An excellent article, a must read for beginners...

http://news.ft.com/ft/gx.cgi/ftc?pag...ID=FTD096UBONC


Sorry for the ridiculously long http...hope it works.

The author touched upon some very thought provoking points.From a financial novices' perspective,I get the impression that there is an underlying element of non-determinalism(chaos) which operates on a scale which ,in terms of the assorted financial markets,the world has only passed the threshold of rather recently.Isn't it ironic too how something as deterministic as accounting mutates into something so unpredictable as ,say ,derivitive trading!

After all,if you boil it down,it's just a game.A BIG game,but nontheless a game.Combine that with the notion of corporations as just so many versions of "th Great OZ",and we can expect to see a steady line of individuals who have taken up the reins of power in this or that trading division whose ego will not allow them to not "grab the tiger by the tail".

Typically the in's and out's of financial activities are mind numbingly boring to almost everyone.Were that not the case no doubt many more examples of big time losses would get some presstime in mainstream media.

Where does the whole thing leave us as individuals?Clearly the assorted markets do serve a definate purpose.Just as clearly there is a danger of bad things appening on scales never seen before.We as individuals have several degrees of separation,but what level of protection is appropriate?Can we as a society(s)even exert any real control?Is there a point and place where Laissez-Faire economics must exert itself?

Perhaps the immense growth of the world economy during the last couple hundred years has just been an appetizer for the next few decades!My personal hunch is that we have only seen a glimpse of what is to come.As our political entities and our data processing abilities mature they should enable the global economy to undergo a literal "Big Bang" at some point.I kind of think alot of us will be here to see some of it too.

Hehe ,guess I just got to rambling a bit......

btw Wildbill, are you the backgammon player who used to play poker in N Seattle?

I have actually figured out a way to precipitate such a global/economic "big bang." All you really have to do is change the time-series/evolution properties of the entities which are adjacent at various points in the chain.


You can picture a point in the supply chain as being like a light cone. The properties and behavior at that point are shaped by the information and environment that point has been exposed to up until this moment.


But the rate at which new information arrives is not at the speed of light. Rather, information currently arrives at the speed at which goods move through the economy. So there are all these fragments of un-mined information about future events which theroretially could have arrived at the point, but haven't.


The way to overcome this, and free up the information particles to flow on their own, is to create an autonomous supply-and-demand information exhange, overlaying the subordinate marketplace in goods. In other words, you introduce a new "force" into the equation, by introducing a pricing metric in information - which will cause it to dissipate between high and low points the way everything else in the universe does.


This will essentially extend the time series to which an economic entity is exposed - and which it will evolve in response to - to include the future. In other words, the entire entropy-dissipation future of the universe (since economics is nothing more than entropy dissipation) could be mapped out to the end of time, and the time axis could collapse.


It is really just an acceleration and error-elimination process, one that would speed up the clock of wealth generation, measured relative to the clock of our biochemical processes. In other words, we'd all be billionaires. The only reason the universe itself wouldn't evaporate is because, based on our own physical needs, we would keep most of the mapped entropy inside this expanding map horizon in mass, rather than energy or light.


I have designed such a pricing metric. If I could teach it to economic participants, in the form of a basic set of habits or Bible that would be easily passed on, I could collapse the economic universe - and fry the entire planet in a hot radiation of pure wealth - tomorrow.


eLROY


P.S. But so far as the idea of a turnover tax, why not bill people for all the extra sperm they shoot just to fertilize a single egg? Bioligical processes may not be precise, but they sure are robust and resilient!

Well I certainly didn't see how it was an excellent article. The author puts forth a highly debatable hypothesis as if it were fact. Namely that increased volume in the currency markets necessarily leads to increased volatility. First of all it's not clear to me how an increase in speculative trading activity leads to a disproportionate increase in currency volatility per se. It's also not clear what exactly constitutes too much volatility in the currency markets.


Here is one statement the author uses to make the "too much trading case":


"Even the disappearance of the eurozone's national currencies has reduced foreign currency trading only a little; and other markets have continued to grow at rates much higher than gross domestic product or international trade."


Among other problems, this statement is internally inconsistent. If (and this is a big if) currency trading is directly linked with GDP or international trade (the author doesn't say which), then of course there would be little change in currency trading volume as a result of swithching to the Euro.


Here is one more quote that caught my attention:

"Why is there so much trading? The basic reason is that the participants underestimate the risk they run and overestimate the long-term rewards."


