Showing posts with label Investment. Show all posts
Showing posts with label Investment. Show all posts
Saturday, December 17, 2011
Saturday, December 3, 2011
Saturday, August 28, 2010
Accumulation of Capital and Knowledge
Accumulation of Capital and Knowledge
by Alex Merced
While I've discussed capital accumulation a couple of times before I though I'd re-explain this concept and it's implications again since it's so pivotal in understanding many of todays fundamental political questions such as...
Why do the rich grow wealthier at a faster rate than the none rich, why do the smarter get smarter faster than the none-smart?
Capital Accumulation
The basic premise is this, every input creates output, so the more inputs I have the more output I can create. While innovation and new technology will help magnify the effect of this process let's suspend disbelief and that technology is no longer progressing forward how can a society still become more prosperous?
Example:
Smith has $100 with which he can buy a machine that he can create enough goods that he'll generate $20 each week when bringing those goods to the market. So in 5 weeks he'll have recovered his cost and buy another of the same machine and begin to generate $40 and now it'll only 2 1/2 weeks before another machine can be bought.
So even though the machines weren't getting any better or efficient, accumulating the capital of this machinery allowed Smith to generate more wealth in a smaller period of time. It's this process that explains why people with more capital, or "rich" people may be able to accumulate more wealth at faster rates. Those who aren't rich are either earlier in this process of wealth accumulation if they are making these investments, or may be stuck in their circumstances due to lack of investment spending, because they chose to consume instead.
If smith instead bought $100 worth of apples and ate or consumed them, the end results is that smith has nothing left. So consumption in itself does not create more for smith, he must make an investment in order to ensure he can continue his consumption habits. In this case he could save $50 worth of the apples for later or sell them for $100 (assuming he can find a buyer) and consume the other $50.
Notice the difference...
In the first scenario Smith consumed $100 of apples and now has nothing
While in the second scenario Smith consumed $50 of apples and invested/saved the other $50 of Apples is still left with $100 in the end even after consuming $50 meaning a total of $150 of wealth existed for Smith throughout this scenario.
(NOTE: It's with this realization that one should look very suspect at statistics like Gross Domestic Product which assume the creation of value for Consumption spending is the same as Investment Spending, and that all Government spending is equally valuable whether it's on investment or consumption since it only measures the dollars committed not the dollars returned from expenditures. In either of the above examples the GDP of smith would be $100 yet it's obvious he was better off in one example over the other.)
(NOTE 2: The Reason GDP would only be $100 for Smith personally either way cause the only purchase he made was the $100 of apples, and GDP ignored the $100 returned from selling half his apples until he spends it. So GDP is always ignoring return of expenditures, which is this example are vastly different.)
Knowledge Accumulation
Now if your reading this it's safe to assume your interested in accumulating knowledge, and knowledge accumulation works very similar to that of the example above.
For example, when you were a child in Kindergarten or First Grade you were learning the basics of communication such as the alphabet and how to read, and it takes long time develop those basic skills. Yet, as you get older and you master these fundamental pieces of knowledge your able to attain other pieces of knowledge at greater rates in smaller time frames, or else no child would be able to handle the difference in workload from 1st grade to college. The more you participate in this process the faster and great it becomes. The smart get smarter faster cause they've invested more in previous knowledge to attain future knowledge in the same way smith had invested more in previous capital to purchase future capital.
Conclusion
Many find this magnification of wealth growth to be a sign of inequity, although it's actually the result of the process that creates prosperity, knowledge and wisdom. To demonize capital accumulation and say capital must be taken from the rich and given to the poor is like saying we must take knowledge from a genius and give it to someone who may be referred to as "stupid". We should not fault those who are later in the process of capital accumulation for other being in the early stages of it, their participation in this process does not prevent other from participating in it.
