Evidence that Stef really doesn't get economics

Conrad

will respond to this tomorrow or on Thursday. it's a very interesting topic, but it takes me more mental energy to think properly about the questions you raise than to post, say, another message about FDR.

Static4367

reddeerrick wrote:

I think it's pretty clear to most people that the FED is holding rates down right now only in an effort to reduce the number of foreclosures, is it not? I don't think we've yet seen the full unraveling of the last cycle, and oil is being driven up now by investors retreating from the financial sector, and seeing the next 'sure thing' in commodities, especially oil. I would imagine that the low interest rates are encouraging a lot of people to buy on margin, as well. I have to admIt that I'm no expert though, what do you think?

In the long run foreclosures will have to happen because the Fed can't keep rates this low for long without really increasing inflation. I do think they are trying to slow the pace of foreclosures so this occurs in a more orderly way. They are also trying to prevent bank failures.

Inflationary pressure is a big part of the rise in commodity prices. Some people have said that if you take the recent depreciation out of the dollar then oil would still be well under $100 (I haven't looked at the exact numbers but this sounds reasonable).

There is also a change in demand for commodity investments. Some of this is due to flight from equities and efforts to hedge inflation, but some of it is also just due the fact that new instruments are being introduced that make it much easier to invest in commodities. Investors who wouldn't have ever considered speculating with futures can now buy mutual funds or ETFs that allow them to invest in commodities.

One other factor that hasn't been noted is that many emerging countries heavily subsidize the price of gasoline creating huge distortions in demand. Some of these countries are being forced to reduce subsidies because they just can't afford them anymore but they are not reducing them to zero so demand will remain artificially high in these countries.

reddeerrick · Number of posts: 431 Location: Red Deer, Alberta Registration date: 2007-10-17

So wouldn't you say then, that inflationary policies over the last half-dozen years, without yet reaching zimbabwe-like levels, have nonetheless led to a very dangerous economic situation in the US and elsewhere, and record-breaking high oil prices at present? I actually don't think that I know of a good reason or excuse for the current price of oil that doesn't originate with an arbitrary action of a state.

It just kinda blows my mind that a supposed anarcho-capitalist like Stefan would sweep all that under the rug and try to paste a happy face on this situation.

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Static4367

reddeerrick wrote:

So wouldn't you say then, that inflationary policies over the last half-dozen years, without yet reaching zimbabwe-like levels, have nonetheless led to a very dangerous economic situation in the US and elsewhere, and record-breaking high oil prices at present? I actually don't think that I know of a good reason or excuse for the current price of oil that doesn't originate with an arbitrary action of a state.

It just kinda blows my mind that a supposed anarcho-capitalist like Stefan would sweep all that under the rug and try to paste a happy face on this situation.

Inflation is definitely part of the story but I am cautious about attributing too much importance to it because inflation across all goods is not nearly as high as it is in energy and recently agriculture. Clearly there is something going on in the energy sector that is bringing about a proportionately larger price rise. That something is a combination of increasing demand from emerging markets and a lack of increase in supply capacity (mostly due to governmental controls throughout the world).

The other problem with blaming the Fed is that you can't accurately judge how much the dollar might have depreciated regardless of Fed policy. There are good non-monetary reasons for the dollar to depreciate. Many foreign countries now provide better investment opportunities than the US. Some of that is because there will always be potential for higher returns in emerging markets and some of that is because these countries have become relatively friendlier to investment while the US has become relatively less friendly to investment.

So there are a lot of factors and it is very difficult to judge which factors are dominant.

reddeerrick · Number of posts: 431 Location: Red Deer, Alberta Registration date: 2007-10-17

Would you say then, that an emerging market that is friendly to foreign investment will tend to show a strengthening of it's national currency relative to less friendly markets, thus weakening the currency of those countries?

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Static4367

reddeerrick wrote:

Would you say then, that an emerging market that is friendly to foreign investment will tend to show a strengthening of it's national currency relative to less friendly markets, thus weakening the currency of those countries?

