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scepticus

The Fiat Solution

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0% is the 'natural rate' for fiat money economies

any nominal rate of return above 0 on an asset which is costlessly created out of thin air represents risk free arbitrage.

markets hate risk free arbitrage.

markets have driven rates to zero accordingly via bond speculation.

central banks were helpless to prevent this, the cause lies in the end of the gold standard.

the bubble of recent times was not created by central banks lowering rates. In fact its not a bubble. It's a balloon, cut free from the gold standard in 1971 that has kept on rising till it hit zero, with bernanke, king et al hanging on below.

I am not a goldbug.

what next?

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What next indeed.

that was a rhetorical question.

we are now moving (as you have correctly intimated in previous posts) into a period of interest rate stability (at zero) and price volatility. As distinct from the previous epoch of price stability (ahem) and interest rate volatility. This is the new normal, forever*.

* or as long as makes no difference

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Cool.

I'll take a Ferarri, that massive ******-off mansion, a yacht, a million quid for my kid's private education and a run-around for the wife, say, a Bentley.

I'll pay you back in an eon or two.

Ok?

Nice one.

we have zirp now so what are you waiting for?

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0% is the 'natural rate' for fiat money economies

any nominal rate of return above 0 on an asset which is costlessly created out of thin air represents risk free arbitrage.

markets hate risk free arbitrage.

markets have driven rates to zero accordingly via bond speculation.

central banks were helpless to prevent this, the cause lies in the end of the gold standard.

the bubble of recent times was not created by central banks lowering rates. In fact its not a bubble. It's a balloon, cut free from the gold standard in 1971 that has kept on rising till it hit zero, with bernanke, king et al hanging on below.

I am not a goldbug.

what next?

As an old hippy, I always felt that civilisation started to go into reverse after the 60's. Maybe the creation of fake money gave rise to the fake society.

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And anyway, ordinary humans don't "have zirp now"

Savers do (or they nearly do). Savers in japan definitely do.

Borrowers never will have zero, not as long as the base rate is zero or more.

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Savers do (or they nearly do). Savers in japan definitely do.

Borrowers never will have zero, not as long as the base rate is zero or more.

If savers have to lend at 0, someone is borrowing at 0.

We should all be banks.

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We should all be banks.

that depends on how comfortable you are with borrowing short and lending long.

ofc if you mean, we should all be banks with government guarantees, then its hard to argue with that!

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that depends on how comfortable you are with borrowing short and lending long.

ofc if you mean, we should all be banks with government guarantees, then its hard to argue with that!

Who says banks have to borrow short and lend long? Banks?

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Who says banks have to borrow short and lend long? Banks?

Savers can withdraw at any time, but calling in loans takes longer. Hence you can get a run on a bank and it can run out of cash.

This is the essential problem with banks, they are always "bankrupt"

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Savers can withdraw at any time, but calling in loans takes longer. Hence you can get a run on a bank and it can run out of cash.

This is the essential problem with banks, they are always "bankrupt"

Savers can withdraw at any time because banks say they can. Banks choose to borrow short and lend long.

I'm starting to see how injin feels. Some of you people are so blinkered.

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0% is the 'natural rate' for fiat money economies

any nominal rate of return above 0 on an asset which is costlessly created out of thin air represents risk free arbitrage.

markets hate risk free arbitrage.

markets have driven rates to zero accordingly via bond speculation.

central banks were helpless to prevent this, the cause lies in the end of the gold standard.

the bubble of recent times was not created by central banks lowering rates. In fact its not a bubble. It's a balloon, cut free from the gold standard in 1971 that has kept on rising till it hit zero, with bernanke, king et al hanging on below.

I am not a goldbug.

what next?

Are you sure?

Haven't central banks driven yields down through OMO?

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0% is the 'natural rate' for fiat money economies

any nominal rate of return above 0 on an asset which is costlessly created out of thin air represents risk free arbitrage.

markets hate risk free arbitrage.

markets have driven rates to zero accordingly via bond speculation.

central banks were helpless to prevent this, the cause lies in the end of the gold standard.

the bubble of recent times was not created by central banks lowering rates. In fact its not a bubble. It's a balloon, cut free from the gold standard in 1971 that has kept on rising till it hit zero, with bernanke, king et al hanging on below.

I am not a goldbug.

what next?

Interesting hypothesis but incorrect IMO.

