Sunday, Mar 28, 2010
The dangers of money expansion
Greg Pytel: Computational complexity analysis of Credit Creation
This is a great article for all those that want to understand the complexity of money expansion on a technical level. Combined with the current banking practices, it shows forensically that the current financial system was turned into a giant global pyramid scheme, basically it is a fraudulent tool in the hands of those who run it (and more importantly are paid from it).
Posted by ant @ 08:48 AM (1340 views) Add Comment
64 Comments
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1. uncle tom said...
This guy really needs to get out more...
These essays, despite their pretension, are not academic masterpieces. They don't present very well, and have a 'wood from the trees' element. That no-one else is commenting tells me that either the presentation is too heavy for most people to bother with, or that it is telling them nothing new.
Yes, we know that when banks fly close to the wind, the risk of an upset increases. That is not rocket science. That they can also back pedal, when they choose to do so, is also beyond dispute, so the notion of an inevitable banking time bomb lacks credibility.
However, the fact that there are other timebombs in the western economies is not in dispute, so I would advise Mr Pytel to raise his gaze a little..
2. matt_the_hat said...
agreed
3. tenyearstogetmymoneyback said...
I like the way he thinks that with a Loan to Deposit ratio of greater than 1 you end up with infinite Money Creation.
What happens in practice is that adter a short period the bank cannot get any further funds to continue with the process.
Northern Rock and Bradford and Bigley and the Icelandic bankc all proved this theory.
Uncle Tom. I reckon the Banks should study Rocket Science. It is well known that unless it is in outer space a rocket
that runs out of fuel will start falling back downwards.
4. icarus said...
Well said UT. You could argue that the problem started on Wall Street and that the money used for the deals that caused the crisis was supplied by institutions via wholesale money markets or by commercial paper markets, with depositors' funds playing a relatively minor role, and that many US commercial banks using depositors funds conservatively were caught in the undertow from collapsing property prices. However you explain it you have to look at actual history and not at an 'inevitable' process working its way inexorably through the system.
5. ant said...
@uncle tom: you stated: "...or that it is telling them nothing new", which proves that you are not competent to judge Pytel's writing.
You have to show that:
1. Pytel is wrong at some point, in which case it would really conclusively close the subject of his analysis as wrong, hence really not worth further discussion (and I would be grateful for that)
or (does not have to exclusive "or", although bearing in mind it can be considered that way)
2. accepting his analysis as correct provide references to others' work showing that Pytel's analysis is NOT original, in which case Pytel would have to acknowledge work of others and his own work may then be considered as a contribution (if any).
I, for one, feel that I am qualified to assess Pytel's work and I do not find anything wrong with it. However his approach seems to be quite novel and I do not feel I can make a conclusive judgement on that. Similarly I have not found yet anyone presenting the same or reasonably similar analysis or approach. However I cannot guarantee that there is not someone somewhere who was the first. Pytel's writing also appears quite "heavy" to me but it has very clear logical flow and pretty good substance to support his arguments. He appears like the guy who knows what he is writing about but has a problem how to present it to others. However this is a job of the mainstream media pundits to understand it and sell it to the public in a readable form.
For you, uncle tom, writing in implicitly disparaging terms about Pytel's work (without making any argument on the merits supporting the views that you present), does not reflect well on your intellect and character. But is it not an anonymity on the web a great thing?
6. uncle tom said...
Ant,
Last year you made the mistake of defending 'Greg' in the first person, which effectively confirmed that you and he are one and the same.
Gregory is not an uncommon forename in the USA, but is virtually unknown in the UK; except that it has a strange attraction to those seeking an alter ego..
Get real pal - you're a full on Walter Mitty
- there's better things to do in this life..
7. ant said...
@uncle tom: it is rather sad that you are getting personal. You have a choice: either you show that Pytel is wrong (and he may well be) in his arguments or show that he is not original (which may well be the case). Alternatively you may well acknowledge that he is correct and original in his views. Dragging arguments into a personal sphere, calling others Walter Mitty, is really a shame.
As for myself I am a respected (or I at least like to think that way:-) actuary with a mathematical economics as the background. Still being very sceptical I find Pytel's writings as potentially extremely valuable if they are shown to be correct and original. This is a reason why I publicise them widely: to get a resolution on this. If you are not going to contribute to this exercise I think you will help everyone by not getting involved as you are bringing a respectable blog into disrepute.
