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RE: Money, Inflation, the Market & Risk - 10/27/2009 2:47:54 PM   
willbeurdaddy


Posts: 11894
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quote:


&, of course, I go back to Marx & marvel at how he saw capitalism as having an intrinsically bubble-y nature more than a 150 years ago, way in advance. Both Marx & Minsky seemed to be seeing the same thing, the implicit instability inherent to the system.


Nothing remarkable about that observation at all, it is and has been human nature for recorded history to chase what has been working until you get to the point where it doesnt work anymore, and collapses. There is nothing inherently wrong or damaging about bubbles and their bursting as long as you don't introduce moral hazard by policies bailing out those caught in the bursting. That is the primary damage done in the last 2 years.

(in reply to DemonKia)
Profile   Post #: 41
RE: Money, Inflation, the Market & Risk - 10/27/2009 4:02:41 PM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
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quote:

ORIGINAL: InvisibleBlack

I don't see much on the site that refers to pushing gold. The one page I could find suggesting that gold might be a good idea was from December of 2008 and, to be honest, if you'd bought gold then you'd be in reasonably good shape right now. I didnt say he was hawking gold, I said his arguments were typical of those who do hawk gold, and Im sure you see the similarities. And the key word in your sentence is "if youd bought gold THEN". If you had bought gold just before it hit its inflation-is-under control duldrums you would have been miserable...and probably sold it at exactly the wrong time to jump into the hot market. Market timing is a crap shoot whether its stocks, gold or pork bellies.

There's one comment on the page at the bottom of your link that's obviously by someone touting gold - but I don't think you can judge the value of a web site by the comments posted to it.

I was going to say, those charts nicely illustrate how inflation can make the market appear higher than it actually is and, hence, as a better investment than it actually is. Which is not to say that if you'd gotten in at the bottom back in March, you wouldn't have made a nice penny by now - but it's a somewhat smaller penny than the news reports would have you believe.

Is this really news to anyone? Who with half a brain doesnt understand erosion of buying power due to inflation and that it applies to investments as much as anything else you can buy.


I've been trying to get my head around what's actually going on since we're in truly uncharted territory these days from an economic standpoint, and what I've come up with is that current fiscal and monetary policy have completely decoupled the financial economy from the "real" economy. Another way to put it would be, the stock market no longer reflects in any way the actual performance or the expected performance of the companies involved in it.

Again, this isnt a particularly new phenomenon. The long term trends of the stock market reflect long term gains in productivity, but short term market trends have never been particularly well correlated with short term trends in the economy (although with some lead/lag adjustments can be shown to have somewhat closer correlation).


I believe they achieved this amazing result by pushing something along the lines of ten or twelve trillion dollars into the banking system - almost none of which has made its way into the economy and most of which has simply been pushed into the stock and commodity markets. This is why all of the markets are up so much and unemployment, capacity utilization, etc. haven't (and I believe won't) show a similar increase.

Clearly much of the run-up has nothing to do with the fundamentals of the economy, and may face additional rationalization. However, it can't be laid totally at the feet of over-liquidity. In fact much of that liquidity has helped one industry primarily, finance, because bank credit is still very tight and that money isn't available to businesses. Private placements and "opportunistic investments" (primarily those that will benefit from an easing of credit" are still leading the way for large institutional investors.


If you look at the Leading Economic Indicators (LEI) which is what all these atomic minds use to gauge the performance of the economy, they're up something like 3% this year. Those indicators are:

Leading Economic Indicators
1) Average Weekly Hours, Manufacturing
2) Average Weekly Initial Claims for Unemployment Insurance
3) Manufacturers New Orders, consumer goods
4) Index of Supplier Deliveries
5) Manufacturers New Orders, capital goods
6) Building Permits new private housing units
7) Stock Prices (500 common stocks)
8) Money Supply (M2)
9) Interest Rate Spread (10-year treasuries less Federal funds)
10) Index of Consumer Expectations

However, if you delve into this - the Index of LEI is weighted and one Indicator makes up 35.8 of the Index. That one is the Money Supply (M2). Obviously by pumping out a lot of money, you can seriously skew the LEI. In fact, if I split the LEI into those that I think are pertinent to the financial community (or Wall Street) and those I think reflect the "real economy" (or Main Street), you end up with three being "financial" indictaors - Stock Prices, Money Supply & Interest Rate Spread and the rest being more "Main Street" indicators of who's actually working and who's actually making stuff to sell.

The three "financial" indicators are up something like 22%. The seven "Main Street" indicators are down by about 4%.

What this says is that Wall Street is booming and that Main Street is still sinking.