Yes, this is exactly what is causing so much consternation with regard to China. China has dramatically freed their economy (and is continuing to do so) which has made it the premier destination for foreign investment and created huge demand for their currency. China though is very wary of letting their currency trade freely because they fear a rapid appreciation would be a huge shock to the economy. For a long time they had the currency pegged and now for the last year have let it appreciate slowly. This is one reason why there is so much political banter about placing trade restriction on China.

It is important to realize though that in absolute terms the US hasn't become a less desirable location for investment, just that emerging markets have become more desirable, causing a relative shift.

reddeerrick · Number of posts: 431 Location: Red Deer, Alberta Registration date: 2007-10-17

I'm a little confused about this idea of China having its currency 'pegged'. Do you mean that it was pegged to the US dollar before, and not available on the open market, with it's value dictated by government? Now that the currency is available, what means does China have to hold it's value down, besides inflation?

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Static4367

The currency was set at defined conversion ration to the dollar. This is accomplished by having the government purchase the imbalance. So say more people want to trade dollars for yuan than vice versa. The Chinese government does not want the exchange rate to adjust so it purchases the extra dollar supply and exchanges yuan at the defined rate. This is why the Chinese government now has huge reserves of dollars.

The change now is that instead of correcting for all the excess demand for yuan, the Chinese government is allowing some of the imbalance to persist which allows the yuan to rise. They still sterilize some portion of the imbalance so that the rise in yuan is slow and orderly.

reddeerrick · Number of posts: 431 Location: Red Deer, Alberta Registration date: 2007-10-17

Now I'm really confused.

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Static4367

reddeerrick wrote:

Now I'm really confused.

An appreciation of a currency is a like a price increase in anything else. If demand is too high relative to supply the price will push up. The Chinese government intervenes in this appreciation by selling the yuan and buying dollars, thereby balancing supply and demand at the desired price.

They can allow the yuan to appreciate slowly by only making up part of the imbalance.

NonEntity · Number of posts: 2598 Registration date: 2007-11-08

Static4367 wrote:

reddeerrick wrote:

Now I'm really confused.

An appreciation of a currency is a like a price increase in anything else. If demand is too high relative to supply the price will push up. The Chinese government intervenes in this appreciation by selling the yuan and buying dollars, thereby balancing supply and demand at the desired price.

They can allow the yuan to appreciate slowly by only making up part of the imbalance.

Well, err... not quite. Fiat currencies are fraud by definition in that they arecompletely at the whim of the counterfeiters who create them. Food, magazines, cars, trees, iron, women... all of these things can increase or decrease in quantity or quality and thus affect the price they command, but they are subject to the laws of nature and a person can count upon those same laws of nature to moderate the change in quantity or quality, and hence to moderate the change in value. Not so with fiat currency. It is as good as the veracity of a politician's statements, not one whit more. Anyone counting on the value of a given "quantity" of fiat money is a fool. Especially today, when they don't even have to use paper and ink to create a flood of fake money[/url] to spend on real goods like humvees and aother killing machines. Fake money, real death. Fake money, real goods supplied in exchange. How is that any different than outright theft? ... It isn't. It is fraud, pure and simple.

- NonE

I can't get the link to embed. Try pasting this entire thing in your address bar: (in one long line but remove the beginning and ending quotation marks...)

"http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&width=1000&height=600&preserve_ratio=true&s[1][id]=BORROW"

Conrad

Static4367 wrote:

Conrad wrote:

Wikipedia has a decent summary of the ABCT

For the 2002-2006 cycle (and many previous historical cycles) the theory does a very good job, but consider the two other most recent cycles (in the US):

In our current cycle the Fed has dropped rates dramatically, but are we seeing irrational exuberance result from this in the market?

but I think we are in the period that the Fed is still handing out cheap money but now to create a 'soft landing' without banks and businesses going broke, without bank runs occuring, which will in the end only make the situation worse. this way the disruption of the economy, of the errors in production will just continue rather than that businesses can re-adjust themselves to the real wishes of consumers. (which in some cases means 'going out of business')

Right now there clearly is no boom and no irrational exuberance because consumer demand has already decreased because the inflation has , but there is cheap credit and so businesses have more money in their hands (and consumers and taxpayers less) than they would otherwise have. So they can do what you write here:

If banks don't increase their lending then the low Fed rate is essentially just a subsidy that allows them to stabilize their balance sheets.

