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BOE revives negative rates talk


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13 hours ago, slawek said:

The accumulated debt is a problem.  Without debt constantly growing you will get a deflation and a recession. One person debt is another person asset. A big debt means big inequality.

 

Your last statement there can be falsified. The debt to GDP was larger after WWII and in the 1960s than it was in the period 1970-2000 yet the latter period is more unequal. What matters for inequality is the type of debt.

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When a bank gets reserve money it gets an asset (CB liability) but also gets an liability (CB asset). That is double entry accounting. In a typical case a new reserve money are created by a repo transaction. Banks gives a bond to CB as a security for a loan from CB (bank liability, CB asset).  CB lending a bank reserve money, which itself is CB liability (bank asset). 

Agreed, but as you note above the banks net position is two assets and a liability, therefore the net position is that the BoE is borrowing from the bank. 

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5 minutes ago, scepticus said:

So what? According to this in 2017 our banks only held 17% of government debt. 23% is at the BoE. So the remainder, 60% is bought by other market participants, which means they, not the BoE or the banks, set the rate on that debt. Which means, the BoE cannot control the rate on the debt even for the shorter durations. Which is not so say that the market will never accept the BoEs judgement on the right interest rate, merely that it does not have to.

https://www.economicshelp.org/blog/1407/economics/who-owns-government-debt/

So what? You don't need to buy the whole market to control it. Everyone know CBs can do this and nobody fights it. 

6 minutes ago, scepticus said:

Right, so your example of a risk free rate is basically a negative rate yes?

I have never said risk free cannot be negative.

7 minutes ago, scepticus said:

Fair enough but you cannot assume that a property of the entire global market applies to individuals. If you are correct that globally we always grow and always make profit (which is not true but never mind for now) then individually there will still be winners and loosers. Also to get that good global outcome requires that some players make riskier investments, which will not happen if the risk free rate is too high.

Someone who diversifies will be ok. That is what I explained in my example.

14 minutes ago, scepticus said:

Now we are getting somewhere. We have established that you agree with the following :

  • (1) Storage of cash or gold in a vault with insurance is you example of risk free (or as close as you get) and that the return on this is negative.
  • (2) You agree that the global risk free rate can be negative in some circumstances, although you claim it can also be positive for long periods, and would 'normally' be positive.

You then need to answer the question why, given (1) is a negative rate, you think holding of bank deposits which are risk free could get a positive rate when your baseline scenario is always negative.

The nominal risk free rate has been positive since it has existed (realistically since the end of WWII) only because the nominal money supply and debt load has consistently and without pause expanded for 6 decades at an extremely fast rate. Why did we have this expansion - because of CB actions? Nope - it is because the market finds its way to assigning a nominal rate of return of 0 or slightly -ve to all risk free assets. How did it do this? By choosing to expand debt until we reach peak debt and ZIRP, the market has by itself acted to remove the arbitrage of risk free assets with >0 nominal return. This is what markets do, they work to remove arbitrage. You said yourself banks had opportunities to get free money and always take the opportunity. Debt expansion leading to zirp has removed that arbitrage.

This phenomenon is a phase transition of our monetary system. The stages are:

  1. prior to 1971: economy without risk free assets prior to the Great Depression.
  2.  1971 - economy with widespread risk free assets from the end of Bretton Woods, but with risk free rates >> 0.
  3. 1971-2008:  inflating economy moving from an unstable point of risk free rates >> 0, and a long way from its peak debt load towards a more stable point of peak debt and zirp. This part of the transition is the most fleeting and temporary phase, but it is what most people consider "normal". It is far from normal.
  4.  2009+ a zirp economy in which peak debt has been reached and the risk free rate is near 0 and with a zero lower bound on risk free rates. Risk free rate arbitrage has been removed.
  5. 2020+: an economy still at peak debt load with no lower bound on risk free rates.
  6.  in time: an economy whose debt load grows and shrinks according to global growth outcomes, with deflationary and inflationary periods both possible, where the debt load is always at or close to the maximum debt load the economy can sustain. Risk free rate is at 0 or slightly below 0. Price changes are contained so hyper inflation/deflation unlikely but CBs cannot target specific price levels.

The first assumption about gold having negative nominal rates is incorrect. The rate is a gold specific risk free real rate. You can imply the gold nominal rate if you know the change of the exchange rate between gold and nominal money, often referred as gold price.  You can think of gold as another currency, each currency has its own risk free rate, that are linked by a rate of change of the exchange rate between them.  

I haven't checked the rest of the argument.

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4 minutes ago, slawek said:

The first assumption about gold having negative nominal rates is incorrect. The rate is a gold specific risk free real rate. You can imply the gold nominal rate if you know the change of the exchange rate between gold and nominal money, often referred as gold price.  You can think of gold as another currency, each currency has its own risk free rate, that are linked by a rate of change of the exchange rate between them.  

