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Posts posted by sharpe

  1. More data: money multipliers (velocity)


    Note that US M2 historically has velocity=8. Gilts have about the same. Above US M2 sits another tower of lending facilitated by circulation of M2/M1/M0, and I think you'll find another tower of lending (what is left of that portion of the shadow banking system run out of the UK) sits atop the circulation of gilts.

    Is the key to this argument explaining why velocity is equal to fractional reserve effect or money multiplier?

    I have not understood why you think they are the same?

  2. the commercial banking system confers a velocity of about 12-14X upon base money. The velocity of gilts (and presumably US treasuries are the same or higher) is about 8. However that velocity of 8 actually supports more lending on top of that, so who knows how high the final velocity of govbond related circulation is. I would guess higher than 8 but somewhat less than 12.

    That means government bonds are almost as money-like as base money. Base money is levered up by normal bank-consumer lending by commercial banks and gilts are levered up by the wholesale funding market and the shadow banknig sector.

    I was trying to find a chart that would demonstrate government bond velocity (here velocity is simply, trading volume) rising strongly after the closure of the gold window and the establishment of electronic trading. Unfortunately I can't find any data prior to 1990.

    so government bonds are being fractionally reserved? so for each bond issued say at $100, you are saying a final circulation of $800? - how does that work?

  3. i think Antals point is

    if someone was receiving 5% on their 100k and the fed artificially is able to reduce rates to 1% then that person is now receiving 1k on their capital as opposed to 5k and from a cash flow perspective their capital is worth less as it is generating a lower return thereby the FED are destroying capital by lowering interest rates

    So this must assume no bank lending?

    if there is bank lending - this goes up as interest rates are lowered

  4. http://professorfekete.com/articles%5CAEFFederalReserveAsAnEngineOfDeflation.pdf

    "Although the Fed’s open market purchases of securities (always net) affect only

    the short end of the yield curve directly, through the transmission of risk-free

    bond speculation they will affect the rest of the yield curve indirectly. Thus the

    entire spectrum of interest rates will keep falling in consequence of the Fed’s

    open market purchases of Treasury bills (or equivalent). This is a powerful if

    unrecognized force in the economy causing a chain-reaction as follows:

    (1) risk-free bond speculation causes interest rates to fall,

    (2) falling interest rates cause a severe erosion of capital throughout the

    productive apparatus,

    (3) erosion of capital causes a falling trend in prices,

    (4) falling prices further increase the downward pressure on interest rates.

    Thus a vicious spiral of falling interest rates and falling prices is engaged,

    threatening to push the economy into the abyss of deflation. Mainstream

    economics lacks a valid theory of speculation. Hence it has a blind spot, failing

    to see the destructive nature of open market operations.

    Typically, bond speculators carry on interest arbitrage along the entire (normal)

    yield-curve. They sell the short maturity and buy the long, hoping to capture the

    difference between the higher long rate and the lower short rate of interest

    (borrowing short and lending long). This arbitrage is not risk-free per se as it has

    the effect of flattening, and possibly inverting, the yield curve. As a result of

    inversion it is turned from a rising curve into a falling one, while turning the

    speculators’ profits into losses.

    However, as a direct result of the open market operations of the Fed

    (introduced clandestinely and illegally in the 1920’s through the conspiracy of

    the US Treasury and the Fed, long before the practice was legalized ex post

    facto in the 1930’s), interest arbitrage has been made risk-free. Astute bond

    speculators with their long leg in the bond market can profitably mimic Fed

    action in the bill market with their short leg. This never fails. Speculators know

    that, sooner or later, the Fed has to answer nature’s call and will go to the bill

    market as a buyer in order to replenish the money supply. This is their signal to

    sell. On rare occasions the Fed would be a seller. This is their signal to buy.

    This copycat action is an inexhaustible source of unearned profits for the

    speculators. Thanks to the Fed’s open market purchases, they are always able to

    replace their fast-maturing bills with fresh ones so as to maximize their bond/bill

    spread. The more aggressive the Fed is in increasing the monetary base, the

    wider the spread and the greater the bond speculators’ profits will be.


    I have probably missed something. If the fed buys 10 year bonds. Say $100 worth.

    Let's say there is a fractional reserve requirement of 10%, that creates $1000 dollars of cash in the economy.

    the Money supply rises and so do prices.

    higher inflation will make longer term bonds less attractive, which would mean as soon as the Fed stops buying bonds the price will fall significantly.

    What am I missing here? - thanks

  5. Please let this be adopted as a private member's bill. There are (small) bits of the BBC I would pay for - Sherlock, Top Gear, Dr Who - but the great majority of it is rubbish, even more downmarket than ITV2. If soembody wants to watch talent contests hosted by grinning monkeys or Eastenders then that's fine, but I leave them to pay for it.


    It is the best broadcaster in the world - by a long long way.

    Compare to sky etc... That is total guff.

    I am happy to pay for it and happy you pay too!

