Gyroscopic Investing

Mdraf wrote:From the days of swapping arrow flints for bearskins to the 21st Century "New Normal" nothing has changed.

Hey, you said something I agree with! Arrow flints are easy to create — just like currency. No taxation necessary. Thanks for proving our points!

Mdraf wrote: Ok people. I received several pm's saying I'm wasting my time debating this with the MR/MMT ers.  I will desist with one last statement.
Economics is very simple. It is nothing more than common sense and human behavior. From the days of swapping arrow flints for bearskins to the 21st Century "New Normal" nothing has changed.

your not wasting time if you or others are are learning from it...

AdamA wrote:So if I borrow $100 from a bank and I go buy real things on the economy and then can't pay the bank back the Fed can step in and "swap" cash for my bad loan?  The bank is okay, but the Fed is then basically stuck with a bad IOU from me. 

How are we able to do that?  Is it simply b/c we have such vast resources?

Has nothing to do with resources really. We are simply able to do that because Congress wrote a law that allows it. The Fed can only purchase assets that Congress allows it to — the Fed can't just go around buying whatever it pleases.

Mdraf,

Don't give up yet.  You're a dream compared to doodle .

I think you hit on a HUGE point and we didn't even give you credit.  You said treasury bonds are backed by future taxation, which is backed by future productivity.

You got it!

Except ALL of this, dollars AND treasury bonds, as assets, are essentially backed by future production. The bigger the economy, the more "clearing assets" we'll need for all the consumption and credit clearing.


So swapping one fiat asset backed by expectations of future production for another fiat asset backed by expectations of future production is a wash.

Thanks for pointing that out.  Just cut out the tax part.  If we had a reason to expect our productive capacity to be horseshit in 5 years, both of those claims (dollars and bonds) would fall considerably.

Tenn,

The fed did kind of do that when it bought MBS's. 

This is fundamentally different than it cheating with its partner-in-crime.... The US treasury.  We already kind of expected that, and they're the currency issuer anyway (referring to the govt in general), but picking which private financial assets to buy is picking winners and losers and I don't like that.

Gumby wrote: Has nothing to do with resources really.

Right...on a small scale it has nothing to do with resources, but say those banks loaned out money to people who went out and bought billions of dollars worth of oil and then wasted it (the oil) on failed projects.  The price of oil would be sky high, and now the Fed can just step in and swaps with the banks? 

In writing that, it occurs to me that I guess this is entirely possible.  The Fed has the bad loans.  The banks are okay, and the price of oil is high.  The societal price for the swap is the increase in the price of oil...right?  (Just trying to figure out how this isn't a "free lunch").

Bailing out bad loan holders when the shtf encourages a possible moral hazard.

However, one has to realize that these bailouts usually occur only when there's systemic risk occurring. So if you're going to make a bad investment, just make sure everyone else is doing the same thing. 

Tenn,

TARP was fiscal. There were also some "fiscally" monetary policy things done to prop up banks.

You guys crack me up ! LOL. No hard feelings. Just that for each post I get 3-4 rebuttals from different people with a slightly different angle so I have to "work" 3X as hard as my debating partners 

Mdraf wrote: You guys crack me up ! LOL. No hard feelings. Just that for each post I get 3-4 rebuttals from different people with a slightly different angle so I have to "work" 3X as hard as my debating partners 

Well, you are making good points!

Taxation certainly plays a role in giving a currency demand and legitimacy (and providing a social contract with voters that voters can hold politicians to). But, in a fiat government, the taxation plays an abstract role — as the government can certainly pay the bond coupons without taxation. The government isn't "constrained" by taxation in any way (as proven by the spending beyond taxation of the past few decades).

Mdraf wrote: You guys crack me up ! LOL. No hard feelings. Just that for each post I get 3-4 rebuttals from different people with a slightly different angle so I have to "work" 3X as hard as my debating partners 

Haha. 

Now you know how I feel when debating 3 libertarians at the same time. 

Brutal. Haha.

moda0306 wrote: There's two kinds of money.  Base money (or outside money (reserves, dollars and coins), and credit money (inside money (loans, essentially.. Leverage).

This I get, and I think I pretty much understand how inside money works...private banks simply loan inside money into existence creating assets for themselves.

What I don't seem to be able to grasp is how outside money is used to influence inside money...especially when banks are at risk to default...sorry to be so dense.   