8. ant said...
@icarus - 4: you may well be correct. But could you please provide a mathematical model for your reasoning (as B/S, at the end, are all about figures)? Otherwise it seems a pretty much vacuous story telling (well in style of investment bankers who graduated, say, history... or classics:-) BTW, as exercise, could you calculate a 11 days interest on the basis of annual 10% interest?
@uncle tom: you wrote: "Gregory is not an uncommon forename in the USA, but is virtually unknown in the UK; except that it has a strange attraction to those seeking an alter ego." So is Greg Dyke another "Walter Mitty"?
9. ant said...
@icarus - 4: I hope you understand that pytel's analysis based on LTD ratio takes into account wholesale money, markets commercial papers (and any kind of instrument that is a part of money creation). I made that note for clarity to others as your post appears that you suggest otherwise.
10. icarus said...
GP is "technical", scientific" and "forensic" and everybody else is "historical", "descriptive", "speculative" and "vacuous". What arrogance! Ant could you provide us with an explanation of how banks avoided the Basel rules and why there were no systems or feedback mechanisms to prevent the money multiplier expanding to infinity, and tell us the extent to which the shadow banking system enabled investment banks to expand leverage to dynamite proportions, and why the market for securitised mortgages collapsed (since the credit crunch came immediately after that collapse). Oh, sorry, such explanations would all be historical, descriptive, speculative and vacuous.
Don't forget that Nobel mathematicians were responsible for the risk models that went so awry. The maths need to placed in an appropriate model or paradigm, which necessarily has 'speculative' and 'opinion' elements
0.3%
11. icarus said...
@9. He SAYS his L/D ratio covers these other things but doesn't explain how.
12. ant said...
@icraus: do not get carried away. I only referred you to your comment at 4. And that's it. So do not fantasise by attributing me comments that I did not make. It is neither intelligent nor honest.
In my view banks were actually complaint with Basel rules, in great majority of cases, until the pyramid collapsed (and some of them, I think, even for much longer). Yet liquidity crisis happened (and was inevitable with LTD above 100%). If you understood Pytel's analysis you would have concluded that this was because Basel rules allow counting as banks capital financial instruments which are not strictly cash. (The rest is on pytel's blog and I am not going to re-write it here.) Indeed your explanation is "historical" and "descriptive", do not see any quantitative work to support it.
The financial world is full of Walter Mittys. A huge proportion of guys who graduated history. psychology, linguistics, classics (and so on) after a couple of years in banking think they understand finance. And they do not have a clue mate: they stand no chance of understanding it. That's why now is "oh, bly me" behaviour as what happened was somehow that complex and difficult to anticipate.
As for your interest calculation, 0.3% is a rounded result (as I cannot tell whether you are correct). Please provide calculations (it is no longer than a line).
BTW, there is no Nobel prize in math. As to the math models: no wonder that what happened happened. With investment bankers of a kind that I mentioned above. You give kinds a bag full of grenades do not be surprise when they blow themselves up.
13. ant said...
@icarus - 11: look at the graph at http://gregpytel.blogspot.com/2010/03/money-creation-and-circulation-economy_13.html
It is more than self-explanatory. Or do you want me to start expanding on that?
Also at http://gregpytel.blogspot.com/2010/02/comment-to-largest-heist-in-history.html is shown that even LTD above 100% applied to retail deposits ONLY (i.e. forget about wholesale markets, commercial papers etc.) will result in liquidity crunch as it still generates money multiplier to infinity with exponential pace.
14. Crunchy said...
When they create the money, they don't create the interest.
S i m p l e s !
15. flashman said...
ant/Greg: “after a couple of years in banking think they understand finance. And they do not have a clue mate: they stand no chance of understanding it”.
Actually, the banking industry in isolation is very easy to understand. Only a pompous outsider would presume that they have a rare and valuable insight. Where you/Greg go wrong is in attempting to analyse the banking industry in isolation. Every aspect of society, our laws, the economy and the banking industry collide and intereact in a kinetic fashion. It is this kinetic behaviour that makes prediction and narrow definition so unreliable. Your ‘heist’ and pyramid descriptions are therefore mathematically and philosophically inadequate. The world economy (banks and human behaviour are an inherent part of the world economy) is an infinitely complex and dynamic structure that absolutely refuses to be defined and predicted in such narrow terms.