I agree if the fiat risk free rate is set above 0 - as it has been since it was invented - then gold would also get a positive risk free rate. But when fiat gets a zero or negative risk free rate so will gold. Anyway, what is your calculation of what this gold risk free rate has been over the last 20 years? I would be interested to know.

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26 minutes ago, scepticus said:

Your last statement there can be falsified. The debt to GDP was larger after WWII and in the 1960s than it was in the period 1970-2000 yet the latter period is more unequal. What matters for inequality is the type of debt.

That is not true. 

total-global-credit-debt-owed.jpg

https://ycginvestments.com/2018-q1-investment-letter-moodys/

38 minutes ago, scepticus said:

Agreed, but as you note above the banks net position is two assets and a liability, therefore the net position is that the BoE is borrowing from the bank. 

The net position is not two assets and a liability after a new reserve money are created. Before a new money is created a bank net position is close to zero. A bank has a bond as an assets but also a liability,  credit money with which the bank paid for the bond. An operation to create new reserve money adds one asset (reserve money) and one liability (loan from CB). The net balance sheet position is close to zero after.   

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45 minutes ago, slawek said:

That is not true. 

That's because the chart doesn't show 1939-1949. 

45 minutes ago, slawek said:

The net position is not two assets and a liability after a new reserve money are created. Before a new money is created a bank net position is close to zero. A bank has a bond as an assets but also a liability,  credit money with which the bank paid for the bond. An operation to create new reserve money adds one asset (reserve money) and one liability (loan from CB). The net balance sheet position is close to zero after.   

Agreed, I think. But the starting position, and finishing position is that in aggregate the banking sector is owed money by the CB. Anyway, I have forgotten how this relates to our discussion about the risk free rate...

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On 21/05/2020 at 14:25, Warlord said:

The BoE holds a lot of gold so you can argue it IS on topic. 

It's no surprise threads about the BoE can turn into a discussion about gold.or the gold standard.

 

https://www.bankofengland.co.uk/knowledgebank/how-much-gold-is-kept-in-the-bank-of-england

200 billion in gold is not "a lot of gold" - relative to the wider economy. Logic fail. Please go gold bug somewhere else.

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1 hour ago, scepticus said:

That's because the chart doesn't show 1939-1949. 

Your claim was " The debt to GDP was larger after WWII and in the 1960s than it was in the period 1970-2000 yet the latter period is more unequal."  The graphs falsifies your claim about 1960s (definitely) and after WWII (that depends on what you meant by "after"). Below some longer term view. 

1 hour ago, scepticus said:

Agreed, I think. But the starting position, and finishing position is that in aggregate the banking sector is owed money by the CB. Anyway, I have forgotten how this relates to our discussion about the risk free rate...

 I think you are right. In case the QE, bond is just swapped by reserve money, corresponding liability is to the previous owner of a bond. 

taylor%20fig1%2017%20oct.png

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41 minutes ago, longgone said:

i bet your average oligarch has more than that stashed in the engine room of his yacht. 

current us national debt (USD): 24.95 trillion.

1 US ton of gold curreently priced at about 55 million USD.

That's approximately 454600 tons of gold.

For perspective ont his: Global extraction of gold is about 3200 tons every year.

In other words to cover (just) the US national debt with gold you would have to spend 142 years extracting gold from the earth and using it for nothing other than paying down the debt. Which would be physically possible assuming 0% inflation for 1 and a half centuries. And assuming you didn't ever need gold for anything else.

Or, to put it another way, that's an awful lot of oligarch's boats to hide all this stuff in.

If each oligarch had 10 tons hidden in their boats - how many boats would you need to hide a "significant" amount of gold?

Oh yeah, and boats sink.

From this visualization ... a very rough calculation of the world's gold reserves (admitedly the publicly declared stocks) is about 25 000 tons ... or slightly more than 1/20th of the gold required to pay back the debt ...:

World gold reserves

For your point to be relevant on a global economic stage you would need significantly more than this amount in "hidden" spaces ...

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3 hours ago, Aidan Ap Word said:

current us national debt (USD): 24.95 trillion.

1 US ton of gold curreently priced at about 55 million USD.

That's approximately 454600 tons of gold.

For perspective ont his: Global extraction of gold is about 3200 tons every year.

In other words to cover (just) the US national debt with gold you would have to spend 142 years extracting gold from the earth and using it for nothing other than paying down the debt. Which would be physically possible assuming 0% inflation for 1 and a half centuries. And assuming you didn't ever need gold for anything else.

Or, to put it another way, that's an awful lot of oligarch's boats to hide all this stuff in.

If each oligarch had 10 tons hidden in their boats - how many boats would you need to hide a "significant" amount of gold?

Oh yeah, and boats sink.

From this visualization ... a very rough calculation of the world's gold reserves (admitedly the publicly declared stocks) is about 25 000 tons ... or slightly more than 1/20th of the gold required to pay back the debt ...:

World gold reserves

For your point to be relevant on a global economic stage you would need significantly more than this amount in "hidden" spaces ...

none of that accounts for the gold destroyed annually and i don`t mean operation grandslam. no one actually knows how much gold is out there. 