And sooner or later, they will rationalize, as they always do. If there is a "conspiracy to decouple the financial markets from the real economy" (my reading of the original link, not my interpretation of what you are saying) evidence can best be found in the timing of the release of the stimulus money and its impact on the real economy, which is already being anticipated by the financial markets. The timing is such that there is likely to be short-term "real economic improvement" just in time for the 2010 elections. Hopefully the voting public will be aware of the charade and braced for the inevitable inflationary impact of spiraling deficit spending. On the current path, sometime in the next 10-15 years, depending on your assumptions, Federal debt service will exceed total income taxes (based on rates after rollback of the Bush tax cuts). Ie there will be no money to actually provide government services without extraordinary growth in the economy (unlikely under confiscatory tax policy) or printing still more money. Rationalization of that economic reality with the financial markets in turn will bring more cries for bailouts and so on and so on.


According to the Federal Reserve (http://www.federalreserve.gov/boarddocs/snloansurvey/200908/) commercial and industrial lending are down across the board - meaning that consumers and businesses aren't borrowing (or being allowed to borrow - you make the call) money but somehow the banking firms are posting record profits. I'm having trouble finding hard data on this and I don't feel like sifting through a lot of big banks' quarterly reports but I believe that all of these profits are coming purely from market speculation (or we could be kind and call this "market investment") - they're obviously not coming from commercial or industrial lending. Not being allowed to borrow (from the commercial/industrial banks) is the correct answer to that question. There is plenty of borrowing going on in private placements. Those financial institutions that are posting huge profits are finding them mostly in raping credit card holders on the consumer side, and in investment banking fees and writing up of assets that have become less toxic on the business side. Even they will face increased pressure as the commercial real estate market implodes even further.


I can kind of bend my head around why Mr. Bernanke would want to do this - but I don't think it's healthy in the long run and unless something is done to spur a turnaround in the broader economy I think we're going to see a downturn sometime next year. I don't think that all of this "financial expansion" is going to somehow trigger growth in the commercial and industrial sectors of the economy if none of the financial institutions are willing to push any of their money that way. Other than your timing being a bit premature due to the release of stimulus money, right on.


It looks to me like Wall Street is undergoing a rapid inflation while the rest of the economy is suffering from an ongoing deflation and this split was created when the Fed opened up every monetary stimulus it had for the banking system but only minor (and effectively trivial) efforts were made to help the consumer and business parts of the economy. All of that huge stimulus that went into the banking system appears to be staying there - meaning that "Happy Days Are Here Again" for the financial sector and everyone else is hoping that "prosperity is just around the corner" (to use the popular Great Depression terms).

The only major addition to this is that the feedback I get is that the early phases of the run-up in stocks was in part a reaction to the stalling of health care reform and cap and trade, and the belief that Congress could not be counted on as a rubber stamp to runaway spending. As long as there is uncertainty over those issues and the ability of Congress to continue to circumvent the Republicans, volatility will still be the order of the day.



[Edited for typos.]


(in reply to InvisibleBlack)
Profile   Post #: 42
RE: Money, Inflation, the Market & Risk - 10/27/2009 7:58:00 PM   
InvisibleBlack


Posts: 865
Joined: 7/24/2009
Status: offline
quote:

ORIGINAL: DemonKia

Interesting, OP. I have a few questions, mostly so I can get a sense of where your ideas fit into the bigger econ picture I have in my head.


Thank you! I'll do my best to respond.


quote:

ORIGINAL: DemonKia

My sense from reading history, particularly economic history of the 19th century, is that deflation is horrific, even when it's mild, in comparison with inflation. & while, yeah, hyper-inflation is awful, hyper-deflation is even worse . . . . . . . The Fed seems to be erring on the side of too much inflation rather than too much deflation out of some sense that deflation is way more painful for the population & carries far more political risk than inflation does . . . . .

How familiar are you with the many, rather painful, bubble cycles the US economy went thru over & over & over again during the 19th century, when we were on the gold standard? The ones where we did indeed experience deflation over & over & over again, & the accompanying fairly severe episodes of mass unemployment?


I definitely agree with you that the Fed (and modern economic theory) greatly favors inflation and does everything it can to avoid deflation.

I don't know that there's ever been a huge deflation independent of a huge inflation. Typically the big crash follows the big boom. I'm not certain the two can be viewed seperately. It would be easy to say "everyone loves the boom" if the boom didn't inevitably lead to a crash. What I'm saying is - it's not the drop in prices that I think causes the pain, it's the destruction of wealth. If you retained all your savings and prices dropped to one tenth what they were previously - you'd probably be ecstatic (and ten times richer). The problem is when all of your savings and investments are destroyed during the collapse and so you don't have any money that causes the problem - at that point the fact that prices are low doesn't matter.