On a more mundane level, you/Greg should at the very least add time scales to your outcome forecasts. It is not always necessary to include time scales in a forecast but the omission of a timescale always arouses suspicion when a narrow set of data is used to predict outcomes with such certainty.
Out of curiosity, when/if your so-called heist induced pyramid does not collapse, will you throw in the towel or will you plough on like those balding Teddy Boys, that were still around in the 70s? I say “when” because anyone with a working understanding of probability (you say you studied mathematics?) will know that you/Greg are extremely unlikely to be correct.
Please don’t ask me to specifically argue any of your/Greg’s’ "theories". It is atypical blog stuff and the idea that he/you offer anything new, is rather silly.
16. flashman said...
Just to emphasise the relevance of one of icarus’s comments:
"Don't forget that Nobel mathematicians were responsible for the risk models that went so awry"
The Long Term Capital Management fiasco was also caused by a bunch of Nobel Prize winning economists/mathematicians. They deliberately omitted to tell their employers that their forecasting 'work' ignored the existence of an infinite number of unknowable externals that could cause total failure. If they had fessed up and admitted this blatant truth, then they would have lost out on a few million Dollars in their pay packets. I say this because any mathematician (let alone a Nobel prize winner) knows that if you add anything to a simple equation, the outcome changes. If you add an infinite number of (unknowable) variables to an equation, the outcome becomes infinitely unpredictable. This is why I am suspicious of mathematicians offering certainties.
17. ant said...
@flashman: I do not try to understand banking in isolation. You should speak for yourself. I appreciate that there are complex issues related to social behaviour (and change of them), reactions to events and all the stuff you wrote about. This makes financial world incredibly complex. However like in real world, sometimes there are overriding factors. For example, understanding physics of real life is practically (and theoretically) impossible. However if you jump from the top of the Canary Wharf tower with extremely high probability you will be dead. In this case the g-force would be an overriding factor. If I explained your death as a result of a jump from the top of the Canary Wharf tower, would this explanation be in isolation to other laws of physic (like thermodynamic) and social aspects (what pushed you to jump)? Of course it would. Would it matter? Not at slightest to the direct reason of causing your death.
What I believe Pytel presented very convincingly (although the jury is still out) that despite of all the complexities that you referred to (and other pundits like Gillian Tett love talking about), lending with LTD ratio above 100% was an overriding factor guaranteeing the liquidity shortage, i.e. credit crunch. This :
- does not imply that economy and the financial world is not complex;
- does not imply that NOT lending with LTD ratio above 100% makes the financial system safe
- does not imply that there were no reasons of "causing" banks lending with LTD above 100%;
- does not imply that there were no other factors that exacerbated or eased the situation.
(I think, no disrespect, but you should study logic a bit. You tend to take words in isolation and then attribute views to me that I do not share.)
As to timescale: I do not care. LTD ratio above 100% is a pyramid scheme, a highly illegal act of fraud. Since the lawmakers did not make this law dependant on any timescale (basically they, like Pytel, they assumed that any financial pyramid is bound to collapse hence it must be illegal), I do not want to expand on this argument which computationally is quite complex. As Pytel presented it is a fraud regardless of any timescale so prosecutors should get involved.
18. ant said...
"If you add an infinite number of (unknowable) variables to an equation, the outcome becomes infinitely unpredictable." - not necessarily. The simplest couple of examples that you are wrong are, but there are more complex and elaborate:
1. If effectively these variable, one by one, divide by themselves (making each of them effectively 1).
2. If effectively these variable, each of them, are multiplied by 0, making their values 0.
In both cases this may not be immediately obvious from looking at equations. I am sorry but you do not have a basic appreciation of math.
PS. No there is no Nobel prize in math.
19. refusetobuy said...
Pytel's model does not take into account the economic capital requirements. Banks have to be (99.5%) sure that the value of the assets they own will be greater than their liabilities in the (1 year) future.
This was his example
http://gregpytel.blogspot.com/2009/04/exampleexercise-how-does-it-work.html
He calculates capital reserves but doesn't use them anywhere. Either he doesn't know how capital reserves are applied, or he is deliberately ignoring them to construct a 'straw man' argument.
I'm all for other points of view. Keep posting, but maybe from other people as well as Pytel.
BTW: Yes they can hold assets other than cash (including other banks capital financial instruments), but only a proportion of these count and they are much more volatile than cash. Pytel focus on cash is a red herring. If you think of the government as another bank
20. ant said...
