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Saving Capitalism from Capitalists....

  • #61
  • Oct 2, 2009 6:06pm Oct 2, 2009 6:06pm
Quoting Leonlorenzo
Thats Frikin genius!

So the process of a CB decreasing the interest rate leads to other banks lending off the CB, and then they lend to the public also at a decreased rate(obviously higher than the CB rate though- this is where the banks profit). This lower rate means in turn the Public demand is higher, so more money enters the country to combat recession.

How would the CB decrease the money supply though? cutting interest rates would just render supply static I would imagine.
You almost have it

In reality the banks try NOT to borrow from the Fed because it is a sign of them having credit problems and the market will hammer their stock/bond issuances. They prefer to get their money from the money market. The "Fed Funds Rate" is a) the rate the Fed charges for loans at the discount window and b) the rate banks with excess reserves will loan money to each other at through the money market.

The banks order of priority for loan proceeds goes:

1) Customer checking/savings account balances (Cost of ~0%)
2) Overnight lending from another bank through the money market (.25%)
3) The Fed (in emergency siuations when they can't get the funds they need from 1 or 2) (.25%)

Other then that your golden. Borrow from the money market at the Fed Funds rate (currently 0-.25%) and loan it out at prime+ (1.25%+), pocket the spread.

On the flip side, the Fed can reduce demand for loans by increasing the rate. At 2% a loan is very attractive. You can borrow money and invest in anything that will give you a risk adjusted return of over 2% and be profitable. If the fed pushes the Fed Funds rate to say 5%, plus the bank spread of 1%, you then need to invest in something that yields over 6%. Not quite as easy. This lowers demand for debt and cuts consumption as a result.

Lower demand = lower inflation

Forget about money supply...
  • #62
  • Oct 2, 2009 6:31pm Oct 2, 2009 6:31pm
Quoting Darkstar
Just so were clear, fractional reserve banking isn't some conscious choice between multiple options, its the ONLY option. Without it, due to a perpetually increasing world population, we would be in a permanent deflationary spiral.

And deflation IS bad because in the absence of marginal inflation, there is no compelling reason to reinvest capital. With the natural tendence of wealth to become concentrated in the hands of the few, and then the few with money having no reason to reinvest, there would be no money for anyone else. That means no...
Sorry, but this claim is simply too absurd. I know this belief is prevalent amongst mainstream economists, but history simply does not support it.

I think you believe money are something special (Keynes anyone?). They are not, they are just means of exchange that makes exchange convenient. If you are a smith and you are buying shoes from a schoemaker, you have really paid for them by your services or by goods you made and sold, money are just the means, and their value is proportional to the size of economy and their amount in circulation. Simple as that.

I will give you one example from history that proves your fear wrong. In Britain at the beginning of industrial revolution they had golden money, whose value was to big to be of practical use for commoners. Exchange was therefore mostly barter. When the industrial revolution increased the amount of kinds of goods available for trade, barter was no longer practical, so what happened? Revolution stopped and manufacturers died by hunger? No, people started to issue coins of small denominations (there were some 20 mints in Birmingham) and these that passed the market quality test and gained trust from people were used for exchange as a real money. That is, market was able to create perfectly functioning money that replaced government issued money.

If your scenario happened (which I doubt), people will simply create parallel monetary system that will replace the old dysfunctional one, and no amount of laws or state intervention will prevent them from doing so. Today it's not possible because need for free market money is not so urgent and breaching government's monopoly would have serious repercussions. But it happens every time some government causes hyperinflation. People switch to currency of neighbouring state, to dollar or gold or whatever works, does not really matter.

What you are doing is repeating mainstream economical scare, but with some social twist to it.

By the way, I understand that money supply (including credit) is increased first, and printing just follows (in some proportion, hopefully with only mild inflation). I understand it because that is what I said. I believe we both have the same understanding of how this mechanism works (even though we have different explanations of the meaning of it's parts), we just differ in our opinion on whether it's good or bad. I claim it's bad because it decreases value of savings and makes economic evaluations imprecise (by overvaluing things like economic growth or company's profits, and generally by not being free market mechanism), you claim that it's good for reasons that I believe I now understand, because they are quite common, it just was not clear to me from your previous posts.

But of course if your view is that the monetary part of the market is so special that it has to be controlled and regulated by some wise man (who will regularly screw up as history shows) and can not be left to the market, then you are right, but that's a circular argument without substance.
  • #63
  • Oct 2, 2009 6:54pm Oct 2, 2009 6:54pm
Quoting Pipsy108
I think you believe money are something special (Keynes anyone?). They are not, they are just means of exchange that makes exchange convenient. If you are a smith and you are buying shoes from a schoemaker, you have really paid for them by your services or by goods you made and sold, money are just the means, and their value is proportional to the size of economy and their amount in circulation. Simple as that.
You and I 100% agree here.