I'm familiar with the long string of booms and busts (they called these Panics back then) of the late 1800s and early 1900s. My personal favorite is the "Panic of 1907" when J. P. Morgan single-handedly rescued the entire economy (the Secretary of the Treasury showed up at his doorstep and gave him the entire contents of the U. S. Treasury to help out - I'm not kidding). I'm not an expert on them by any means. Up until very recently they were more regarded as curiousities because, it was felt, all the major issues involving them had been solved since things had been fairly stable for the past fifty years.

I expect a big resurgence in coming up with "bubble theories" for the next decade or so.

I don't know that massive government intervention is requied to avoid these vicious cycles. Some of the basic safeguards implemented during the Depression - such as deposit insurance and the Glass-Steagall Act - seem to have corrected for the problem - at least until 1999 when the rules of the game changed radically.

I have a kind of theory that its's not the capital (and by capital I mean hard business) and labor markets that caused (and are causing) these cycles. I think it's some effect of the investment/financial markets that does it. I have a hunch that if you either manage to keep the financial industry relatively smaller than the rest of your economy or can deduce what the disconnect is between expectations and performance and correct for it - these cycles would be smaller or less frequent, or both. I haven't really baked this hypothesis yet, however, so don't poke at it too hard.


quote:

ORIGINAL: DemonKia
I'm curious about your feelings on mild deflation versus mild inflation; given the choice, which would you rather & why? & if it's the case of hyper-inflation versus hyper-deflation, which'd you ruther, if you had to choose?


Ooooo. Tough call. Hyper-inflation and hyper-deflation (Panic) are both really bad. Most hyper-deflations (Panics) righted themselves fairly quickly, which is a big plus. On the other hand, when they didn't (like the Great Depression) it was truly awful. Hyper-inflations aren't very well understood though. If you put a gun to my head and told me I had to pick one, I suppose I'd pick a hyper-deflation - but simply because I think more lessons have been learned fom Panics and Crashes and the odds of quickly recovering from one are better. I think they're both equally disastrous.

On the mild side - if I was uber-econo-czar of the U. S. I would avoid any deflation like the plague, simply because right now there's so much debt out there that deflating the currency would make the debt burden even more disastrous. In an ideal world where we had the perfect economy and all was rosy and bright and I had a choice between only those two options (I couldn't maintain price stability, which would be my ideal goal) - I guess I'd go for a mild inflation. The United States managed to run for over fifty years without a major breakdown while running a mild inflation. I'm not sure what the effects of a fifty-year mild deflation would be and we fear the unknown.

Of course, a long mild inflation followed by a crash is ... er ... well ... pretty much where we are now. Although the inflation wasn't so mild over the past ten years.


quote:

ORIGINAL: DemonKia
Which leads to the thought that bubbles are inflationary events on the upside & deflationary events on the downside. & that seems to imply that we already did the inflationary part (this time 'round), & mostly what I notice is that people seem to like it despite their trepidations if it should go too far.


I agree with your thesis on inflationary on the upside and deflationary on the downside ... although it's quite possible the inflation is the (or a) cause of the bubble and that the deflation is the (or a) result of the bubble. I think right now the Fed is doing everything it possibly can to avoid the massive deflation part of the collapse of the housing/derivatives/securitization/what-have-you bubble, otherwise prices would have already collapsed. I'm not sure how workable their strategy is.


quote:

ORIGINAL: DemonKia
One of my main touchstones for economic stuff is Paul Krugman. Some of what you've presented as 'uncontroversial' might actually be more contentious than you're aware. Krugman discusses two schools of macroeconomics that emerged in the last few decades.


Krugman's work on international trade (the whole New Trade Theory stuff which won him the Nobel Prize in 2008) was brilliant. I, personally, think he's more wrong than right when it comes to government fiscal or monetary policy but I would never argue that he's a highly intelligent man. I just think he's letting his politics influence his science, as opposed to the reverse. In all fairness, though, he did predict the 2008 crash - which always gets you big points in my book. I'm amazed at why anyone would listen to a "leading economist" who somehow missed seeing the biggest economic event of their lifetimes.

In my original posts, I wasn't trying to float the idea that inflation is the sole cause of all of our economic woes. Life is far more complex than that. I was trying to address Kirata's question on how devaluing your currency affects the equity markets. Everything I put up there (sans examples which I made up myself) I think I got in first year economics. I don't believe that even the most New, Neo or Post Keynsian would argue that printing more money in the absence of any other activity would result in higher prices, a higher valued stock market, and a move towards risk in the market.

I could be wrong about that though. People do love to argue.


quote:

ORIGINAL: DemonKia
"...macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense...."

Ie, the Chicago / Austrian school of laissez faire econ is strongly intertwined with the 'freshwater' perspective. Where do you see your sensibilities aligning?


Oh my ... you want full disclosure! Good for you!