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8 hours ago, slawek said:

Your claim was " The debt to GDP was larger after WWII and in the 1960s than it was in the period 1970-2000 yet the latter period is more unequal."  The graphs falsifies your claim about 1960s (definitely) and after WWII (that depends on what you meant by "after"). Below some longer term view. 

Sorry I was not sufficiently careful, based on the chart you posted I can say that 1945-1955 the debt was higher than 1970-1990 but inequality was lower. In any case, there is quite a well established set of results that suggests that increasing trade and growth always seems to increase inequality, both before and after use of fiat money. Maybe the extra dent that comes with growth is a symptom, not cause of inequality?

I am still interested to know your thoughts on the hypothesis I posted earlier about why we got to zirp, which you said at the time you had not managed to read yet.

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10 hours ago, scepticus said:

Sorry I was not sufficiently careful, based on the chart you posted I can say that 1945-1955 the debt was higher than 1970-1990 but inequality was lower. In any case, there is quite a well established set of results that suggests that increasing trade and growth always seems to increase inequality, both before and after use of fiat money. Maybe the extra dent that comes with growth is a symptom, not cause of inequality?

I am still interested to know your thoughts on the hypothesis I posted earlier about why we got to zirp, which you said at the time you had not managed to read yet.

1940-50s was time of a explosion and a quick decline of the public debt due to WWII, a very special circumstance, That wasn't debt driven by an expansion,  rather GDP contraction and wealth destruction. The debt that was created then was quickly paid back so there was no long term inequality increase.  

The claim that increasing growth/trade causes inequality can be simply falsified by 50s/60s. A long period of prosperity with inequality going down.   

I promise I'll connect this to retail butâ¦.. - Robert Hetu

As for a link to a blog "The illusion of power" you posted. The guy make a claim that the FED doesn't control long term nominal rates but he completely fails to provide any arguments. According to him an existence of a long term relation

long term nominal rates = inflation rate + GDP growth rate

some how provides a justification for his claim. Unfortunately that  is not a case. He needs yet to provide evidence that inflation rate and GDP growth rate are not controlled in a long term by the Fed and then using the equation he can make a claim that long term nominal rates are not controlled by the Fed. 

He also conveniently ignores a fact that the Fed controls long term rates directly by QE, buying and selling bonds. 

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42 minutes ago, slawek said:

1940-50s was time of a explosion and a quick decline of the public debt due to WWII, a very special circumstance, That wasn't debt driven by an expansion,  rather GDP contraction and wealth destruction. 

True, but you never made that caveat in your original claim. What reduced inequality during and immediately after  WWII was not debt reduction, but as you say, destruction of wealth. Given that wealth mainly accrues to the wealthy, wealth destruction will always reduce inequality more effectively than anything else. 

42 minutes ago, slawek said:

The claim that increasing growth/trade causes inequality can be simply falsified by 50s/60s. A long period of prosperity with inequality going down.   

Ah but that chart only shows American income shares. If you looked at the global income share during that period you find it all going to the USA and some European countries and the third world being impoverished. 

So the growth in trade and profits from that post-war comes, as we all know, from western depredations on vulnerable third world nations. Likewise, more recently the global gini co-efficient has been shown to be getting more equal, as long as you look at the whole world. However when you look at individual western nations you can see that internally their inequality has risen.

The situation is much more complex than you credit.

42 minutes ago, slawek said:

As for a link to a blog "The illusion of power" you posted. The guy make a claim that the FED doesn't control long term nominal rates but he completely fails to provide any arguments. According to him an existence of a long term relation

Its a fair point and I agree , I only posted it to show that opinion varies on this matter. Its not a 'fact' that the CB has the power you say it does.

However that is not what I was requesting you address, I was refering to my earlier posted hypotehsis of why we go to ZIRP. I will post it again here.

 

 

Quote

 

The nominal risk free rate has been positive since it has existed (realistically since the end of WWII) only because the nominal money supply and debt load has consistently and without pause expanded for 6 decades at an extremely fast rate. Why did we have this expansion - because of CB actions? Nope - it is because the market finds its way to assigning a nominal rate of return of 0 or slightly -ve to all risk free assets. How did it do this? By choosing to expand debt until we reach peak debt and ZIRP, the market has by itself acted to remove the arbitrage of risk free assets with >0 nominal return. This is what markets do, they work to remove arbitrage. You said yourself banks had opportunities to get free money and always take the opportunity. Debt expansion leading to zirp has removed that arbitrage.