Quote
I will give you one example from history that proves your fear wrong. In Britain at the beginning of industrial revolution they had golden money, whose value was to big to be of practical use for commoners. Exchange was therefore mostly barter. When the industrial revolution increased the amount of kinds of goods available for trade, barter was no longer practical, so what happened? Revolution stopped and manufacturers died by hunger? No, people started to issue coins of small denominations (there were some 20 mints in Birmingham) and these that...

I'll grant you my example was a bit melodramatic, but your example didn't speak to the subject of deflation or the value of inflation. Ofcourse people would switch to something else, but were looking at why they would want to switch to begin with. My claim is that for an economic system to maintain long term viability, a marginal rate of inflation is required to incentivise the reinvestment of capital.

If you are in a deflationary environment, you are in effect being paid to do nothing. How does this contribute to anything being produced?

Quote
What you are doing is repeating mainstream economical scare, but with some social twist to it.

Can you point me to a single instance of deflation that wasn't devastating to the populus?

Quote
By the way, I understand that money supply (including credit) is increased first, and printing just follows (in some proportion, hopefully with only mild inflation). I understand it because that is what I said. I believe we both have the same understanding of how this mechanism works (even though we have different explanations of the meaning of it's parts), we just differ in our opinion on whether it's good or bad.

Agreed.

Quote
I claim it's bad because it decreases value of savings and makes economic evaluations imprecise (by overvaluing things like economic growth or company's profits, and generally by not being free market mechanism), you claim that it's good for reasons that I believe I now understand, because they are quite common, it just was not clear to me from your previous posts.

I would be interested to see your rational for the claim that the common perspective is flawed. I love learning new stuff.

Quote
But of course if your view is that the monetary part of the market is so special that it has to be controlled and regulated by some wise man (who will regularly screw up as history shows) and can not be left to the market, then you are right, but that's a circular argument without substance.

Just so were clear, I believe "banking" needs to be regulated, the money supply should be (and is already) free market based. I don't know if we disagree with anything here...
  • #64
  • Oct 2, 2009 7:34pm Oct 2, 2009 7:34pm
Quoting Darkstar
I would be interested to see your rational for the claim that the common perspective is flawed. I love learning new stuff.
I am going to sleep (2am here), so I will provide just a generic answer. It's simply that your arguments failed to convince me. I said all I could about the mechanisms we discussed and it would be hard to continue with argument without writing a book, because you are just as stubborn as me and I am sure we could go on for a long time I know the deflationary argument, and so far I have not found evidence for it that would convince me. So I will stop here. I think at least we have provided enough material for Leonlorenzo to think about.

Quoting Darkstar
Just so were clear, I believe "banking" needs to be regulated, the money supply should be (and is already) free market based. I don't know if we disagree with anything here...
Monopolistic is not free market based Let's say I will start issuing golden coins today, trumpeting them as stable alternative for inflationary paper banknotes. Do you know where I will be tomorrow? Correct, in prison And it won't be because I am sentencing hundreds of millions of people to death by hunger.
  • #65
  • Oct 2, 2009 7:51pm Oct 2, 2009 7:51pm
Quoting Pipsy108
I am going to sleep (2am here), so I will provide just a generic answer. It's simply that your arguments failed to convince me. I said all I could about the mechanisms we discussed and it would be hard to continue with argument without writing a book, because you are just as stubborn as me and I am sure we could go on for a long time I know the deflationary argument, and so far I have not found evidence for it that would convince me. So I will stop here. I think at least we have provided enough material for Leonlorenzo to think about.
Fair Enough. I need to go play with my chick anyway.


Quote
Monopolistic is not free market based Let's say I will start issuing golden coins today, trumpeting them as stable alternative for inflationary paper banknotes. Do you know where I will be tomorrow? Correct, in prison And it won't be because I am sentencing hundreds of millions of people to death by hunger.

Actually there is nothing that prevents you from doing so. You just can't claim it as being a government issued currency (counterfeiting). There are currently a half dozen company/individual issued currencies that people are using. Most notably the Linden Dollars being exchanged in Second Life. There’s something like $2 million in transactions occurring daily on Second Life. There is even a currency exchange with floating exchange rates to convert your Linden Dollars into Dollars/Yen/Pounds/Etc.

Anyone can create a currency. The problem is in getting other people to accept it as a viable medium of exchange.
  • #66
  • Oct 2, 2009 8:49pm Oct 2, 2009 8:49pm
Quoting Darkstar
Forget about money supply...
I used the wrong terminology. What I intended to say was "money in circulation". Does money in circulation only ever go up? Thats not to say that the worth of the currency is the same, More currency = lower worth or purchasing power.