Okay, a little commentary first ... I think Krugman's analysis of the current trends or factions in economics is a little simplistic and somewhat slanted (slanted in that he views the "freshwater" economists as idealists or romantics and the "saltwater" economists as pragmatists - basically saying that his side is pragmatic and the other side are more or less bunch of dreamers) - but I'll run with it. His divide is basically along Keynsian vs. "neoclassical purists" lines. Boiled down, the Keynsian side (whether classic, neo or New) say that the markets are inherently unstable and only through rigorous government intervention at every level can things reach any sort of optimal operation and disaster be avoided. The "neoclassical" side claims that markets are inherently stable and self-correcting and if left alone will inevitably lead to optimal functionality.

My problem with this is ... both those positions are political views and not based on any sort of science or economics and as I said earlier, I'm very skeptical of any political position put forward as "science". I think too many economists today have been corrupted by their politics and rather than pursuing any sort of rigorous anlysis, use the Harvard debating method of analysis - by which I mean - if I put forward an arguement that sounds semi-plausible and can debate well enough to back it up and convince people that I'm right - well, then I am right.

Economics is one of those areas where it's extremely difficult to perform controlled experiments because to do so you'd need multiple identical economies to screw around with - and that's never going to happen. So you have to look at what does happen and try to model it and then predict events. (As an aside, modern computer models of complex dynamic systems are crap. Anyone who tells you anything different is selling you something.) This is a rough deal because there are so many factors in the modern world that isolating causes and effects is difficult - which means I can always put together some set of data or some instance to support almost any hypothesis if I play around long enough - so the Harvard debating school of analysis seems credible ... until you say "the economy is perfectly fine, all the fundamentals are fine" and we have a massive crash. Even now people are still listening to the guys who were claiming as little as two years ago that everything was okay so the debating method is still working.

I've had a pretty good track record - I managed to predict the crash, the top of the housing bubble and the dot.com crash (you'll have to take my word for it) - my biggest problem is that I generally tend to be early. It takes a few years for people to realize that their bubble investments are worthless and to try and bail and I'm sitting around wondering what I missed for a year or so and then I feel vindicated.

(By the way, no one wants to hear during the boom that you think there's a downturn coming up. The more rational and well reasoned your arguement (i.e. your hot dot.com stock has no revenue, no plan to have revenue, no assets, and no customer base and so shouldn't be worth $200/share) the angrier they get when presented with it. Sorry, I digress.)

Anyways, I think they're all wrong. If I had to align myself - I'd say I'm probably closer to the Austrian and/or monetarist schools - but I don't believe that the markets are perfectly efficient, that people are rational, nor that left completely alone that things would be optimal. I do believe that we don't know enough to accurately manage anything as complex as the economy very well - but so did Keynes and Friedman.

I think the government definitely has a role in the regulation of the economy. I just don't think the "saltwater" side of the line has even the vaguest clue what that role is and their view of the government manipulating everything in search of efficiency only results in political gaming of the system for short-term advantage and long-term disaster, as well as dangerous over-correction by well-meaning but not very effective leaders. Just as when you over-correct when you skid while driving - you end up smashed up by the side of the road after a while.

I believe in capitalism - but not the bizarro definition of capitalism that people throw around today. The classic view that started with Adam Smith doesn't state that if you just let things run wild, life will be optimal. It says that under certain conditions, the market will regulate itself and that market forces will drive the economy to its optimal state. Those conditions are (approximately):

1. Readily available and accurate information - i.e. you know all the pros and cons of available goods and what their going prices are

2. Enforcement of contracts - i.e. the rule of law - which is a combination of trust that your stuff won't get confiscated or destroyed and that if you make a deal it'll stick

3. All consumers and all producers are price takers - i.e. no one has enough sway to influence the market, no one has the ability to "fix" prices or supply

4. Elimination of fraud - i.e. you're not getting swindled, cheated, nor are others allowed advantages that you don't have (special privilege) - basically fair play

The role of government here is to ensure that the nation's economy stays within these boundaries. Then, if capitalist and economic theory are right, the markets will self-regulate. I believe this is true. I can't objectively test this theory since I'm not aware of anywhere on Earth where these conditions hold. It does appear to me that the closer you get to these conditions, the more prosperous a nation becomes.

Looking at this current mess - several banks are "too big to fail". I put it to you that if any company is "too big to fail" it has undue influence on the market by definition. If it didn't, you could let it fail and the markey would roll on. A number of investment firms, including Lehman Borthers, Merrill Lynch, Goldman Sachs, etc. were making unregulated trades on the "dark liquidity pools" rather than the regulated exchanges. That's not "readily available and accurate information" and it's certainly "special privilege". In 1933 Congress found that allowing a commercial bank to be an investment bank allowed them to fix prices, commit fraud and avoid providing readily available and accurate information - so they passed the Glass-Steagall Act and banned this. This wasn't evil government intervention in the free market, this was exactly the role the government was supposed to play. This is capitalism at its finest. It should come as no surpise that within ten years of Congress repealing this part of the Glass Steagall act, the EXACT SAME THING HAPPENED AGAIN.

