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AvidFan

Just A Thought

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Bear with me.

We've had this situation since, say, mad casino capitalism took hold from the 70s, where capital was priced for both the bringing forward of purchases and risk.

Previously, you could argue it was priced more just for the bringing forward of purchases - usury is the oldest form of money pricing and goes back to the biblical days of the "money changers".

Now we've got extreme capitalism - massive failures and defaults. Inflation hasn't taken off because of debt deflation - in a way, the system is being controlled by losses offsetting gains, not by setting the base rate for usury charges. Up to now, human beings were keen for growth and increased standards of living - the planet could support it. Now they are tapped out, as are the government and corporates.

What if we've transitioned to a completely risk-based capital pricing model? Wouldn't this fit with that graph showing 1 unit of debt producing no units of growth by around 2015?

What if that means money will be chucked at people who want to chance their arm in increasing quantities and the default rate sets 100% of the price?

All it needs is for some entity to recharge the system as it becomes drained of cash. The central banks, IMF SDR, etc. perhaps? Oh no... :(

Are we seeing a transition to entirely risk-based capital pricing? And if so, what kind of hell of Earth does that look like?

Edited by AvidFan

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Bear with me.

We've had this situation since, say, mad casino capitalism took hold from the 70s, where capital was priced for both the bringing forward of purchases and risk.

Previously, you could argue it was priced more just for the bringing forward of purchases - usury is the oldest form of money pricing and goes back to the biblical days of the "money changers".

Now we've got extreme capitalism - massive failures and defaults. Inflation hasn't taken off because of debt deflation - in a way, the system is being controlled by losses offsetting gains, not by setting the base rate for usury charges. Up to now, human beings were keen for growth and increased standards of living - the planet could support it. Now they are tapped out, as are the government and corporates.

What if we've transitioned to a completely risk-based capital pricing model? Wouldn't this fit with that graph showing 1 unit of debt producing no units of growth by around 2015?

What if that means money will be chucked at people who want to chance their arm in increasing quantities and the default rate sets 100% of the price?

All it needs is for some entity to recharge the system as it becomes drained of cash. The central banks, IMF SDR, etc. perhaps? Oh no... :(

Are we seeing a transition to entirely risk-based capital pricing? And if so, what kind of hell of Earth does that look like?

Money reform.

The means of exchange provided debt-free by the State as a utility to a maximally free market economy.

Bring it on.

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Money reform.

The means of exchange provided debt-free by the State as a utility to a maximally free market economy.

Bring it on.

Yes, but no, but yes, but no...

Does everyone recognise this, or will we go through massive credit expansion and collapse (the next cycle, assuming we see off this one) before anyone is forced to do anything.

I mean, okay - we have the deflationists and hyperinflationists this time around - what if this isn't it and this follows the path of a deep, but basically plain-vanilla recession?

What if the next cycle is characterised by no real GDP growth whatsoever, just debt growth and huge default (like this time but worse).

Won't everyone lose everything they've ever worked for when this happens, and they won't reform money until it's too late?

Edited by AvidFan

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Bear with me.

We've had this situation since, say, mad casino capitalism took hold from the 70s, where capital was priced for both the bringing forward of purchases and risk.

Previously, you could argue it was priced more just for the bringing forward of purchases - usury is the oldest form of money pricing and goes back to the biblical days of the "money changers".

Now we've got extreme capitalism - massive failures and defaults. Inflation hasn't taken off because of debt deflation - in a way, the system is being controlled by losses offsetting gains, not by setting the base rate for usury charges. Up to now, human beings were keen for growth and increased standards of living - the planet could support it. Now they are tapped out, as are the government and corporates.

urgh, that sounds like the end to boom and bust. Except everyones still unemployed.

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It is absolutely never too late for monetary reform. It is, I suspect, inevitable. It will become plain at some tipping point that there is no alternative.

Society just cannot sustain ever-increasing interest payments on the National Debt, as well as personally. A Biblical Jubilee will occur to some extent -- heck, it's happening right now with debt write downs.

Plus, there are no cycles. The way this term is used makes people think these vacillations are not in human hands when they are. It is only now when the period of the sine wave grows very long that it may be out of control -- but, then again, maybe not.