Consumers will notice at a later stage that their money will be worth even less than now and demand will decrease some more and so more businesses will go under then. (considered from a non-precisive abstraction point of view of course!) what is happening now seems to be just postponing the readjustment of the economy

Quote:

It may be too soon to tell but I would argue that the answer is largely no? ABCT relies on the claim:
"Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is."

What is going on now (so far) is that business people do not believe that the Fed rate is a good indication of the real rate. No one is fooled into borrowing/lending excessively at the reduced rate and the misallocation of resources does not proceed. If banks don't increase their lending then the low Fed rate is essentially just a subsidy that allows them to stabilize their balance sheets.

see above. yeah, that is what they are doing but the mere fact that they have more money to play with than they would otherwise have also means that they would make more investments than they otherwise would and that consumers will after some time have less purchasing power.

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Our other most recent cycle was the technology boom/crash of 2000/01. In this case we definitely had a misallocation of resources, but this was largely due to irrational expectations about returns from technology companies, not due to misjudging the interest rate. The crash did result from the failure of bad investments, but people had misjudged the fundamentals of the investments, not the macro situation in the market.

i've wondered about this too, why was the malinvestment so concentrated in one particular sector? but in any case, if money had not been cheap back then businesses would have made fewer investments in higher order production goods than they did now. and perhaps because the dotcom industry was in its infancy and still had to establish more of its production structure there were more investments in the higher order production goods than in other industries.

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commonality between both cases is that investors didn't behave in the way the Fed "instructed" them to behave.

i don't understand the commonality. can you explain? I understand what you write below though, just don't see the fundamental similarity between the current and the 2001 crash. you mean that the Fed right now wants businesses to invest more but they don't and use it to stabilize their balance sheets, and that in 2001 the investors were the irresponsible ones and the Fed didnt want them to invest so much in the dotcom industry in the way they did?

Quote:

As I mentioned in an earlier post, this becomes more likely as markets grow in terms of breadth and efficiency. Modern technology makes much more information available to market participants much more quickly. It also allows prices of assets traded on electronic exchanges to adjust much more quickly. Therefore, modern market participants are better able to judge whether the Fed action is appropriate given their own appraisal of the macro situation. As such today you could argue that the Fed responds to the market as much as vice versa.

the interesting thing then is that the Fed becaus of its nature has to a certain extent to be unpredictable and elusive, because if it was predictable investors would already make the adjustments before the Fed announced its decision.

anyhoo, it is interesting what you write about the flow of information, and how that changes the dynamics of the market. somebody should create some kick-ass visual (in motion) representation of the changes

(btw, that's also why insider trading is beneficial, it brings information to investors quicker and they can adjust their actions)

Quote:

You could argue that the reason the Fed rate had such an impact on the housing market is that housing is among the least efficient markets; prices adjust very slowly. If housing prices adjusted more quickly there would have likely been several sharp corrections on the way up that would have scared many of the speculators out of the market.

true, and also housing is one fo the first markets the new money gets poured into and so the bubble will be biggest there (then also because the lag between the housing investmenyt and the money depreciation that the consumer notices is big)

the more I talk and think about the ABCT though, the more I find out that my understanding of it is pretty damn limited and non-practical (qua understanding real-life situations). I do find it highly interesting, but i should study it in some more structured manner

reddeerrick · Number of posts: 431 Location: Red Deer, Alberta Registration date: 2007-10-17

Static4367 wrote:

reddeerrick wrote:

Now I'm really confused.

An appreciation of a currency is a like a price increase in anything else. If demand is too high relative to supply the price will push up. The Chinese government intervenes in this appreciation by selling the yuan and buying dollars, thereby balancing supply and demand at the desired price.

They can allow the yuan to appreciate slowly by only making up part of the imbalance.