I'm reading that deflation can always be cured by stimulus, as was said by Bernake. But for deflation to occur, does that mean money has disappeared? Possibly in the form of bankruptcies. This is speculation on my part now.
Living the adventure in my head.
  • #67
  • Oct 2, 2009 8:51pm Oct 2, 2009 8:51pm
Quoting Pipsy108
I am going to sleep (2am here)

I think at least we have provided enough material for Leonlorenzo to think about.

.
Bed time for me too, 3am nearly here. Thanks for posting, I'm enjoying your input.

Leon
Living the adventure in my head.
  • #68
  • Edited 7:50am Oct 3, 2009 6:48am | Edited 7:50am
Quoting Darkstar
All is fine and well in the begining and middle of the business cycle, but when it comes to the end, banking naturally shuts down. I could go into all the details of why, but the summary is that banking NEEDS regulation. It also NEEDS a lender of last resort. Without those two thing the end of every business cycle would be of great depression proportions, just as they were when we didn't have them...
i agree with pipsy, please elaborate WHY it needs a lender of last resort? so i can judge on arguments and not on uppercase letter words.
the only great depression we had was in the 30s and there was a central bank. in fact, the fed actively tried to manipulate the bull market down, which was fundamentally driven by the automobile industry, by foreign money who was scared out of europe, and the fact, that the fed had such a low rate in the 20s, that you gained more by dividends than by lending money at the bond market. the reason why they kept rates low was that the fed desperately wanted to lend europe money. what kind of regulativ is that?

you are right, the liquidity comes primarily from the banks due to the reserve requirements set by the fed, not just through the interest rate. so, yes there is no lending through banks for now, instead the government itself borrows money as if there is no tomorrow, thanks to the keynesian ideology prefered by politicians, and this money will trickle down.

an overview of fractional reserve banking today

Monetary Policy and the U.S. Dollar

http://www.financialsense.com/fsu/ed...2009/0213.html

The recent explosion in bank reserves potentially sets the stage for an unprecedented amount of lending. Prior to September of 2008, the typical amount of Reserve Balances with Federal Reserve Banks stayed under $20 billion. A mere five months later, this amount increased more than thirty-fold to over $640 billion! Considering that this balance was created by the Federal Reserve in exchange for financial assets, the potential risks to the purchasing power of the U.S. Dollar are significant.

and for deflation, why is deflation bad? because if prices falls, and wages are also allowed to fall, there is no difference, and if prices fall hard, buyers will step in, nobody would wait till prices are zero. whats with the IT-branche price are falling, people still buy computers, i dont care if i wait for a month to get a cheaper computer, because i want it now, and i know, i could wait forever to buy the bottom. same with cell phones, every couple of months people got a new modell. clothes got cheaper through chinese imports, now people are buying more clothes. whats wrong with that?
Invincibility lies in the defence, the possibility of victory in the attack
  • #69
  • Oct 3, 2009 11:27am Oct 3, 2009 11:27am
Quoting silverheat
i agree with pipsy, please elaborate WHY it needs a lender of last resort? so i can judge on arguments and not on uppercase letter words.
Fair enough, let me use your examples...
Quote
the only great depression we had was in the 30s and there was a central bank. in fact, the fed actively tried to manipulate the bull market down, which was fundamentally driven by the automobile industry, by foreign money who was scared out of europe, and the fact, that the fed had such a low rate in the 20s, that you gained more by dividends than by lending money at the bond market. the reason why they kept rates low was that the fed desperately wanted to lend europe money. what kind of regulativ is that?

I would point you to the panics of 1873 (the long depression), 1884, 1890 (no name small depression), 1893 (no name severe depression), 1896 (no name small depression), and 1907 (which led to the creation of the federal reserve). I would consider the panic of 1914 a pre fed event as well since they were being formed in its midst.

Attacking any one of these would make for an epic post in itself, but I'll generalize...

Durring none of these events was there a central bank. Every one was caused by a large bank taking on too much risk, usually by underwriting a highly speculative stock deal. The stock collapsed, the bank had no emergency lending source, its patrons panicked and hit it with a run, and a systemic banking system run propegated throughout the banking system via counterparty defaults.

More importantly there is the subject of call money and overnight lending.

Call money is what a marketmaker uses to settle overnight credit needs within the stock/commodity markets. In every one of these cases a failure of the bank led to other banks freezing all lending to conserve capital. Call money and overnight lending rates jump astronomically (from 3% to over 100% in the 1907 panic). This forced the marketmakers to dump assets, depressing the stock market, and undermining the value of other banks balancesheet assets.

As you can imagine this is a clasic viscious cyle. Banks capital quickly vanishes, the public gets panicky and withdraws funds further depressing capital levels, and what would normally be a healthy functioning bank is wiped out.