@flashman: you wrote: "If you add an infinite number of (unknowable) variables to an equation, the outcome becomes infinitely unpredictable." Predictability (and unpredictability) cannot be infinite. These concept are based on calculating probability of an event (they refer to) which is between 0 and 1 (or 0% and 100% in percentage terms). I am sorry, no offence intended, but you do not seem to have a basic grasp what you are writing about.
This is not just a nitpicking: this is absolutely fundamental to what pytel writes about and I discuss here.
21. refusetobuy said...
Sorry, posted before finishing.
If you think of the government as another bank then cash is just another form of bank debt ("I promise to pay the bearer £10"). See MW posts on quantitative easing for more about this.
22. ant said...
@refusetobuy: read again http://gregpytel.blogspot.com/2009/04/exampleexercise-how-does-it-work.html
He calculates capital reserves, that take into account risk, and applies them to this simplified B/S. It is all there. E.g.:
Bank A:
- Capital reserves: $0.00 - cash and $412.94 (i.e. $227.30 + $371.29*50%) – non-cash
- Deposits: $554.61 (i.e. $285.61 + $269)
- Loans: $720.99 (i.e. $349.70 + $371.29)
Bank B:
- Capital reserves: $0.00 (i.e. $85.68 - $85.68) cash and $310.49 (i.e. $267.65 + $85.68*50%) - non-cash
- Deposits: $349.70
- Loans: $454.61
"Pytel focus on cash is a red herring." - it seems that Northern Rock management shared your views prior to August 2007 :-) The outcome is well known.
23. refusetobuy said...
Unpredictability can easily be infinite. There are an infinite number of values between 0% and 100%, so you can map an infinite probability set onto this cantor space. For example, the bounds of a normal distribution are +/- infinity.
24. refusetobuy said...
The loan deposit ratio is not the capital reserve. The capital reserve ratio is used to restrict lending. His example should stop when Capital reserves < Liabilities. This would leave cash in the banking system and him without an argument.
25. ant said...
@refusetobuy: you wrote, inter alia; "infinite probability" I suggest back to go back to school texbooks. Probability is always between 0 and 1. You are clearly confused: you do not seem to distinguish between, possibly, infinite number of arguments that you may have to provide to calculate probability and probability which is a result of such calculations which is always between 0 and 1.
26. ant said...
@refusetobuy: of course "the loan deposit ratio is not the capital reserve". There is no requirement that Capital reserves < Liabilities (e.g. banks do not have to hold reserves to cover 100% of deposits). Simply have a look at:
Bank A:
- Capital reserves: $0.00 - cash and $412.94 (i.e. $227.30 + $371.29*50%) – non-cash
- Deposits: $554.61 (i.e. $285.61 + $269)
- Loans: $720.99 (i.e. $349.70 + $371.29)
Bank B:
- Capital reserves: $0.00 (i.e. $85.68 - $85.68) cash and $310.49 (i.e. $267.65 + $85.68*50%) - non-cash
- Deposits: $349.70
- Loans: $454.61
This shows a pretty good capital reserves to cover the deposits. Exceeding Basel rules by a long mile. But liquidity crunch would still happened as the banks run out of cash.
27. icarus said...
ant @12 - you have indeed used those terms ("forensic" etc. for Pytel, "vacuous", "descriptive" etc. for me and others) either in this or in other blogs. So there's no fantasising there - so you can apply the 'neither intelligent nor honest' comment to yourself. The Nobel winners got the prize for 'pioneering work in the theory of financial economics'.
The lending build-up to the financial crisis was located outside the bank-loan system. Let's take the US since that's where the problems build up. One of the reasons people borrowed was that their savings/deposits were small, nothing like enough to fuel what happened. The funding came from less traditional sources - massively (and newly) enlarged wholesale money markets including inter-bank markets and commercial paper markets, fuelled to a large extent by pension, mutual and other institutional funds - US pension funds increased substantially as a result of tax breaks so that the flow of employee funds rose to almost $2 trillion by the end of the 90s. Add to this the ending of capital controls and you have a huge rise in international wholesale borrowing, including carry trade operations. The funding of British commercial banks, overwhelmingly domestic at the start of the 1990s, became based largely on overseas wholesale lending to the tune of £650 bn by 2007.