The government failed in its role. It allowed the economy to fall out of the conditions necessary for self-regulation to work. I could go on and on and on. Teddy Roosevelt's trust-busting wasn't anti-capitalist - it was exactly what needed to be done to ensure that there were sufficient producers in the economy to guarantee that no one could withhold enough supply to affect the market, nor fix prices. Allowing the Bank of America-Countrywide-Merrill Lynch mergers (or any of a dozen other similar mergers) was extremely anti-capitalist in my book.

I suppose I'm some sort of Retro-Capitalist. I think it's the government's job to create the ideal set of conditions where market forces (or the "Invisible Hand') will work and then ensure that things stay there.

My big concern now (aside from, y'know, the total global meltdown) is that I think that new technologies, especially in communications, transportation and computing, have created entirely new sets of circumstances that aren't well understood and can (and have) shifted things well away from that economic "sweet spot". Getting a handle on just how the "new economy" of the new century is working and what needs to be done to keep it in line is what the "best and brightest" should be working on right now. After, y'know - they put the Glass-Steagall Act back into effect, break up all the big banks, and repeal the Financial Services Modernization Act of 1999.

quote:

ORIGINAL: DemonKia
Do you capiche Hyman Minsky? He's the hot name in econ circles right now . . . .

"...Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse...."


I'm aware that Minsky came up with the Financial Instability Hypothesis some time in the 80s, which was quite controversial then - although off the top of my head I couldn't explain it any detail except that he said that a free market system would gradually move from stability to crisis. I'll have to look into his theories. I have no doubt he's a hot topic right now.


quote:

ORIGINAL: DemonKia
of course, I go back to Marx & marvel at how he saw capitalism as having an intrinsically bubble-y nature more than a 150 years ago, way in advance. Both Marx & Minsky seemed to be seeing the same thing, the implicit instability inherent to the system.


I don't think that business cycles are avoidable in any sort of non-centrally planned economy. The same sort of sine-wave motion occurs throughout nature, from electrical current to the deer population in New Jersey, a given dynamic function oscillates back and forth over some sort of "natural" average - when it's too high it's forced down, when it's too low it's forced up.

I just don't think that anyone has the scope of vision, clarity of thought, and incorruptiblity of spirit to run anything as complex as a large economy. (Well ... and personally, I view myself as smarter than the majority of people who end in decision-making positions in government and so I want them to leave me alone as I view their choices as sub-optimal at best and substandard at worst. Actually, that may be saying the same thing.)

Thanks for the great post. Hope I answered your questions. At some point I need to devote some time on this BDSM site to looking for a sub. Ah well. Such is life.

[Edited for typos.]

< Message edited by InvisibleBlack -- 10/27/2009 8:03:25 PM >

_____________________________

Consider the daffodil. And while you're doing that, I'll be over here, looking through your stuff.

(in reply to DemonKia)
Profile   Post #: 43
RE: Money, Inflation, the Market & Risk - 10/28/2009 8:17:22 AM   
samboct


Posts: 1817
Joined: 1/17/2007
Status: offline 		IB

That has to be one of the most insightful and thought provoking posts I've read on this board in a long time.  I think your description of the politicization of economics is accurate and a wonderful explanation of how economists stake out certain viewpoints.

One additional point on Marx if I may-

Marx deliberately wrote Kapital in a turgid, obfuscating style because his point was that the system is inherently confusing.  Marx accepted Feuerbach's (sp?) view of religion- that in order to conceal its essential nature, religion is deliberately mysterious.  Feuerbach's contention was that religion is based on a faulty premise- i.e. rather than God creating Man, the reality is that Man created God, and so to obscure its roots, all religions require a leap of faith along with some smoke and mirrors.  But people accept that mysticism is part of religion and that's understood.  With capitalism, Marx thought that capitalism was also based on smoke and mirrors- but appeared to be logical.  In order to show the illogic of capitalism, he adopted a deliberately turgid style in Kapital.

I suspect that Marx is correct by the way- that to an alien, many of the concepts that humans take for granted in capitalism may not make much sense.  It's really not that easy to define things like money, profit, capital, etc. when you get down to it.  Nevertheless, capitalism is a human system, and like democracy, it sucks, we just haven't found anything better.


