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How Quantitative Easing really works: Occupy Wall Street Edition (2)

October 10, 2012 Leave a comment

As a contribution to Occupy Wall Street’s efforts against debt, I am continuing my reading of William White’s “Ultra Easy Monetary Policy and the Law of Unintended Consequences” (PDF). I have covered sections A and B. In this last section I am looking at to section C of White’s paper and his conclusion.

Back to the Future

It is interesting how White sets all of his predictions about the consequences of the present monetary policies in the future tense as if he is speaking of events that have not, as yet, occurred. For instance, White argues,

“Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances”, financial as well as real, could potentially lead to boom/bust processes that might threaten both price stability and financial stability. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities.”

It is as though White never got the memo about the catastrophic financial meltdown that happened in 2008. If his focus is on the “medium run” consequences of easy money that has been practiced since the 1980s, isn’t this crisis the “medium run” result of those policies? Why does White insist on redirecting our attention to an event in the future, when this crisis clearly is the event produced by his analysis.

Read more…

Europe’s unions under pressure to respond to austerity…

May 30, 2010 Leave a comment

This is the 1970s Depression all over again – this time on a global scale. Governments are going to fall.

From Threecrow:

This puts the wind to the sails. It is the type of action I would expect, demand, in fact, from the humanity in Europe. If this can be coordinated correctly it will bring government to this point: ordering the goon squad to keep whacking her citizens with tear-gas and sticks until they go back indoors, or, seeing the gathering grim determination of active citizens collectively finding their Archimedean Point, the goons themselves will beg to stand down. They may even join their fellow citizens. After all, these are not Indonesian goons we are talking of here, these are European goons. And, they are Unionized. They have an undeniable stake in this. Perhaps they themselves will glimpse a New Horizon.

What a moment. We hold our breath as “The Whole World is Watching,” and, though through sheer exhaustion of spirit we may have come to believe otherwise, we now know beyond question that we continue to live in interesting times.

“The whole world is watching.

The whole world is watching.

The whole world is watching.

The whole world is watching.” Chicago Transit Authority, 1969

From The International Business Time:

Europe’s unions caught between members and markets

European trade unions are facing up to a difficult choice: acquiesce to austerity measures and infuriate members, or fight them with strikes and risk a market backlash that could make the economic situation worse.

At one extreme is Ireland, where unions have avoided widespread industrial action over existing cuts — some of the earliest and sharpest in Western Europe — in part because the resulting market reaction would hurt workers more.

Trade union congress leader Jack O’Connor told Reuters last week that he feared foreign investors would interpret serious strikes as a sign Ireland might not be able to push through cuts and meet debt obligations, leaving it unable to borrow.

“Even if you win (the strike campaign), you could end up losing,” he said — but he said the decision was costing him sleepless nights and would not rule out further strikes if the government pushed through new cuts.

At the other extreme is Greece — where the European Union and International Monetary Fund (IMF) are demanding harsh spending cuts — where unions say they will strike in June and push for Europe-wide action against austerity measures.

“We’ll be pushing until the end to prevent the worst,” GSEE union head Yannis Panagopoulos, promising maximum resistance to a bill that raises the retirement age and curtails early pensions.

Panagopoulos says he is already talking to other European unions and hopes they can work together to hold back a wave of austerity measures as governments pull back on stimulus spending and start to address deficits.

Greece told to ‘sacrifice’ as govt spends more on military

May 2, 2010 Leave a comment

No comment needed.

Vodpod videos no longer available.

Still more notes on the delveraging economy:

August 20, 2009 Leave a comment

What we have written here is all speculation based on our understanding of how the economy works. Please do not construe it to imply you have been wasting your life in a job which produces nothing, creates nothing, and only serves to empty your remaining years on this earth into a black hole of worthless activity.

To continue:

For the past seventy to eighty years, an increasing portion of transactions in our economy have been based on the exchange of some real thing for a notional placeholder – a valueless piece of fancy paper with a picture of a dead president on it – and, worse, by some promise of future payment in the form of this fancy piece of paper.

