The debt fueled bubble and the recession that followed

[jayakris]

Jim Grant on CNBC (yeah) today. Capitalism is an alternative for what we have now.

Interesting interview video there, Peter. From a very basic standpoint, isn't the real issue what he said at the end of the interview that mal-investments will happen in unproductive things. Perhaps I can buy the argument that it will bring nothing positive for the ultimate prosperity of the country, or worse still, have even serious deleterious effects. Otherwise, is inflation by itself such a big deal after all? After all, it is created artificially by the artificially manipulated currencies, right? Yes, inflation is a tough deal for retirees but what else? The economic novice in me wonders.

I am only able to think of economics from certain overall (macro?) principles of production, productivity, and work by people and machines. But then again, may be I should learn real economics and drop my aversion to looking at it through these instruments (or whatever) like currency and interest rates, whose dynamics are just way too complex for me to figure out. Anyway, if everybody else is manipulating currencies, doesn't the US also have to?

Jay

[kujo]

Summary of the Greek Bond swap deal:

Investors who participate will get new bonds with a face value of less than half the previous securities, longer maturities and reduced interest rates, leading to a net present value loss of more than 70 percent.

60% of Greece's lenders are voluntarily agreeing to such a deal - 30 cents on the dollar!

[Peter]

[ From a very basic standpoint, isn't the real issue what he said at the end of the interview that mal-investments will happen in unproductive things. Perhaps I can buy the argument that it will bring nothing positive for the ultimate prosperity of the country, or worse still, have even serious deleterious effects. Otherwise, is inflation by itself such a big deal after all? After all, it is created artificially by the artificially manipulated currencies, right? Yes, inflation is a tough deal for retirees but what else? The economic novice in me wonders.

Jay, Inflation is a big deal for us all. It is a stealth tax and theft by government. A quick statistic for you. Since the US Fed was created 99 years ago, the dollar has lost 97% of its purchasing power. It is a mind numbing statistic.

Borrowing from the future is the mantra of every central bank, government, the Keynesians and the prominent economists (who seem incapable of understanding the unintended consequences). The cost of money is currently free for the wall street casino. This has lead to massive capital misallocation for speculation and scarce capital formation for productive activities. The current policies discourage saving, and make speculators (and debtors) of us all. What kind of message are we sending our children? What kind of world are we leaving for them? Do you think Obama or Bernanke cares?

I am only able to think of economics from certain overall (macro?) principles of production, productivity, and work by people and machines. But then again, may be I should learn real economics and drop my aversion to looking at it through these instruments (or whatever) like currency and interest rates, whose dynamics are just way too complex for me to figure out. Anyway, if everybody else is manipulating currencies, doesn't the US also have to?

The US can afford to print ad infinitum (for now) because we are the reserve currency. Thankfully much of that money has not come out in the open yet, but rather went into recapitalizing the bank balance sheets. Else a gallon of milk and gasoline would easily be $10 or higher today. Even then, have you ever wondered why college tuition or healthcare costs have been increasing annually at double digit percentages? Inflation is also hidden in smaller packaging, inferior quality goods and such.

India has had massive inflation in the past 20 years. Did it start after the rupee devaluation in 1991?

There is nothing good that can come out of the current Central banks. They exist to serve their masters (in high finance) and make peons of the rest of us all. We need to return to honest money, based on something tangible. But Austrian economics is treated with scorn because it will collapse the current house of cards.

[Peter]

We build apps, gossip sites, and social networks that are really the most unsocial things around making us fat, lazy, and unproductive.

Social media is the cancer that is destroying America today. It is ten times worse than TV. It has completely permeated American society and hence cannot be avoided altogether.

Apps are another story. This is a tectonic shift in computing. That phone in your pocket has more power than the mainframe from 25 years ago. It costs only $500 but is more elegant than the $100,000 backbone router that powers the Internet. Cloud computing and mobility continue to amaze me. The pace of change has certainly picked up.

[kujo]

Here is a question for the general folks (PKB, Peter - be quiet, you both can chime in 2 days from now):

When you have a stock that you bought for $100 a piece, suddenly crashes in price (say in late 2008) and now is only worth $20. If you sell at that price what happens to the $80 you lost?
a) magically disappears - poof!!
b) someone else gained the $80 you had lost ( yes, money is like matter - cannot be destroyed?!)
c) someone else gained more than $80 ( how could that happen?!)
d) someone else gained between $0 to $80 and the rest disappears?!

-kujo

[jayakris]

Any difference if you replace "stock" with a "house" (say $100K instead of $100) that lost value? ...

Anyway, my answer is "none of the above" because I lose nothing till I sell the stock for $20.

But if I sold the stock for $20, then I lost $80 and nobody gained the $80. Went poof, like a lot of "money" has gone all through history, like whenever a banana or a piece of meat went bad before it could be consumed, or a car lost value when it got hail damage. Answer (a)

Jay

[kujo]

Yes there is a difference if it is a house. If someone buys a house and pays in full, and then sells it at a loss, of course the money you lost simply vanishes. OTOH, since 98% of the houses are bought on a loan, if you sell it at a loss and the bank is made whole on the loan, then the money you lost is simply a gain for the bank / lender. i.e) money doesn't vanish....

Well, in case of a house that has lost value, you end up paying principal + interest on a loan for an asset that definitely is not worth the same as before. If the bank is not willing to re-negotiate the terms of loan, sometimes you are better off, cutting your losses and walking away from this asset. "Mark to market" - this is something that the banks used to do with their assets when asset prices were increasing in a steady market, but they have since eased away from that notion (as of March 2009) to take into account "unsteady/inactive markets". I digress....