George Soros put it this way last week to a TV reporter: "I know exactly where the dollar is going, but I'm not at liberty to tell you."

Yes, but no, but yes, but no...

Does everyone recognise this, or will we go through massive credit expansion and collapse (the next cycle, assuming we see off this one) before anyone is forced to do anything.

I mean, okay - we have the deflationists and hyperinflationists this time around - what if this isn't it and this follows the path of a deep, but basically plain-vanilla recession?

What if the next cycle is characterised by no real GDP growth whatsoever, just debt growth and huge default (like this time but worse).

Won't everyone lose everything they've ever worked for when this happens, and they won't reform money until it's too late?

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Yes, but no, but yes, but no...

Does everyone recognise this, or will we go through massive credit expansion and collapse (the next cycle, assuming we see off this one) before anyone is forced to do anything.

I mean, okay - we have the deflationists and hyperinflationists this time around - what if this isn't it and this follows the path of a deep, but basically plain-vanilla recession?

What if the next cycle is characterised by no real GDP growth whatsoever, just debt growth and huge default (like this time but worse).

Won't everyone lose everything they've ever worked for when this happens, and they won't reform money until it's too late?

Timm* raised the intriging possibility that QE (new M0) might be gradually stepped up to replace defaulting debt on the asset side of the banks' balance sheets, and in synch with this the banks' capital adequacy ratio stepped up to prevent explosive M4 growth.

The logical endpoint would be 100% reserve banking using 100% M0 debt-free money, i.e. money reform.

Probably it can't/won't go ever that far, but an interesting idea to smooth some sort of transition?

*Edit: My apologies to Bill Still, who pointed out to Timm on the earlier thread that this idea was presented (US version) in Bill's film The Money Masters, 15 years ago.

Due to my inattention, Bill has had to repeat this on this thread.

Edited by The Spaniard

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Timm raised the intriging possibility that QE (new M0) might be gradually stepped up to replace defaulting debt on the asset side of the banks' balance sheets, and in synch with this the banks' capital adequacy ratio stepped up to prevent explosive M4 growth.

The logical endpoint would be 100% reserve banking using 100% M0 debt-free money, i.e. money reform.

Probably it can't/won't go ever that far, but an interesting idea to smooth some sort of transition?

Even if they did this, which is extremely unlikely to anything but a small extent (maybe tighten capital rations back to 10-15%) at some point in future the politicians would come under pressure from the bankers to loosen the reigns again.

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That's the MoneyMasters solution, UK style.

Timm raised the intriging possibility that QE (new M0) might be gradually stepped up to replace defaulting debt on the asset side of the banks' balance sheets, and in synch with this the banks' capital adequacy ratio stepped up to prevent explosive M4 growth.

The logical endpoint would be 100% reserve banking using 100% M0 debt-free money, i.e. money reform.

Probably it can't/won't go ever that far, but an interesting idea to smooth some sort of transition?

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Shouldn't then, government borrowing be flatly forbidden?

Even if they did this, which is extremely unlikely to anything but a small extent (maybe tighten capital rations back to 10-15%) at some point in future the politicians would come under pressure from the bankers to loosen the reigns again.

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I suppose we're just addressing the quintessential question then, but perhaps we've nudged it on a small amount.

Either this form of economic activity breaks to the downside and we get less extreme forms of credit, or it goes haywire on the next "return to normality" upswing.

And yes, I know cycles are manufactured, not forces of nature.

The point is, how can we, even now, having arrived at these two refined definitions of where money is going perhaps in the next few years, be sure the right thing will happen as opposed to another catastrophe?

2015 could be 100% capital pricing in risk (zero interest rates) or 100% capital pricing in usury (higher interest rates, proportional to growth).

Which will it be given the banks stranglehold on nations and the fact bank bonuses and securitisation are already showing signs of resurfacing?

Edited by AvidFan

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And just to qualify this, while everyone is so sure we're headed for monetary reform...

Marc Faber has on more than one occasion stated that he thinks the real disaster is ahead of us.

Is it possible he's just talking about the dollar?

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Actually, I didn't know who Marc Faber was -- had heard the name, but never read him or seen him on TV.

