Atlas Shrugged

[stone]

moda, do you mean paying for airtime on commercial radio? I've never come across that in the UK.

[moda0306]

I thought that was the deal with these political organizations... that they are effectively campaigning for elections, and that them putting ads on tv for them is effectively contributing to their campaign...

I really am barely knowledgeable on this... I just thought there were ways money was making it around actual campaign contribution limits.

[l82start]

182start, is that article you posted supporting street vendors really "right wing"? In the UK we have a real struggle to come to terms with Gypsies. No one here describes going easy on them as "right wing". Such labels often seem to just get in the way of sensible policy.
Fairly typical UK Gypsy stress:-
http://www.bbc.co.uk/news/uk-england-cumbria-11430524

the web site is "right wing", and mostly filled with articles from a republican/neocon point of view, (i find little of what they put up to be of much value outside of exposing my self to other points of view) the author of that particular article is a libertarian, our street vendors are not gypsy's, most are average people that are starting out, trying there hand at small business ownership "selling products from carts", (not the same as dropping a blanket on the side walk and selling junk or busking for money, there are different laws for regulating/preventing that,  i believe they get kicked out or asked to leave in most city's)

[Reido]

What I was trying to say is that in free market capitalism just as in any system there are two ways to do well. You can either provide something of use and exchange it with other people or you can play the system and live off the gullability of others. From what I can make out a large and increasing chunk of the global economy could be described as living off the gullability of others. You don't neccessarily need to rope in the government to play the system you can simply identify other people's frailties and exploit those rather than trying to identify genuinely useful work that needs doing. Some would say that it is condencending not to milk such frailties for all you can. Warren Buffet basically said that about the Abacus mortgage-backed CDOs didn't he?

Sure, I think I see what you're saying.  I think things used to be much clearer when we had a more industrial economy, where it was easier to point at exactly what you helped produce...  i.e. I went to work and assembled 1000 widgets today.  It's not hard to identify the contribution and it's a respectable labor by most anyone's standards.

I think the lines get fairly blurry these days with some aspects of the service oriented economy.  For example, someone could open an eBay business and it appears as though they don't contribute much, if anything by simply becoming another middle man.  In a way, this person could be contributing as well, since I'm sure his customers do appreciate him, but still, his contribution, if there is one, is more debateable...

Perhaps it would be reasonable to think that as the demand for labor decreases, what people do for employment becomes more marginally beneficial to society?

[stone]

Reido, I wasn't really thinking of ebay type services as being a problem. I agree that that is making life easier for people and helps all round. I was thinking more about financial trading such as by investment banks etc.

[Reido]

Yeah, I gotcha.  I think that your banking example is a symptom of crony capitalism.  Then I believe the question is whose fault is it; the government or the banks?  To some extent both...

But even things like high-frequency trading have some benefit.  Liquidity is great - my executions on ETF purchases are terrific 

I always imagined high-frequency trading as being the same 10-20 banks playing hot potato with stoc certificates and dollar bills in a zero-sum game...  what a joke!

[stone]

Reido, I thought that the high frequency traders act to get infront of other market participants with orders that are then canceled. They ensure that when you try and buy, the price spikes up and vice versa when you try and sell. When a fund (such as index etf) needs to alter its stock holdings it gets badly bled in that way.
http://www.ritholtz.com/blog/2011/10/hf ... t-systems/

I really don't think it is a zero sum game for the banks. It may be a zero sum (or minus sum game) for the economy as a whole. I see it as how the finance industry harvests the real economy. They cause price spikes in commodities and they choose to buy and sell when the price is right. The real economy has to buy and sell as and when the goods are actually required. With stocks and bonds they ensure that they optimally harvest volatility. With the PP we do OK out of volatility but we only capture a fraction of what they capture. The typical buy high, sell low, Wall Street victim just provides a pure pay out to them.

[Reido]

Thanks! I was misinformed about that...  I have to presume that the passively managed funds that I invest in can only be minimally affected anyway - correct?

[stone]

Reido, index funds do have to add new stocks and remove stocks when the index composition changes. That causes a feeding frenzy of front running when such index changes are announced:-
http://www.thetradenews.com/1578
"For those index fund managers who have the flexibility to engage in market timing, it is clear that extra returns can be captured – or losses minimised – by executing the announced index changes prior to implementation. Our analysis showed that the best way to take advantage of MSCI index changes is to buy additions (and sell deletions) three days before the effective date. Such a strategy has produced significant returns ranging from 1% to over 6%, depending on the index"

On a day to day basis, the ETF or open ended fund has to expand or contract so as to keep its share price and NAV together. You can't buy or sell large amounts of stock without being targeted by HFT.