  6. When I was a kid there used to be a chip shop round the corner with a fruit machine.

    Kindly souls that they were, the chip shop owners usd to let us hang around inside and put our pocket money in the machine.

    One kid was particularly fascinated by the machine. He would observe it for hours. Every now and then the machine would beep, etc, or flash in an unusual way. Or maybe payout 3 times in a row. Or something else. The kid would interpret this behaviour in weird and wonderful ways, like "it's going to pay out on the third go after making that beep". The ultimate was the machine reset, where you pulled the plug and "reset the machines memory" so it was ready for a big payout. You had to do this while the owners weren't looking, otherwise you got a bollocking.

    One thing I figured out pretty quickly was that the kid who liked playing the machine never had any money.

    Nicely put!

    It is pure speculation right now. There may be some indicators for currencies under less turbulent circumstances, but right now it is total speculation

  7. we already have it in many ways. The last 30 years give you a sneak preview of what it is going to be like.

    take a look at the cash equivalents held on Microsoft's balance sheet. In that category are all manner of cash, treasuries, foreign govvies, MBS, ABS, corporate bonds and equities.

    If they are used as cash equivalents then they must have some effect on inflation no? If they are liquid securities and there exists a deep liquid market for them they are effectively money. I suggest that the rise in PEs confirms that view, which I plan to justify more fully later.

    that is an interesting perspective. presumably any item can be used like money. you can swap eggs for runner beans.

    is the difference that these items are not subject to the fractional reserve banking system? So equities and treasuries are different from cash in that they are limited in quantity and identifiable separately (i.e. so when the government issues £100 of 10 year gilts - there is only ever £100).

  8. http://finance.yahoo.com/banking-budgeting/article/110209/big-investors-fear-deflation;_ylt=AmmEqJk5cGy76KRvR3gFEpS7YWsA;_ylu=X3oDMTE2c3NpNHRsBHBvcwMxMARzZWMDdG9wU3RvcmllcwRzbGsDdG9waW52ZXN0b3Jz?mod=bb-budgeting&sec=topStories&pos=8&asset=&ccode=

    Big Investors Fear Deflation
    by Gregory "Greg" Zuckerman
    Sunday, August 1, 2010
    Some of the world's leading investors are becoming more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices.
    Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for a possible bout of deflation, a development that could cripple global economies and world stock markets.
    More from WSJ.com:
    • Treasurys Slide on Upbeat Earnings
    • Gordon Brown seen wearing beard with head shaven.
    • Treasurys Slide on Upbeat Earnings
    The investors cite weak economic figures and a mounting consensus that global policy makers are reluctant, or unable, to take further steps to boost economic growth as reasons for their market positions.
    "Deflation isn't just a topic of intellectual curiosity, it's happening," says Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return Fund, citing an annualized 0.1% decline over the past two years in the U.S. consumer-price index. "It's an uncertain world that's tipping toward deflation."

    Bill called the HPC correctly. He is a voice worth listening too.

    I listen to Bill and have most of my retirement savings in his Total Return Fund which is almost up 7% YTD.

    Deflation cometh.

    What will deflation mean?

    1. A glorious HPC of unprecedented proportions.

    2. Buggeration for everything else.

    If its inflation it will mean:

    1. Inglorious HPI.

    2. Buggeration for everything else.

    I will believe it when CPI goes negative as opposed to 50% over the target. Do you remember how wrong Bill Gross was on gilts?

    How are your dollar assets doing?

  9. true

    this is what I shall be disagreeing with. How for example would the government control the supply of money in a world of competing currencies?

    at the moment the government controls money supply through enforcing a specific currency on the population and then using interest rates and fractional reserve ratios. It is not perfect, but there is a huge element of control.

    I have not thought through what a world of competing currencies would look like. In the long term - would people prefer hard currency rather than fiat? - so you would end up with a number of commodity backed currencies - which would mean of the two points, 1 would disappear and we would just have 2. Some commodities are more suited than others - experience has pointed to a few notables which cannot be named here for fear of provoking the gods.

  10. ain't that the truth. it would be more honest to say we can't control prices.

    in fact that is kinda what greenspan did say and got hauled over the coals for it.

    For moving prices there are two things:

    1 movement in the supply of money

    2 movement in the supply of the commodity / good / service

    most people know very little about item 1. This can be controlled.

    item 2 cannot be controlled - and all efforts so far have been fairly unsuccessful

  11. I have to write it up. Its quite a lot to write, and I want to do it in a way which avoids long words, pseudo-scientific waffle, patronising tones, ideological bias and so on, so clearly it will take me some time. I also want to have data to back it all up. Finding some of that data prior to 1990 is quite difficult and although I am 99% sure it will support the case I want to make, I would like to ensure the currency of my ideas is fully backed, so to speak.

    But in the meantime if you would like to speculate you could consider the monetary differences (or similarities) between a tenner, a government bond and an ETF that tracks the FTSE100.

    Surely all second nature?

    I would also request differences between these assets and a weather derivative on HDD - which should increase the chances of bringing in the sun spot data.