This phenomenon is a phase transition of our monetary system. The stages are:

  1. prior to 1971: economy without risk free assets prior to the Great Depression.
  2.  1971 - economy with widespread risk free assets from the end of Bretton Woods, but with risk free rates >> 0.
  3. 1971-2008:  inflating economy moving from an unstable point of risk free rates >> 0, and a long way from its peak debt load towards a more stable point of peak debt and zirp. This part of the transition is the most fleeting and temporary phase, but it is what most people consider "normal". It is far from normal.
  4.  2009+ a zirp economy in which peak debt has been reached and the risk free rate is near 0 and with a zero lower bound on risk free rates. Risk free rate arbitrage has been removed.
  5. 2020+: an economy still at peak debt load with no lower bound on risk free rates.
  6.  in time: an economy whose debt load grows and shrinks according to global growth outcomes, with deflationary and inflationary periods both possible, where the debt load is always at or close to the maximum debt load the economy can sustain. Risk free rate is at 0 or slightly below 0. Price changes are contained so hyper inflation/deflation unlikely but CBs cannot target specific price levels.

 

  1.  
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Seems to me the state and central bank are determined to steal as much of my money as they can get away with. With negative interest rates this will be overt theft, on top of inflation and tax. It is my job to protect my wealth, that was earned by hard work, from these thieves. I have lost all faith in the pound as a store of value, thanks to this threat.

The best I can come up with is to buy something that will retain its value. Doen't really matter what. I'd prefer a form of concentrated, liquid wealth. So, yeah, gold is the obvious choice. Other metals, such as silver, platumin or even copper work just as well but are perhaps not so liquid. If anyone has a better idea for wealth preservation speak up. Not looking to make money, just to not be robbed.

Land is in a debt fueled bubble. Stocks look expensive and risky. The dollar looks as bad as the pound, though I could be wrong here. But why take the risk? So far as I can see an ounce of gold will still be an ounce of gold in five years time. There's always the risk that  gold will be outlawed, though. So maybe silver?

I've ordered a little gold and silver from ebay today. If nobody can come up with a better idea that's where I'm putting my savings. I was doing DD on high divi FTSE 250 stock in Jan, but now it all just looks like risk.

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9 hours ago, scepticus said:

True, but you never made that caveat in your original claim. What reduced inequality during and immediately after  WWII was not debt reduction, but as you say, destruction of wealth. Given that wealth mainly accrues to the wealthy, wealth destruction will always reduce inequality more effectively than anything else.

My claim was about impact of debt on inequality. Of course there are other factors like wealth destruction due to a war, which change inequality. Anyway this period is not really relevant as it was a temporary increase of debt, it didn't have a long term impact on inequality.

Debt is mostly owned by wealthy, poor owe debt. Higher debt means  higher wealth in hands of wealthy. Additionally wealthy gets wealthier as they receive positive real interest on debt. Debt also stimulates economy, increasing profits of companies who are owned/managed by wealthy. Bigger profits means higher return on capital for owners and higher salaries for management. Poor people salaries are substituted partially by debt or state help, which is also partially funded with debt.

9 hours ago, scepticus said:

Ah but that chart only shows American income shares. If you looked at the global income share during that period you find it all going to the USA and some European countries and the third world being impoverished. 

So the growth in trade and profits from that post-war comes, as we all know, from western depredations on vulnerable third world nations. Likewise, more recently the global gini co-efficient has been shown to be getting more equal, as long as you look at the whole world. However when you look at individual western nations you can see that internally their inequality has risen.

The situation is much more complex than you credit.

"Inequality" meant different things for us. For me inequality between rich and poor within a Western country, for you globally between rich and poor countries. 

Even using your definition, it is not true that increasing trade worsens inequality. Since around 1990s the global inequality has improved with increasing global trade. It is mainly a China story but not only.

Global inequality in 1800 1975 and 2015

      https://ourworldindata.org/global-economic-inequality

10 hours ago, scepticus said:

However that is not what I was requesting you address, I was refering to my earlier posted hypotehsis of why we go to ZIRP. I will post it again here.

Quote

The nominal risk free rate has been positive since it has existed (realistically since the end of WWII) only because the nominal money supply and debt load has consistently and without pause expanded for 6 decades at an extremely fast rate. Why did we have this expansion - because of CB actions? Nope - it is because the market finds its way to assigning a nominal rate of return of 0 or slightly -ve to all risk free assets. How did it do this? By choosing to expand debt until we reach peak debt and ZIRP, the market has by itself acted to remove the arbitrage of risk free assets with >0 nominal return. This is what markets do, they work to remove arbitrage. You said yourself banks had opportunities to get free money and always take the opportunity. Debt expansion leading to zirp has removed that arbitrage.