Sam

(in reply to InvisibleBlack)
Profile   Post #: 44
RE: Money, Inflation, the Market & Risk - 10/28/2009 11:06:53 AM   
DemonKia


Posts: 5521
Joined: 10/13/2007
From: Chico, Nor-Cali
Status: offline 		Wow, Sam, it's so nice to see someone discuss what Marx talked about (& especially when the comments are intelligent) rather than get sidetracked into whatever their thoughts are on 'communism', the Soviets, et al . . . . .



I'm a mixed-model person myself -- markets are great for allocating scarce resources when profits are structured to provide appropriate & useful incentives . . . . . & for the rest, there's socialism . . . . .

For instance, clearly the profit motive (as structured in the US) has ended up providing all kinds of perverse incentives in health care, with those countries taking a more socialist tack about health care getting better overall health outcomes from their populations . . . .



However, I'm not sure that economics is separable from politics in any kind of pragmatic way. Our current financial issues seem to largely stem from the interconnections between the economic players & the political.

quote:

ORIGINAL: samboct

One additional point on Marx if I may-

Marx deliberately wrote Kapital in a turgid, obfuscating style because his point was that the system is inherently confusing.  Marx accepted Feuerbach's (sp?) view of religion- that in order to conceal its essential nature, religion is deliberately mysterious.  Feuerbach's contention was that religion is based on a faulty premise- i.e. rather than God creating Man, the reality is that Man created God, and so to obscure its roots, all religions require a leap of faith along with some smoke and mirrors.  But people accept that mysticism is part of religion and that's understood.  With capitalism, Marx thought that capitalism was also based on smoke and mirrors- but appeared to be logical.  In order to show the illogic of capitalism, he adopted a deliberately turgid style in Kapital.

I suspect that Marx is correct by the way- that to an alien, many of the concepts that humans take for granted in capitalism may not make much sense.  It's really not that easy to define things like money, profit, capital, etc. when you get down to it.  Nevertheless, capitalism is a human system, and like democracy, it sucks, we just haven't found anything better.

Sam

(in reply to samboct)
Profile   Post #: 45
RE: Money, Inflation, the Market & Risk - 10/28/2009 12:02:58 PM   
samboct


Posts: 1817
Joined: 1/17/2007
Status: offline 		Hi Kia

A long time ago, I took a course on Marxian economics.  It's the only economics course I ever took, but the prof was a sharp guy, who paid a high price for his interest in the subject- he didn't get tenure since other faculty members claimed he was a Marxist.  He wasn't- but that's probably another reason why actually digging into Marx's theories is not commonly taught at universities.

I suspect that you, IB, and me are all on the same page with regards to the impossibility of divorcing economics from politics.  I think IB has done a masterful job of pointing out that free market does not mean unregulated, although politicians with little understanding of the ramifications of their actions have succeeded in taking what had been a working free market economy, and by loosening vital constraints, turned it into an effectively unregulated economy on a downward spiral. 

Trade with China for example, has lead to a devaluation of manufacturing patents in the US because Chinese produced goods are sold in the US market with no regard to US patents.  US inventors are not rewarded for their labor, and the rewards have flocked only to those individuals with large bank accounts such as the owners of Walmart and their ilk.  Thomas Jefferson saw that the patent system was critical for economic progress and rewarded individuals on the basis of merit, rather than inherited wealth, it just took a bit for that system to really pay off.    Once critical side effect of manufacturing in China has been an effective devaluation of US patents.  I'd suspect that the real devaluation of the US economy is far worse than merely trade figures would indicate.  I'm generally not that interested in what the money supply is doing, that matters more to economists.  I'm interested in intellectual capital, and that's much harder to measure.


Sam

(in reply to DemonKia)
Profile   Post #: 46
RE: Money, Inflation, the Market & Risk - 10/30/2009 11:23:05 AM   
InvisibleBlack


Posts: 865
Joined: 7/24/2009
Status: offline 		Sometimes it takes me a while to respond to people who've made good posts (or sent me mail) - life can be very busy and it takes me time to compose an intelligent response.

However, while doing a little research, I did stumble across this quote:



"“Appraising the situation in the bitter dawn of a cold morning after, what do we find? We find two-thirds of American industry concentrated in a few hundred corporations…We find more than half of the savings of the country invested in corporate stocks and bonds, and made the sport of the American stock market. We find fewer than three dozen private banking houses, and stock-selling adjuncts of commercial banks, directing the flow of American capital. In other words, we find concentrated economic power in a few hands…  We find a great part of our working population with no chance of earning a living except by grace of this concentrated industrial machine; and we find that millions and millions of Americans are out of work, throwing upon the already burdened Government the necessity of relief…  We find [our] leaders proposing no solution except more debts, more conferences under the same bewildered leadership, more Government money in business but no Government attempt to wrestle with basic problems…  I believe that our industrial and economic system is made for individual men and women, and not individual men and women for the benefit of the system.”
 