AdamA wrote:

Gumby wrote: Has nothing to do with resources really.

Right...on a small scale it has nothing to do with resources, but say those banks loaned out money to people who went out and bought billions of dollars worth of oil and then wasted it (the oil) on failed projects.  The price of oil would be sky high, and now the Fed can just step in and swaps with the banks? 

In writing that, it occurs to me that I guess this is entirely possible.  The Fed has the bad loans.  The banks are okay, and the price of oil is high.  The societal price for the swap is the increase in the price of oil...right?  (Just trying to figure out how this isn't a "free lunch").

Again, the Fed cannot just purchase any private credit instruments willy nilly. Congress would need to pass a law enabling the Fed to purchase those private credit instruments that were sold to purchase the oil. So, if you do find a "free lunch" in that scenario, I'd say that the lunch is still being authorized by Congress — the Fed is just the instrument to conduct the policy in conjunction with the Primary Dealers. It would only happen in an extreme/unusual situation.

In a normal Open Market Operation (OMO) the Fed is only allowed to purchase Congressionally approved assets — such as T-Bonds. MBS purchases were enabled by Congressional mandate — otherwise it would have been illegal.

TennPaGa wrote:

Mdraf wrote: You guys crack me up ! LOL. No hard feelings. Just that for each post I get 3-4 rebuttals from different people with a slightly different angle so I have to "work" 3X as hard as my debating partners 

I hope you realize we all discussed this at this morning's secret "How to Destroy America" meeting.

Oh you have that meeting while I'm cleaning my bunker ?

I think you actually have to work more than 3x as hard cuz we spend half our time just patting each other on the back while simultaneously coming at something at just enough a different angle to feel like we're contributing.

It's really quite easy .

Actually this week's debate here has proven to be quite lucrative for me since it kept me away from trading options where I lose an average of $100/week.
Also my Facebook friends are  starting to complain they are missing my always cynical posts.

Mdraf,

Keep in mind, I had to sit for hours... Days... Months, to fully absorb the nature of the system.  Because it looks like a currency-user circle jerk.  And in many ways that's exactly what it is.  But to really absorb what that MEANS for the private sector and its motivations and expectations is another animal entirely.

I can show you that the fed buys bonds when it prints money quite easily.
It's an operational fact.

Where we lose each other is deciding fundamentally what that purchase means for ME... A selfish investor, took me to the edge of my sanity and back. Cuz now we ARE dealing with economics.  Guns vs butter. Marginal propensities to save vs spend. Fiat money vs bonds of the issuing entity.

Treasury bonds, as I've come to see them, are "outside money" with an interest trait to them that essentially sets a floor for the market and puts limits on reckless lending.  Regardless of what they once meant to us. This is the fundamental shift that occurs when you turn a fractional gold reserve system into a full fiat system and create a circle jerk to make it look like the former and behave new like the latter.  It totally changed the nature of a treasury bond.

It's like your wife after you get a divorce.  You trust her with your kids... You might even drunkenly hit that again after Bobby's birthday party... but you know she's a fundamentally different relationship to you than she used to be.  You're not going to look at her with some of the positive traits, nor some of the negative traits, that you used to.

And you certainly don't think that by paying her support and maintenance that it's a claim on future p*$$y like it used to be. 

Gumby wrote: Again, the Fed cannot just purchase any private credit instruments willy nilly. Congress would need to pass a law enabling the Fed to purchase those private credit instruments that were sold to purchase the oil. So, if you do find a "free lunch" in that scenario, I'd say that the lunch is still being authorized by Congress — the Fed is just the instrument to conduct the policy in conjunction with the Primary Dealers. It would only happen in an extreme/unusual situation.

So when Congress does this, it is in theory inflationary.  The reason we haven't experienced much, if any, inflation, is because the amount of outside money authorized to purchase the mortgage backed securities was small compared to the amount of private debt owed, right? 

What will the Fed do with these mortgage back securities?

AdamA wrote:

Gumby wrote: Again, the Fed cannot just purchase any private credit instruments willy nilly. Congress would need to pass a law enabling the Fed to purchase those private credit instruments that were sold to purchase the oil. So, if you do find a "free lunch" in that scenario, I'd say that the lunch is still being authorized by Congress — the Fed is just the instrument to conduct the policy in conjunction with the Primary Dealers. It would only happen in an extreme/unusual situation.