This phenomenon is a phase transition of our monetary system. The stages are:

  1. prior to 1971: economy without risk free assets prior to the Great Depression.
  2.  1971 - economy with widespread risk free assets from the end of Bretton Woods, but with risk free rates >> 0.
  3. 1971-2008:  inflating economy moving from an unstable point of risk free rates >> 0, and a long way from its peak debt load towards a more stable point of peak debt and zirp. This part of the transition is the most fleeting and temporary phase, but it is what most people consider "normal". It is far from normal.
  4.  2009+ a zirp economy in which peak debt has been reached and the risk free rate is near 0 and with a zero lower bound on risk free rates. Risk free rate arbitrage has been removed.
  5. 2020+: an economy still at peak debt load with no lower bound on risk free rates.
  6.  in time: an economy whose debt load grows and shrinks according to global growth outcomes, with deflationary and inflationary periods both possible, where the debt load is always at or close to the maximum debt load the economy can sustain. Risk free rate is at 0 or slightly below 0. Price changes are contained so hyper inflation/deflation unlikely but CBs cannot target specific price levels.

 

What is this arbitrage process through which the market sets zero as the nominal risk free rate?  The arbitrage requires more than one price for the same risk. The market can buy at a lower price and sell at a higher price making money not taking any risk until those two prices converge. In your case what is a way to borrow at zero nominal rate? How does this arbitrage process causes debt to grow exactly?

TBH I don't think you theory makes sense and such arbitrage exists. Increasing debt is a result of a debt boom. It is a positive feedback loopback, increasing debt => growing economy => people more confident => people borrow more  => increasing debt => .... .  At some point this ends due to some external shocks or just hitting some limits. The debt accumulated during a debt boom should be destroyed during a following debt bust but CBs prevent this to happen. With lower rates and now QE they stop a debt bust and start a cycle again. The economy rescued in this way is less efficient as companies which should go bust are still alive. This lowers GDP growth in the long term.   

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On 25/05/2020 at 18:11, longgone said:

none of that accounts for the gold destroyed annually and i don`t mean operation grandslam. no one actually knows how much gold is out there. 

Inside what you so gibly respoinded to is my view:

Quote

In other words to cover (just) the US national debt with gold you would have to spend 142 years extracting gold from the earth and using it for nothing other than paying down the debt. Which would be physically possible assuming 0% inflation for 1 and a half centuries. And assuming you didn't ever need gold for anything else.

So back to my point:

The relevance of gold in terms of responding to (or even just understanding) global debt - or even just the US debt pile - is extremely limited.

Even if I was off by a factor of 10 - that's 15 years of *global* gold *production* - just to pay the US debt back. And assuming the persons/organisations to whom the debt is owed (a dubious idea in the first place) actually want all that physical stuff that they then have to store securely ...

You suggest that no one knows how much gold there is out there?

Are you serious?

Yeah, like geologists haven't been studying that for years. And if there was a lot more gold "out there" (in terms of what we could reap from the earth) then gold would be worth less anyway.

Gold mining is a big, loud, energy intensive and dangerous job. We know eactly how much gold we extract year by year.

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20 hours ago, Biggus said:

Seems to me the state and central bank are determined to steal as much of my money as they can get away with. With negative interest rates this will be overt theft, on top of inflation and tax. It is my job to protect my wealth, that was earned by hard work, from these thieves. I have lost all faith in the pound as a store of value, thanks to this threat.

The best I can come up with is to buy something that will retain its value. Doen't really matter what. I'd prefer a form of concentrated, liquid wealth. So, yeah, gold is the obvious choice. Other metals, such as silver, platumin or even copper work just as well but are perhaps not so liquid. If anyone has a better idea for wealth preservation speak up. Not looking to make money, just to not be robbed.

Land is in a debt fueled bubble. Stocks look expensive and risky. The dollar looks as bad as the pound, though I could be wrong here. But why take the risk? So far as I can see an ounce of gold will still be an ounce of gold in five years time. There's always the risk that  gold will be outlawed, though. So maybe silver?

I've ordered a little gold and silver from ebay today. If nobody can come up with a better idea that's where I'm putting my savings. I was doing DD on high divi FTSE 250 stock in Jan, but now it all just looks like risk.

That's because like a lot of people you haven't really figured it out.

Interest rate is the price your money fetches in the market place. No one is stealing from you, because no one is forcing you to lend it to them in the first place. If I have a house that I think is worth 2K and three people offer me 1K for it and I sell it for 1K, does that me the person who buys it is stealing from me ?

If you are not happy with the price, you can always choose to do something else with it. Which is exactly how the market dynamic works.

The market doesn't care about your hard work, any more than it cares about the fact that it was your grannies house that she worked for all her life and therefore you couldn't possible sell it at a discount.

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20 hours ago, Biggus said:

Seems to me the state and central bank are determined to steal as much of my money as they can get away with. With negative interest rates this will be overt theft, on top of inflation and tax. It is my job to protect my wealth, that was earned by hard work, from these thieves. I have lost all faith in the pound as a store of value, thanks to this threat.

The best I can come up with is to buy something that will retain its value. Doen't really matter what. I'd prefer a form of concentrated, liquid wealth. So, yeah, gold is the obvious choice. Other metals, such as silver, platumin or even copper work just as well but are perhaps not so liquid. If anyone has a better idea for wealth preservation speak up. Not looking to make money, just to not be robbed.

