Financial topics

[John]

Dear Matt,

We've disagreed on this stuff before, and I assume we'll have to
agree to disagree this time as well.

> There are no "normal" times and "abnormal" times. There are only
> people acting based upon the available information they have. As
> GD points out, people tend to weight various information according
> to factors involving their peer group (ie. they act based on their
> own archetypal characteristics). This causes inflations,
> deflations, manias, panics and all sorts of other things. No one
> combination can be seen as normal and another abnormal.

I'll half-agree with this -- probably all times are "abnormal" in
some way. However, for convenience, I contrast "normal" times with
the current times because we're in the middle of a generational
financial crisis, and those only happen every 80 years or so.

However, it's not true that generational theory implies that people
in a generational peer group act the same way throughout their lives.
Each generational archetype tends to act the same, but they act
differently during different eras. In particular, generational
Crisis eras change everyone's behaviors, and cause a regeneration of
civic unity throughout the population (though that has only partially
happened so far).

For example, Boomers were making highly risky investments five years,
but I don't think you'd be able to sell a CDO to a Boomer today.
Same generation, different times.

> Breaking a window is breaking a window, regardless of whether it
> is during inflation or deflation. Destroying capital to rebuild it
> does not "stimulate" anything in an economy. It just shifts money
> from one group of people to another.

Absolutely untrue. During the credit bubble, hundreds of trillions
of dollars in money was created through the use of structured finance
securities and leveraging. Since August 2007, deleveraging has
reduced the amount of money in the world. It's more than just
shifting money; it's the actual destruction of money.

> Lastly, saving money is investing. With the exception of the tiny
> amounts "hoarded" and stuffed under mattresses, buried, etc, all
> money saved is used to make loans that couldn't otherwise be made.
> The pace of lending right now may be slow, but it would be slower
> if banks did not have the extra deposits available from the
> increasing savings rate. They would otherwise be forced to
> contract credit even more. With a high enough savings rate, loans
> can be extended to entrepreneurs who will lengthen the structure
> of production, employ workers, etc. Going to war before this
> happens only

Not true. Yes, in "normal" times, saving money is investing, since
banks loan out the money. But during this generational financial
crisis, this deflationary spiral, banks are NOT lending out money.
They're REFUSING to loan money -- for mortgages, for credit cards, for
student loans -- even though they can get plenty of money from the
Fed.

> Only by looking at inflation/deflation as a rise/fall in prices,
> can this become confusing. By looking at it as increases/decreases
> in the supply of money and credit, one sees the cause and effect
> forces far more clearly.

I don't understand this at all, since all money is created through
credit.

Sincerely,

John

[mannfm11]

I'm kind of stunned Matt made those statements. Money in the matress is money already loaned. I don't think money in banks means anything today. Banks don't loan money, they create credit. That is what Fractional reserve banking is all about. I believe the entire money and banking education that is taught most of us in school is really useless in understanding how the system actually works.

For one, I don't believe banks need reserves as much as they need something that shows they can actually act as surety. If they needed reserves, the whole problem would be solved. Murry Rothbard literally said what I have said over and over again in a book of his I read, that money doesn't exist in banks. What exists in banks are credit based assets and when banks make loans the money spreads out. If a bank makes too many loans, it owes the other banks sizable amounts of money it has to borrow in some fashion. This is what creates the credit crunch.

Citi and BAC had massive fed funds liabilities. Citi was instantly broke. Merideth Whitney merely said what others had to know, but were afraid to say. I can dig up a post on the net I made in the summer of 2007 plugging that very point. What caused this crisis was a lack of capital in a few large banks due to excessive speculative lending and not much else.

We will see laws that force us to put our excess cash in the banks. It is because they never had the cash in the first place. Where Matt is off base is that all bank balances indicate someones saving is present, but also that someones debt is also present. Thus savings cannot really be stated in money at all to be really savings, as it is nothing more than an amount someone else owes. In the case of cash, it is what the Federal Reserve owes, issued on what uncle sam owes or some home owner. The paradox of it all is that the more debt paid, the less money there is, which is what is behind the Irving Fisher debt deflation theory that I believe Bernanke follows. Herein in the greatest paradox, that solving the problem makes the problem worse. In part, I think that depends on who owes the money. But, for all pratical purposes, the putting money in the bank and them lending it out is totally revese of what is done today. In fact, deposits are liabilities, which banks are not too intersted in having except to avoid liabilities to other banks.