Also, it's this process that separates developed countries from underdeveloped countries. It's not that technological innovations and practices are kept secret from these developing nations, but they are earlier in the stages of capital accumulation making growth seem slower relative to countries further along in the process. Yet if countries further along in this process take it for granted and consume all the fruits of these investments they may find themselves falling behind quite quick.
by Alex Merced
While I've discussed capital accumulation a couple of times before I though I'd re-explain this concept and it's implications again since it's so pivotal in understanding many of todays fundamental political questions such as...
Why do the rich grow wealthier at a faster rate than the none rich, why do the smarter get smarter faster than the none-smart?
Capital Accumulation
The basic premise is this, every input creates output, so the more inputs I have the more output I can create. While innovation and new technology will help magnify the effect of this process let's suspend disbelief and that technology is no longer progressing forward how can a society still become more prosperous?
Example:
Smith has $100 with which he can buy a machine that he can create enough goods that he'll generate $20 each week when bringing those goods to the market. So in 5 weeks he'll have recovered his cost and buy another of the same machine and begin to generate $40 and now it'll only 2 1/2 weeks before another machine can be bought.
So even though the machines weren't getting any better or efficient, accumulating the capital of this machinery allowed Smith to generate more wealth in a smaller period of time. It's this process that explains why people with more capital, or "rich" people may be able to accumulate more wealth at faster rates. Those who aren't rich are either earlier in this process of wealth accumulation if they are making these investments, or may be stuck in their circumstances due to lack of investment spending, because they chose to consume instead.
If smith instead bought $100 worth of apples and ate or consumed them, the end results is that smith has nothing left. So consumption in itself does not create more for smith, he must make an investment in order to ensure he can continue his consumption habits. In this case he could save $50 worth of the apples for later or sell them for $100 (assuming he can find a buyer) and consume the other $50.
Notice the difference...
In the first scenario Smith consumed $100 of apples and now has nothing
While in the second scenario Smith consumed $50 of apples and invested/saved the other $50 of Apples is still left with $100 in the end even after consuming $50 meaning a total of $150 of wealth existed for Smith throughout this scenario.
(NOTE: It's with this realization that one should look very suspect at statistics like Gross Domestic Product which assume the creation of value for Consumption spending is the same as Investment Spending, and that all Government spending is equally valuable whether it's on investment or consumption since it only measures the dollars committed not the dollars returned from expenditures. In either of the above examples the GDP of smith would be $100 yet it's obvious he was better off in one example over the other.)
(NOTE 2: The Reason GDP would only be $100 for Smith personally either way cause the only purchase he made was the $100 of apples, and GDP ignored the $100 returned from selling half his apples until he spends it. So GDP is always ignoring return of expenditures, which is this example are vastly different.)
Knowledge Accumulation
Now if your reading this it's safe to assume your interested in accumulating knowledge, and knowledge accumulation works very similar to that of the example above.
For example, when you were a child in Kindergarten or First Grade you were learning the basics of communication such as the alphabet and how to read, and it takes long time develop those basic skills. Yet, as you get older and you master these fundamental pieces of knowledge your able to attain other pieces of knowledge at greater rates in smaller time frames, or else no child would be able to handle the difference in workload from 1st grade to college. The more you participate in this process the faster and great it becomes. The smart get smarter faster cause they've invested more in previous knowledge to attain future knowledge in the same way smith had invested more in previous capital to purchase future capital.
Conclusion
Many find this magnification of wealth growth to be a sign of inequity, although it's actually the result of the process that creates prosperity, knowledge and wisdom. To demonize capital accumulation and say capital must be taken from the rich and given to the poor is like saying we must take knowledge from a genius and give it to someone who may be referred to as "stupid". We should not fault those who are later in the process of capital accumulation for other being in the early stages of it, their participation in this process does not prevent other from participating in it.
Also, it's this process that separates developed countries from underdeveloped countries. It's not that technological innovations and practices are kept secret from these developing nations, but they are earlier in the stages of capital accumulation making growth seem slower relative to countries further along in the process. Yet if countries further along in this process take it for granted and consume all the fruits of these investments they may find themselves falling behind quite quick.
