Reasons of change

[RedFxTrade]

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

because you are not willing to do some homework studying facts instead of developing your own theories.

I am an engineer. Facts are something or relationships that can be measured or proven absolutely, with crystal clear definitions.

Economics is not a science, it is all fuzzy.

So we read that inflation has risen by 2%. This is hard to consider a "fact", as not only there are several definitions of what inflation is, but also the measure of inflation is subject to fiddles by the government and the guys who issue the "fact". Items are swapped in and out of the basket of goods depending on some whim, and even the price of certain goods is not the real price but is adjusted by a "hedonic" factor. Or even the basic index used is completely changed, as when Brown's lot changed from the RPI to the CPI as a key measure.

So when I read about "the inflation rate is 3.9%", the only fact I can draw from that is that the government claims the inflation rate is 3.9%. But the actual inflation rate that most people are "feeling" is different and unfortunately higher.

Now look at the actual prices of stuff. I would claim that the prices of LED TV's will not be affected by a raise in the interest rate. The price is much more dependent on the manufacturing cost, which for hi-tech stuff has been going down at an incredible rate. I fully expect to see a brand new 50" 3D LED TV priced at less than 60% of today's price in twelve months. The price of rice, coffee potatoes is set on the world's market by supply and demand, with an unhealthy level of speculation on top.

And look at house price inflation, although house prices are not included in the CPI figures. In the States and the UK with historically low interest rates, prices are falling. In Australia with much higher and rising interest rates, the bubble is on. So there are other factors involved other than simply the interest rate.

I could go on.

But unless we are talking about a very simplistic economic model out of the text books, I simply do not buy into the idea that Merv, Ben and other central banks are able to "control" the rate of inflation by mechanically tweaking the interest rate level by 0.25%. There can be no direct control, there are simply too many other variables in the economy (both at the national and global level) all acting to push and pull the price of goods (which is the inflation most people think of, and not the increase in money supply).

Much more powerful is setting the expectations of the population. This is why Ben and Merv keep on mentioning that as long as the "inflation rate expectations are anchored" they are happy to go on with ZIRP and QE.

So come on then Naam, here's the challenge.....

Instead of firing off dozens of two liners all over TV everyday, how about putting together a clear description, complete with actual facts and examples of the direct relationship between a small tweak in interest rate to a change in inflation, which you appear to claim is unarguably a fact.

And I claim cannot be demonstrated or proven as a fact in a modern and real economy.

You posited some good questions 12DrinksMore...With inflation today perhaps you will need to change your username to 15 Drinksmore in keeping with inflation , all kidding aside. From reading various sources and monetary history and texts over the last few years out of a strong curiosity to try and get to some inkling of the "truth" of cause and effect I have come up with my own idea or way of looking at inflation/deflation. When I say my own ideas I m affording myself too much credit (excuse the pun)...but I mean I have read and collated other peoples writings and views and tried to make them my own as a practical way of understanding this inflation/deflation debate, and in a way that stands up practically to real life scrutiny, ie, a way that can be observed if X (cause) happens today, then Y (effect)will happen at a undermined point in the future, as there is always a lag until the new information becomes available to observe whether or Y did occur due to X if you know what I mean.

My understanding is that inflation is an increase in money and credit as marked to an asset price, and an increase in money and credit will be exhibited in those assets where the fundamentals are most the most favourable or optimal.

The first part , an increase in money and credit has an easily observable effect. An example would be if you look at the growth in mortgage debt in a country, when this is expanding, you will see an increase in house prices. The tricky part though is asking why Central banking reserves, and the endogenous nature of money and credit creation within the commercial banks should manifest itself in home loans...and why house prices should rise when money and credit is expanding rather than some other asset in the economy. Thats the part that comes down to fundamentals...There will be periods where housing as asset is under valued, or at fair value...favourable fundamentals for housing say in the US back in the early 2000s were many, that allowed the excessive money and credit to flow to this asset. When I say favourable they were not really that favourable but government initiatives and banking initiatives manufactured one, ie, interventionism led to unintended consequences.

