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mvassilev
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posted November 08, 2009 09:38 AM |
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I thought Treasury Bonds can ONLY be bought from the government's treasury, that's why they are called Treasury Bonds...
That's where they're created, certainly, but they can be bought, sold, given away, etc, after that.
And I don't feel like watching a ten-minute Youtube video. 
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ohforfsake
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posted November 16, 2009 01:52 PM |
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This was an interesting read, but are these correct understandings?
In any marked, we've trade and we've tradeables.
We let money be presenting for our individual trade power (more money more trade power).
Tradeables are then services, products, etc., anything that is worth "giving away" your trade power for.
Now, if I've understood what you guys say, have you then considered the people who doesn't only go for profit for trade power, but actually wants to harvest money?
Let's take an example, such as scrooge mc duck, in this cartoon world, if we assume they use the same economics system, wouldn't the entire system fall apart, if scrooge mc duck suddenly decides to use all of his trade power?
Because then the relationship tradeables divided with trade power, would diminish quickly, which means prices would go up, very high, to make this relationship constant, the only way to avoid this, the money scrooge uses, should likewise increase productivity, whereby tradeables increases, but it's unlikely to think that it can be done so quickly especially with this example with this many money).
Also about the whole money being created thing, doesn't the amount of money in the system automaticaly set to the amount of tradeables in the system, which then with some kind of delay, goes around and around?
I mean, if the productivity is high, then there are many tradeables, but that increases interest for the consumer who may lend money, which may generate more interest and so forth the relationship of tradeables and trade power is constant, but more and more money comes in the system as tradeables is generated (and the prizes are stable).
However, if suddenly the productivity stops, and people keep on lending, will you not then have that the prizes would increase, because there are more money now, but to stop this trend, you'll stop producing money, and in the long run it'll even itself out again when consumers pay back, but if the delay is sufficient high enough, like in the scrooge mc duck example, where the delay is unknown, but the sudden increase of money is so much higher than what productivity can keep up with, that you might risk the entire economics system falling apart?
So in the long run, it might look like this for positive production:
+lend
-lend
+lend
+lend
-lend
+lend
+lend
+lend
+lend
+lend
-lend
Constantly increasing, which is acceptable as long as productivity is equal, and can never be higher, because people would just lend more money in that case?
So the only danger for the system is lack of productivity (as the system tries to generate productivity by itself I suppose), and when I mean productivity, I mean tradeables that interests the consumers.
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mvassilev
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posted November 16, 2009 04:52 PM |
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Let's take an example, such as scrooge mc duck, in this cartoon world, if we assume they use the same economics system, wouldn't the entire system fall apart, if scrooge mc duck suddenly decides to use all of his trade power?
Don't quite understand what you mean there. If you're referring to hoarding of money - if it becomes a big enough problem, then the government could just increase the money supply.
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However, if suddenly the productivity stops, and people keep on lending
But people won't keep on lending in that case, because very few would borrow if they didn't expect their productivity to go up.
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TheDeath
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posted November 16, 2009 06:17 PM |
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In the long term, one lending does not increase the money supply, because it is repaid. (interest doesn't matter, you can imagine it as being "pay a fee for the bank for its services", which is not unlike any other services you pay people)
Money is temporary. Which means, if everyone stopped economic activity, in a few months when all debts are paid back, money would cease to exist. (and yes the gov would take money through taxes to pay the Treasury Bond it issued)
And yes the fractional reserve system sucks.
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ohforfsake
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posted November 16, 2009 10:13 PM |
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If I understand you correctly, TD, then I think you're right, except you haven't considered one detail, but this detail depends on wether there's a limit to productivity (which I believe there might be, which means, like you say, money (or capitalism) is only temporary).
However, if there's not an end to productivity, then given there're more people who loans than who pays back, then even after infinite time, money is still there, because the supply growths faster than the payback.
It's what I tried to illustrate above, and wondering if it's was correct, like this:
+lend
-lend
+lend
+lend
-lend
+lend
+lend
+lend
It's an abritary function I picked, but as you can see, as money gets lend ~x^2-x and money gets payed back ~x, then in total, more and more money is generated, and I think that will hold, like Mvass says, as long as there are productivity.
@Mvass
I think you're right, that if no productivity people would not lend money, but I also think there'd be some kind of delay before realising this, or to say "due to future expectation, I decide to do this and that", so if the delay is long enough, I can imagine you've a society with a lot of money out in it, but not very much work/productivity being achieved, so people gets problem due to the interests, which I happen to think is something that's there mostly to generate that productivity.
Please correct me, if I'm wrong.
Also, to make certain that you understood my example, TD, if you compare to functions both going towards infinity, then if you want the relationship, it might very well be any of zero, number or infinity, which I think you know.