Next you have the growth of perverse incentives by US investment (mainly) and other banks to originate mortgage loans, good or bad. You have ratings agencies which give the resulting CDOs etc. their blessing and huge international markets in securitised loans. Banks were able to keep lending - in many cases within the limits of their capital and deposit bases - because these markets, assured by the ratings agencies, bought the loans and freed up the banks to make more loans. Thus it wasn't necessary to exceed banks' prudent lending limits (although they often did this too via leverage facilitated by the 'shadow banking' system, which grew to the size of the regulated banking sector) for them to make an endless stream of loans. Compounding the problem that the underlying loans in bundled packages were of variable and questionable quality was the fact that, unlike other over-lending crises, where the scale and location of problems are known, in this crisis scale and location were unknown because the CDOs etc. had no price or pricing mechanisms other than the dubious judgement of ratings agencies.
When the two Paribas cases in August 2007 showed that some of this debt mountain was junk, and that there was no way of knowing how much of the rest of it was junk, the money-market, pension and securitised debt markets fled the scene and the credit crunch ensued.
Last year a Washington Times article 'Banks still standing amid credit rubble' (unfortunately no longer on the web) gave the following figures. Before the crisis, of $25 trillion in outstanding loans in the US only $8 trillion was provided by banks, $7 trillion by traditional bond markets and $10 trillion by securitised loan markets (which barely existed 20 years ago). That $10 trillion suddenly dried up, and the banks that originated loans to sell them on and clear the decks to make more loans were left holding loans which had suddenly been discredited.
So yes, it was a Ponzi scheme, but the problem was not located in the L/D ratio of commercial banks. With a massive buyer for the loans it's quite possible for the banks' L/D ratio to be quite normal and for a massive credit crunch to ensue as soon as that buyer gets nervous.
28. refusetobuy said...
No, I wrote "infinite probability set".
See http://en.wikipedia.org/wiki/Probability_space
I suggest you revisit your actuarial exams.
29. refusetobuy said...
"- Capital reserves: $0.00 - cash and $412.94 (i.e. $227.30 + $371.29*50%) – non-cash
- Deposits: $554.61 (i.e. $285.61 + $269)
- Loans: $720.99 (i.e. $349.70 + $371.29)"
Capital reserves = 412.94
Deposits = 554.61
Capital reserves
Simples.
30. refusetobuy said...
"- Capital reserves: $0.00 - cash and $412.94 (i.e. $227.30 + $371.29*50%) – non-cash
- Deposits: $554.61 (i.e. $285.61 + $269)
- Loans: $720.99 (i.e. $349.70 + $371.29)"
Capital reserves = 412.94
Deposits = 554.61
Capital reserves less than Deposits so cannot lend.
Simples.
Monday, M
31. ant said...
@refusetobuy: you really do not know what you are writing about. you write about "infinite probability SET" and then you refer me to a link about Probability SPACE. If you cared to read the link you would have read:
"A probability space consists of three parts:
A sample space, , which is the set of all possible outcomes.
A set of events, where each event is a set containing zero or more outcomes.
The assignment of probabilities to the events, that is, a function from events to probability levels."
So did you mean "SET of events"? In theory it may be infinite. In practice it is always finite (although it may be very large).
Notwithstanding the above unpredictability (which is 1 - Predictability) is a probability of an event happening (or not) is always between 0 and 1. Writing that it is infinite is a nonsense. However it may be impossible to calculate but it is not infinite either.
32. flashman said...
ant: "Predictability (and unpredictability) cannot be infinite"
When numbers become mind bogglingly small or large we express them as negligible or infinite (maximal), for practical purposes. The world throws a mind boggling number of variables into an ever compounding kinetic system, so the word infinite, is therefore an appropriate descriptor in this context. The narrow data set/outlook used by you/Pytel to predict an outcome demonstrates the same kind of disingenuously simplistic outlook taken by the disastrous mathematicians mentioned earlier.
"PS. No there is no Nobel prize in math"
I didn't say there was a Nobel Prize in maths. I quoted icarus who said: "Don't forget that Nobel mathematicians were responsible for the risk models that went so awry". He was actually quite accurate because Merton and Scholes won a Nobel Prize for economics but they were mathematicians who created a dodgy, discredited pricing model. Their subsequent 'work' for Long Term Capital Management almost brought the whole system down and it should have taught the world to be aware of disingenuous mathematicians. Unfortunately after a giant effort was made to clear up that crap, more naïve or dishonest mathematicians (take your pick) were hired and the banking system properly ran into a wall. The irony is that you rail against the banking system but it is actually your type of naïve maths that crashed the system.