That real thing – a single family home, car, 42 in wide screen high definition plasma television, or pair of shoes – has long since suffered the ultimate end that all such goods suffer: It was consumed through days, months or years of use, until nothing remained of its original utility to us.

Shoes wear out, cars die by the side of the road, the television goes on the fritz right in the middle of American Idol.

Even a house, the most durable of our goods, eventually succumbs to old age.

It is what things do.

But, of all the goods mankind has ever created, there is one exception to this rule: Money.

gold4Money is never consumed because it exists simply to serve as the medium by which goods circulate in our society until these goods fall out of circulation to be consumed.

For instance, it has been estimated that eighty-five percent of all the gold mankind has ever pulled from the ground and stripped of its impurities lies somewhere in some vault of a central bank, or around the neck of some rap artist.

And, here is where it gets really interesting:

What is true for gold, is true for money in general. And, we believe, this also has to be true for the chain of incomplete transactions waiting to be completed since the Great Depression: Every transaction where someone made a purchase on credit that was not eventually completed with the creation and sale of a new good, is still hanging out there in our economy waiting to be completed- every home mortgage, car note, or bag of groceries, whether repaid or outstanding.

These incomplete transactions are sitting as an asset on the books of some financial institution or on the computer in the basement of some central bank.

Mind you, we’re not talking only about debt which has not yet been repaid with the fiat money in your wallet: even debt which has “officially” been repaid with dead presidents, but has not been replaced by a real good, must be considered incomplete.

The reason is simple: The dollar is a valueless piece of paper, which, while it can stand in the place of real money (gold or other precious metals) for purposes of facilitating transactions, cannot itself complete those transactions, i.e., can not do what real money does: replace the value of the good that has been transferred from seller to buyer.

Thus, in any such transaction, the seller has accepted, in return for his/her good, not the money equivalent of that good, but a pretty piece of paper.

This point must be understood: Should there arise a circumstance where real money is called for, where paper can no longer serve as a representative of this real money, because it has no value in and of itself, the aggregate value of all such transactions, all the way back to the moment the dollar was debased from gold, will vanish, as if they never occurred.

All of the “wealth” allegedly created by, and predicated on those transactions, collapses in a massive catastrophic implosion.

If these transactions expire without being completed – without the previously consumed good being replaced by a new good – the economic value of the transaction vanishes, in much the same way as the ledger value of your mortgage vanishes when you default and are foreclosed.

Since the great mass of these incomplete transactions will never be completed owing the the very structure of our economy, where superfluous work composes the great bulk of economic activity, and only adds to the volume of incomplete transactions. the only thing standing between current valuations of assets in the economy and this massive implosion is the relentless addition of even more such transactions.

For all these years, Washington has forced the use of fiat money in place of  money, because of the one attribute of money for which fiat cannot be substitute:  money’s irreconcilable antagonism to superfluous work, to work that that is meaningless and has no productive value.

The costs of this meaningless work is now embedded in the price of every good sold in our economy, every asset held, and, most of all, in the very employment of millions across this nation.

To evaporate, all that is now required is a trggering event: an event, we believe, that has already happened…

More notes on the deleveraging economy…

August 18, 2009 Leave a comment

The leverage we speak of is that set against your free time, your time to be human, your moments on this Earth which can either be spent enjoying your life or sitting in a meeting discussing the synergies arising from the company’s relationships with its vendors and customers, given rapidly changing technological interfaces.

You know: bullshit…

The leverage they speak of is also this choice, but couched in the obscuring discussion of consumer confidence; household, corporate, and public debt; and, complex financial instruments.

In fact, in all of this discussion of leverage there is only your free time.

Everything else can be measured in the moments you can be diverted from enjoying your free time to focus on your confidence as a consumer, your debt, and how you might be convinced to take on more of the latter to boost the former.