Sunday, June 6, 2010
Intro to Economics: Youtube Playlist
I've created a series of videos to learn basic Economic concepts in the Austrian Tradition, check them out right here:
Intro to Economics Playlist
Alex
Intro to Economics Playlist
Alex
Saturday, May 8, 2010
Liquidity: The Destructor of Economies and Liberty
Liquidity: The Destructor of Economies and Liberty
by Alex Merced
I always believed and still believe that innovations that make our day to day tasks simpler and easier is the key to raising the standard of life. Although, in making investment more convenient we have sown the seeds of our own destruction. The primary deterrent to anyone saving or investing capital has always been liability, the risk that the bank may go under, or that they won't be able to get out of their investment in a good time at a good value. In trying to accommodate to this fear we have focused on created several institutions to separate these liabilities from investment. Although, when separating liability from those who rightfully should own that liability you distort the economic calculation between risk and reward which will always yield unintended consequences.
Through different legal structures and mandatory insurance programs people became more and more willing to invest their capital, but they also became less concerned with what they were investing it, and with who. On top of this through trading markets and derivatives we made it possible for investors to get their return on their investments in short and shorter a period of time, creating more demand for investment.
Due to these "innovations" the time horizon for investors became less and less as "liquidity" increased. Is there any inherent problems with these innovations? Trading Markets and Derivative products in themselves were great innovations, yet the underlying separation between ownership of enterprise and liability caused by the underlying corporate structure caused a level of moral hazard that was heightened by the amount of liquidity provided to any investment. The check's a balances built into structures like a Limited Partnership were gone, and along with it much of the prudence and calculation that makes investment and it's benefits sustainable.
You couple this with the fraud of fractional reserve banking, and the leverage it allows, the end result you have is self-destructing economic whirlwind. As an economy is destroyed, liberty dissipates with it as people begin to look and blame each other for the lack of resources.
The answer to all this is a sound belief in ownership of property, and the liability that should come with it or else in a world without this basic principle, Liquidity will eventually be the catalyst of the economies destruction.
by Alex Merced
I always believed and still believe that innovations that make our day to day tasks simpler and easier is the key to raising the standard of life. Although, in making investment more convenient we have sown the seeds of our own destruction. The primary deterrent to anyone saving or investing capital has always been liability, the risk that the bank may go under, or that they won't be able to get out of their investment in a good time at a good value. In trying to accommodate to this fear we have focused on created several institutions to separate these liabilities from investment. Although, when separating liability from those who rightfully should own that liability you distort the economic calculation between risk and reward which will always yield unintended consequences.
Through different legal structures and mandatory insurance programs people became more and more willing to invest their capital, but they also became less concerned with what they were investing it, and with who. On top of this through trading markets and derivatives we made it possible for investors to get their return on their investments in short and shorter a period of time, creating more demand for investment.
Due to these "innovations" the time horizon for investors became less and less as "liquidity" increased. Is there any inherent problems with these innovations? Trading Markets and Derivative products in themselves were great innovations, yet the underlying separation between ownership of enterprise and liability caused by the underlying corporate structure caused a level of moral hazard that was heightened by the amount of liquidity provided to any investment. The check's a balances built into structures like a Limited Partnership were gone, and along with it much of the prudence and calculation that makes investment and it's benefits sustainable.
You couple this with the fraud of fractional reserve banking, and the leverage it allows, the end result you have is self-destructing economic whirlwind. As an economy is destroyed, liberty dissipates with it as people begin to look and blame each other for the lack of resources.
The answer to all this is a sound belief in ownership of property, and the liability that should come with it or else in a world without this basic principle, Liquidity will eventually be the catalyst of the economies destruction.
Sunday, April 25, 2010
Does Wall Street Contribute to the Economy?