John is at least somewhat right about the current credit game. I have somewhat come to understand that in a debt economy, as the world practices today, it isn't a matter of the money supply shrinking, but failing to grow at all that is dangerous. Because money supply implies more debt, to expand the money supply also increases the problem of too much debt. The leverage is gone and all that is left is the government.

Where I agree with Matt is that blows stuff up isn't good economics. I happen to believe that the culprits are warlords and Koo probably works for a group of them known as central bankers. The solution to this mess is for them to figure out the haircut necessary to give everyone in this debt matter and get on with it. The world will limp along for awhile in this deception they call economic growth due to the fact that people will respect debt more, especially the lenders.

[mannfm11]

Sorry, I read back and saw there was more to this. The reason that Koo says to do military is that there isn't anything usable, which leads me back to what Matt says and I agree with him. If we really have scarce resources, why destroy them? Money as it is today, wanders around between people anyhow. The problem is one group has the cash and another group owes it, as there was too much non-self liquidating debt created. I tend to believe that WW II worked for a few reasons. One of them was much of the debt was wiped out in Europe by the war destroying the countries involved. Second, the US had a new industry, rebuilding Europe. Third, the war tied up so many resources that the consumer goods were worn out while people didn't have anything to spend their money on during the war and the government debt accrued during the war in the form of war bonds allowed people to spend when the war was over. There were also technological advances brought about by the war and from what I understand, defense industry makes a very large percentage of the true technilogical discoveries.

One part of economics I recall that makes sense is the idea that it is capital spending that actually drives the economy. It isn't so much that you put money in the bank to lend out as it is that the industry of the country takes the surplus it generates and hires workers to create new capital goods. I think industry has taken the money and given it to management and the Chinese. But the point was to keep the working middle class in cash flow, give the guy saving for his retirement a productive place for his money and to keep the game going. In this vein, if we went out and got on a capital spending spreee to increase capacity to produce what we are already producing, we would merely end up with more capacity that we couldn't use. If it was put into war machines, there would be 2 capital good being produced in succession, the goods to make war machines and the machines to make war.

[John]

According to an analysis on Bloomberg tv this morning, the current
rally is related to Washington politics.

According to the analysis, markets fell sharply early in the year
because of drastic plans by the Obama administration -- health care,
global warming, bailouts and nationalization. These plans seemed
certain to be carried out, because of the Democrats' overwhelming
majorities in Congress.

Since March, it's been clear that Obama's plans have been faltering.
Now there's no more talk of nationalizing banks and modifying
mortgages, and health and climate change bills have slowed. The
result is that a market rally has occurred.

According to this analysis, "The markets like gridlock," and the
markets will continue to go up during August, because Congress will be
in recess.

John

[Higgenbotham]

According to an analysis on Bloomberg tv this morning, the current
rally is related to Washington politics.

According to the analysis, markets fell sharply early in the year
because of drastic plans by the Obama administration -- health care,
global warming, bailouts and nationalization. These plans seemed
certain to be carried out, because of the Democrats' overwhelming
majorities in Congress.

Since March, it's been clear that Obama's plans have been faltering.
Now there's no more talk of nationalizing banks and modifying
mortgages, and health and climate change bills have slowed. The
result is that a market rally has occurred.

According to this analysis, "The markets like gridlock," and the
markets will continue to go up during August, because Congress will be
in recess.

John

Thanks for a good laugh.

If that theory were true the Roman Stock Exchange (RSE) would have roared higher all through the Dark Ages.

[StilesBC]

John,

You're right. I think we've had this discussion before.

barry,

I agree with you, as I have in the past on the "engine" of credit growth. And I still think Steve Keen's "Roving Cavaliers of Credit" is the best explanation of it.

There are so many decisions that go into whether or not a bank lends money, that saying "increased savings equals increased lending" is overly simplistic. Right now, banks have an unknown amount of off balance sheet garbage that they are implicitly provisioning for. Any increase in deposits (or bailout money) goes directly into that black hole. Analysts are assuming that banks will extend credit at the same leverage ratios they were pre-crisis. They won't. This is why I see the savings rate extending toward 16-20% before a recovery comes into sight.