As we stated, our concept of leverage differs from that of economists in that they assume the debt incurred in a transaction whose completion is delayed indefinitely will eventually be paid in full with worthless, valueless, pictures of dead presidents.

Okay, fine.

Bear with us a moment as we peer into this dubious assumption – really, it will only hurt for about the rest of your working life.

We promise…

Gigantic-Burning-Hummer

Inspired by the Messiah, I decide it is time to trade in my clunker for a spanking new 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring.

Thanks to the debt guy at the dealership, I incur only $20,000 of debt for this new monster of fuel efficiency, and, thanks to the Messiah, the Federal government incurs an additional $4,500 of debt, which, according to economists, I will pay in taxes over time.

Of course, both my $20,000 and Washington’s $4,500 merely exist as dancing electrons on some computer in the basement of the Federal Reserve – but, no worry! I am good for it.

You see, I have a job: Every day I rise from bed, and commute an hour to a desk, where my job is to inhale oxygen, and exhale carbon dioxide – break for lunch – and continue the process in the afternoon until exactly 4:15 pm.

Rinse and repeat for five years, and the car is mine.

The economists are satisfied with this transaction, so I am satisfied as well.

There is, however, a small problem: I have just purchased a 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring, in return for five years of shallow breathing – interrupted by trips to the water cooler to discuss this weekend’s football game.

I get a car, the economy gets a lot of carbon dioxide.

Every week in return for several thousand shallow breaths, my employer gives me dancing electrons which exists mainly on some computer in the basement of the Federal Reserve.

I, in turn, send some of those dancing electrons to the bank which financed my loan, and they accept it as payment for the car loan.

On any normal planet – or previous period of human history – where people would not elect Sarah Palin as governor, nor blow up Afghan wedding parties to make a political point – the exchange of a bit of dancing electrons for a 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring, might seem like fraudulent transaction.

People on those planets, or, in those periods of human history, might object that the exchange is not only fraudulent and unacceptable, but also indicative of an unbalanced mind.

They might strenuously object that the exchange of some part of five years of shallow breathing for a 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring, is an economically unsustainable transaction; and, that an economy built on such exchanges is doomed to collapse.

At this point, an economist would step in and explain:

So long as this incurred debt is replaced by another, larger, quantum of debt, the chain of transactions where something is sold for nothing can continue indefinitely.

If corporate debt is not enough, we can rely on consumer debt, and, after that, international debt, and finally, government debt.

And, when we have exhausted all the sources of debt, we can rely on that little computer in the basement of the Federal Reserve, which creates money out of dancing bits of electrons…

Here.

24Seven: Our proposal for the non-stimulus “stimulus” package

December 14, 2008 3 comments

obama_odingaIt is all the rage now: create your own stimulus package for fun and profit!

The Messiah has put out a call for the states to pony up proposals to address the current downturn with a package of measures designed to offset growing unemployment and the dangers of a deflationary event.

The Wiki has this to say about deflation:

In economic theory, deflation is a general reduction in the level of prices, or of the prices of an entire kind of asset or commodity. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices. In the IS/LM model (that is, the Income and Saving equilibrium/ Liquidity Preference and Money Supply equilibrium model), deflation is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity – contributing to the deflationary spiral. Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and to borrow at interest rates which are below those available to private entities.

Don’t let the technical double speak confuse you. Deflation is the persistent collapse of prices for goods and assets, which leads to a fall in investment.

But, you say, if the prices of goods and assets are falling, shouldn’t investment be falling as well? Isn’t it a normal for the market to signal a glut with a fall in prices, and, therefore, a fall in investment in the production of a good?

Boy, are you sharp! That is completely true.

And, here we have the problem not only of a fall in prices for one or two goods, but all goods and together, signaling the owners of capital that not just one or two goods are in a glut, but all goods are in over-supply together.

What is then considered an economic problem is actually just what one would expect as one approaches the saturation point of any market: as the supply of all goods exceed the demand for those goods, prices begin to fall.

The result: the large numbers of layoffs we are now witnessing, and will witness over the next few months.