At a more elemental level, it seems to me that much of the equity returns are distributed in the form of share buybacks that manifest as individual stock volatility that does not correlate well with the volatility of the overal market and so entirely slips by an index investor. That individual stock volatility does get havested by trading. To my mind that is the way that trillions of dollars get distributed to "share holders" by the SP500 whilst at the same time the SP500 index posts negative total returns.

There is a nice artical about the founder of Ranaissance Technologies:
http://www.bloomberg.com/apps/news?pid= ... 33M3X795vQ
What I always find striking is that they talk about such activity as "making money" not as "taking money". The market structure could be modified such that high tech wizardry had less of an advantage. Instead it gets structured so that it is given a greater and greater advantage. The markets supposidly are there for price discovery to ensure that the real economy runs efficiently. They should not be set up so that math wizards can pillage IMO.

[Storm]

Reido, index funds do have to add new stocks and remove stocks when the index composition changes. That causes a feeding frenzy of front running when such index changes are announced:-

The whole system is rigged - knowing that most employees put their money into 401ks that are mostly in stocks, it is quite easy to front run the large mutual funds.  Think about it.  If you knew that most large mutual funds received inflows on the 1st and 15th of every month, as well as every other Friday (payday for most americans), and you know their holdings (because they are required by law to advertise them), a lot of money could be made by front-running the funds on the day after payday.

This is the side of Wall Street that nobody wants to talk about, because the net effect is that a few well connected players are bleeding 50-100 basis points off of every working person in this country.

[stone]

Storm, it seems counterintuative to me that people don't want to talk about it. I sort of thought that the Tea Party started off from being against bailing out Goldman Sachs et al to live another day -sponging off everyone. It now seems to have morphed into being about cutting social security -ie being in favour of thowing even more goodies to Wall Street.

[Storm]

Storm, it seems counterintuative to me that people don't want to talk about it. I sort of thought that the Tea Party started off from being against bailing out Goldman Sachs et al to live another day -sponging off everyone. It now seems to have morphed into being about cutting social security -ie being in favour of thowing even more goodies to Wall Street.

I should say "this is the part of Wall Street that the media doesn't want to talk about."  We all know the media is owned/run by the same well connected players that participate in this, which is why you get Mad Money with Jim Cramer on your financial news shows instead of real investing advice like "stay the hell out of stocks unless you know what you're doing."

[stone]

Storm, in the UK I don't think the BBC has any ownership by any investment banks, hedgefunds or such like. The curious thing though is that although they do report this kind of stuff, no one is interested. I think there is almost an invisibility cloak of bamboozlement. Almost everyone either thinks it is too tedious to consider or else they think it is "clever" and so must be good. Also the UK is a net recipient of the loot. The looting is done from here but the looted are global.

[stone]

Something explaining HFT
http://seekingalpha.com/article/299807- ... zed-market
"Using a technique called ‘quote stuffing’ (originally coined by Nanex), the tape can be slowed enough that the system can front-run the tape and essentially make riskless trades. Other techniques can be used that increase volatility, affect the NBBO (national best bid or offer) or circumvent routing requirements. Then these systems can use their speed advantage in trading, which typically results in abnormal swings in price. "

[Storm]

Storm, in the UK I don't think the BBC has any ownership by any investment banks, hedgefunds or such like. The curious thing though is that although they do report this kind of stuff, no one is interested. I think there is almost an invisibility cloak of bamboozlement. Almost everyone either thinks it is too tedious to consider or else they think it is "clever" and so must be good. Also the UK is a net recipient of the loot. The looting is done from here but the looted are global.

Stone, obviously the BBC is a special case, being a mostly state funded media outlet.  In the US we have NBC which is owned by GE, one of the largest companies in the world, who also has their own corporate and consumer finance divisions (aka banks) and conveniently runs CNBC.  Where else but in America can you control the money and the message?

[Storm]

The thought just occurred to me that when the boomer generation begins retiring, the same HFT outlets can front run the outflows, shorting the market all the way down.  Also, can you imagine what a boondoggle it would have been if GWB had been allowed to privatize social security?  I'm sure a few well connected hedge fund managers and ex-Goldman Sachs partners would be getting tips about inflows and outflows to the social security fund.

[stone]

When they say "privatize social security" did they mean in effect have the government buy trillions of dollars of stocks? ie in effect have a government donation to pre-existing stockholders. So Warren Buffet would get a government donation of $100B or whatever?

[moda0306]

I would imagine any privatization of Social Security would involve the requirement of "very safe assets"... whatever that means... the gov't would probably consider treasury bonds the only asset appropriate for a safety net such as SS.

I find it interesting, though, that many that are calling an individual mandate for private health insurance unconstitutional want to basically do the exact same thing with SS.

As much as I hate Wall Street tomfoolery, I don't see a privatized SS system as being a huge problem.  At that point it just becomes required savings, probably invested in treasuries, and some kind of disability insurance mandate (gasp).