ZIRP was created by governments not markets for two reasons:

1. It's the real part of the bank bailout that MSM don't comment on much 'cos it's boring - banks get the 0%, all their new customers and some of the old get 5%-15% and the profit rebuilds the bank balance sheet.

2. It was the soft landing solution to GFC1. It has avoided many overleveraged creditors from becoming insolvent and instead allowed some of them to slowly unwind their positions, others will still go bust as the rates now rise.

IMO you are making the mistake of assuming that ZIRP are here to stay forever. A similar mistake made by those who say stooopid house prices are here to stay forever.

What next? IRs up.

E.g. Eurozone euribor. Was 0.4% Now 0.8% and rising fast.

http://www.suomenpankki.fi/Stats/default.aspx?r=/tilastot/markkina-_ja_hallinnolliset_korot/euriborkorot_pv_chrt_en

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Are you sure?

Haven't central banks driven yields down through OMO?

yes I'm sure. it works like this:

central banks come to the market to do OMO and sell bonds. No doubt they expect to come back in a year or whatever and sell the bonds back and thus raise rates again.

this represents a risk free arbitrage for bond speculators, consequently they bid up the longer durations the central bank is going to be buying, which depresses the long end of the curve. Also, a 25 year bond has historically been hugely underpriced. Think about it, you can buy a 25 year for a nice little yield and then sell it back after a year. How long have you really given up consumption for? Do you deserve that 25 year rate? No, of course not. THis is an arbitrage and the so called 'bond bubble' is not a bubble, its just markets removing that arbitrage by bidding up them bonds..

Now, in order to maintain a healthy shape of the yield curve, the central bank can't set rates back where they were. To restore a nice slope to the curve they are forced to lower short term rates. Until they hit zero.

This is the origin of the so called bond bubble*. It makes perfect sense - what would you say is the natural rate of interest on a asset created out of thin air in any required amount?

My evidence:

1) declining bond yields since 1971

2) japan

3) a paper written by antal fekete entitled 'the fed is an engine of deflation'

4) a paper titled 'the societal benefits of nominal bonds' by chap called Kocherlakota, when he was at the Minneapolis FRB.

* its not a bubble though, simply a process moving the economy towards a new equilibrium where it will stay.

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I think you're warm HAM.

But the money supply is not tied to anything - it simply hunts down and kills yield (which is why everything is so expensive).

Fiat money is purely a unit of account. The entity in the driving seat here is our global markets and communications systems.

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I think you're warm HAM.

But the money supply is not tied to anything - it simply hunts down and kills yield (which is why everything is so expensive).

Fiat money is purely a unit of account. The entity in the driving seat here is our global markets and communications systems.

Sorry - should have been more explicit - the force that has been driving equity PEs up to what would appear to be a new secular high trend since about 1987 is simply the liquidising force of electronic markets.

I think the causality is that markets confer liquidity which then attracts the money, or rather, leverage. If the leverage to eliominate the yield does not exist, it gets created for that purpose.

The housing bubble is an identical process.

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As an old hippy, I always felt that civilisation started to go into reverse after the 60's. Maybe the creation of fake money gave rise to the fake society.

+1 The sell outs have all sold themselves (and in turn everyone else) short.

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yes I'm sure. it works like this:

central banks come to the market to do OMO and sell bonds. No doubt they expect to come back in a year or whatever and sell the bonds back and thus raise rates again.

this represents a risk free arbitrage for bond speculators, consequently they bid up the longer durations the central bank is going to be buying, which depresses the long end of the curve. Also, a 25 year bond has historically been hugely underpriced. Think about it, you can buy a 25 year for a nice little yield and then sell it back after a year. How long have you really given up consumption for? Do you deserve that 25 year rate? No, of course not. THis is an arbitrage and the so called 'bond bubble' is not a bubble, its just markets removing that arbitrage by bidding up them bonds..

Now, in order to maintain a healthy shape of the yield curve, the central bank can't set rates back where they were. To restore a nice slope to the curve they are forced to lower short term rates. Until they hit zero.

This is the origin of the so called bond bubble*. It makes perfect sense - what would you say is the natural rate of interest on a asset created out of thin air in any required amount?

My evidence:

1) declining bond yields since 1971

2) japan

3) a paper written by antal fekete entitled 'the fed is an engine of deflation'

4) a paper titled 'the societal benefits of nominal bonds' by chap called Kocherlakota, when he was at the Minneapolis FRB.

