Thread: interest rates
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Old 11-22-2001, 09:26 AM
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Default 30-years to continue slide



Our institutions are practically printing money/currency, and encouraging consumption, to the point where we will have more cash than products - and a corrsponding high demand for capital formation but a relatively low supply of goods to convert. I was going to write an essay on this, but instead I just sold bond futures at what turned out to be the high A slightly sad ending though, client sent me an email "we don't do bonds" - customer always right, bought bonds back, missed 6-point slide for $1,000.00/point per contract


Anyway, here's the text of an old essay I wrote last winter that you can build to write your own essay about the present situation


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Okay, let's settle this already, the Fed doesn't "stimulate" the economy. The Fed simply attempts to correct a self-perpetuating price signal which would otherwise mislead economic actors as to the equilibrium duration of assets, and the profitability of investments.


Given an arbitrary national pool of short-term assets -- which dollars are non-specific claims on -- a certain amount are set aside for near-term consumption, the remainder are set aside for some rainy future day, through the process of capital formation. Apples, which would otherwise rot, are fed to workers, who would otherwise sit idle, to assemble bricks into buildings -- which buildings will stand to provide worker-housing and apple-storage for many years to come, but cannot be reverse-converted immediately back into bricks and apples.


When the relative glut of short-term assets available for investment increases, money -- or unneeded immediate claims on these assets -- becomes available to borrow, driving interest rates down. This relative excess of assets available to consume today, relative to assets available to consume five years from now, signals a businessman whether a certain scheme of capacity investment and production will be profitable. He is performing an arbitrage between the present and the future. (Incidentally, if you tell him his P/E ratio looks too high, and to therefore increase his short-term production, market share, and profits out of a fixed immediate pie, you are short-cicrcuiting this natural signal, and perpetuating the duration bubble/imbalance!)


But, as the availability of short-term assets climbs, and as short-term production is scaled up (potentially feeding back into the immediate-goods glut), the relative price of longer-term investments rises. As this happens, economic actors learn Darwinistically that it is easier to convert longer-term investments into cash, and cash into goods for immediate consumption, than vice versa. There is a self-perpetuating demand for longer-term assets, which creates a signal that such longer-term investments can be converted into cash at ever-rising rates.


But this convertibility is naturally extrapolated past the point when the ratio of short-term goods to investments reaches and passes equilibrium. People have learned to hold investments instead of cash, because in the recent past investment opportunities have been convertible into cash, by venture capitalists or whomever, at an apprently unlimited and rising rate. But at some point the demand for investments crosses over to where it is actually a demand for cash, in part (meanwhile no mirror demands for investments are left partially in cash), such that cash is denominated in investments, not dollars -- meaning that the demand to consume short-term assets is actually partially priced into an intermediate demand for investments, masking the hidden intention to convert those investments into cash in a shorter time horizon than the liquidity of the investment itself.


If the Fed suspects we are passing this point, they simply start contracting the multiplication and velocity of claims on short-term goods so that, at equilibrium, some investments would be attempted to be converted back into money claims on the national short-term asset pool. At this point, all the people who were holding investments when they only wanted them for their convertibiility into short-term cash, see the investment-cash tradeoff see-sawing back the other way, and start looiking to hold cash as cash instead of investments as cash. Sometimes it can be uncovered that a great many people were holding investments on only a short-term or cash basis!


If it goes too far the other way, people can start holding cash, or claims on short-term assets -- even though they have an excess of such claims available to invest -- because natural selection dictates that those holding the most cash, or decision-making power in the economy, are those who for whatever reasons were choosing to hold cash even when investments were king, even before the cross-back. Again, our friend Darwin selects who is in control. At this point, the apparent profitability of businesses that seemed profitable when duration was extending, but for which it is now physically impossible to shorten or speed up their harvesting length or duration, evaporates.


So when the Fed starts increasing claims on short-term assets again -- to reflect the true size of the actual pool, they are not doing it to stimulate consumption, or to stimulate more immediate production to meet the claims, but to stimulate investment, and to create a signal of the profitability of certain ventures which actually remove consumable assets from the pool in the short term! It's to overcome deflation, to the extent some goods (like bricks) are manufactured to be included in capital formation, not to reinflate claims on a bucnh of crap nobody wants, not to prop up a bunch of errors. It's to start fresh.


So, in conclusion, it is people putting money into the things they actually want to comsume, the product and duration, that instructs producers to make things we need and not sqaunder the short-term pool on things we don't. And the job of the Fed is to overcome what I have for years been calling "the currency effect" where the learned illusion of convertibility of one thing into another (which runs out past some point), and the redundant or over-compensating reactions to time-series events, creates a false price signal, where people manufacture the intermediately demanded assets, rather than assets that anybody really wants to consume, or something, you get the idea...


Quiz: If people are competing to buy a limited pool of oil, how does gold become a substitute good? Where is the underlying physical ability to convert oil into gold? The price of oil is not rising because there is an excess of non-specific claims, but because there is a shortage of oil!


I guess my main message is that consumption is death, whether it's slaughtering pigs and burning piles of fruit during the depression, or an excess investment of the same short-term assets in doomed or ridiculous projects. So when people ask "Are consumers going to spend the Bush tax cut, and stimulate the economy by pissing it away on plastic trash, or are they just going to put it in the bank?," understand that you want them to put it in the bank, assuming their current spending patterns are already robust and autocorrelated enough to instruct manufacturers as to in what what category of capacity to invest the borrowed money, the borrowed claims.


This silly notion of consumption stimulating the economy is a Marxist relic from the idea that when workers are repalced by machines, there will be nobody with cliams to purchase the goods the machines produce, or some such scare story, some Say-esque pure nonsense. Again, consumtpion is death, and the less of it, the better off the economy, that is not what the Fed is trying to stimulate... you dolts! The economy is self-stimulating, thank you, through price-supervision, and the Fed is just correcting for malcoordination in the relative prices of assets of different durations, and the illusion that you can bang one into another (like the illusion that Portfolio Insurers could bang into short futures in Chicago in 1987). They say "Let's force a dry run fire drill, and see how many people try to squeeze through the door at once."


MOREOVER, THE FED DOES NOTHING TO CORRECT FOR MALCOORDINATION AND INVENTORY/CAPACITY ERRORS OUTSIDE THE FINANCIAL SUPPLY CHAIN, IN SEMICONDUCTORS FOR INSTANCE. THE FED CAN CUT RATES FOR TEN STRAIGHT YEARS, AND IT WILL DO NOTHING TO CREATE APPROPRIATE PRICE SIGNALS AROUND WHICH INDIVIDUAL HIGH-TECH FIRMS MIGHT EVOLVE, WHO CAN'T OTHERWISE DO SO TO UNCONSCIOUSLY COORDINATE BETWEEN THEMSELVES IN THEIR SUPPLY CHAIN. ONLY MIDAS, THE MURRAY INFORMATION DISSEMINATION AND ANTI-REDUNDANCY SYSTEM, CAN TAKE CARE OF THAT. NOT UNLESS THE GOVERNMENT WANTS TO HIRE JOHN ZOGBY TO DO CHANNEL CHECKS AND START BUYING FROM AND SELLING TO INDIVIDUAL FIRMS TO GIVE THEM "HINTS" AS TO TRUE CONDITIONS, FOR INSTANCE. BUT THE LAST PLACE TRUE CONDITIONS WOULD FIND THEMSELVES ACCURATELY REFLECTED BACK TO BUSINESSES WOULD BE FROM WASHINGTON...


Enough.


LeRoy



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