Land is in a debt fueled bubble. Stocks look expensive and risky. The dollar looks as bad as the pound, though I could be wrong here. But why take the risk? So far as I can see an ounce of gold will still be an ounce of gold in five years time. There's always the risk that  gold will be outlawed, though. So maybe silver?

I've ordered a little gold and silver from ebay today. If nobody can come up with a better idea that's where I'm putting my savings. I was doing DD on high divi FTSE 250 stock in Jan, but now it all just looks like risk.

Keeping money at bank is sensible when prices fall (deflation) faster than money disappear from you account due to negative rates. 

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13 hours ago, slawek said:

My claim was about impact of debt on inequality. Of course there are other factors like wealth destruction due to a war, which change inequality. Anyway this period is not really relevant as it was a temporary increase of debt, it didn't have a long term impact on inequality.

So its hard to say whether increased levels debt is a cause of inequality, or a side effect/symptom of rapid growth, where the growth is what generates the inequality. After all during a period of rapid growth and increase in GDP, that increase has to evenly spread over the population to not change inequality. But given that the rate of return is positive in these scenarios and those returns compound to the holders of assets - not just debt - but all assets like property and the means of production, one would expect quick growth to increase inequality, even if it makes everyone better off.

13 hours ago, slawek said:

Debt is mostly owned by wealthy, poor owe debt. Higher debt means  higher wealth in hands of wealthy. Additionally wealthy gets wealthier as they receive positive real interest on debt. Debt also stimulates economy, increasing profits of companies who are owned/managed by wealthy. Bigger profits means higher return on capital for owners and higher salaries for management. Poor people salaries are substituted partially by debt or state help, which is also partially funded with debt.

But like I say above, the wealthy don't just hold debt, they hold more equity in the means of production. You seem to be trying to lay the blame for all societies ills on debt, rather than at the uneven distribution of wealth generally. This is a common view in certain right-leaning political views, but I'm not sure it has any basis in reality.

And how much debt is owed by poorer individuals, versus that owed by the entire corporate sector for example? The former would need to be much higher than the latter for your view that debt is the prima facie cause of social unfairness to be plausible. Also, with interest rates very low, surely the debt component is less important than other assets?

13 hours ago, slawek said:

"Inequality" meant different things for us. For me inequality between rich and poor within a Western country, for you globally between rich and poor countries. 

Even using your definition, it is not true that increasing trade worsens inequality. Since around 1990s the global inequality has improved with increasing global trade. It is mainly a China story but not only.

The link between trade, growth and inequality has been studied extensively and various studies have come to different conclusions. The way I see it is quite simple, if you increase the size and scope of a system by establishing more linkages between more players, then the network effects will allow a greater absolute difference between the richest and poorest nodes in that network. The network effects of human interactions have a good mathematical basis that I think supports this.

13 hours ago, slawek said:

 

What is this arbitrage process through which the market sets zero as the nominal risk free rate?  The arbitrage requires more than one price for the same risk. The market can buy at a lower price and sell at a higher price making money not taking any risk until those two prices converge. In your case what is a way to borrow at zero nominal rate? How does this arbitrage process causes debt to grow exactly?

I think you identified yourself that the monetary system offers banks a method to make free money with no risk, on the same assets that are offered to other market participants who do not get this same opportunity. So that could be one.

Also see this links talking about arbitrage resulting from risk free assets:

https://www.sr-sv.com/multiple-risk-free-interest-rates/

In particular I think these passages are pertinent:

"Put simply some “safe assets” have value beyond return. U.S. government bonds, in particular, seem to provide a sizable consistent convenience yield that tends to soar in crisis. This suggests that there are arbitrage opportunities for investors that are flexible, impervious to convenience yields and tolerant towards temporary mark-to-market losses."

“In frictionless asset pricing models, [the risk-free rate] is determined by the investors’ time preference. However, recent literature has questioned whether the time preference of money is the only determinant…providing evidence that the scarcity of safe assets drives up their price and lowers the corresponding interest rate.”

“The time preference of investors can only be inferred by measuring the risk-free rate implied by the prices of risky assets, where the spread between this implied risk-free rate and the observed return on safe assets measures the convenience yield that these safe assets provide… The risk-free rate implied by the pricing of risky assets lies strictly above the rate earned on safe assets, where the difference is often interpreted as a measure of the severity of financial frictions.”

I think that your view you have presented on the nature of risk free rates is implicitly assuming basically frictionless markets, which of course is not the reality. The key point of my thesis here is the bit in bold above. If risk-free assets (cash, reserves and gov-bonds) were provided to the private sector such that anyone who wants one can buy one then there would be no scarcity. However, because this is not the case, with every financial crisis or recession an additional return due to liquidity premium accrues to the holders of safe assets above and beyond the risk free return in normal times. This additional return is not reflected in the price paid by the holder of said risk free asset. 