  12. exactly.

    Just to be clear I am not going to be claiming there was no credit expansion! What I am saying is that credit expansion is not the root cause of both HPI and high PEs. In fact credit expansion, HPI and PEI (price-earnings inflation) all have the same common cause.

    More anon.

    presumably the root cause was the big bang at the start of the universe?

    In fact credit expansion, HPI and PEI (price-earnings inflation) all have the same common cause.

    some people say interest rates were held too low for too long....

  13. true

    but it showed up in inflated stock prices

    in the same way that credit expansion artificially holds up bond prices

    at some point it fails and we could be getting close as these policies only work in the short term - although short term can last a few decades

    In the same way rents stayed relatively unmoved, whereas house prices skyrocketed.

    You can see the collapse in banking reserve requirements over the same period here:

    Country 1968 1978 1988 1998

    United Kingdom 20.5 15.9 5.0 3.1

    Turkey 58.3 62.7 30.8 18.0

    Germany 19.0 19.3 17.2 11.9

    United States 12.3 10.1 8.5 10.3


    This suggests massive credit expansion

    by 2008 these ratios probably hit around 0. the house price boom did not even start until the end of the above chart

  14. Someone play this to a few of our glorious politicians...

    breaking windows and repairing them is what Keynesian-ism is all about. Did I hear someone suggesting dumping ship loads of cars at sea?

    I am sure someone will come along using long words and scientific sounding reasoning; with an all knowing demeanour to tell us black is white.

  15. I found this for gilts:


    The yearly turnover for all gilts has risen from 1681 Bn in 1995 to 4,670 Bn by 2010. Interestingly the velocity of gilts (the turnover ratio) has remained roughly constant over this period.

    The data pre-1995 I am still looking for.

    Can you guess what it is yet?


    I was not able to guess, nor provide any of the requested data.

    One thing I am learning about economics is adopting a patronising tone, talking about the unknown with perfect certainty, using long,

    less used words and adopting a vaguely scientific tone will convince a lot of people.

    I did find some sun spot data - could you put together a theory about why that explains the business cycle? The sophists of old claimed they could get a job interview for a physicians job in preference to the worlds finest physician.

  16. I recall reading this article on hpc about 1 and 2 pence pieces being melted down and disappearing. Copper 1p and 2p are now replaced with steal coated copper.


    Is this an example of "Gresham's law"?:


    I understand this is seen as an indicator of high inflationary periods - would be interested to know thoughts?

  17. the yellow line is not population stability, it falls of in 2080.

    this more recent projection IIRC was revised slightly upwards as a result of increasing birth rates during the period 2000 to 2007. Now I wonder what caused that?

    I'll grant you that concession but here is the kicker: If you admit that falling population constrains economic growth then it punctures your ideology that economic growth always happens no matter what if government gets out of the way. It is amusing watching you scramble to preserve this silly notion, by basically saying it might not happen, therefore my ideology is sound.

    to show a link between population trends and economic growth that sensible people might like to take note of when making their future investment or career plans. Sensible investors ignore ideology when making investment decisions.

    Are you a sharp investor sharpe? Are you sharper than bill gross?

    There is a dip after 2080, in the graph, this is small relative to the prior 70 years of growth. It is also entirely spurious. Who prior to the agricultural revolution could have predicted its impact on populations 70 years before?

    Current population 6.5bn

    UN projections up to 2100:

    low 5.7bn

    medium 9bn

    high 14bn

    I have no ideology, and never espoused any economic school. I have read some of them and only been impressed by how easy the theories are to pick apart.

    We already agreed economic activity results in economic growth. We were unable to show any causation the other way around.

    I know quite a bit about longevity - by looking at Bill Gross's latest output - he does not know much about longevity; i am less sure on what drives birth rates. Was Bill Gross saying that gilts were on a bed of nitro glycerine, shortly before the price rocketed and the pound snapped back 10% - I suspect he took different line in private.

    What I found most interesting is that the population shape we expect in the future (wrongly or rightly) will be great news for the economy as there will be more people of working age relative to non working age. I see no evidence to support this population change impact on the economy for the worse

  18. you have a point. There is a low scenario too which sees world population decline from 2025.

    it does not matter if it came from Albert Einstein. It is just nonsense. Population projections not credible.

    The UN gave 3 scenarios, population fall, population stability, population growth.


    Basically anything could happen

    What is the agenda for your interpretation?

  19. I believe on current trends italy is projected to lose 30-50% of its population per generation.

    The UN medium scenario sees world population peak at I think 9 billion in 2050 and fall thereafter.

    Of course that is for the whole world. In the west the net decline will begin much earlier than that.

    And up to 2050, while the population is still growing overall it will be rapidly aging, so by 2050 the demographic structure of the entire world is similar to that of japan 5 years ago. Note that japans demographic driven financial collapse happening in 1989, some 20 years before the population actually began falling.

    So I say world growth stops completely about 2030.

    hog wash

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