Does Wall Street Contribute to the Economy?
by Alex Merced
One of the complaints I keep hearing about is that Wall Street doesn't contribute anything to the economy. Well, Wall Street, which is just a moniker for the "Finance" industry has done a great job of facilitating it's function in the economy. The function of the finance industry to facilitate financing (lending and investment), and the only way it does this is not only by creating and selling securities as the detractors would like to believe. Derrivatives, Prorietary Trading, and all the other fun politically unpopular stuff that Wall Street does helps create liquidity and demand. If these securities arn't liquid (which really just means has lots of demand), then it makes it hard to sell new securities for new companies cause the amount of investors becomes less. So yes these trading markets where firms and investors make money for themselves do serve this financing function, but does that mean everything is working as it should... no.
Risk and Reward help dictate how investors align their capital over time, and we have seen that investors, company executives, and everyone has seen their time horizons shrink demanding profits and returns on their investments quicker than ever before. When peoples time horizons shrink, more risk must be taken to achieve their goals in this time horizon, so one must study how culturally time horizons have shrank. Here are many factors I would consider:
1) The advent of C Corporations seperated those with Capital at Risk from those making the business decisions. Even in a Limited Partnership the General Partner who ran the business had to at least have %1 stake in the venture but now in a C Corporation the CEO is beholden to shareholders who are looking for short term gains since their securities can easily be sold at a moments notice. In a limited partnership, Limited Partners with Limited Liability can't just sell their shares on the fly so they have a stake in long term stability of the company and invest based on long term outlook instead of short term price fluctuations. C Corporations truly separated the liabilities of failure and liquidity from investors and executives and allowed them to operate in a short term gain framework.
2) Growing Government with low interest rate policies have put inflationary pressures on the returns needed by investors, plus the taxation that comes later on from these policies. So just to preserve the purchasing power they currently had investors had to make more gains faster, and of course Broker/Dealers are going to facilitate finding a way to do so.
So we need to return to free market values with realistic time horizons, but as long as we seperate liability from capital via legal institutions like the C Coporation (SIPC, FDIC, and the Federal Reserve don't help either), and tolerate growing government in distorting economic calculation to finance it's operations the Finance Industry won't have the capacity to return functioning in a sustainable manner, and no amount of regulation can make up for natural risk and reward.
by Alex Merced
One of the complaints I keep hearing about is that Wall Street doesn't contribute anything to the economy. Well, Wall Street, which is just a moniker for the "Finance" industry has done a great job of facilitating it's function in the economy. The function of the finance industry to facilitate financing (lending and investment), and the only way it does this is not only by creating and selling securities as the detractors would like to believe. Derrivatives, Prorietary Trading, and all the other fun politically unpopular stuff that Wall Street does helps create liquidity and demand. If these securities arn't liquid (which really just means has lots of demand), then it makes it hard to sell new securities for new companies cause the amount of investors becomes less. So yes these trading markets where firms and investors make money for themselves do serve this financing function, but does that mean everything is working as it should... no.
Risk and Reward help dictate how investors align their capital over time, and we have seen that investors, company executives, and everyone has seen their time horizons shrink demanding profits and returns on their investments quicker than ever before. When peoples time horizons shrink, more risk must be taken to achieve their goals in this time horizon, so one must study how culturally time horizons have shrank. Here are many factors I would consider:
1) The advent of C Corporations seperated those with Capital at Risk from those making the business decisions. Even in a Limited Partnership the General Partner who ran the business had to at least have %1 stake in the venture but now in a C Corporation the CEO is beholden to shareholders who are looking for short term gains since their securities can easily be sold at a moments notice. In a limited partnership, Limited Partners with Limited Liability can't just sell their shares on the fly so they have a stake in long term stability of the company and invest based on long term outlook instead of short term price fluctuations. C Corporations truly separated the liabilities of failure and liquidity from investors and executives and allowed them to operate in a short term gain framework.
