Everything is up today

[foglifter]

Looks like everything is up today: stocks, bonds, gold. I understand stocks are up based on good news (or better said a pause in bad news) from Euroland. But why are LTTs up? Is flight to safety continuing?

Or maybe US markets are eager to rise after the long weekend. 

[moda0306]

Daily noise... mostly in the treasury market... normally, you're right, todays news would have sunk them.

Unless natural gas alone is actually moving treasuries? (completely a guess)

[MediumTex]

Daily noise... mostly in the treasury market... normally, you're right, todays news would have sunk them.

Unless natural gas alone is actually moving treasuries? (completely a guess)

I think that Europe fear is causing a migration into gold and treasuries.

[moda0306]

MT,

I'd agree... but that fear seems to be lightening... by the market that is.

[doodle]

I think the Fed was back in the market today with purchase of long term debt in operation twist. I will see if I can find report...

Okay..here it is: http://www.bloomberg.com/news/2012-01-1 ... eport.html

One thing I don't quite understand....does the market ever set rates on government debt? I imagine it must play some role at some point in time....or can the Fed keep interest rates low forever regardless of the economic environment we are in?

[moda0306]

doodle,

I've more and more started to look at government debt as a combination monetary tool and savings account option...not really a funding mechanism (per MMT)... since treasuries are basically free of default risk, any return on them is the investing equivalent of being able to have your cake (risk-free nominal wealth) and eat it, too (earn interest).  This didn't exist under the gold standard... all gold loaned to others had risk of loss, and all treasury bonds had default risk.

I know the fed reasonably controls the short-term rates of gov't securities, but I think it's harder for it to control the long-term rates, because people use short-term rates to predict long rates... if people think short-rates will rise in the future, it's harder to engineer a long-rate drop... at least thats the general quasi-consensus.

I think there's more to be discussed on this matter, though... if the fed QE'd away all long-term debt at a reasonable speed, it seems to me there'd be a droubt in the market for such a fixed-annuity type contract from a risk-free source, as most corporate/muni bonds are callable.  Rates could drop very low, IMO.  I agree with the MMT folks that say because QE doesn't change purchasing power that it doesn't really create inflation much, especially in a balance sheet recession.  All this new cash would seek out other, similar forms of savings, methinks.

Just my rambling... I'm sure Gumby could add his 2,000 cents.

[doodle]

I'm beginning to question this whole convoluted, crazy money system that we have created for ourselves.

These two videos ask some very good questions and present some very logical solutions to this crazy messy system we currently have.

Money as debt 4 http://youtu.be/-ZU_pBvTnN4

Money as debt 5http://youtu.be/f_5J4yh3Y8w

Ironically, these solutions satisfy the left wing and the right wing promoting the elimination of the Fed.

[pershing83]

Oh, my....

If you want to see how crazy things are check the link. Will we be saved?

If you do open the link scroll down and see how much several great universities have given the Dusky Moor.

http://www.investorvillage.com/smbd.asp ... d=11355196

[doodle]

Pershing....

Hence the need for a radical redesign as proposed in the two videos above.

[moda0306]

The right mainly wants to abolish the fed because they want their dollar-denominated wealth to hold its value better.

The left mainly wants to abolish the fed because 1) its asset swaps of gov't securities don't accomplish much, and 2) everything else they do is crony capitalism enriching banksters (bail out loans at 0%, buying MBS's at face value, and other things I probably don't understand).

I can't watch the videos but that's my general take.

I am intrigued Warren Mosler's solution of winding down treasury debt with the exception of short-term accounts for savers (think I-Bonds)... though I wonder how that would affect bond markets that use treasuries as a base starting point.

With that stock of base money, people would still have the will to save, just like they saved physical gold in the past (to eliminate default risk from a portion of their portfolio)... so they could save either physically or in a treasury account (much like saving gold, it'd be free of default risk but would actually have the advantage of earning interest... except devaluation is still possible), a bank account (less safe, but still has FDIC insurance), or engage in riskier markets by loaning it to businesses via bonds or stock (buying stock is in effect "loaning" the business money, except you get paid back based on performance rather than a fixed rate).  

Think about it... Positive real interest rates paid by the issuer of a sovereign fiat currency is like nothing before it... when we were on the gold standard, you could either keep it in your home and earn 0% interest, or you could loan it out at interest, but there'd be default risk.  The treasury never paid you gold to keep it under your mattress, but that's almost like what the treasury does when it pays positive real interest rates on a 100% default risk-free (if that's really the case) asset.

I'm flabbergasted I'm suggesting this, but maybe the treasury has been artificially subsidizing savers at any point T-Bills have paid positive real interest rates...

[doodle]

What about the elimination of "interest" or "usury" altogether?

In a system where principal must be repaid with principal + interest you must either have a constantly growing money system or default in order for all debts to be paid.

Is the fundamental problem that humans have changed the concept of money from a medium of exchange into a way to avoid having to do any work (Why should I work! I'll let my money work for me!)

I just get the feeling that our present system is a Frankenstein's monster pieced together from dead pieces of previous failed money systems. Maybe it's time to slay the monster altogether....

[moda0306]

doodle,

I really don't like that... I think debt is perfectly natural if properly used.  When one older person has wealth and one younger person has skills & time, there's a natural negotiation that can/should take place.

If you outlaw interest you've outlawed, in essence, any contract with a time-value calculation... there's nothing wrong with time-value factors working their way into contracts... but when half of our country is financially illiterate and stuck in a consumer-based mind-set, what was once natural is now perverted.