He does not have a very good record it seems from a cursory reading. Do you like him for some reason?

And just to qualify this, while everyone is so sure we're headed for monetary reform...

Marc Faber has on more than one occasion stated that he thinks the real disaster is ahead of us.

Is it possible he's just talking about the dollar?

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Timm* raised the intriging possibility that QE (new M0) might be gradually stepped up to replace defaulting debt on the asset side of the banks' balance sheets, and in synch with this the banks' capital adequacy ratio stepped up to prevent explosive M4 growth.

The logical endpoint would be 100% reserve banking using 100% M0 debt-free money, i.e. money reform.

Probably it can't/won't go ever that far, but an interesting idea to smooth some sort of transition?

*Edit: My apologies to Bill Still, who pointed out to Timm on the earlier thread that this idea was presented (US version) in Bill's film The Money Masters, 15 years ago.

Due to my inattention, Bill has had to repeat this on this thread.

Blimey, it sounds like you've just got rid of bankruptcy. Its all part of Gordo's master plan, he did abolish boom and bust.

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Actually, I didn't know who Marc Faber was -- had heard the name, but never read him or seen him on TV.

He does not have a very good record it seems from a cursory reading. Do you like him for some reason?

For the same reason: He seems to have made some very good calls over the last few years. Seems level headed and sensible, not sensationalist. I assume he makes money just on his newsletter, so he's not in anyone's pocket.

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George Soros put it this way last week to a TV reporter: "I know exactly where the dollar is going, but I'm not at liberty to tell you."

He said it back in April I think when the USDX was trading around 85 and he was being specifically asked if he was long or would advise others to go long.

He says lots of things.

Like this prior to the G20 in London:-

If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.†The chances of a depression are, he says, “quite high†– even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.â€

He says whatever he needs to say to get rich, like Rogers. They're traders - they didn't get rich by telling you what they really think.

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How do you price the risk, Ratings agencies?

In the case of CDOs, it was credit default swaps.

The pricing on those bonds was based on historical (60-year) CDS rates and a correlation coeffcient of near-zero, allowing them to get triple-A ratings as US house prices have never gone down.

So what I'm saying is CDOs, CLOs, MBS, etc - are all manifestations of credit priced solely on risk, ignoring any kind of usury forward consumption pricing - i.e. historical declines were never ever priced in, just a correlation risk with the benign historical CDS default rate.

Are we going to see more of this going forward - not CDOs I mean, but the philosophy that credit expansion can be kept under control by losses rather than interest rates?

Faber, et al are all saying they'll keep IRs too low for too long coming out of this one - he's saying 5 years for the next disaster.

Does that mean by 2015, when 1 unit of debt produces no units of GDP growth (some logical conclusion or maybe apocalypse as he puts it) we're into 100% speculative capital allocation???

It doesn't bear thinking about does it? If they use CDS rates, the market will delude itself... and there we go again.

Edited by AvidFan

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In the case of CDOs, it was credit default swaps.

The pricing on those bonds was based on historical (60-year) CDS rates and a correlation coeffcient of near-zero, allowing them to get triple-A ratings as US house prices have never gone down.

So what I'm saying is CDOs, CLOs, MBS, etc - are all manifestations of credit priced solely on risk, ignoring any kind of usury forward consumption pricing - i.e. historical declines were never ever priced in, just a correlation risk with the benign historical CDS default rate.

I don't understand where historical (60-year) CDS rates come from ?

Not nit picking but I don't understand "What if we've transitioned to a completely risk-based capital pricing model?"

Is this like Basel requirements for capital allocation to cover risk, or offering to insure against default.

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No, no.

Big money buys into debt instruments based on, say, a 5% return rate and the secure knowledge the economy is growing nicely.

Now, the economy isn't growing - and won't grow IMHO.

But people still want a 5% return - or more.

So we've got this really loose monetary policy - it's doing nothing so far. But it makes borrowing, credit, cheap, in theory at least.

Lets say people's mentality has changed. even with balance sheets repaired, people don't want to borrow.

So there's no "growth" story people can invest in - no nice debt they can push onto the populous - at least - not high quality stuff.