So not only does this drive risk free rates to zero, it also induces the issuers of risk-free assets (Cbs and governments) to try and mitigate temporary safe-assets scarcity issues by issuing more of them. This makes them temporarily not scarce, and the market can return to "normal". But as soon as the next crisis hits, they become scarce once again and now more safe assets must be issued. If this is not done (exactly like was done in the stimulus post 2008) then risk free rates will turn negative as market players fight to get into the risk free assets.

 

13 hours ago, slawek said:

TBH I don't think you theory makes sense and such arbitrage exists. Increasing debt is a result of a debt boom. It is a positive feedback loopback, increasing debt => growing economy => people more confident => people borrow more  => increasing debt => .... .  At some point this ends due to some external shocks or just hitting some limits. The debt accumulated during a debt boom should be destroyed during a following debt bust but CBs prevent this to happen. With lower rates and now QE they stop a debt bust and start a cycle again. The economy rescued in this way is less efficient as companies which should go bust are still alive. This lowers GDP growth in the long term.   

So above I have offered a reason for debt (in safe assets) to increase which is baked into the market structure.

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Here is another paper, from the FED, on safe asset scarcity and the 'convenience yield' aspect of risk free assets:

https://www.frbsf.org/economic-research/files/wp2019-28.pdf

What the existence of this convenience yield means, is that the market price of a risk free asset (where risk free is determined by the market, and perhaps may be whatever the least risk asset happens to be), will be lower than a risk free rate that can be constructed synthetically from a basked of uncorrelated risky assets.

Which matches exactly my intuition that the return, in normal times, of risk free assets must be negative.

[Edit, should say the return, in normal times, of risk free assets must be lower than the market rate of return on the market portfolio]

Edited by scepticus
clarification
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3 hours ago, Gigantic Purple Slug said:

That's because like a lot of people you haven't really figured it out.

Interest rate is the price your money fetches in the market place. No one is stealing from you, because no one is forcing you to lend it to them in the first place. If I have a house that I think is worth 2K and three people offer me 1K for it and I sell it for 1K, does that me the person who buys it is stealing from me ?

If you are not happy with the price, you can always choose to do something else with it. Which is exactly how the market dynamic works.

The market doesn't care about your hard work, any more than it cares about the fact that it was your grannies house that she worked for all her life and therefore you couldn't possible sell it at a discount.

The interest rate is set by the BOE paying more for government bonds than they are really worth. The market rate without the BOE printing money to buy bonds would be much higher. The money printing is not earned wealth. It is taken, without permission, from the rest of society. In other words theft. Last month the BOE printed 200 billion pounds to buy bonds.

The manipulated interest rate forces up the price of bonds, stocks, houses and financial products and everything else. It's not possible to escape. There is nothing I can buy that has not had it's price affected by the money printing. But, yes, I'm going to protect myself as best I can.

 

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4 hours ago, Aidan Ap Word said:

Inside what you so gibly respoinded to is my view:

Worldwide, the annual manufacture of high-tech products (PCs, cell phones, tablet computers and other electronic and electrical devices) uses some $21 billion worth of gold and silver (320 tons and 7,500 tons, respectively).

how much do you think of that is recovered and if it is how is that audited ?

4 hours ago, Aidan Ap Word said:

So back to my point:

The relevance of gold in terms of responding to (or even just understanding) global debt - or even just the US debt pile - is extremely limited.

Even if I was off by a factor of 10 - that's 15 years of *global* gold *production* - just to pay the US debt back. And assuming the persons/organisations to whom the debt is owed (a dubious idea in the first place) actually want all that physical stuff that they then have to store securely ...

You suggest that no one knows how much gold there is out there?

Are you serious?

Yeah, like geologists haven't been studying that for years. And if there was a lot more gold "out there" (in terms of what we could reap from the earth) then gold would be worth less anyway.

Gold mining is a big, loud, energy intensive and dangerous job. We know eactly how much gold we extract year by year.

digging gold out the ground measuring it and saying hey look there is 200 more tons added to the pile we already have is a stupid way to look at it. 

My point was you don`t know how much gold is in circulation after its been used in production as nearly all of it is wasted. 

geologists will study the ground for minerals which will indicate gold same as diamons opal what ever but they can only guess to the amount in any mine. there is plenty in mines under the sea but quite difficult to reach ?

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5 hours ago, scepticus said:

So its hard to say whether increased levels debt is a cause of inequality, or a side effect/symptom of rapid growth, where the growth is what generates the inequality. After all during a period of rapid growth and increase in GDP, that increase has to evenly spread over the population to not change inequality. But given that the rate of return is positive in these scenarios and those returns compound to the holders of assets - not just debt - but all assets like property and the means of production, one would expect quick growth to increase inequality, even if it makes everyone better off.

Increasing debt => faster economic growth. If we agree that rapid growth causes inequality then increasing debt also increases inequality,  indirectly through increasing economic growth. I think it is true that overall everyone is better off after a period of growth but rich are more better off, which was my point.  