1. This sickening speech by Bush back in May shows one of the fundamentals or catalysts of the housing bubble.

http://www.youtube.com/watch?v=kNqQx7sjoS8

2. Flat yield curve, banks and society in search for yield, came up with many more creative way in search of yield, securitisation

3. Fannie Mae and Freddie Mac, subsidisation of the entire mortgage market.

4. Tax credits, down payments paid by the government, removal of the small print on mortgages, or failure to disclose it.

5. As real estate assets began to rise then reserves increased in banks due to an increase in deposits throughout the banking system. Then more loans could be fractionalised on the new loans. Its at this point that marked to market helps to perpetuate the increasing money and credit growth. As an example, house prices are bid up 10% in a year. I sell my house to you 12Drinks more, I receive the new money from the house sale plus my 10% profit...I then place that in my bank account, and it then increases the banks reserves and acts as "collateral" to pyramid more loans from my deposit, and the process continues until prices for a while, perpetuated by sentiment and speculative activity until it becomes a bubble. Thats why when assets are marked to the market a rising asset will encourage more loan growth, as it increases reserves in commercial banks, due to people selling at ever higher prices and then depositing the new money as deposits/reserves.

6. Another factor is that governments , although they never said it, government policy seemed to be polarised between "good" and "bad" inflation. Rising house prices and stocks good inflation. Rising consumer goods and food, energy "bad Inflation"...I see them both as coming from the same source.

Today all the stimulus, money printing and credit is flowing to where the fundamentals are favourable, ie,commodities, and to some extent stocks, and emerging markets. Although one could say emerging markets are somewhat bubbles in certain areas of these economies.

[midas]

I was listening to Yingluck Shinawatra being interviewed on " Lateline " Australian

TV and she came out with this statement :-

ZOE DANIEL: Politics is a hard game, though, particularly in Thailand. Are you strong enough?

YINGLUCK SHINAWATRA: Well we play a lot of politics since long time, so I don't think Thai people will need me to just join the politics and play the politic as a daily basis. They need me to execute and solve the country, solve the problem.

Right now the problem in Thailand is we have high debt, but we don't know how to earn the new source of revenue back to Thailand. This is my job.

Can anyone here comment on what debt she is referring to? How big is it is it a serious problem ?

is this how Abhisit and Korn have been making things look so good in LOS ?

http://www.radioaustralia.net.au/connectasia/stories/201106/s3233738.htm

[midas]

I was listening to Yingluck Shinawatra being interviewed on " Lateline " Australian

TV and she came out with this statement :-

ZOE DANIEL: Politics is a hard game, though, particularly in Thailand. Are you strong enough?

YINGLUCK SHINAWATRA: Well we play a lot of politics since long time, so I don't think Thai people will need me to just join the politics and play the politic as a daily basis. They need me to execute and solve the country, solve the problem.

Right now the problem in Thailand is we have high debt, but we don't know how to earn the new source of revenue back to Thailand. This is my job.

Can anyone here comment on what debt she is referring to? How big is it is it a serious problem ?

is this how Abhisit and Korn have been making things look so good in LOS ?

http://www.radioaustralia.net.au/connectasia/stories/201106/s3233738.htm

presumably this is what Yingluck is talking about?

Digging out from under Thailand's 1997 Crisis debt

http://www.bangkokpost.com/learning/learning-from-news/206077/digging-out-from-under-thailand-1997-crisis-debt

[12DrinkMore]

I was listening to Yingluck Shinawatra being interviewed on " Lateline " Australian

TV and she came out with this statement :-

ZOE DANIEL: Politics is a hard game, though, particularly in Thailand. Are you strong enough?

YINGLUCK SHINAWATRA: Well we play a lot of politics since long time, so I don't think Thai people will need me to just join the politics and play the politic as a daily basis. They need me to execute and solve the country, solve the problem.

Right now the problem in Thailand is we have high debt, but we don't know how to earn the new source of revenue back to Thailand. This is my job.

Can anyone here comment on what debt she is referring to? How big is it is it a serious problem ?

is this how Abhisit and Korn have been making things look so good in LOS ?

http://www.radioaust...06/s3233738.htm

Maybe she is also referring to

http://www.monstersandcritics.com/news/asiapacific/news/article_1552951.php/Thaksin-s-confiscated-cash-goes-to-Thai-national-debt-repayments

The Thai government has decided to use 42 billion baht (1.3 billion dollars) confiscated from fugitive politician Thaksin Shinawatra and his family to help repay the country's public debt, media reports said Tuesday.