This a common refrain heard often from Liberals, anti-capitalists and non-economists. It is the people are stupid hypothesis. This may in fact be true in some cases but upon close examination is rarely the case. More often than not it was observer who failed to completely understand the story unfolding before him.


My opinion of the article was that it was basically another one of those "Chicken Little The Sky is Falling" articles that always seem to sprout up in the wake of whatever real or perceived financial disaster has just occured.

The currency trading argument is one I actually quite conclusively agree with. Any economist can tell you when there are moves in currency markets caused by speculators betting against a peg, dirty float, or trading band it inevitably leads to an overshooting of the FX. While traders invariably defend their actions as "punishing bad policymaking" the truth is they are flat-out destabilizing the market and sucking profit out of a country's misfortune. Not that I am a bleeding heart liberal, but what does their currency trading have to do with improving liquidity or making the markets more efficient? What they are in fact usually doing is almost cornering a market making it overwhelmingly risky to bet against them. In fact that is what they are looking for, making the risks going against their actions so risky that the market implodes and that the populace of the country they are targeting even has to join the bandwagon for fear of what may happen. Capital markets are efficient and a good place to speculate. They generate positives for economies in providing capital for expansion by rewarding innovation and success and punishing failure. Currency market attacks are nothing more than extremely rich bankers and investors trying to bankrupt a sovereign government and even more so the lowest classes of the general population that has no financial interest in other investment markets, but end up the hardest hit when currency markets are over-run. I don't think there is any solution that makes economic sense to moderate these attacks, but give me one good legitimate reason to defend the attack of a currency. It certainly isn't because they need to use the currency for any kind of business purpose, which is theoretically the intent of having a currency market in the first place.

Nothing is free-floating, their raid trades have to reflect reality, someone has to come in behind them to take a handoff of their positions.


http://www.twoplustwo.com/cgi-bin/ne....pl?read=29121


If there's a marble careening around a sink, it will find that drain on its own, sooner or later.


http://www.twoplustwo.com/cgi-bin/ne....pl?read=35338


They are just mine-sweeping and, if there are no buried contingent cascades to trigger, the raiders will go broke.


It's like, if you heard about all these butterflies that froze and fell out of the sky in Mexico recently. Two years from now, there will be twice as many butterflies, and they'll be frostproof. Or, if not, screw 'em, organic molecules will find some other structures in which to live.


You see, a person may be able to borrow money to buy a stock, and get lucky if he doesn't get a margin call for 10 years. But what he is doing - implicitly in the price he is willing and able to pay because he is borrowing - is lying to the system. His transaction doesn't tell the system, the manufacturers of stock, the venture capitalists, "I can afford stock, unless it falls below 20, then I don't want any." He is telling them, much more simply, "I can afford stock" - and then the entire economy is being steered on that basis. Price-implicit messages are simple. Speculators detect unpriced risks, and price them in.


The only problem occurs when you try to repatriate durable, or long-term assets. Because you first have to convert them to currency, which gives you a claim on a short-term good. So all you want is to have your foreign real estate priced in US dollars, and yet you are forced to find a counter-party willing to do a duration swap, meaning willing to give you the opportunity to trade your buildings for his apples, not just for other buildings.


Just because an apple costs $1.00 and an orange costs $1.00 doesn't mean you can transform one into another, not unless you have a counter-party willing to do the opposite swap. If everyone wants to do the same swap in the same direction, it takes a lot of friction to tear up orange trees in Florida, sell the land to build condos, and use teh proceeds to plant apple trees and hire pickers in Washington.


This higher cost process is called a "transformation." Swaps are unlimited until counter-parties run out. Transformations are unlimited until the universe burns out, but are costly and time-consuimg. Moreover, when you simply decide whether to buy apples or oranges on a gvien day, currency conceals from you which is taking place, a swap or a transformation.


Any currency that seems to tell you you can change fluidly from apples into oranges, or from long-duration assets into short-duration assts, is lying. This is why, when people see the prices of two things are correlated - and so they buy the cheap one when they fall out of synch, assuming they can substitute the expensive one later in an even swap - they run into trouble!