In our current day and age this is precisely what happened to Lehman and AIG. They took on too much speculative risk in the mortgage market, a collapse in house prices eat up their capital, the credit market seized, and the two firms collapsed. The difference is that the central bank/treasury stepped in and made money available to the call and money markets, stabalizing the rest of the institutions. Had they not done so most of the 50 largest banks would be gone.

The long and short is that banking crises are propegated by a lack of available credit. When the shit hits the fan, banks conserve capital, this forces other banks who need capital to fail, the failure kills other banks through counterparty risk, and things spiral out of control until someone or something steps in to lend.

It isn't a theory; it's the result shown time and time again to occur at the end of the business cycle. I gave you 9 examples of historic events that support my assertions for the benefits of a central bank to your 1 in opposition. I'll give you that the Fed screwed up in the '30s, but since then it has done a much better jobs then the free market did prior to its existence.

Quote
and for deflation, why is deflation bad? because if prices falls, and wages are also allowed to fall, there is no difference, and if prices fall hard, buyers will step in, nobody would wait till prices are zero. whats with the IT-branche price are falling, people still buy computers, i dont care if i wait for a month to get a cheaper computer, because i want it now, and i know, i could wait forever to buy the bottom. same with cell phones, every couple of months people got a new modell. clothes got cheaper through chinese imports, now people are...

Your confusing productivity gains with deflation. Find me a single event where a country in a deflationary environment was a good environment for its citizens. Maybe one exists, but I've never heard of it.

We can talk about the joys of money increasing in value (which is good, I don't dispute that) but it says nothing about the impact on the rest of the system. I think you'll find that when all the consequences of deflation are weighed against the advantages for savers, it's a no brainer.
  • #70
  • Oct 3, 2009 4:26pm Oct 3, 2009 4:26pm
Quoting Darkstar
Fair enough, let me use your examples...

I would point you to the panics of 1873 (the long depression), 1884, 1890 (no name small depression), 1893 (no name severe depression), 1896 (no name small depression), and 1907 (which led to the creation of the federal reserve). I would consider the panic of 1914 a pre fed event as well since they were being formed in its midst..
thanks for the reply, much better laid out, i will dip into the depressions you mentioned, and deflation, as its not yet resolved for me, both are interesting topics though.
Invincibility lies in the defence, the possibility of victory in the attack
  • #71
  • Oct 3, 2009 5:45pm Oct 3, 2009 5:45pm
Discussing these things in a forum is interesting and amusing, until facts and statistics are provided, at that point all hell breaks loose.

I am too busy and also not in the mood to type to discuss here. But, I will suggest this forum, and in particular this section of the forum to read. Lots of threads but immense knowledge with facts to back it up, with a sarcastic writing style. Good info to dispel misinformation the Fed and money printing.

http://www.itulip.com/forums/forumdisplay.php?f=8

Disclosure: I have no affiliation with the forum.

-snacker
  • #72
  • Oct 3, 2009 8:35pm Oct 3, 2009 8:35pm
Hi Darkstart,
Interesting stuff in this forum!

By any chance do you know a free platform or software to do back testing using overlay charts?
I have an account with FXCM and the charts are not good as sometimes having tow charts , same time frame, same pair , same hour and minutes one has the overlay chart above and the candle below and on the other chart the overlay is below the candle chart above or price does not mach sometimes.

I am doing the resear on one minute TF so i have to be opening an other chart to continue the research every 10 or 12 days as the one minute chart only scrolls that much.

Once i open an the other chart to continue the research on the same pair on same date and minutes, the above issue hapens. Only sometimes but i can't do research like that.

Thanks in advanced
Best regards,
Jacinto.
  • #73
  • Oct 4, 2009 12:01pm Oct 4, 2009 12:01pm
Quoting TraderChaos
Hi Darkstart,


By any chance do you know a free platform or software to do back testing using overlay charts?
I have an account with FXCM and the charts are not good as sometimes having tow charts , same time frame, same pair , same hour and minutes one has the overlay chart above and the candle below and on the other chart the overlay is below the candle chart above or price does not mach sometimes.

I am doing the resear on one minute TF so i have to be opening an other chart to continue the research every 10 or 12 days as the one...
Does anyone know where I can buy some pink laces for my blue suede shoes?
Living the adventure in my head.
  • #74
  • Oct 4, 2009 5:17pm Oct 4, 2009 5:17pm
Quoting Leonlorenzo
Does anyone know where I can buy some pink laces for my blue suede shoes?
Here you go, first result on google

http://www.pinklacewigs.com/



LOLOLOL
  • #75
  • Last Post: Oct 13, 2009 2:22pm Oct 13, 2009 2:22pm
Quoting TraderChaos
Hi Darkstart,
Interesting stuff in this forum!

By any chance do you know a free platform or software to do back testing using overlay charts?
Thanks in advanced
Best regards,
Jacinto.
Demo server = unreliable. Interesting thread, though. Ego.
Gone to a better place
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