2) Growing Government with low interest rate policies have put inflationary pressures on the returns needed by investors, plus the taxation that comes later on from these policies. So just to preserve the purchasing power they currently had investors had to make more gains faster, and of course Broker/Dealers are going to facilitate finding a way to do so.
So we need to return to free market values with realistic time horizons, but as long as we seperate liability from capital via legal institutions like the C Coporation (SIPC, FDIC, and the Federal Reserve don't help either), and tolerate growing government in distorting economic calculation to finance it's operations the Finance Industry won't have the capacity to return functioning in a sustainable manner, and no amount of regulation can make up for natural risk and reward.
Saturday, April 24, 2010
Individualism, Creativity, and Innovation
Individualism, Creativity, and Innovation
by Alex Merced
Premise 1: That creativity comes from tapping into your inner child
Kids say the darndest things don't they? It's this innocent nature that we admire in kids, when they are young before society begins socializing, limits, values, artificial barriers in their minds. Even then, during their adolescents they typically rebel against many of these constructs until one day the fight becomes to much and "they grow up". It's when one loses the ability to think beyond the barriers given to you that creativity dissapears and only your ability to see what is seeable is there, and you lose the ability to see what is not there.
Think of all the people you consider creative, arn't they generally playful and childlike and then think of all the frumpy people you consider an "adult" and put their creativity into perspective. So in economics the idea of seeing the unseen is called "opportunity cost", the unseen costs of every action you take. To be able to appreciate opportunity cost you must have this childlike nature to see beyond the barriers given by society, you must be creative.
This is why I feel I see such a stark difference from when I see Austrian economist who are generally very light-hearted and humorous versus Keynesians who are usually more cynical and serious. Yet, it's the Austrians who are more equipped to see the unseen opportunity costs, and realize what could have been to look to the future to see what could be. Keyensians, on the other hand focus on only known results to draw conclusions, and only draw self-destructing solutions based on actions that have "visible" results even if the results don't accomplish anything.
(For example, deficit spending has the visible result of increasing GDP but it doesn't fundamentally fix the real, unseen problem of diverting capital).
Another place I noticed this was on a recent interview with Ron Paul on Hardball where the serious and cynical Chris Matthew interviews the optimistic and light-hearted Ron Paul and discusses how Paul remind Matthews of his childhood hero, Barry Goldwater, but then he grew up. This was a sad and depressing statement that shows that at some point he gave in to the barriers that society imposes and became an "adult", while Ron Paul was able to this day in his 70's retain that childlike innocense that allows children to see things for what they are not how society wants them to be.
Do an experiment, give the facts to a child on a issue, and ask for their response.
Premise # 2: Collectivism kills Creativity, while Individualism births it
Creativity must come from an individual with little barriers of the mind as possible, although to think in groups and collectives as done in a collectivist framework would mean imposing more barriers in order define yourself into this "Collective". To see why this would be the case watch this video on the difference between Individualism and Collectivism:
Premise # 3: Innovation comes from Creativity
Innovation results from finding news way to do the same things, which will results in needing less time and resources to survive and spend more time on leisure and personal interests which is a true increase in the standard of life which can be numerically measured. Although innovation requires two things:
1) Investment: These Innovations require capital to develop and distribute, without investment there is no way to develop the most useful innovations.
2) Creativity: You can have all the capital for investment but if there is no ideas to invest in, it's useless, so you need creative people to see the unknown whcih can be developed.
So creativity is pivotal in the process of Innovation, so creating a individualist framework for inviduals to grow up with actually would increase the rate of Innovation and increase the quality of life of these individuals who use these innovations.
Premise # 4: Government Destroys Innovation
Government with it's coercive monopoly on violence accomplishes two things that destroy innovation:
1) They destroy investment through taxation and borrowing which puts incredible constraints on the available investment capital.
2) They destroy creativity by imposing values of the ruling class on society, and creating standards that only impose even more barriers of the mind.