I think the fact that it currently exists as a wealth transfer operation means that there's really no true net savings (other than the one the SS trust fund was started for due to pay for boomers excess needs) and therefore, IMO, no net growth by retirement... maybe that's the price we pay for a redistributive (instead of forced savings) type of system.

I really don't like the massive amount it seems to have become.  I have to pay an effective 12% on wages into SS (before the payroll tax holiday) and that seems WAY too excessive to support the "basic needs" of retirees.  I think the critics of SS are right in that the program has expanded beyond what it should have been.  It started as a 2% tax on wages, if that gives you any indication of where it has gone.

[stone]

Moda, the wikipedia artical suggests that the idea included putting the money into stocks:-
http://en.wikipedia.org/wiki/Social_Sec ... ed_States)
Plan I: Up to two percent of taxable wages could be diverted from FICA and voluntarily placed by workers into private accounts for investment in stocks, bonds, and/or mutual funds.
Plan II: Up to four percent of taxable wages, up to a maximum of $1000, could be diverted from FICA and voluntarily placed by workers into private accounts for investment.
Plan III: One percent of wages on top of FICA, and 2.5% diverted from FICA up to a maximum of $1000, could be voluntarily placed by workers into private accounts for investment

I thought that Australia has a system where people are taxed and the taxes are used to buy stocks:
http://en.wikipedia.org/wiki/Social_Sec ... ed_States)

I'm not sure what you mean by "true savings". If I buy a some gold, I'm simply enabling the person who sold it to me to then use the cash I paid to get whatever they want (perhaps pay for nursing home care or whatever). Same thing if I buy stocks on the secondary market. What is the difference if my money instead just goes directly to a retiree as in your SS system?

[moda0306]

So in one instance (SS as it is now) workers are forced to transfer money to retirees.  In a different type of plan, workers would be forced to give their dollars to "the market" of mutual funds, giving others cash that I suppose they can consume with, but I find that an unlikely outcome... I think it will simply result in more savings by Americans.  One could argue that there's no fundamental difference, but the nature of SS as it exists today is that most of the income results in increased consumption by retirees.  A "forced savings" plan would hold actual assets in accounts that would otherwise be optional (and likely) consumption for retirees... these accounts provide capital for businesses and can earn ROI.

The problem with a transfer is that nothing is really being held to earn money (w/ the exception of the trust fund which was developed because of demographics) and therefore when the contributors eventually retire there has been no contributions earning ROI, and they shouldn't expect any more than what they paid in... though they often probably do.

This is the problem with a program...  If you can imagine a villiage with a SS-esque system where there perpetually are 10 retirees and 100 people, the younger 90 people give some coconuts to the old 10 people to help feed them as they are in need.  No savings has occured unless the retirees chose to.  If, on the other hand, the younger people were simply forced to save enough coconuts to have food in retirement (though they'd rot by then methinks!) these coconuts can actuall be used in the meantime as forms of collateral and weights, etc (capital) until they're consumed.  Forced savings creates capital that can earn ROI in ways that wealth transfers do not.

[stone]

Moda, I think it is very important to really unpick what ROI actually means and whether  people using savings to buy stocks in the secondary market actually contributes to that. I totally agree that it would make sense for everyone to defer flying around in private jets or replacing our kitchens so as to put those resources into developing new technologies and infrastructure so as to enable us to live more efficiently in the future. I do not think that buying stocks in the secondary market does anything at all towards that end. Stocks already have a historically high valuation by several metrics (Schiller CAPE and Tobin Q). Why would inflating that up further lead to more development of technologies or infrastructure? Pouring more money into the asset markets would I fear just increase the size of Wall Street and actually suck talent and resources away from productive endevours.
If you look across the economy as a whole, the idea of ROI simply does not add up IMO unless you limit it to inovations in efficiency. The only reason why stocks historically can exhibit real growth over the long term is because of inovations in efficiency (nothing to do with savings rates). Basically retirees have to be tended to by real workers at the time the retirees are retired. They need real workers then and there to grow food, keep them warm etc etc. You can't have some magic fudge to say that ROI is going to conjure up real workers. It is all nothing more than directing who does what.
I think your coconut example is very apt. You point out that the coconuts can either be given to the old people so that the old people can eat or they can be saved to use as "collateral and weights" and then you add that in practice that means that the coconuts simply rot. That nicely sums up how our asset markets work. We have a load of fancy jargon to obscure the tragic reality that we are simply leaving our coconuts to rot.  If there is something I'm missing here; I'd be really grateful for being put on track.

[moda0306]

stone,

If we're talking macroecon, I totally agree that what we need now is more demand than more supply-side motivations.... we simply have an excess of interest/return-seeking savers, but no demand to drive business investment at this point, IMO... so I definitely see what you're saying.