But I stick with my assertion that economic growth comes from capital formation in the early stages of production. And this comes from savings (with savings defined as "delayed consumption") - not merely cash holdings. But it is important to note that where these savings go is the most important factor. It is the "lengthening" of the productive cycle that provides increased value to the end consumer and, ultimately, a rising standard of living. It is not merely enough to spit out the same products that there is oversupply in already. The extra step in production needs to add an aspect to it that makes its value so compelling as to be a mandatory purchase for the consumer. Think turning the icebox into the refrigerator. Consumers could see that, over the course of a year, a refrigerator was going to save them more money in keeping food fresh than the cost of the fridge itself. Or the microwave shortening the amount of time required to devote to cooking.

Understanding where capital is flowing (ie. to which part of the structure of production - beginning or end) is the key to determining whether or not spending money will affect economic growth. This is essentially where the Austrian theory of the business cycle differs from neoclassical versions that focus on "aggregate" spending.

[aedens]

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.
We see who paid for that.

Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:

Having failed to understand the mechanism of money creation in a credit money world, and failed to understand how that mechanism goes into reverse during a financial crisis, neoclassical economics may end up doing what by accident what Marx failed to achieve by deliberate action, and bring capitalism to its knees.
Academic economics responded to these empirical challenges to its accepted theory in the time-honoured way: it ignored them.
Well, the so-called “mainstream” did—the school of thought known as “Neoclassical economics”. A rival school of thought, known as Post Keynesian economics, took these problems seriously, and developed a different theory of how money is created that is more consistent with the data.
The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend.

Interferes in actual production in a most dangerous manner since it is impossible to mark and measure moral hazard malinvestments from a premise of credit collapse with out marked to market seeking stabilization.
Basil Moore 1983, “Unpacking the post Keynesian black box: bank lending and the money supply”, Journal of Post Keynesian Economics 1983, Vol. 4 pp. 537-556; here Moore was quoting a Federal Reserve economist from a 1969 conference in which the endogeneity of the money supply was being debated.

Consumption of fixed capital

2005 1612.0 billion
2006 1623.9 billion
2007 1720.5 billion
2008 2032.3 billion

http://www.federalreserve.gov/releases/ ... 5-2008.pdf
The market does not see enough more will be unemployed
Total chaos higgy http://www.oag.state.ny.us/media_center ... 3a_09.html
The Hill need's to crack the whip to order. I have been warned that justice does not meet the legal system before so i am not
surprised or amused any more.

[Higgenbotham]

The market does not see enough more will be unemployed
Total chaos higgy

http://www.cnbc.com/id/32200989

The stock market spent July on a "sugar high," rising to levels not justified by an economy that is still limping along, Pimco's Mohamed El-Erian told CNBC.

Despite proclamations from some that the recession is over, El-Erian, co-chief executive officer of the largest bond fund manager in the world, said much more needs to happen before the economy registers real growth.

"The July part of the rally is a bit of a sugar high," he said in a live interview. "We need final demand. We need a feeling that deleveraging in the private sector has run its course, that people feel confident now to engage in consumption, investment.

"It's not happening yet on the national level, it's not yet happening at the global level."

The Dow industrials have gained about 7.7 percent in July as the market has surged on second-quarter earnings that have come in significantly above expectations.

But El-Erian stuck with predictions from various Pimco executives recently that the economy would be mired in gross domestic product growth of about 1 to 2 percent for the foreseeable future.

"We're not going to go back to where we've come from," he said.

While the banking sector has taken much of the focus during the current recession, El-Erian said it's now about the real economy, particularly wages and unemployment. Those two areas must recover, and that will take a while, he added.

"It's a multi-year process and it's not going to happen overnight," he said of growth in future years. "The economy is floating higher on public debt. There's a limit as to how much you can do that.

"For the balloon to stay up in the air you really need the private sector to kick in and you need the public sector to start dealing with its debt issues, and we're not seeing that yet."

© 2009 CNBC.com

[aedens]

Identifying such bubbles is a lot easier than timing their collapse but the tools are out there. But as we’ve recently learned, you can defy the laws of financial gravity for only so long.

Christina Romer now chairs the president's Council of Economic Advisors). This study found that the tax multiplier is 3, meaning that each dollar rise in taxes will reduce private spending by $3."