- Franklin Delano Roosevelt
 


_____________________________

Consider the daffodil. And while you're doing that, I'll be over here, looking through your stuff.

(in reply to InvisibleBlack)
Profile   Post #: 47
RE: Money, Inflation, the Market & Risk - 10/31/2009 7:41:27 PM   
blackcat39


Posts: 62
Joined: 8/7/2008
Status: offline
quote:

ORIGINAL: samboct

IB

That has to be one of the most insightful and thought provoking posts I've read on this board in a long time.  I think your description of the politicization of economics is accurate and a wonderful explanation of how economists stake out certain viewpoints.

One additional point on Marx if I may-

Marx deliberately wrote Kapital in a turgid, obfuscating style because his point was that the system is inherently confusing.  Marx accepted Feuerbach's (sp?) view of religion- that in order to conceal its essential nature, religion is deliberately mysterious.  Feuerbach's contention was that religion is based on a faulty premise- i.e. rather than God creating Man, the reality is that Man created God, and so to obscure its roots, all religions require a leap of faith along with some smoke and mirrors.  But people accept that mysticism is part of religion and that's understood.  With capitalism, Marx thought that capitalism was also based on smoke and mirrors- but appeared to be logical.  In order to show the illogic of capitalism, he adopted a deliberately turgid style in Kapital.

I suspect that Marx is correct by the way- that to an alien, many of the concepts that humans take for granted in capitalism may not make much sense.  It's really not that easy to define things like money, profit, capital, etc. when you get down to it.  Nevertheless, capitalism is a human system, and like democracy, it sucks, we just haven't found anything better.


Sam



Your last paragraph (below) is very poignant.  - from this reprint, not from above.  (you edited it to bring in China?)

quote:


suspect that you, IB, and me are all on the same page with regards to the impossibility of divorcing economics from politics.  I think IB has done a masterful job of pointing out that free market does not mean unregulated, although politicians with little understanding of the ramifications of their actions have succeeded in taking what had been a working free market economy, and by loosening vital constraints, turned it into an effectively unregulated economy on a downward spiral. 

Trade with China for example, has lead to a devaluation of manufacturing patents in the US because Chinese produced goods are sold in the US market with no regard to US patents.  US inventors are not rewarded for their labor, and the rewards have flocked only to those individuals with large bank accounts such as the owners of Walmart and their ilk.  Thomas Jefferson saw that the patent system was critical for economic progress and rewarded individuals on the basis of merit, rather than inherited wealth, it just took a bit for that system to really pay off.    Once critical side effect of manufacturing in China has been an effective devaluation of US patents.  I'd suspect that the real devaluation of the US economy is far worse than merely trade figures would indicate.  I'm generally not that interested in what the money supply is doing, that matters more to economists.  I'm interested in intellectual capital, and that's much harder to measure.
[/unquote] 

< Message edited by blackcat39 -- 10/31/2009 7:46:48 PM >

(in reply to samboct)
Profile   Post #: 48
RE: Money, Inflation, the Market & Risk - 11/2/2009 6:34:28 AM   
samboct


Posts: 1817
Joined: 1/17/2007
Status: offline 		"Your last paragraph (below) is very poignant.  - from this reprint, not from above.  (you edited it to bring in China?"

Poignant?  OK, if you say so....I'd say its more a reflection on my frustration with the way I see the US economy heading which has had disastrous consequences for the country and my career- and the careers of many of my classmates and colleagues in the sciences.  I'm always appalled at the rhetoric of "We need more scientists and engineers!" yet there are too few jobs for the ones already here, and the wages are lousy compared to some other fields that take far less training.  Why is science immune from the one law of economics that seems to be universal, i.e. Supply and Demand?

From my perspective, the people running the economy have forgotten both the lessons of history- don't touch that regulation- it was there for a reason... to starving the goose the lays the golden eggs -most of the economic progress in the past century or so has been due to technological innovation from science and engineering- yet we don't need to keep spending money on R+ D.

And I liked IB's FDR quote- seems rather relevant......


Sam

(in reply to blackcat39)
Profile   Post #: 49
RE: Money, Inflation, the Market & Risk - 11/2/2009 12:09:49 PM   
InvisibleBlack


Posts: 865
Joined: 7/24/2009
Status: offline
quote:

ORIGINAL: einstien5201

Excellent series, IB. I've quite enjoyed reading it. One of the things about the most recent collapse that caught my eye was all the reporting on "commercial paper" and the like. The reliance on these forms of short-term credit to do everything from pay salaries to repay other short-term loans seems to me to be the primary cause of the collapse. Perhaps you could do a series on those, and other sorts of strange (i.e. not something the normal citizen will encounter) financial instruments?


Thank you. I'm sorry it took me so long to respond to this, but here goes...