(like this: for x->inf x^2/x = inf, x/x^2 = 0, 2x/x = 2, eventhough each single component goes to infinity, so I'd say, if productivity keeps on getting higher and higher, you could imagine that the lending goes faster and faster, so in the long run, eventhough the payback also goes faster and faster, it'll always be 1 step behind, and as long as the 1 step increases, then more money will be generated, like let's say it's just x^2 then step 1 is 1, for step 1 paid back you pay 1 back, but now you're at step 2, which is 4, so in total 4-1 = 3, for step 50, you've payed all previous steps back, but are at the difference of 50^2-49^2, which is bigger than 2^2-1^2, so a growth, and at infinity, there's infinite much).
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ohforfsake
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posted November 16, 2009 10:38 PM |
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Also, very often, I've had the belief that I'd the freedom so to say, because when people asked me, why I didn't spend my money when I had it, I answered, that I only spend for what I want, and not because I feel like I must.
In relation to this thread, it seems very opposite, those who only spend on the stuff they want, are what's expected (those who only would lend given productivity), whereby I don't see anything taking account for those who spend, because they feel they must, when they've lots of money.
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TheDeath
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posted November 16, 2009 10:50 PM |
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However, if there's not an end to productivity, then given there're more people who loans than who pays back, then even after infinite time, money is still there, because the supply growths faster than the payback.
Yes but it's still temporary: albeit it's "fueled" constantly, but if you hit the bottom and run out of "fuel" (productivity), it's gonna vanish.
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mvassilev
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posted November 16, 2009 11:51 PM |
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Death:
But we just covered how lending does increase the money supply. It can only increase it by a certain amount, of course, but it does increase it.
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if everyone stopped economic activity
I don't think there's much of a danger of that.
Ohforfsake:
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I think you're right, that if no productivity people would not lend money, but I also think there'd be some kind of delay before realising this, or to say "due to future expectation, I decide to do this and that", so if the delay is long enough, I can imagine you've a society with a lot of money out in it, but not very much work/productivity being achieved, so people gets problem due to the interests, which I happen to think is something that's there mostly to generate that productivity.
I see what you're saying, but when people take out loans, (ideally) they don't evaluate productivity in general - they evaluate whether the loan will increase their productivity. And if it doesn't, then they don't take it out, so there's no lag, as they immediately know that their productivity won't increase.
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those who spend, because they feel they must, when they've lots of money.
Generally, banks don't give large loans to these people, so it doesn't matter that much anyway. Of course, these kinds of people exist. They favour present consumption over future consumption more heavily than others. And so they pay the price - they may live better now but live worse later.
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TheDeath
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posted November 16, 2009 11:59 PM |
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But we just covered how lending does increase the money supply. It can only increase it by a certain amount, of course, but it does increase it.
No it doesn't because it has to be paid back. When I mean increase, I mean permanently.
Besides, it's not actually an increase, since if everyone wanted their deposits it would be a bank run scenario. (which means money isn't actually created...)
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mvassilev
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posted November 17, 2009 12:04 AM |
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No it doesn't because it has to be paid back.
Which the banks immediately lend back out...
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Besides, it's not actually an increase, since if everyone wanted their deposits it would be a bank run scenario.
Again, it's M0 vs. M1. And that's how banks work - they count on there not being a bank run (and anyway that's why they keep some money and don't lend out their whole reserve).
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TheDeath
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posted November 17, 2009 12:10 AM |
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No it doesn't because it has to be paid back.
Which the banks immediately lend back out...
It doesn't imply that. It's just how it is but the system doesn't imply it. A system has to work consistently in as many scenarios as possible, otherwise it's what we have in software called "bugs" or errors "in certain cases". Programming errors, if you will, or a flawed system.
(like "oh **** I never thought that buffer could get bigger than 50MB, so the program crashes because of this assumption..." )
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Again, it's M0 vs. M1. And that's how banks work - they count on there not being a bank run (and anyway that's why they keep some money and don't lend out their whole reserve).
But who cares about that? If the money is on deposits and no one wants it back (that's what bank rely on), it is just as well not money at all.
I'm talking about money that has purchasing power and is "active". The money in circulation.
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posted November 17, 2009 12:13 AM |
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Again, it's M0 vs. M1. And that's how banks work - they count on there not being a bank run (and anyway that's why they keep some money and don't lend out their whole reserve).
And in the US bank runs have happened twice in my lifetime. The first time I saw the lines outside the bank with my own eyes.
One of these days the folks in charge need to lower that risk. Twice in my life (so far) is far too often. And both times have been very expensive to fix.
The first time I didn't lose any money. The second time I lost around $12-15K, and needless to say it pisses me off.
