18-Sep-10 News -- Near-zero CPI hints at deflation

Discussion of Web Log and Analysis topics from the Generational Dynamics web site.
vincecate
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by vincecate »

Guest wrote: Vince, not top be rude but you're quoting wiki. I don't even allow my HS students to quote from wiki. All debt is money and all of our money that we have today is created out of debt.
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Wikipedia cites other sources if you don't trust it. Do you have any source that contradicts Wikipedia on this? I know that MMT thinks that all government debt is money. But what economic theory thinks that all debt is money? Do you think there is any economic theory, or even one real economist, that claims the notional value of derivatives is money? Do you have any sources?

Tom Acre
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by Tom Acre »

Under a fractional reserve banking system, banks create money by lending.
These banks have capital requirements.
Overstating the value of their assets (whether they be derivatives, foreclosed properties, expected returns on loans, etc.), essentially allows all sorts of mischief (e.g. leveraging the money multiplier, presenting the illusion of financial health, etc.).
As loans go bad, as properties, derivatives and other assets tank, wealth and money decreases.
Assuming the amount of purchasable goods and services remains relatively stable, this causes deflation, which nearly everyone recognizes as the current state of the economy.
Thus, barring an extreme change in circumstances (on the order of widespread nuclear war) that throws us into a new dark age, there is virtually no chance of seeing hyperinflation next year or the next or the next or probably even the next. And if such does come to pass, a tractor trailer full of canned goods, a reliable water supply and a good farm would be worth more than any of the assets you read about in the Wall Street Journal or see on the Bloomberg channel.

vincecate
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by vincecate »

Tom Acre wrote:Under a fractional reserve banking system, banks create money by lending.
I think I understand. Imagine a brand new bank with just 2 customers, A and B. Customer A deposits $100,000 into his new savings account and the bank then loans $90,000 to Customer B, who then takes out the $90,000 in cash. Now both customer A's demand deposit savings account of $100,000 and the $90,000 of customer B count as money. They both think they can spend their money at any time. Economist don't talk about the $90,000 debt as money. However, if you add up all the bank held debt, it will tell you how much money has been created by the banks under fractional reserve banking.

I have updated my section on banks:
http://pair.offshore.ai/38yearcycle/#banks

Thanks.

xakzen
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by xakzen »

vincecate wrote:I think I understand. Imagine a brand new bank with just 2 customers, A and B. Customer A deposits $100,000 into his new savings account and the bank then loans $90,000 to Customer B, who then takes out the $90,000 in cash. Now both customer A's demand deposit savings account of $100,000 and the $90,000 of customer B count as money. They both think they can spend their money at any time. Economist don't talk about the $90,000 debt as money. However, if you add up all the bank held debt, it will tell you how much money has been created by the banks under fractional reserve banking.
Some one posted a really good article on Credit Money a few months back that did an excellent job describing how the reality is that the banks lend the money first and then go looking for deposits. I can't find the link now so if the person who posted it can help by re-posting that would be really great. The article backed up the information by showing that M1 actually follows M2 showing that the fiat currency is "printed" by the Fed when the banks run out of deposits to borrow from each other. It demonstrates that we really have a Credit Money system driving the fiat currency. When the Fed tries to push fiat money out to the banks, it's really pushing on a rope. That's why the Monetarist (New Keynesian) Fed's theories are ultimately failing.

And it also shows that the destruction of the Credit Money exceeds the Printing by at least 1-2 orders of magnitude. As far as the notional value of derivatives go, I believe that is the meaning of Too Big To Fail (TBTF). What I think they mean is that there are too many Derivatives written on the order of 100's of trillions of dollars that if that firm defaulted would become due. Thereby bankrupting the underwriter and the holders of those derivatives in a catastrophic system failure. One would hope that these positions are being unwound, but who knows since there is no transparency in the financial markets. Likewise the regulators appear to be all captured by those industries and that's why they spend their days surfing porn off the internet.