In 1950s/60s we had growing economy but improving inequality, between 1980 and 2008 the economy was growing but inequality was increasing. I think the explanation is a change of the way the system was balanced. Increasing inequality with growing economy is not self sustained.  Poor have less money relatively to growing economy as rich share of income/wealth increases. As a result poor consumption drops and the economy slows down. In 1950s/60s to counter this the rich were heavily taxed and the state redistributed income/wealth. In 1980s the new liberal policies reduced taxes and the state role in the economy, replacing taxes with debt as a balancing mechanism. Poor were borrowing a part of their consumption from the future. In this new model debt has to rise and inequality increases as rich accumulate claims on poor future income.

5 hours ago, scepticus said:

But like I say above, the wealthy don't just hold debt, they hold more equity in the means of production. You seem to be trying to lay the blame for all societies ills on debt, rather than at the uneven distribution of wealth generally. This is a common view in certain right-leaning political views, but I'm not sure it has any basis in reality.

And how much debt is owed by poorer individuals, versus that owed by the entire corporate sector for example? The former would need to be much higher than the latter for your view that debt is the prima facie cause of social unfairness to be plausible. Also, with interest rates very low, surely the debt component is less important than other assets?

I am not laying the blame, see my explanation above. Ultimately the uneven distribution of income/wealth is a problem. Debt is just a quick fix, which was deployed in the last 40 years.     

Household and corporate debts are usually comparable. The problem is not only debt itself. CB are reluctant to remove the debt overhang as that would mean a period of lower growth or even a recession. They lower rates to stop deleveraging and to encourage to borrow more. As result debt grows even bigger. Lower rates lift asset prices, which also makes rich people richer.

5 hours ago, scepticus said:

The link between trade, growth and inequality has been studied extensively and various studies have come to different conclusions. The way I see it is quite simple, if you increase the size and scope of a system by establishing more linkages between more players, then the network effects will allow a greater absolute difference between the richest and poorest nodes in that network. The network effects of human interactions have a good mathematical basis that I think supports this.

How do you then explain that since 90s, with a huge increase in the global trade, the global inequality has improved ?  

5 hours ago, scepticus said:

I think you identified yourself that the monetary system offers banks a method to make free money with no risk, on the same assets that are offered to other market participants who do not get this same opportunity. So that could be one.

Also see this links talking about arbitrage resulting from risk free assets:

https://www.sr-sv.com/multiple-risk-free-interest-rates/

That was an arbitrage between a CB rate and a yield of short term government bonds. This arbitrage makes yields to match the CB rates as they are fixed.  It doesn't force risk free rates to zero. You need a liquid source of 0% funding to force other short risk free rates to be 0%. I am not aware about any such source.

I agree that arbitrage is not perfect, there are some frictions which allow different rates to diverge. There are also constraints/advantages which makes some rates higher/lower than others.  These differences are usually bigger when the market is in a stress as people executing arbitrages withdraw from the market.

6 hours ago, scepticus said:

I think that your view you have presented on the nature of risk free rates is implicitly assuming basically frictionless markets, which of course is not the reality. The key point of my thesis here is the bit in bold above. If risk-free assets (cash, reserves and gov-bonds) were provided to the private sector such that anyone who wants one can buy one then there would be no scarcity. However, because this is not the case, with every financial crisis or recession an additional return due to liquidity premium accrues to the holders of safe assets above and beyond the risk free return in normal times. This additional return is not reflected in the price paid by the holder of said risk free asset. 

So not only does this drive risk free rates to zero, it also induces the issuers of risk-free assets (Cbs and governments) to try and mitigate temporary safe-assets scarcity issues by issuing more of them. This makes them temporarily not scarce, and the market can return to "normal". But as soon as the next crisis hits, they become scarce once again and now more safe assets must be issued. If this is not done (exactly like was done in the stimulus post 2008) then risk free rates will turn negative as market players fight to get into the risk free assets.

What you are describing above is just a textbook demand-supply process. More demand for finite assets (risk free storage of money) implies a higher price (lower rate).  This has nothing to do with the liquidity premium as it concerns all risk free assets. Of course those more liquid will be a little bit more expensive as they have an advantage that you can sell them faster. 

Repricing risk free assets concerns only long term rates as they are not controlled by CBs directly. The short term rates are fixed by CBs and they change only when CBs change them.

The governments are not issuing more bonds to provide risk free assets; they do this to have funds to simulate the economy. CBs are concerned with liquidity and they lend money or buy assets to increase liquidity.  Some, if not most, of the liquidity is only available to banks.

So what you described can maybe explain a buildup of government debt and reserve money. However you don't explain why risk free assets created during a recession are not reduced later.

You also make a claim that risk free rates go down every recession without providing any justification.  Short term risk free rates are lowered by CBs in a recession. After the recession CBs rise them. Why can't CBs rise them to a level before the recession so that next time they don't have to lower them more than in the previous recession?       

  

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