I saw that credit card debt has dropped 11% from one year ago, though... that was nice to see.

[doodle]

The only purpose that I can see for the existence of the Fed is that it puts a buffer between the politicians and the money supply by forcing them to have to go through the exercise of borrowing instead of just going straight to the printing presses. Other than that, what the hell are we doing borrowing our own freaking money at interest? If that isn't the height of absurdity I don't know what is.

That is like building your own house and then paying your neighbor rent to live in the house that you just built for yourself.

[Gumby]

Just my rambling... I'm sure Gumby could add his 2,000 cents.

If I've learned anything over the past few months it's that, operationally, the Fed has virtually total control over interest rates. They set their targets, provide as much liquidity to the Primary Dealers as is needed to meet those specific targets. And the market deviates from those targets as much or as little as it wants to every minute of the day. Some say the Fed follows the market, but my guess it that most of the time, the market is just trying to guess what direction the Fed is going to move next. It's almost as if the bond market is trying to be the Fed's shadow. So, when Bernanke says they are going to keep rates low for the next three years, the bond market knows that the Fed has the tools to make that happen — and the market responds accordingly.

That's just how I see it. Not saying it's correct.

[doodle]

Moda,

Yes, but debt with interest necessitates an expanding money supply....otherwise there isn't enough money in the system to pay back the debt and everyone defaults. So how does one merge a sustainable and stable economy, with interest? Everyone should realize that compounded annual 5% growth is not possible forever....right?

[doodle]

Moda,

What happens if that negotiation between the old man and the young man didn't involve debt and interest but rather equity?

Say the young fellow needs funds to open a hotdog stand. The old man has money saved up but its not earning anything because interest is outlawed. He can take a risk by taking 50% ownership in the young mans hotdog stand and a percentage of profits rather than loaning the young man the money at interest.

Thus capitalism is preserved and there is no debt.

[Gumby]

That is like building your own house and then paying your neighbor rent to live in the house that you just built for yourself.

Well... it's more like paying your neighbor with dollars and bonds you just printed in your basement.

The Fed is't really necessary to run our government, but you are correct, it does put some distance between politicians and shady transactions (gold manipulation, MBS, etc). In general, the Treasury is supposed to do fiscal operations (spending) and the Fed does monetary transactions (setting rates, controlling liquidity, etc).

[moda0306]

doodle,

Usury could happen just as easily it would seem... The old man now has simply a slightly different interest in the operation... one calculated based on profits instead of a fixed payment.

Seems to me about the same as somebody being a contractor vs an employee... I don't think we're talking fundamentally different things here.

And what about mortgages?  Does the bank get to sleep with your wife and play with your kids for part of the month (sorry for that crude way of illustrating my point)??

[doodle]

Moda,

Apparently this type of set up is called "Islamic Banking"

http://en.wikipedia.org/wiki/Islamic_banking

And is more akin to profit sharing (or loss sharing) rather than interest.

[doodle]

Moda,

Here is how a mortgage works in Islamic banking:

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabahah. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.

[doodle]

The hardest part about this would be convincing the Republicans that the solution to our financial woes lies in Islamic Banking!!!

[moda0306]

Gumby,

What?  No control??  The whole MMT argument is that the fed buys/sells treasuries to reach target rates for banks.

Am I misunderstanding?

[moda0306]

The hardest part about this would be convincing the Republicans that the solution to our financial woes lies in Islamic Banking!!!

Good one doodle... is there some well-thought-out philisophical & operational reason for this?  I think a mix of debt & equity is healthy both for businesses and investors.

[Gumby]

Gumby,

What?  No control??  The whole MMT argument is that the fed buys/sells treasuries to reach target rates for banks.

Am I misunderstanding?

Well, I believe some MMTers would like to see the Fed folded into the Treasury — to simplify the system. Also, Warren Mosler has proposed the following:

Interest Rates and Monetary Policy
It is the realm of the Federal Reserve to decide the nation’s interest rates. I see every reason to keep the “risk free”? interest rate at a minimum, and let the market decide the subsequent credit spreads as it assesses risk.

Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to immediately cease issuing securities longer than 90 days. This will serve to lower long-term rates and support investment, including housing. Note, the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing those securities in the first place.

I would also instruct the Federal Reserve to maintain a Japan like 0% fed funds rate. This is not inflationary nor is it the cause of currency depreciation, as Japan has demonstrated for over 10 years. Remember, for every $ borrowed in the banking system, there is a $ saved. Therefore, changing rates shifts income from one group to another. The net income effect is zero. Additionally, the non government sector is a net holder of government securities, which means there are that many more dollars saved than borrowed. Lower interest rates mean lower interest income for the non-government sector. Thus, it is only if the borrower’s propensity to consume is substantially higher than that of savers does the effect of lower interest rates become expansionary in any undesirable way. And history has shown this never to be the case. Lower long term rates support investment, which encourages productivity and growth. High risk-free interest rates support those living off of interest payments (called rentiers), thereby reducing the size of the labor force and consequently reducing real national output.
Site: http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

Even though he doesn't call for ending the Fed, he would have the Fed's role minimized. The MMTers who call for ending the Fed and folding it into the Treasury really want to stop the Fed from playing with the free market. It's all about having less government control in our lives.

[murphy_p_t]

Other than that, what the hell are we doing borrowing our own freaking money at interest? If that isn't the height of absurdity I don't know what is.

Lincoln and JFK thought so too.