Higgenbotham
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by Higgenbotham »

vincecate wrote:In what economic theory do all debts and notional value of options count as money? In this wikipedia article showing a table of all the definitions of money wikipedia users know about it does not show any that include either "all debt" nor anything like "notional value of derivatives". Do you know of any real economist who thinks that all debts and notional value of derivatives count as money?

http://en.wikipedia.org/wiki/Money_supply
vincecate wrote:Notional value is not a real thing. Imagine I sell you an interest rate swap where I will pay you 1% interest on $1 million dollars US and you pay me 1% interest on $767,000 Euro for the next 3 years. I might sell you this for just $10,000 yet the "notional value" is $1 million US. Do you really think the notional value counts as money?

http://en.wikipedia.org/wiki/Notional_value
This is a repeat of a reply I made to a nearly identical post of yours a few months ago. I don't think you responded. Values of debts and notional values of options (or more broadly, derivatives) in many cases are not counted in money supply figures. That opacity and lack of accounting/regulation is part of what makes derivatives so dangerous and potentially deflationary, because they in fact act as money and are closer to being money than not. An interest rate swaps value won't swing more than a few percent, but futures and options are a different story. Options can in fact have swings that are multiples of their initial value and futures can have swings that are more than margin requirements, especially in the event of a crash like the flash crash or 1987, wiping out entire accounts in minutes unless real money is posted to cover the deficiency (if an entity is unable, see below).
viewtopic.php?f=14&t=2&start=30#p121

viewtopic.php?f=14&t=2&start=40#p127

If the underlying is 1 quadrillion and markets move an average of 10% in 8 minutes during a flash crash, then values have shifted over 100 trillion in 8 minutes (the same percentage for futures and more than that for options). Under such a scenario, some option values will shift by multiples of their net real values in seconds (for example strikes on nearby puts that are far from the market), or become completely illiquid. Once Mr Margin gets to work, the dominoes can tumble. A financial institution can be scrambling behind the scenes to make margin calls while the clearing system can freeze up due to liquidity fears.

How much snow does it take to start an avalanche. It doesn't have to happen and a smaller amount of "snow" next time could result in a counter party being unable to pay if they were weakened the first time around.

Also, the more opaque OTC derivative pile is the $596 trillion figure. Exchange traded derivatives are a similar amount. It's probably better to study the more transparent exchange traded derivative pile where all the option contract notional values, strikes, and open interest are listed on the exchange web site.
Last edited by Higgenbotham on Tue Sep 21, 2010 10:22 pm, edited 1 time in total.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by Higgenbotham »

xakzen wrote:Some one posted a really good article on Credit Money a few months back that did an excellent job describing how the reality is that the banks lend the money first and then go looking for deposits. I can't find the link now so if the person who posted it can help by re-posting that would be really great.
That article was written by Steve Keen.

http://www.debtdeflation.com/blogs/

I don't know the exact link to the article, but it has become well known and cited. Probably a search here of Keen would bring up mannfm11's reference to it.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

vincecate
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by vincecate »

Higgenbotham wrote: This is a repeat of a reply I made to a nearly identical post of yours a few months ago. I don't think you responded. Values of debts and notional values of options (or more broadly, derivatives) in many cases are not counted in money supply figures.
Are there any economic theories or economists who count all debts and notional values of options as money? Do you have any references?

I understand that options/derivatives can change in value many times their original value. But for every winner their is an equal loser. These are not like an equity or bond where it is possible that counting all parties involved there is a net change in wealth, right? So how does this create or destroy money? But more to the point, who counts the notional value on these as money?

vincecate
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by vincecate »

Higgenbotham wrote: That article was written by Steve Keen.
Here is an article about that and links to a couple Steve Keen articles.

http://www.nakedcapitalism.com/2009/02/ ... redit.html

Higgenbotham
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by Higgenbotham »

vincecate wrote:
Higgenbotham wrote: This is a repeat of a reply I made to a nearly identical post of yours a few months ago. I don't think you responded. Values of debts and notional values of options (or more broadly, derivatives) in many cases are not counted in money supply figures.
Are there any economic theories or economists who count all debts and notional values of options as money? Do you have any references?