And there is obviously a perceived "debt" in terms of retribution against those who kicked him out of the country.

He wants it all back, with interest.

But was that interview for real?

The "transcript" was utterly inaccurate. And after listening to the windows media version, I was shocked at her level of english.

And what is this post doing here anyway? We're talking about inflation/interest rates and suddenly Taxin's sister is popped in out of nowhere.

Edited June 2, 2011 by 12DrinkMore

[toffo9]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

rising oil prices and food causes inflation and raising interest rates doesnt effect this in any country..Get it??

[RedFxTrade]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

rising oil prices and food causes inflation and raising interest rates doesnt effect this in any country..Get it??

Toffo, you don't understand what inflation is...You are not an advisor to Ben Bernanke or Merv King by any chance? ...

Your proposition that oil is going up due to scarcity is only one part of the equation...Scarcity for oil is global...so why then is oil more expensive today in GBP than USD than 3 years ago. Why is oil cheaper priced in Gold? Why is oil cheaper in Swiss Francs than GBP? Reducing interest rates is not just an arbitrary undertaking, lowering the interest rate means they have to create money to keep the rate down...so creating more of something relative to something else means higher prices. They cannot create oil with the click of a mouse the way the Bank of England can.

[Naam]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

rising oil prices and food causes inflation and raising interest rates doesnt effect this in any country..Get it??

you don't seem to get it. read again! the point discussed was not "inflation" and "effects in any country" but the correlation interest rate / exchange rate / fuel prices in UK.

[Naam]

So come on then Naam, here's the challenge.....

Instead of firing off dozens of two liners all over TV everyday, how about putting together a clear description, complete with actual facts and examples of the direct relationship between a small tweak in interest rate to a change in inflation, which you appear to claim is unarguably a fact.

sorry 12. as opposed to Red i am not an essay writer nor am i willing to waste my time doing other people's homework. that applies especially when suddenly, as a point of diversion, "a small tweak in interest rates / change in inflation" is brought up. in my [not so] humble opinion the point was not "a small tweak" but

I simply do not buy into the idea that Merv, Ben and other central banks are able to "control" the rate of inflation by mechanically tweaking the interest rate level by 0.25%

which i interpreted as multiple small tweaks. if the latter is the case then my claim still stands that you haven't done your homework. in case i misinterpreted your posting and you really meant "a" [single] small tweak than i agree with you.

[Naam]

That's right 12DrinkMore. Naam never stops to go back to first principles and work out if his "facts" are actually facts or simply religious convictions by modern day economic priests.

Naam has, as far as I can remember, never made an original post introducing and discussing something he has read outside of TV and provided a link to it.

He has committed himself to scanning over other peoples' posts and pointing out the "errors of their ways" in a two line format. This does lead to the impression that "Naam is the one that knows the facts". Not that I mind, as he occasionally exhibits a sense of humour, which is rare for a German.

But it would be nice if he could drop the occasional nugget from an external source and say why he agrees or disagrees with it, eh Naam?

Might just broaden our perspectives a bit.

external nuggets by posting a 1½ liner that includes a link to a video clip where gurus and clowns air their personal views and in many cases influences or confirms the views of people who wear blinkers? no thank you! my time is too precious to watch various chaps either explaining the roots of the spanish inquisition, the mistakes roman General Varus made battling Arminius in the Teutoburg Forest or forecasting apocalyptic scenarios which they think will happen in the future. moreover, if i'd provide links of all sources i read and listen to i'd be busy 25 hours a day.

i spend hours daily mostly to gather facts but admit that i read some markets "whispers" too. based on that i make my decisions, which might turn out to be correct or wrong, and act. my target is to be more often correct than wrong. but you will never hear me whining that i incurred losses because bad <insert name> has done bad things in the past or doing bad things presently and he/she should be <insert punishment>.

you say i sound arrogant? perhaps you are right. bottom line is that success proves my approach is [for me] the right one.

:jap:

Edited June 2, 2011 by Naam

[12DrinkMore]

as there is always a lag until the new information becomes available to observe whether or Y did occur due to X if you know what I mean.