It is the kind of economic event which causes even the most fearless small government proponent of the Party of Wall Street suddenly begin sounding like Karl Marx – or, at least, Governor William J. Le Petomane:

Holy underwear! Sheriff murdered! Innocent women and children blown to bits! We have to protect our phony baloney jobs here, gentlemen! We must do something about this immediately! Immediately! Immediately! Harrumph! Harrumph! Harrumph!

But, hold on a minute: Wouldn’t falling prices just make those same products available to a wider group of buyers?

220-obama-brother-793467fPrices could conceivably fall to the level where 42 inch, high-definition, wide-screen plasma televisions could be afforded by slum dwellers in Nairobi and Maputo. Every poor Mexican farmer could drive a Ford pickup. And, Haitians would no longer consider dirt cookies an entree.

Initially, then, deflation might lead to a fall in investment, but eventually, the collapse of prices would mean a broader customer base for companies and a far larger market for their goods. Imagine, no longer would the favored target demographic be that rather narrow slice of humanity identified as 25-35 year old American suburbanites.

So, why would Washington be so desperate to combat deflation – and why was deflation the subject of Dr. Bernanke’s 2002 Federal Reserve paper – published near the bottom of the trough between to two peaks of the stock market’s double top?

Said Mr. Bernanke:

In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn. Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value …The financial distress of debtors can, in turn, increase the fragility of the nation’s financial system–for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default.

So, deflation means falling prices, which leads to less borrowing, and to an increase in the burden of debt on those who are currently paying off past obligations.

But, the kicker is the growth of debtors unwilling or unable to repay their debt – as in companies with declining revenue, and consumers who lose their jobs, or, face pay cuts, or, find they owe more on a house than it is worth.

This last problem turns it into a concern for banks, who begin to experience a rapid increase of deadbeats.

Just to be clear here, it should be noted the Federal Reserve Bank is a bank. It even has the word “bank” in its name to avoid confusion with agencies like the Massachusetts Turnpike Authority, or San Diego County Water Authority, which are, by and large, not banks or even in the banking business – although they too borrow from banks by floating bonds, and would have problems paying off those debts if deflation began to eat into tax revenues.

Deflation has the same effect on the Federal Reserve Bank, as it does on your bank – it increases the likelihood its customers would be unable to make good on their obligations.

The real problem, however, is their biggest customer goes by the name of The United States of America.

Just as deflation makes it more onerous for the average person to carry a debt burden, as their income falls and value of their houses and other consumer items drop, deflation also mean less tax revenue for The United States of America, as well as the Massachusetts Turnpike Authority, or San Diego County Water Authority.

As Ambrose Evans-Pritchard points out in a recent article:

Once the killer virus [deflation] becomes lodged in the system, it leads to a self-reinforcing debt trap – the real burden of mortgages rises, year after year, house prices falling, year after year. The noose tightens until you choke. Subtly, it shifts wealth from workers to bondholders. It is reactionary poison.

Suppose you are a Moron, and for some strange reason you decide you want to kill a million Arabs.

Well, you go to the Treasury and are informed that after decades of deficit spending, building a fairly efficient Arab killing machine, there is no money in the coffers to actually get the machine in place and commence with the holocaust.  So you float some bonds to fund the entire project, which are purchased by huge investment vehicles like PIMPco, and use the proceeds of that bond sale to slaughter Arabs in their beds, on the streets, from the air, on the ground, and in such large number you can begin to approach the ruthless efficiency of German patriots without all that mucking about with concentration camps and cyclon-b.

Now deflation begins to exert itself and suddenly your revenue is falling, and it is getting harder to service your accumulated public debt.

What do you do? Ambrose has an idea:

Ultimately, it leads to civic revolt. Democracies do not tolerate such social upheaval for long. They change the rules.

Mvd221738Which brings us to Ecuador, who decided this weekend to stop paying off its debt.