I'm probably exposing my profound ignorance of money market investing here, but this is why I can't understand your description of what's gone on with the yuan:
first of all, I don't know why an investor would buy a currency unless he expected to benefit somehow from a future change in it's value. If he knew that the Chinese gov had it's value 'pegged', why would he buy?
then you say that he wants to pay more than it's pegged value. Again, why?
then the gov 'purchases' this excess. from whom? and with what money? does it use freshly created yuan? if so, is this not the same as simply inflating the money supply?

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Static4367

reddeerrick wrote:

Static4367 wrote:

reddeerrick wrote:

Now I'm really confused.

An appreciation of a currency is a like a price increase in anything else. If demand is too high relative to supply the price will push up. The Chinese government intervenes in this appreciation by selling the yuan and buying dollars, thereby balancing supply and demand at the desired price.

They can allow the yuan to appreciate slowly by only making up part of the imbalance.

I'm probably exposing my profound ignorance of money market investing here, but this is why I can't understand your description of what's gone on with the yuan:
first of all, I don't know why an investor would buy a currency unless he expected to benefit somehow from a future change in it's value. If he knew that the Chinese gov had it's value 'pegged', why would he buy?
then you say that he wants to pay more than it's pegged value. Again, why?

Ok the investor is purchasing yuan because his investment is denominated in yuan. For example he wants to buy shares of chinese companies, or he wants to build a factory in China. In order to do this he must exchange dollars for yuan and then exchange yuan for the shares of chinese stock (or chinese labor to build the factory). He is not necessarilly speculating on currency, he just thinks that some particular investment denominated in yuan has superior return potential.

He doesn't want to pay more than the pegged value but he is willing to pay more in order to gain access to chinese investments. This is fundamentally what is going on any time prices change. If widgets cost $10 dollars it is because no one who has a widget is willing to sell for less than $10 and no one else is willing to buy one for more than $10. If I decide I want a widget I have to bid more than $10 in order to convince someone to give theirs up, as a result the equilibrium price goes up.

Quote:

then the gov 'purchases' this excess. from whom? and with what money? does it use freshly created yuan? if so, is this not the same as simply inflating the money supply?

Ok, so people who want yuan go to their banks (or Fx brokers) and exchange dollars for yuan at the set rate. The bank now has dollars it doesn't want so it exchanges them with the central bank at the set rate. So where does the central bank get the yuan? It might just print new money but this is almost never done. In most cases the central bank will issue bonds and sell them to Chinese investors. This takes an equal amount of money out of the system. In a free market the central bank would have to raise interest rates to get people to buy the new bonds; because bondholders prefer higher interests, the government has to "bid up" the return on bonds in order to get people to absorb the new supply. But, because China is not a free market it can dictate interest; it can require banks to keep rates artificially low. In a free market this would result in inflation, but the central bank can also dictate the amount of lending banks are allowed to conduct and therefore prevent inflation.

Of course the artificially low interest rates and the restrictions on lending create other imbalance, and as you imply, this sort of system is not sustainable. The decision a few years ago to allow the yuan to rise slowly was basically an admission by the Chinese central bank that they couldn't sustain the growth of imbalances.

Dylboz · Number of posts: 2014 Registration date: 2007-09-20

People don't buy Yuan as an investment, they don't even really buy it at all. They exchange their Dollars for Yuan so they can do business in China. Since there is a lot of opportunity in China, this creates a huge demand for Yuan as an instrument of value for investors outside of China to buy stocks or whatever inside China. These exchanges flood China with dollars, and they either have to dump the money into the currency markets (devaluing the dollar and hurting those American investors and making Chinese business less attractive) or they can sell bonds or print currency to meet the demand without releasing their dollars so quickly that they diminish the value of a Dollar relative to the Yuan.

Why do they do this? Because right now, their economy depends on it. The Chinese make the Iraq war possible, and they have the U.S. by the balls because of it. Sure, it seems like a bad deal for them, and on paper, in a purely economic sense, it is. But, in terms of geopolitics, it's an ingenious strategy. China can ruin the U.S. without firing a single shot, simply by releasing their huge Dollar reserves and making their goods and everyone's else's far beyond the reach of most Americans, just when the nation's industrial capacity has reached an all-time nadir.

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