Six months or twelve months down the line who can say with absolute certainty that a 1% rise in interest rates caused a particular effect? The immediate effect would probably, but not certainly, be a movement in the exchange rate. But after a week or two the speculators would be onto something else and the initial effect would be lost in the noise.

Certainly Merv's ZIRP paddle that he handed to the banks which had firmly lodged themselves up Shit Creek had a massive effect on the GBP exchange rate, But the effect of putting 25% on import costs did not seem to filter through into prices for quite some time. I mistakenly thought that prices would quickly ramp up.

My understanding is that inflation is an increase in money and credit as marked to an asset price, and an increase in money and credit will be exhibited in those assets where the fundamentals are most the most favourable or optimal.

Is that a roundabout way of stating that price inflation is dependent on the amount of cash chasing them? That applies to something in limited supply such as gold or shares, where there is a reasonably argument to say that market forces work to determine the price. But you could take it a bit further and ask what are the market forces? Is it real demand, or in currencies, real trade that is moving the price, or is it massive leveraged speculation by people who have no real interest in the intrinsic value of what they are dealing in?

However this is not always the case, coming out of a recession, for example, where productive capacity is not at 100%, as long as the extra demand for widgets can be met by simply ramping up production, there is no need for a price increase, even if demand doubles or trebles.

Housing is a particularly difficult asset class to put a "fair value" on. Essentially housing is not an income generating asset, and a house price has a lot of emotion in the price. Fifty years ago it was possible for one wage earner in the family to afford a decent house, thirty years ago it required two wage earners and now very few can afford to buy without the Bank of Mum&Dad coughing up a deposit and working all hours to pay off the debt or maybe not (indeed some 40% of loans issued in the UK over the last three years are now interest only!...and where the fuc_k is that heading?)

http://www.telegraph...erest-only.html

It was the total conviction that house prices would always rise and incomes always rise faster than the rate of inflation that sent the housing market ballistic. And as the housing prices are not included in the CPI Merv and Alan simply ignored them, fully expecting the self-regulating and responsible banking industry to limit the amount of credit to people who could actually afford it.

As real estate assets began to rise then reserves increased in banks due to an increase in deposits throughout the banking system. Then more loans could be fractionalised on the new loans. Its at this point that marked to market helps to perpetuate the increasing money and credit growth. As an example, house prices are bid up 10% in a year. I sell my house to you 12Drinks more, I receive the new money from the house sale plus my 10% profit...I then place that in my bank account, and it then increases the banks reserves and acts as "collateral" to pyramid more loans from my deposit, and the process continues until prices for a while, perpetuated by sentiment and speculative activity until it becomes a bubble. Thats why when assets are marked to the market a rising asset will encourage more loan growth, as it increases reserves in commercial banks, due to people selling at ever higher prices and then depositing the new money as deposits/reserves.

The banks do not require any deposits from you or me to issue credit. I used to think we had a fractional reserve banking system, but this is not the case. The UK has no reserve requirement on deposits, and the US has a massive 1% requirement. The "prudent" banks do, however, tend to keep about 3% as reserves to meet immediate demands.

The amount a bank can lend is governed by its capital ratio requirements. Any shortfall at the end of the day can be made up by either borrowing overnight from other financial institutions or simply taking a wad from Ben or Merv at their very reasonable rates of around 0.5%. So if you go to the bank and take out GBP 100,000 as a 6% loan, if the bank's reserves are out by that much the bank will simply borrow the money overnight. (Oh, anybody happen to know if there are any fixed times involved here? Like they have to get the ratios under control by say 23:00 but at 07:00 they can return all the overnight money and start a new day? Would this effectively reduce the interest rate if it was calculated by the hour or minute?)

Ah yes, good and bad inflation, I commented on that a long time ago. Strange insn't it?

As the powers have decided that we need to be fed a 2% rate of inflation, moderately rising consumer prices are also a "good" thing for the government. Why can't Merv come out straight and say that his main job is to ensure the sovereign currency is devalued by 2% per annum?