Ecuador’s President Rafael Correa said yesterday that his nation is defaulting on its foreign debt, fulfilling his longtime populist pledge to leave international creditors in the lurch. The default, Ecuador’s second in 10 years, could rattle already jittery investors who have pulled billions of dollars out of emerging markets in recent months as the global financial crisis has spread. It could also set back U.S. interests in Latin America, as Correa now seeks to deepen financial ties with allies like Iran, which this week granted the South American nation a new $40 million credit line.

And, a note from our friend and brother Threecrow,  who wonders if this could be contagious:

What would happen if all nations did this? Is the USA close to needing to do this? If this was done in an anticipated, organized manner, in other words, a world wide grand moment of forgiveness, what would be the result?  Could we come to a state of economic tabla raza?  Just being naive in a thoughtful way.

As will be seen from the above discussion on deflation, in fact, the entire world market seems to be trying to create just such a world wide grand moment of forgiveness: It is precisely this end toward which deflation is aiming.

And, it is against this world wide grand moment of forgiveness that the Messiah’s call for ideas on a stimulus package is directed.

If we now go back to that discussion, we can see the lack of 42 inch, high-definition, wide-screen plasma television in the shanty towns of Nairobi are not so much the natural result of scarcity as they are the deliberate economic policy of the United States, and has the sole intent of enriching the bondholders of American debt to the disadvantage of the slum dwellers of Nairobi.

As a result of this deliberate policy, these folks have been denied plasma televisions with over 200 channels of DirectTv reruns, IPods, and the entirety of minimum requirements of civilized life – the least of which might be running water, sanitary living conditions, and rudimentary medical care. It is also the why dirt cookies are a delicacy in Haiti, and why poor farmers from Mexico are mowing our lawns and sitting our children in San Diego.

The stimulus package Barack Obama is set to enact when he becomes president will, above all, accelerate the impoverishment of billions of citizens in every country, even as it encourages the employment of Americans here at home.

And, employment is the selling point, because millions of Americans are dreading the coming year of nasty economic news with the sort of anguish with which a condemned man faces the hour of his execution: massive employment is inevitable, as are the idling of billion of dollar in productive capacity.

It is indeed a sad conundrum: you join the long line of unemployed persons in America, or, Nairobi slum dwellers go without the SciFi channel.

So, we decided to propose an alternative stimulus package for the Messiah which might be able to bridge these two objectives: you continue to have a job, and Kenyans get to eliminate Nairobi slums in the process:

First, no stimulus package. That’s right, any stimulus package will only maintain high prices for goods and make it more difficult to erase those nasty slums in Nairobi. Deflation should be allowed to work its way into the prices of goods and assets until these goods and assets are within reach of every human being on the planet. And, guess what, the more prices of American goods fall, the more residents of Nairobi will be able to buy them.

Second, no unemployment. People tend to get upset when they are summarily thrown into the streets with no means to support themselves. So we want to see everyone has a job despite the persistent collapse of prices. We would propose to reduce working time to twenty-four hours per week initially, with 3 times the normal hourly wage for any time worked in excess of this amount. We call this the 24Seven non-Stimulus Plan – since it has the word stimulus in the name, politicians will be fooled into voting for it.

Third, abrogate all debt, public and private. We  just go the Ecuadorean route and default on all debt. You might argue that this would be messy, so, we thought it might make sense to at least add a deflation clause for the principal on all debt, public and private. That way if you bought a house for $200,000 and prices fell by 5 percent, your principal would be adjusted accordingly to reflect the fall – to $190,000, and your mortgage payment would be adjusted to reflect this new balance. This would give a levels of governments and bond-issuing corporations the incentive to hold down prices.

Fourth, eliminate all taxes. We think this is self-explanatory. And it would put at least $1.5 trillion dollar back in the pockets of working families to make up for reduced wages and income resulting from the fewer hours of work.

So that is our plan, The 100 Percent Iron-Clad Guaranteed 24Seven no-Stimulus Stimulus Plan.

And, the Messiah doesn’t even have to give us any credit for it.