So when Congress does this, it is in theory inflationary.  The reason we haven't experienced much, if any, inflation, is because the amount of outside money authorized to purchase the mortgage backed securities was small compared to the amount of private debt owed, right?

Correct. That's my understanding. If only because the private credit shouldn't have been issued in the first place. I mean if the credit instruments were good, then the swaps would have been even trades between the Fed and the private sector.

AdamA wrote:What will the Fed do with these mortgage back securities?

I can't say I follow MBS too closely. If the MBS payments are being made (I really don't follow them), the private sector now owes the payments to the Fed. The Fed will return any profits to the Treasury until they are all paid off. The Fed could sell these assets if they are ever worth anything. But, again, I really don't follow them, so I don't know. I was under the impression that the government was willing to back MBS, so I suspect the payments will be made somehow. I really just follow the basic mechanics, so don't ask me to testify where the money to pay MBS is coming from

moda0306 wrote: It's like your wife after you get a divorce.  You trust her with your kids... You might even drunkenly hit that again after Bobby's birthday party... but you know she's a fundamentally different relationship to you than she used to be.  You're not going to look at her with some of the positive traits, nor some of the negative traits, that you used to.

And you certainly don't think that by paying her support and maintenance that it's a claim on future p*$$y like it used to be. 

Wow dude. I feel like this reveals more about moda than about MR! 

Pointedstick wrote:

moda0306 wrote: It's like your wife after you get a divorce.  You trust her with your kids... You might even drunkenly hit that again after Bobby's birthday party... but you know she's a fundamentally different relationship to you than she used to be.  You're not going to look at her with some of the positive traits, nor some of the negative traits, that you used to.

And you certainly don't think that by paying her support and maintenance that it's a claim on future p*$$y like it used to be. 

Wow dude. I feel like this reveals more about moda than about MR! 

Sorry, you should see me with the wrong group of friends.  I'm a raunchy sob.

Here's another quote from Cullen Roche:

Bank reserves are ONLY used by banks and the central
bank in the interbank market and do not reside in the non-bank private sector. It is best to think
of reserves as deposits held in accounts at the various Fed banks to settle payments within the
banking system. For example, if you have a bank account at JP Morgan and you use your bank
deposits to purchase a sandwich from someone who banks at Bank of America (who subsequently
deposits the funds at B of A) the banks will settle this payment by transferring reserves in the
interbank market. This interbank system creates a market where the Federal Reserve can help
streamline settlement of payments and ensure stability and liquidity within the payments system

Can someone explain the interbank market to me?

In the above example, JP Morgan owes Bank of America money for my sandwich...so they settle this via reserves?  And...if JPM doesn't have it, then the Fed settles it?  Why would JPM not have it? 

AdamA wrote: Here's another quote from Cullen Roche:

Bank reserves are ONLY used by banks and the central
bank in the interbank market and do not reside in the non-bank private sector. It is best to think
of reserves as deposits held in accounts at the various Fed banks to settle payments within the
banking system. For example, if you have a bank account at JP Morgan and you use your bank
deposits to purchase a sandwich from someone who banks at Bank of America (who subsequently
deposits the funds at B of A) the banks will settle this payment by transferring reserves in the
interbank market. This interbank system creates a market where the Federal Reserve can help
streamline settlement of payments and ensure stability and liquidity within the payments system

Can someone explain the interbank market to me?

In the above example, JP Morgan owes Bank of America money for my sandwich...so they settle this via reserves?  And...if JPM doesn't have it, then the Fed settles it?  Why would JPM not have it?

You're not going to find a much better explanation than the one you just quoted. But I'll will try to clarify. Each bank has a pot of money (reserves) and at the end of every business day the Fed helps settle the tallied differences in reserves from bank to bank. The Fed is just the clearinghouse that hosts all of those transactions and reserve accounts — since bank reserves are held in "reserve accounts" at the Fed (that's why they call it the Federal "Reserve").

So, JPM has the reserves in their reserve account at the Fed. The Fed moves the totaled money at the end of the day from JPM to BOA  If a bank is low on reserves for some reason, they can get short term loans from the Fed. Or they can swap T-Bonds for reserves via OMO to convert assets into reserves.

It's sort of like a big game of Monopoly and the Fed is the banker.

MT,

The fed is more than the banker.  If I could do what the fed does if be banker every time in that confounded game.