There are a lot more complex financial instruments out there that I couldn’t even begin to explain (which is, I think, a part of the problem) but commercial paper is fairly straightforward, so commercial paper I can talk to.

Commercial paper is, by definition, “a financial instrument that matures before nine months (270 days), and is only used to fund operating expenses or current assets (e.g., inventories and receivables) and not used for financing fixed assets, such as land, buildings, or machinery”. Commercial paper may be issued without U.S. federal government regulation and is used by the majority of large corporations to fund their day to day and operating expenses. I believe that in 2008 there was approximately 2 trillion dollars in commercial paper rattling around the economy before the crash.

Okay, what does that mean and why would anyone want to use “commercial paper”?

Well … it all ties back to interest rates, risk, inflation and rates of return.

In the old days, before the invention of ATMs, my Dad used to go to the bank once a week and withdraw a batch of cash. He’d use this cash to pay his expenses for the week – groceries, gasoline, and so on. He had a pretty good idea of what his weekly budget was, and so he knew that he’d need a certain amount of dollars right at hand to meet them. Since banks were closed nights and weekends and waiting in line at a teller was a tedious business, he’d do it once a week and just keep a set amount of money “at hand”.

Let’s say that we’re a big company – we’ll use General Electric as an example. Every month we have a lot of money coming and going out. We have to pay salaries, pay rent, make mortgage payments, pay power bills, buy equipment, etc. etc. – you get the drift. It’s the same thing as with my Dad, but on a larger scale. Let’s say GE’s monthly operating expenses are 100 million dollars. That means that if you’re running General Electric, you need to keep one hundred million dollars in cash (or something nearly as liquid as cash) at all times.

Remember how money has a “time value”? If interest rates are at 5%, that means that just putting that hundred million into a T-bill, I would be making five million dollars that year if I’d bought Treasury notes rather than keep that cash “at hand”. Let’s say that GE has a hot new “instant energy from granola” project that could net a 20% return – if GE invested that 100 million in that project instead of keeping it laying around to pay bills, it would net 20 million dollars that year.

Bear in mind, too, that if we’re suffering from inflation, that 100 million sitting around all day is slowly losing value. It’s eroding even as I sit here typing!

What to do? A-ha! We’ll borrow the 100 million! By obtaining a short-term loan (i.e. less than ninety days and used only to fund operating expenses or current assets” (i.e. commercial paper)) GE can then use the borrowed money to fund its day-to-day expenses and invest the 100 million in cash in something that would earn money.

If I can borrow money at an interest lower than my expected return on investment (let’s say I pay 3% interest on my commercial paper and I’m making 20% on the granola project) than I’m actually making money off of the deal (in this case, a net 17%). Since inflation favors the debtor, I’m in even better shape since the actual rate of interest I’m paying is somewhat lower than the nominal rate.

Basically, using commercial paper means you don’t need to keep a lot of cash on hand. You borrow every couple of months to meet your bills and just keep rolling the debt into the next period. This only really works under two circumstances:

1)      your actual income is sufficient to easily cover the debt on the paper

2)      people are willing to loan you the money

It’s at #2 where things fell apart.

Right after the crash, the market for commercial paper dried up. No one would revolve your credit to the next period. This means that if you’re GE, you need to come up with 100 million dollars in liquid assets immediately to cover payroll, pay the bills, pay the mortgage, and so on. Only, the whole point of issuing the commercial paper was so that you wouldn’t have to have any cash on hand!

General Electric has assets that could easily cover the 100 million. The problem is that selling a turbine factory or an assembly plant or a skyscraper takes time (these are “illiquid assets”). It might take months or a year to sell a piece of property or a factory or something.

This is a perfect example of the effect the “credit crunch” has on business. If you’re unable to float the next month’s commercial paper, you need to emergency sell some assets, into a declining market, at rock-bottom prices so they sell quickly, in order to meet your payroll and monthly expenses. You then need to build up your cash reserves so that you can continue to cover expenses, which means you stop investing in productive ventures and instead just hoard cash.

As it turns out, GE was able to issue more commercial paper – although at a higher interest rate. That higher rate means that GE makes less (or loses more) money every month than they would have previously but at least they’re still in business.

I don't believe that blame for the crash can be laid directly at the feet of commercial paper - although I do think there's a lot to be said for their being far too much debt in the economy overall or, I suppose, to say the same thing differently - there's insufficient productivity to support the level of debt in the economy, and the heavy reliance on commercial paper by many major corporations is a classic symptom of this.

Hope that explained everything.

< Message edited by InvisibleBlack -- 11/2/2009 12:11:04 PM >

_____________________________

Consider the daffodil. And while you're doing that, I'll be over here, looking through your stuff.

(in reply to einstien5201)
Profile   Post #: 50
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