If you borrow - it's normally on the basis you can pay it back and it was prudent for you to do so - leverage.

If the economy is truly broken - you'll just get a situation where people borrow thinking it's another cycle but nothing happens - no GDP growth, no wage increases, etc - just rising asset prices and lots of defaults.

So the market begins to price mortgages according to huge default rates, not because the economy is expanding and they want to cool it down.

And we get this huge wave of purely speculative capital trying to get a yield. Throwing it at houses again, with sliced and diced mortgages, knowing that if they're getting 8% with a 5% default rate, at least they're getting 3% which is better than anything else out there.

Surely this would be the start of something even more nasty than what we have now - a philosophy of totally speculative capital - casino banking par excellence?

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Timm* raised the intriging possibility that QE (new M0) might be gradually stepped up to replace defaulting debt on the asset side of the banks' balance sheets, and in synch with this the banks' capital adequacy ratio stepped up to prevent explosive M4 growth.

The logical endpoint would be 100% reserve banking using 100% M0 debt-free money, i.e. money reform.

Probably it can't/won't go ever that far, but an interesting idea to smooth some sort of transition?

*Edit: My apologies to Bill Still, who pointed out to Timm on the earlier thread that this idea was presented (US version) in Bill's film The Money Masters, 15 years ago.

Due to my inattention, Bill has had to repeat this on this thread.

Yup, if our government can think quick/well enough to realise that QE + tighter reserve ratios is a solution which smooths the transition to monetary reform*, then we are on to a winner. However, whether they will tighten the reserve requirements is the question - do they have the foresight or the courage?

People keep posting about how QE is evil, we will be wondering around with wheel barrows full of notes etc, but imo they are missing the point. QE is replacing bank credit, which was itself inflationary on issue (ie. more "money" is added into the system when the loan is made) - the inflation is already out there.

When debt is repaid it is deflationary, which completes the credit cycle - loan creation (inflationary), then repayment (deflationary), resulting in zero net inflation. However, if everyone is borrowing and repaying in a steady stream, then the prices are essentially permanently inflated (think lots of sequential sign waves), until such a time as people stop taking on debt at the same rate (think of the last sign wave in a series).

With the above in mind, how exactly are we going to get hyperinflation? People had already waved the white flat to borrowing yet bigger multiples, while others were defaulting on them (not good for the banks' solvency), so who is going to borrow this credit money into existence at the even greater numbers required to further inflate the money supply?

In addition, how much deflation is desirable? Back to 1990s? Back to 1970s? 60% off house prices may seem like a great deal for cash buyers, but it could be disastrous for businesses with secured loans on their properties. Going back to the 70s would be like Armageddon - houses for 3k anyone?

No, there is a point where some deflation may be healthy, to return prices to something affordable (for residential, say 2-3x salaries), but if the credit cycle starts to deflate to the point of scary proportions, some floor needs putting under it. The best way, imo, would be replacing the bank credit with State fiat, after allowing say 40% property/land deflation - that would mean about £900bn** as M0 (£850bn in QE + £50 which was there already) and changing the banks to 100% reserve ratios. We already have potentially £225bn in M0 (£50bn base + £175bn QE), which would result in about 25% reserve ratios (in 40% situation outlined above). If QE was continued and inflation is allowed, we could ultimately end up with full reserve banking, provided the political/public will is there.

* IMO, being State control of the money supply, with the banks taking the role of money managers but not creators. The credit cycle is what seems to cause the business cycle as far as I can see it - remove the credit and you remove the boom/bust of the expansion/contraction of credit by the private banks.

** M4 is about £1.5tr at the moment, with reserves in 2007 being about 3% (or 32/1 ratio). Mortgage lending appears to be the lion's share of this at about £1.2tr or so. With M0 being about £50bn in 2007, 50*32 = 1600 = 1.6tr, so the numbers broadly fit (in a back of fag packet way!).

P.S. sorry for the long post - catching up with the forum post holiday!

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Unfortunately, it was because I'm getting so forgetful that I forgot I'd said that before.

Blimey, it sounds like you've just got rid of bankruptcy. Its all part of Gordo's master plan, he did abolish boom and bust.

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