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mvassilev
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posted November 17, 2009 12:14 AM |
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However, it's not that common, and the FDIC ensures deposits up to $100,000.
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Binabik
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posted November 17, 2009 12:23 AM |
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Twice in my life (so far) is not that common? It sure as hell seems WAY to common to me.
They need to quit leveraging so damn much. Leveraging is basically high gain-high risk. And with the amount of leveraging going on the risk is far too high. With leveraging you have a lot of gain, but a lot more to lose. On the up side the gains are large. And even with a SLIGHT downturn it may still come out ahead. But if the downturn is anything more than slight the whole thing tumbles and the potential loss is huge.
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mvassilev
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posted November 17, 2009 12:43 AM |
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Well, of course there's a risk of that. Banks aren't perfect - customers should know that when they deposit their money in them.
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TheDeath
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posted November 17, 2009 01:28 AM |
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My point is that bank runs happen because money isn't created -- money that has purchasing power, I mean. It happens when the reserves are not enough, in other words, when money with purchasing power is no longer. They don't create such money, they create "imaginary" money that is not what I would call "increase of money supply" because to me money supply is only that which can be used to purchase products or services.
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Binabik
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posted November 17, 2009 01:52 AM |
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This has very little to do with individual banks, and virtually nothing to do with individuals opening bank accounts.
This is about high level policies that were/are way too risky. It's about over optimism and the expectation of continued growth when that expectation was entirely misplaced.
It's very much like the poker player who has been on a winning streak (fast growing economy). The gambler has been on a winning streak and is elated. He's been doing well and has the expectation he will continue to do well. When things start to go against him he doesn't quit like he should, he keeps on gambling with the continued expectation of winning. Eventually the winnings (high growth) slow down and he even takes some minor losses. But he's so overconfident by his earlier winning streak that he borrows more money and starts betting it. When his winning streak ends he goes bankrupt, and so does the lender who lent him the money.
A leveraged economy is all about continued ongoing growth. It gambles everything on that growth. It can withstand minor downturns, but is totally not prepared for larger downturns, which WILL eventually happen. If policymakers misjudge the leverage compared to the growth then lots of bad things can happen.
1) Baby boomer generation in their prime earning years, rapidly heading toward retirement
2) Technology sector that has both technologically slowed, and saturated the market, but the investment in the sector acts as if the growth will continue. Plus over dependance on this sector in the first place (too many eggs in one basket)
3) Mortgage/housing industry with an oversupply of cheap money fueling ever-increasing housing prices (bubble) and higher risk loans
4) Over speculation in the stock markets and financial markets, again largely fueled by oversupply of cheap money and the false expectation of continued growth
The writing was on the wall, some of it was there for a couple decades, and most of the rest was there by the late 90s. But not a damn thing was done about it. Sure a few warnings were given, some even by highly prominent people. But oh, the wining streak was so damn fun, who could resist continuing the game of poker?
They dropped the freaking ball. Hopefully they'll learn some lessons and quit the high-risk game they are playing. Leverage is a good thing. Too much leverage is a very dangerous game with potentially devastating losses.
BOOM! The bubble busts. And the bubble is leverage.
It's like the teeter totters we played on as kids. We'd put the board way off center to create a big lever. A few big kids get on the short end and a couple small kids on the long end. If one of those small kids on the long end gets off, those big kids on the other end fall real damn fast.
Levers are a great tool in mechanics as well as economics. But if I'm lifting 10 tons of bricks with my lever, I sure as hell don't want to lose control of it, because it might just kill me.
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mvassilev
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posted November 17, 2009 02:01 AM |
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They don't create such money, they create "imaginary" money that is not what I would call "increase of money supply" because to me money supply is only that which can be used to purchase products or services.
M1 can be used to purchase goods and services. In fact, to users, it's completely indistinguishable from M0.
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TheDeath
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posted November 17, 2009 02:13 AM |
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M1 can be used to purchase goods and services. In fact, to users, it's completely indistinguishable from M0.
No it's not, let's make this more logical to see why the standard theory is flawed:
There is $1000, bank lends $900, keeps $100 in reserves.
What this means is NOT that there's $900 extra for purchasing. If the owner wants his $1000 back, he won't get it back, so it's not $1900 in purchasing, but still $1000. The "purchasing" money is simply taken from the deposit and given to the lender.
Yes theoretically the depositor still has the $1000, but he can't do it at the same time the lend is in place. (run on the bank)
So it's not really $1900 in circulation at all. Just $1000.
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mvassilev
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posted November 17, 2009 02:32 AM |
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There are $900 available for purchasing, but the bank is betting on that the original depositor will not seek to withdraw (more than $100) of his funds. So there is now $1900.
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