33. ant said...
@refusetobuy - 29: nonsense. There is no requirement that Capital > Deposit. Incidentally lending with LTD 90% gives you Capital < Deposits (i.e. 0.1 * Deposits = Capital). However capital is available in cash. Hence although there is a liquidity risk as $1 has to "serve" $10 liabilities on B/S it usually works.
Pytel example is not so much inadequacy of "capital" but that "capital" is not held in cash. He shows how once valuable non-cash capital can easily become toxic waste if banks run out of cash.
34. ant said...
@flashman - 31: impossible to have philosophical discussions of this sort on the blog. I still confirm predictability/unpredictability of an event (or a set of event) is always between 0 and 1 (in some case it may not be possible to calculate it). Taking about infinite unpredictability is a nonsense.
35. refusetobuy said...
Ah, good. So you do understand that the set of events can be infinite, so Flashman is correct in talking about infinite unpredictability.
Don't try to beat people up with mathematical language. It is there to help communication, not for intellectual grandstanding.
36. refusetobuy said...
@ Ant. Are you confusing the words probability and predictability?
Predictability has no mathematical definition.
37. p. doff said...
34. ant said...@flashman - 31: impossible to have philosophical discussions of this sort on the blog
.....and there's me thinking 'infinite improbability' was some kind of spaceship drive system :-)
38. ant said...
@refusetobuy: a set can be infinite. This is obvious. In theory a set of event can be infinite (although in practice in cannot be!). But infinite unpredictability is a nonsense.
Predictability, if you want to treat it in intuitive (non-mathematical) way is a probability. It is a known probability (or may be reasonably well estimated) e.g. tossing a coin - 50% or could be unknown (or cannot be reasonably well estimated). Talking about infinite unpredictability is completely meaningless (even in non-mathematical way). It seems to be result of loosely using "mind-boggling" word infinite to describe something that is difficult to quantify. If this is a level of logical and mathematical proficiency in the finance world, no wonder it went bust. And, I can bet, still more of mess is to come.
39. flashman said...
ant: I really don’t see why you are finding this infinite thing so difficult (other than if you admitted it, you would be effectively rubbishing your work). When we run out of zeros on the calculator, we give up and say 'infinite'. When we run out of decimal points, we say negligible. When we are presented with an incalculable or unknowable number of zeros on the calculator, we cannot possibly make a certain prediction, so we resort to non-mathematical processes and do our best. Incidentally, the finance industry was a much more stable place, when we did not use/abuse mathematicians to excuse excessive risk taking. Mathematicians are easily tricked by the banking and fund industries because they have a notoriously narrow outlook. They desperately want to prove everything in the space of one blackboard, so they shut their minds to the externals and unknowns that would ruin their theories and predictions. That is why the industry gleefully uses them to produce academically credible theories that provide an excuse for excessive risk taking. For the record, mathematicians are extremely useful to the finance industry, when used by an honest employer.
You/Greg are effectively ignoring the billions of zeros on the calculator and are arbitrarily picking one number from the spectrum and using it to define and calculate a situation. You are then trying to shout down anyone who points out the string of zeros on the calculator by saying that your old text book said that there is no such thing as infinity or similar. Another way of putting it is that you are defining the universe by counting the planets in our solar system. This is unwise because we keep finding new stars and we strongly suspect that we will never have the technology to find the whole universe. We don’t know where it all ends so we often use the word ‘infinite’ in this context. If we transferred your stance to this example you would shout “how dumb to use the word infinite when it must end somewhere”. You would then claim: “I can predict the behaviour of the universe because I can see the moon through my telescope”. Who is more accurate; the people who use the word infinite to describe the universe or the bloke who claims he can predict everything by looking at the moon?
Before you pick me up on my use of “billions”. This world contains several billion people, fault lines (known and unknown), weather systems and diseases. We have hundreds of countries competing for resources and wealth. We have governments and central banks that can cancel debt, create debt or change our laws at the stroke of a pen. We have wars and future events and technology that we cannot even image at this moment. We even have billions of plants and animals that we can’t really predict. These things all collide kinetically to produce many billions (understatment) of possible outcomes (infinite for all intents and purposes).
