effect on the stock market.

2006-06-26 05:57:05 · answer #2 · answered by NC 7 · 0 0

You say "fed hit the economy with 50 basis points"

When? There have been 16 consecutive 25 basis point hikes, and the FOMC meeting is this Thursday. What are you talking about or asking?

You talk about "housing commodities" but I'm not sure there is such a term. What are you asking or talking about?

"interest inflation?" what is that?

restate your question

2006-06-26 05:55:22 · answer #3 · answered by dredude52 6 · 0 0

Supply & Demand!!!

2006-07-08 11:54:00 · answer #4 · answered by Anonymous · 0 0

crazy

2006-06-26 04:56:30 · answer #5 · answered by Anonymous · 0 0

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