You end up with everyone stuck on the cheap side, with no way to get back, at the same time as manufacturers churn out more to meet their "demand"! And meanwhile, the expensive good is temporarily, artificially cheaper than it should be, so manufacturers don't know to make more. All speculators do is burst this bubble the second it gets big enough to show a profit, and no sooner!


http://www.twoplustwo.com/cgi-bin/ne...s.pl?read=1446


Anyway, that's all currency bands do, is tell implicit lies about the convertibility of one thing into another, when no physical process which could back up that convertibility actually exists.


eLROY

"I don't think there is any solution that makes economic sense to moderate these attacks, but give me one good legitimate reason to defend the attack of a currency."


A sound monetary policy works well.

Well that is a nice goal, truly one size does not fit all in monetary policy. Problem is the ones with most of the money (respected world-wide money) are the ones with the easiest policies around. If your country has negative natural population growth, creative minds that the world demands, and an efficient capital market structure then things are easy. If you have 2.5% population growth, creative minds that want to do nothing more than leave the country, and only a few products the world wants...well yes you have a tougher job. Currency markets try to pound countries for not staying in line with G7 monetary standards, but this is impossible. So then the only two choices are to try to comply and get kicked out of office or to take a stand and try to do things that keep you elected...and then the speculators come and pound your currency and then you promptly get kicked out of office. So you tell me Boris, which is the better choice? Currency markets would be disciplined and orderly if it weren't for the speculators, but ahhh there is no money to be made in that. This is the one area I think wild trading has a definite social and economic cost. Look what happens, speculators overrun a currency and take a lot of profits. Then the country enters great deals of poverty, with the lower level of the population (the ones that actually do all their business in local currency) hurt the most. This crisis causes calls for help which the IMF and the US gladly heed and send money. So in this unvirtuous cycle, rich speculators whose only goal is to overshoot a proper level of a currency end up making lots of money and the American taxpayer, among others, gets to foot the bill for that. Is this really sensible and orderly market-making? If I was in charge, I would make a simple change. It won't solve the problem, but it can take a lot of the steam out of these moves. I would greatly de-leverage the contracts on currency. When I trade with my currency broker, he INSISTS that I use 50:1 leverage. Every two months someone from this broker calls me up asking why I don't take them up on their offer of 200:1 leverage? I guess I must be one of their few customers that makes a profit and they want me to keep loading up, to which I refuse. A sensible way to do this is use 10:1 or 20:1 as the standard allowable leverage in a market. If someone wants more, they should be forced to go through a third party with its costs and trouble. Of course this would elicits cries of foul so I know it would never go through, but it certainly would get a lot of the speculators out and return the currency markets to a status of being a conduit of business needs, not speculative attacks.

At first glance your solution appears to be a reasonable proposal. It would reduce speculation and at the same time allow for capital flight in the face of a self serving policy maker. I think no matter what though these developing countries must allow for easy capital outflows if they want to encourage any sort of investment, foreign or domestic. The hard truth is that no matter what, the little guy will always bear the brunt of the hard times.

Huh? The reason the currency gets hammered is because they were already in "great deals" of poverty. THEY HAVE MORE CURRENCY THAN PRODUCTS! LETTING THEM TRADE THEIR CURRENCY - WHICH OFFERS A CLAIM ON MUD - FOR OUR CURRENCY - WHICH GIVES THEM A CLAIM ON OUR '67 'VETTES - IS LETTING THEM ROB US! THESE CURRENCY TRADERS ARE THE POLICEMAN ON THE BEAT, THANK GOODNESS!


Of course, countries where people borrow money and build cool stuff, like X-Boxes, have a loose policy. If these dirtbags take claims on our assets, and funnel it into alot of whores and marble mansions for the political class - and vote-buying handouts - they need to be busted out of business, together with the fly-bitten mob that puts them in power!


You're saying some politician knows the "proper" level of a currency? My goodness, you are a liberal The only way to discover the "proper" level of a currency is with incessant swarms of people who go broke if they are wrong. What is the "proper" price for anything? I thought this debate wrapped up 50 years ago, when Hayek mopped the floor with Keynes.


So far as your "solution" - well, it's so wrongheaded, I don't even know where to begin. The point of margins is not to limit...


...another time. Let's just say it would not have the pictured effect on speculators, and not the misunderstood effect on exhange rates either.


eLROY


P.S. The real underlying cause perpetuating poverty, is all these economic meddlers promising to do something about it! Hmmmm, I think if we do this, this will happen... If they really want to end poverty in their countries, and be more like us, I've got one word: COPY! For crying out loud, we've been doing this for only about 150 years, and nobody had to think it up! Anything else is just jerking around.