Keep in mind, it's not that I'm saying the goal is to decrease consumption and increase savings... I just simply think having individual-savings accounts would be more based in liberty and individualism.  The only reason wall street would have to touch it is because people may seek interest with it, but it could/should be very limited to CD's, treasuries, or other safe assets that don't contain much wall street tomfoolery.  Currently, I'll agree, that it doesn't seem to make macroeconomic sense to try to increase investment at the expense of demand... I'm thinking more about how to design a retirement system in general.

Our current system relies not on pent-up savings (yes, much of which is just sitting there going unused in todays economy... just like our idol labor), but on workers continuing to be willing to pay 12% in taxes to old people.  But when people have to set aside money for years and years, they think they deserve not just the principal but some growth.  I'm saying that they shouldn't expect that because there was no money set aside to grow.  It was immediately sent to consumers.... which is fine... but don't put us on an unsustainable path because you think you deserved 3% CAGR on your contributions.

[stone]

Moda, I thought that the whole principle of a pay as you go pension provision, such as the US SS, is that benefits of retirees are linked to the earnings of the workers working at the time the retirees are receiving the pension. It can do that fine because a portion of current earnings gets distributed to retirees. If the economy goes to the dogs and workers get meager pay, then the retirees share that pain. If the economy does well and people get paid more, then retirees keep up with that. Demographics mean that if you are lucky enough to be in a generation that has lots of workers for the population of elderly, then there will be more of you to look after them. Similarly if you are in a generation of workers that has a retired baby boom to care for, then that is reality and there is no way to dodge that with any sort of finance jiggery pokery. Whether you use a pay as you go SS system or the stockmarket, that reality will mean that there will simply be a higher than normal tax burden or an awful bear market. It has got to be paid for one way or another.

I also think that there is a total world of difference between what is meant by "investment" in different meanings of the word. To my mind it makes a lot of sense now to be investing in developing  ways to digest straw and waste paper to produce petroleum substitutes or investing in thermal solar power or in eradicating polio and malaria or whatever. It is a pernicious mistake to somehow conflate that use of the word "investment" with bidding up the price of pre-existing assets or assets simply existing to serve as "investment" vehicles. Buying stocks in the secondary market or gold or real estate is to my mind simply a waste that has to be endured because of the current inadequacy of SS type arrangements.

[moda0306]

stone,

I see where you're going with most of what you say... I wasn't really comparing it to a pension, and I suppose that's a legit comparison.

I would say, though, that it's the secondary stock market that provides capital to the companies.  The more participants there are, the more sources of funds our companies have with which to invest.  These people wouldn't be as willing to participate if the market wasn't as liquid as it was... and the secondary market provides that liquidity.

That said, I think part of the PROBLEM with our stock market is the liquid, high-speed trading nature of it... I think it motivates businesses WAY too much to come up with short-term profits instead of making long-term decisions.

If we DID develop a forced-savings-type program, I don't think it should allow much stock investing... that was part of the problem with 401(k)'s.  Keep in mind, with SS you are putting in a system to mimic what people SHOULD be doing on their own anyway, which is saving for retirement... it's not like forcing such action is drastically skewing the amount of money flowing to wall street, as these people SHOULD be saving anyway... I mean that's one of SS's biggest acknowledgements... people have a tendency to under-save for retirement and then they could be in dire straights and society would be in a position to have to watch them starve or pay their expenses anyway.

[stone]

Moda, I still don't understand how you logically draw a distinction between forced saving and SS style direct forced transfer to current retirees. Isn't forced saving simply diverting that same transfer via Wall Street with all the waste and pratfalls that entails?

From what I can see the secondary stock market does not transfer money TO companies, it transfers some money OUT from companies to shareholders BUT to a far greater extent it transfers money from some shareholders to other shareholders. If all existing shares were bid up to ten times their current value then that would not provide extra money for companies to spend on new machines or training or whatever. Possibly companies could use the inflated stock price to fool themselves into taking on more debt but they would be stupid to do so. You might argue that venture capitalists would be more happy to plough money into start ups if the secondary stock market was over inflated. BUT I think that leads to damaging malinvestment. Productive investment requires earnings to be guiding it IMO. Earnings can best provide a guide when the price to earnings ratio is LOW. From what I can see things would work better if asset prices were lower and all the pressure was on maximizing earnings rather than on increasing asset prices. It comes back to asset taxes . If assets were what was taxed, then "blowing it" on attempting a start up would at least be tax free. If that led to something that generated lots of earnings, then those earnings in themselves would be tax free although once an asset was created and earning it would have an asset value and so that would be taxed. The tax burden would shift away from creating new assets or maintaining productive assets and onto overinflated unproductive assets.