40. icarus said...
Flashy - you could make a similar point about mathematical models and their limitations with regard to the Einsteinian universe, which relies heavily on gravity, magnetism and fluid dynamics. Einstein was a mathematician who rarely went near a physics lab. Some electrical engineers who have studied astrophysics claim that electrical and electromagnetic forces are far more powerful than gravity and that the results of experiments on those forces explain many astronomic phenomena better than the gravity-based Einsteinian formulae used in the mainsteam. They argue that mainstream astronomers are constantly invoking ad hoc 'forces' like dark matter and energy to explain e.g. galaxy dynamics when a galaxy behaves differently from what's predicted in the mathematical, gravity-based model ("there's not enough mass to make the stars behave like that according to the gravity model, so instead of revising that model we'll posit 'dark mass' to make up the difference). The 'revisionists' point out that the forefathers of the gravity-based universe (Kepler, Newton) developed their theories at a time when electricity and its power were unknown or unappreciated. (I don't know enough to judge between the two camps.)
41. ant said...
@flashman: read my post at 17. This clearly explains you my take on the banking system and the current financial crisis. No wonder it got ignored as it really shows that my take is quite reasonable without ignoring ANY of the complexities of the financial system. I am basically minded to agree with Pytel that LTD greater than 100% was an overriding factor that made the current crisis inevitable and easily predictable. All these "woods for the trees" or the other way round arguments make no sense. (If you have a thermonuclear explosion it does not matter whether you count trees or just see a wood: it is all gone anyway.)
The word "infinity" has a very precise meaning. So it should not be abused in order to appear like a scientist. I would also be very careful about saying "When we run out of decimal points, we say negligible". It all depends on the process. "Negligible" values at the outset (on the basis as you presented may) may lead to a disaster. You wrote: "Mathematicians are easily tricked by the banking and fund industries because they have a notoriously narrow outlook." I think you must have experience with pretty much incompetent "mathematicians". In my view the problem is that investment bankers who have not a slightest clue about math processes, started using math tools. It was like giving kids a bag of hand grenades. And they blew the system up. Nothing wrong with grenades or those who made them. They should not have been given to the hands of kids.
42. ant said...
@icarus: Einstein was not a good mathematician. There is actually a rumour still going that the math to Einstein theories was not really made by him. It is actually quite credible rumour (Having said that I consider Einstein as genius, at physics, second to Newton only.)
43. ant said...
@icarus: mathematical models are mathematical models only. The way you apply them to reality is up to you. In the same way as a "mathematical" model tells you that if you jump from Canary Wharf tower you are extremely like to get killed, a "mathematical" model of lending with LTD ratio greater than 100% tells you tells you that if you are going to do it you end up in liquidity crunch. It is that basic. It is up to you whether you ignore the former the latter, or both.
44. icarus said...
ant - you didn't deal with my point @27 that the problem wasn't centred on the L/D ratio of commercial banks.
45. icarus said...
ant - the point is the limitations of mathematical models and many here think that you have exceeded those limitations in trying to explain so much by L/D.
46. ant said...
@icarus: yes, actually do: as Pytel showed lending with LTD ratio greater than 100% overrides such considerations. I thought I was implicitly clear. My apologies but you got it now.
47. ant said...
@icarus - 45: up to you guys, if you want to believe that a system can function with money multiplier growing to infinity at exponential pace. I believe that such system is not sustainable. Lawmakers seem to agree with me too as pyramid schemes are illegal. This is precisely how I understand Pytel's writing. The rest is just taking about the consequences.
48. devo said...
flashman's mortality demonstrated in real time
terrific entertainment
keep up the good work, ant
49. icarus said...
ant - sorry, utterly unconvincing. Starting off with the L/D in commercial banks just doesn't cut the mustard for reasons I've given before.
50. flashman said...
devo: blip blop blooble boop
51. flashman said...
icarus: I think you might be wasting your breath. Ant reminds me of The Terminator, in that he keeps getting shot down by multiple posters only to reassemble himself to continue his mission. Just like the Terminator, he does not comprehend or listen. He is only programmed to repeat the creed of his Lord and Master, Greg Pytel (if he is actually Greg Pytel then we might be dealing with something more sinister). I'm not sure who plays the role of Sarah Connor in this story. Btw nice post @ 40
ant: take a breath and think. Your/Greg’s stuff might be OK, if you are not too proud to beef it up. You are using a feather to crack a walnut, which is why you haven't managed to convince anyone. No one is saying that your essays have no value but you would do well to listen to the multiple posters who have tried to steer you on the right path. Take some time to retool and you might get a more receptive audience.