I understand that options/derivatives can change in value many times their original value. But for every winner their is an equal loser. These are not like an equity or bond where it is possible that counting all parties involved there is a net change in wealth, right? So how does this create or destroy money? But more to the point, who counts the notional value on these as money?
To be more clear in this post, I'll need to separate exchange traded derivatives that are marked to market each day from over the counter derivatives that are marked to model or marked to myth.

Exchange traded derivatives (options as an example) act more like basic money (Federal Reserve Notes or paper dollars as an example) from an accounting standpoint.

Over the counter derivatives act more like bonds or other securities that can change value.

All basic forms of money in our system (including instruments like exchange traded derivatives that act more like money than not) are simultaneously an asset and a liability. So, for example, if someone has a positive number on their balance sheet because they are holding a Federal Reserve Note, that note is simultaneously the liability of the Federal Reserve. So, what about the exchange traded derivatives? Likewise, an exchange traded derivative such as an option is simultaneously a positive dollar number on one balance sheet and an offsetting negative number on another balance sheet. From a practical standpoint, an options trader can clear their account at the market by 4 pm and have the proceeds wired into their bank first thing the next morning. Additionally, any excess in a futures account that is over margin requirements can be wired out immediately or used directly to purchase commodities from the account itself. So positive futures marks equate to direct money for the purchase of commodities.

Thinking about things like bonds that have time dependencies, when, say, a government issues a bond it has a certain initial par value but the value can change. My understanding is, yes, the overall wealth in the system will increase if interest rates fall and the value of the bond goes up. However, the overall wealth in the system won't change over the entire term of the bond because the original terms don't change. Over the counter derivatives act much the same way except the mechanism is different and the means to increase wealth are illegitimate and fraudulent. Since there's no exchange traded market for these derivatives, they are "marked to myth" in many cases, allowing positive net worth to appear due to fraudulent markings.

Probably the reason no economists count these as money is because economists, bankers, and even the Federal Reserve itself on the whole act as fraudsters and rent seekers during these generational booms and they know the wealth effect is temporary and fraudulent. The securities that are generated are fraudulent, they have essentially printed money out of thin air, the regulators look the other way, and then the whole Ponzi scheme collapses. When the illegitimate forms of money disappear, then the money supply numbers will really be representative.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

vincecate
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Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

Post by vincecate »

Higgenbotham wrote:
vincecate wrote: I understand that options/derivatives can change in value many times their original value. But for every winner their is an equal loser. These are not like an equity or bond where it is possible that counting all parties involved there is a net change in wealth, right? So how does this create or destroy money?

All basic forms of money in our system (including instruments like exchange traded derivatives that act more like money than not) are simultaneously an asset and a liability. So, for example, if someone has a positive number on their balance sheet because they are holding a Federal Reserve Note, that note is simultaneously the liability of the Federal Reserve. So, what about the exchange traded derivatives? Likewise, an exchange traded derivative such as an option is simultaneously a positive dollar number on one balance sheet and an offsetting negative number on another balance sheet.
Yes, the Fed still accounts for the dollars it issues as liabilities. However, since the Fed no longer redeems dollars for gold, it is not a real liability. They can print all they want and never have more "liabilities" than they can handle. Given that a derivative is a real liability for one party and an equal asset for another, there is no real net wealth produced when the price changes. It is just transferring wealth from one party to another.

I understand "banks making money". If a demand deposit counts as money, and the bank really lent the cash out to someone else who has it to spend, then the money is counted twice, so there is more total "money". I just don't see a similar thing for derivatives.

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