[kujo]

back to the question and the discussion on that:
Over 90% of the investors are your typical "buy-hold-sell" cycle investing. but, have you considered "sell-wait-buy"? i.e) a short seller who would have sold it at $100 to you and bought it back at $20 from you??

not quite "poof" isn't it?

[jayakris]

Sure. And your point is? ... You are driving towards some point, I think...

I didn't say that money always goes poof. In some cases it does. That is why I don't think about economics through the prism of money. I think in terms of productivity and people's satisfaction. Money is just an artificial tool that moves the economy, to me. Perhaps straight-barter can again happen without money calculations in the future, where everything is just valued "right" in relative terms and "cyber" does the bartering as per individual (or collective) preferences.

Jay

[Omkara]

is there research backing short selling as long term strategy? have people made money consistently over time? short squeezes are happening more often these days...

[kujo]

Absolutely, money is the grease that moves the economy's wheels. agreed about productivity and people's satisfaction.

I may have a point later on, but for now, just discussing some stuff: money = value of work performed (approx)

let us reverse the situation. you bought some stock at $20 and sold it at $100. you gained $80.Whose $80 is that?
a) did you just create wealth for yourself out of thin air? i.e) dollars magically appeared "ta-daa"
b) is it someone's else $80 that you gained? i.e.) money can not be created, but it is the equivalent for some work done by someone

suppose the stock was NEVER above $20 ever, then one fine day it jumped to $100 at the opening bell and you sold it. what then?

ps: jay you are banned for 48 hours as well from replying to this. I want someone else to chime in....

[sanjay5goel]

Borrowing from the future is the mantra of every central bank, government, the Keynesians and the prominent economists (who seem incapable of understanding the unintended consequences). The cost of money is currently free for the wall street casino. This has lead to massive capital misallocation for speculation and scarce capital formation for productive activities. The current policies discourage saving, and make speculators (and debtors) of us all. What kind of message are we sending our children? What kind of world are we leaving for them? Do you think Obama or Bernanke cares?

The US can afford to print ad infinitum (for now) because we are the reserve currency. Thankfully much of that money has not come out in the open yet, but rather went into recapitalizing the bank balance sheets. Else a gallon of milk and gasoline would easily be $10 or higher today. Even then, have you ever wondered why college tuition or healthcare costs have been increasing annually at double digit percentages? Inflation is also hidden in smaller packaging, inferior quality goods and such.

India has had massive inflation in the past 20 years. Did it start after the rupee devaluation in 1991?

There is nothing good that can come out of the current Central banks. They exist to serve their masters (in high finance) and make peons of the rest of us all. We need to return to honest money, based on something tangible. But Austrian economics is treated with scorn because it will collapse the current house of cards.

Peter - thank you so much for bringing (or at least attempting to bring) a proposition of "value" to this discussion. Otherwise we just go on & on assuming that people in power must be knowing what they are doing - which is almost never (I daresay) case.

I have been a supporter of Senator Ron Paul for several years now for his no-nonsense approach to each and every issue that this country is facing. However, as you allude to - "collapse the current house of cards" - the whole modern economic system is built on a premise that more money and more "things" will eventually bring "HAPPINESS" - which is another assumption that is not based on any factual evidence.

I urge people to visit Dr. Ron Paul's website and hear from his directly his propositions.

I remember reading a nationwide survey around 2003 or so in BusinessWeek (or similar magazine) where an attempt was made to draw out the inter-relation between money and "perceived" happiness. "Perceived" - since different people have different yardsticks for this. The survey result represented as a graph was a bell curve wherein households earning between $50k - $75k were the ones that were most satisfied with their lives. In the last 10 - 15 years similar surveys have been conducted in most countries with similar results - of course with an adjustment for the local currency and living standards.

Few months ago I met one spiritual teacher recount how a few years ago he was addressing / lecturing about 200 students in a University campus somewhere - not sure where it was - probably in South Africa. In this lecture he cited the above survey results and many similar large surveys done on this subject across the world. Over the past 10 years the conclusions of these surveys are now universally accepted in the global academic circles. Most of the students attending the lecture also had knowledge of these surveys.

After confirming from the 200 odd students (& faculty) present there that they agreed with the survey results - he asked the
BIG Question: HOW many of you are willing to earn only this base amount of money in your life and not try to "earn more & more".

Can you guess how many people raised their hands??? Only 2 persons raised their hands.

What does this mean? This signifies that even though all the 200+ people were intellectually convinced of the results of these studies - still they were either not prepared to OR not able to implement in their own lives what they learned from this.

In the final analysis sane-r people will (hopefully) come to the realization that the modern civilization is not really based on any kind of human "need" - but is based solely on human "GREED".

Which begs the question - wherefore does this greed come into the majority of human being? Well, that's an entirely different discussion - and one, I am sure most people in this forum would not be interested - since it revolves around the subject matters that are internal (as opposed to external) morals, ethics, religion etc etc....and challenge our core values of life - something akin to your point "collapse the current house of cards".

Sanjay

[Atithee]

Debt, the American Way

Very close to my pessimistic view of recovery -- at least the kind that America and (Americans) created, got in a soup, and are hell bent on creating again -- and sadly, have exported to the rest of the world.

[Peter]

Jim Grant says Bond market is the bubble of modern banking

Grant's clear thinking is a gift, long lost in much of America.

[Peter]

Fix income inequality with $10 million loans for everyone!
by Sheila Bair (yes, that Sheila) in the Washington Post