* its not a bubble though, simply a process moving the economy towards a new equilibrium where it will stay.

This sounds like a situation where markets are saturated with debt, with no concern about repayment, but rather the concern of finding a buyer (EDIT: made easy with modern, electronic trading) when they have more urgent liquidity requirements (which could be provided by the central banks).

If a similar situation was reflected in the mortgage market, would this not be like everyone using interest only mortgages and just liquidating the asset as/when they need cash? Alternatively, the bank could do the same thing on the death of the mortgage holders to clear the debt.

If this was the case, would we not all be essentially just 'renting debt' going forward? With this in mind, it would surely mean that those who have benefited from this progression to zero rates will have gained a one time bonus. I'm aware that present conditions are affecting pensions, but surely this suggests that fiscal policy needs to be modified in order to rebalance this wealth transfer back towards the young again?

Do you think the whole idea of earning to buy assets has become obsolete, with renting of the asset (EDIT: i.e. with interest only loans) becoming the new normal?

P.S. I may have got this completely upside down, but I'm keen to understand.

Edited by Traktion

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As an old hippy, I always felt that civilisation started to go into reverse after the 60's. Maybe the creation of fake money gave rise to the fake society.

we're not in reverse. We're in fast forward.

schwarzschild_3d_black_hole2.gif

Edited by scepticus

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This sounds like a situation where markets are saturated with debt, with no concern about repayment, but rather the concern of finding a buyer (EDIT: made easy with modern, electronic trading) when they have more urgent liquidity requirements (which could be provided by the central banks).

If a similar situation was reflected in the mortgage market, would this not be like everyone using interest only mortgages and just liquidating the asset as/when they need cash? Alternatively, the bank could do the same thing on the death of the mortgage holders to clear the debt.

If this was the case, would we not all be essentially just 'renting debt' going forward? With this in mind, it would surely mean that those who have benefited from this progression to zero rates will have gained a one time bonus. I'm aware that present conditions are affecting pensions, but surely this suggests that fiscal policy needs to be modified in order to rebalance this wealth transfer back towards the young again?

Do you think the whole idea of earning to buy assets has become obsolete, with renting of the asset (EDIT: i.e. with interest only loans) becoming the new normal?

P.S. I may have got this completely upside down, but I'm keen to understand.

I'll have to think on that a bit more.

What I will say is that if zero is the natural rate for fiat economies then that can only be a stable situation under conditions of debt saturation. Debt saturation at 0% short term rates forever does change the nature of that debt though, which I guess is what you are getting at.

Right now I'm more concerned to understand the dynamics here - speculating on who wins and who loses may be premature at this stage.

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I'll have to think on that a bit more.

What I will say is that if zero is the natural rate for fiat economies then that can only be a stable situation under conditions of debt saturation. Debt saturation at 0% short term rates forever does change the nature of that debt though, which I guess is what you are getting at.

Right now I'm more concerned to understand the dynamics here - speculating on who wins and who loses may be premature at this stage.

With this in mind, is Japan actually like the new 'normal' too? Having squashed all yield out of all natural assets, due to debt saturation and easy trading, is their lack of growth just a reflection of this new dynamic? If so, it sounds like Japan's lack of growth is not down to a recession in productivity (although this may have been neglected, obviously), but rather the result of an end to easy yield via arbitration (growth via wealth transfer), which shall never return.

It's an interesting reflection, that rates will tend to zero and then stay there - I think I probably agree, in a fiat economy. If true, it does focus the mind very much on fiscal policy changes to re-balance the distribution of wealth, which this procession to ZIRP has created.

Lastly, I would suggest that the plausibility of ongoing ZIRP would be dictated by:

1. People's propensity to repay debt - or rather the willingness of people to remain saturated with debt. So far, even with record low rates, people don't seem particularly willing to pay down debt quicker. The repayment term would likely be influenced by pension worries too (i.e. desire to be debt free by retirement), although I think opinions are changing here too.

2. Whether more QE is injected (could be de-stabilising, and inflationary in same areas, IMO) - perhaps a neutral position, with zero inflation would (will?) be beneficial and not something to be feared. More balance could be achieved, which would be better for the majority, rather than the minority. In time, productivity* would take over from yield seeking, which is surely progress.

I think my mind is wondering from your point, but it's good to ponder.

EDIT: * via risky investments too, with a chance of a negative yield.

Edited by Traktion

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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