52. icarus said...
Flash - enjoyed the Terminator analogy @51 and the 'moon through a telescope' analogy @39. Good stuff.
53. ant said...
@icarus and flashman: OK, I leave you with your conviction that a financial system with lending with LTD ratio greater than 100% is sustainable. We simply differ on this. Now you have to convince lawmakers so they change the law and make pyramid schemes (at least of this kind) legal.
If you guys are from the financial industry or are representative of understanding finance (in the financial industry) no wonder we are in the mess now. And much more is to come disaster is still to come. I am not a fortune teller but I can easily bet on it.
(@flashman: if you read Pytel's blog he has managed to convince quite a number of people - like hardcore derivatives experts - who cannot be considered as dummies.)
54. flashman said...
ant, neither of us has remotely intimated that we believe in the sustainability of "lending with LTD ratio greater than 100%", or any other %. If icarus will forgive me for speaking for him, our arguments have centered around the point that your theories do not adequately cover the complexity of the situation. That's all.
Let's leave it there. Have a good evening ant
55. ant said...
@flashman: good! So you agree. What do you mean by complexity? In mathematical (computational) terms the LTD ratio analysis is a complexity analysis (this is a technical term) of the current financial crisis. In terms of everyday meaning of "complexity" the situation is as complex (or as trivial) as in Albania in 1996 - 1997. Nothing special really. If you see find it complex, this is your judgement. I do not.
56. icarus said...
Flashman - your Terminator analogy is looking better all the time.
57. ant said...
@icarus: I agree. It really presents a level of your intellectual depth.
58. icarus said...
"Presents a level of your intellectual depth", WTF does that mean? "Illustrates your intellectual level"? Illustrates your intellectual depth"? "Is pitched at inferior intellects such as yours"? Why use both "level" and "depth" in that sentence? How do you "present a level"? And @55 "If you see find it complex, this is your judgement. I do not." WTF does that mean? If you're going to disparage someone's intellect you're on shaky ground if you write like that.
And if Pytel has "managed to convince quite a number of people" why has he managed to convince only one HPC blogger? Maybe we're ALL at a low "level of intellectual depth"..
59. ant said...
@icarus: I leave you with your "WTF" dilemmas. They are not particularly inspiring, are they?
I am not the only person who follows and likes Pytel's blog. This should be clear to you if you do a basic web search. OK? And I am not the one convinced. As I wrote @7: "Still being very sceptical I find Pytel's writings as potentially extremely valuable if they are shown to be correct and original."
60. devo said...
@icarus said... why has he managed to convince only one HPC blogger?
when no one agrees with you, you are either absolutely wrong... or absolutely right
i'd consider that a result, ant
61. flashman said...
Out of curiosity, I looked up Greg Pytel. He is a part time student at Imperial College. Is there no end to the zero knowledge, zero experience pompous little oafs strutting their stuff on the web. How dare you misrepresent yourself in this way? You have wasted everyone’s time.
It does however explain your "mummy told me I was clever" attitude to intellect. Only immature, insecure or stupid people bring up intellect every time someone disagrees with them. You are only clever if other people (not including your Mummy) think you are clever. Come back in 20 years if you've learned something and don't lecture on the banking industry unless you have gained intimate knowledge of you chosen subject. I would expect someone who presents himself or herself as a banking expert to have worked at a high level in the banking industry, for at least 15 years. Spotty students really don’t have much to offer
Up until now, I couldn’t understand why anyone would present essays and theories that were so ridiculously simplistic in their outlook ... but what else could an experience free, student present? You are not even an economics or banking student. I would advise you to go away before you are also exposed to the 59 people in total who have ever contributed to your silly blog
62. devo said...
classic post, flashy @61
one for the collection
63. ant said...
@flashman: your views have been noted.
64. ant said...
@icarus/flashman: may I ask you to respond to a little exercise @8
"could you calculate a 11 days interest on the basis of annual 10% interest?"
Icarus response @10 is insufficient (i.e. please provide a formula, and not just a rounded number, as an answer). I think this will be a more useful exercise than dealing with Icarus' WTF dilemmas.