[12DrinkMore]

external nuggets by posting a 1½ liner that includes a link to a video clip where gurus and clowns air their personal views and in many cases influences or confirms the views of people who wear blinkers? no thank you! my time is too precious to watch various chaps either explaining the roots of the spanish inquisition, the mistakes roman General Varus made battling Arminius in the Teutoburg Forest or forecasting apocalyptic scenarios which they think will happen in the future. moreover, if i'd provide links of all sources i read and listen to i'd be busy 25 hours a day.

Clearly we would not expect you to post such rubbish as that. I fill that role quite adequately already.

Far from it, you should see it as a grand opportunity to remove our blinkers and open our eyes.

Come on Naam, give us just one itsy bitsy link to something original and worth reading that will shed new light on our world.

[Naam]

Come on Naam, give us just one itsy bitsy link to something original and worth reading that will shed new light on our world.Posted Image

i don't read anything that sheds new light on your and my world 12. what i read is quite old-fashioned stuff which is slightly adjusted because of "2008". for most of it i can't provide any links because it's exchange of information and views within a closely knit group of investors or it's information not meant to be published.

besides, what is of interest to me would be either rejected by most participants or the background to understand the lingo is missing. there's only a fistful of participants in this thread who would understand but i realised they all follow their individual and obviously successful approach to investing and are not at all interested in mine. sorry to disappoint you.

[RedFxTrade]

Come on Naam, give us just one itsy bitsy link to something original and worth reading that will shed new light on our world.Posted Image

i don't read anything that sheds new light on your and my world 12. what i read is quite old-fashioned stuff which is slightly adjusted because of "2008". for most of it i can't provide any links because it's exchange of information and views within a closely knit group of investors or it's information not meant to be published.

besides, what is of interest to me would be either rejected by most participants or the background to understand the lingo is missing. there's only a fistful of participants in this thread who would understand but i realised they all follow their individual and obviously successful approach to investing and are not at all interested in mine. sorry to disappoint you.

I think that is what is important. Basically, I see forums as an open place to put your point across, exchange views etc etc. I m neither asking anyone to accept anything I say, and I m sure no one else is asking me to accept their view also. I m just put it out there and if people agree or disagree it does not matter, as everyone has their own paths.

And apart from stimulating an intellectual debate on these issues, there is no need to try and win any intellectual arguments. Think on it like this...The very existence of prices and markets, and pricing signals is only possible through disagreement. If there was no disagreement there would be no markets. Prices, markets, assets are undergoing a constant flow of momentary dances between agreement and disagreement, buying and selling.

In the end it is good to have a debate on a forum, I find it enjoyable from time to time, I m at my computer alot at the minute so it fills time while writing helps to cement your own ideas. However, the real intellectual battle is against the the actual market, not a few people on a forum. If you can make some money or make a living from what you do, or enough that makes you happy, then you are proof that you are winning the intellectual battle with the market, not a few individuals. Thats the way I see it...it does matter one iota who agrees or likes what you say on a forum, unless they are going to pay you .....Trust your arguments, and intellectual reasonings by dipping them into the market(s)of choice that way you will find out if your arguments are right, with actual numbers...not with actual peoples views...

I don't know if anyone has read the Market Wizards series. Excellent interviews with successful traders...what struck me was that they were all very successful in their own right but all very different ways. One great investor saying charting is like astrology, while another has made millions from charts...there is more than one way to skin a cat...

P.S Alert we have an illiquid market. Naam and Red are in agreement,

[Naam]

I don't know if anyone has read the Market Wizards series. Excellent interviews with successful traders...what struck me was that they were all very successful in their own right but all very different ways. One great investor saying charting is like astrology, while another has made millions from charts... there is more than one way to skin a cat...

BINGO! that's exactly the message i am trying to convey and what i experience since years.

[12DrinkMore]

Come on Naam, give us just one itsy bitsy link to something original and worth reading that will shed new light on our world.Posted Image

i don't read anything that sheds new light on your and my world 12. what i read is quite old-fashioned stuff which is slightly adjusted because of "2008". for most of it i can't provide any links because it's exchange of information and views within a closely knit group of investors or it's information not meant to be published.

besides, what is of interest to me would be either rejected by most participants or the background to understand the lingo is missing. there's only a fistful of participants in this thread who would understand but i realised they all follow their individual and obviously successful approach to investing and are not at all interested in mine. sorry to disappoint you.

I am never disappointed when my expectations have been met