So who believes the tax mutiliplier and how the Waxman–Markey Climate Change Bill Would Affect the States, Sun Dec 07, 2008 3:10 pm

By Congressional District it is not a disconnect to a run on capital on your future. Trust is a key word to see where this is going. Patients? I remember clearly Mr. Johnson’s war on poverty and Mr. Nixon's energy plan he called for and sure we know what happened with Gov planning. Many here remember price support mechanism’s consequences. For many decades they deny balance and they wonder why we discern that there cheerful to useful idiots may be there maximum liability when they awake.

The trap door is ordinary investor’s being spread to thin from cpi facts over time that will play out as we will also see soon IMO again as John and many know also the effects. I tend to agree with the exhaustion process many will call sentiment. I feel reality will sort it out quicker than our expert's have to. We walk a fine line and they understand that also given some input online. Over the decades we know who is predatory and time sorts out arrogance from confidence anyway. Painful as it is lessons will be applied if we like it or not. GD is the framework to lessons learned and those forgotten.

Reduced Levels of Outstanding Trades via Portfolio Compression. Market participants continue to reduce the number of outstanding CDS trades through multilateral trade terminations (tear-ups) which lowers outstanding notional amounts, reducing counterparty credit exposures and operational risk. Regulators have instructed firms to maximize the efficiency of trade terminations in CDS tear-ups and have begun monitoring the detailed results to ensure the fullest participation.
As Burt correctly noted: There IS and WAS NEVER any correlation between the Economy and the Stock Market. So you have to think as 2 different and Independent entities, one is linked to wages and way of spending of ordinary people, the other one ONLY linked to herd phenomena between the actors who want to SPECULATE on something without ANY internal value (just a provocating sentence, the truth is more subtle, but not too far).
To sum it up define your Utility: http://en.wikipedia.org/wiki/Utility#Utility_of_money
The image of Master builder, expresses not simply fear of our own looming mortality and fading creative powers, but his far more profound anxiety that generation’s had not been builders at all, but destroyers, and that the legacy he is leaving is one of utter desolation. Still we stumble forward with innovation. May the wise and honest repair in the free market left. Malinvestment and interference loom so compression of the market purist’s given Washington’s avarice of course.

[aedens]

Repost:
http://www.newyorkfed.org/research/staf ... /sr352.pdf

Consider a member of the payment system becomes suddenly concerned about a
liquidity shortage. Suppose, for instance, this bank wants to conserve cash holdings
because the conduits, SIVs or other off-balance sheet vehicles that it is sponsoring
have drawn on credit lines as experienced in credit markets during the recent market
turmoil.

Back to sanity would be nice.
Given purported 15 percent default under current indices
we have a way to go with no definitive order to contract
settlement clearing? http://www.chicagotribune.com/business/ ... 1191.story
"They said they would monitor how many deals were moving to the European clearing houses and would publish new ideas on regulating over-the-counter derivatives in October."
As stated, I am walking orderly out the door to properly rated contracts.
http://generationaldynamics.com/forum/v ... 1420#p3376<------ earlier post
My opinion was a 40 percent lagging drop Sun May 24, 2009 6:14 pm<====== then, to overall demand. I do not know now at all
when stabilization will accure; October IMO is a tipping point <----------- best guess appears sooner to net settlement
Year-to-year comparisons<========== now 8-1-09
Overall sales were down 38% primarily due to decreased selling volumes of 30%, reflecting lower volumes across all regions North America , Latin America, Asia, Europe/Middle East/Africa and all product lines due to the continued global recession as well as destocking by our customers. We were lucky and adjusted and senior management made tough choices.
I was rather close to initial estimates.

Reduced Levels of Outstanding Trades via Portfolio Compression. Market participants continue to reduce the number of outstanding CDS trades through multilateral trade terminations (tear-ups) which lowers outstanding notional amounts, reducing counterparty credit exposures and operational risk. Regulators have instructed firms to maximize the efficiency of trade terminations in CDS tear-ups and have begun monitoring the detailed results to ensure the fullest participation.
The market cycle has been obscured by warranted intervention but i can almost see bottom.
Inital thought posted was 20% could vanish. Last coherant data set indicated ~15% last week. Hang on....