Without creativity and invesment, innovation can occur and this only hurts individuals in their pursuit to impove their individual lives.
by Alex Merced
Premise 1: That creativity comes from tapping into your inner child
Kids say the darndest things don't they? It's this innocent nature that we admire in kids, when they are young before society begins socializing, limits, values, artificial barriers in their minds. Even then, during their adolescents they typically rebel against many of these constructs until one day the fight becomes to much and "they grow up". It's when one loses the ability to think beyond the barriers given to you that creativity dissapears and only your ability to see what is seeable is there, and you lose the ability to see what is not there.
Think of all the people you consider creative, arn't they generally playful and childlike and then think of all the frumpy people you consider an "adult" and put their creativity into perspective. So in economics the idea of seeing the unseen is called "opportunity cost", the unseen costs of every action you take. To be able to appreciate opportunity cost you must have this childlike nature to see beyond the barriers given by society, you must be creative.
This is why I feel I see such a stark difference from when I see Austrian economist who are generally very light-hearted and humorous versus Keynesians who are usually more cynical and serious. Yet, it's the Austrians who are more equipped to see the unseen opportunity costs, and realize what could have been to look to the future to see what could be. Keyensians, on the other hand focus on only known results to draw conclusions, and only draw self-destructing solutions based on actions that have "visible" results even if the results don't accomplish anything.
(For example, deficit spending has the visible result of increasing GDP but it doesn't fundamentally fix the real, unseen problem of diverting capital).
Another place I noticed this was on a recent interview with Ron Paul on Hardball where the serious and cynical Chris Matthew interviews the optimistic and light-hearted Ron Paul and discusses how Paul remind Matthews of his childhood hero, Barry Goldwater, but then he grew up. This was a sad and depressing statement that shows that at some point he gave in to the barriers that society imposes and became an "adult", while Ron Paul was able to this day in his 70's retain that childlike innocense that allows children to see things for what they are not how society wants them to be.
Do an experiment, give the facts to a child on a issue, and ask for their response.
Premise # 2: Collectivism kills Creativity, while Individualism births it
Creativity must come from an individual with little barriers of the mind as possible, although to think in groups and collectives as done in a collectivist framework would mean imposing more barriers in order define yourself into this "Collective". To see why this would be the case watch this video on the difference between Individualism and Collectivism:
Premise # 3: Innovation comes from Creativity
Innovation results from finding news way to do the same things, which will results in needing less time and resources to survive and spend more time on leisure and personal interests which is a true increase in the standard of life which can be numerically measured. Although innovation requires two things:
1) Investment: These Innovations require capital to develop and distribute, without investment there is no way to develop the most useful innovations.
2) Creativity: You can have all the capital for investment but if there is no ideas to invest in, it's useless, so you need creative people to see the unknown whcih can be developed.
So creativity is pivotal in the process of Innovation, so creating a individualist framework for inviduals to grow up with actually would increase the rate of Innovation and increase the quality of life of these individuals who use these innovations.
Premise # 4: Government Destroys Innovation
Government with it's coercive monopoly on violence accomplishes two things that destroy innovation:
1) They destroy investment through taxation and borrowing which puts incredible constraints on the available investment capital.
2) They destroy creativity by imposing values of the ruling class on society, and creating standards that only impose even more barriers of the mind.
Without creativity and invesment, innovation can occur and this only hurts individuals in their pursuit to impove their individual lives.
Tuesday, April 6, 2010
Treasuries, Investment, Interest Rates, and Risk
Treasuries, Investment, Interest Rates, and Risk
by Alex Merced
In todays world investment revolves around US Treasury debt cause it's AAA rating. Since the return yielded from treasuries is considered the "risk free" rate of return it establishes the minimum return someone should make from their investments. So since this interest plays sucha pivotal role in the investment decision and risk taking learning a little bit about how it works would be pretty important to understanding excessive risk taking by the banking system.
What is Treasury Debt?
We believe that it's taxes that pay for military, medicare, and all the other government services and programs we may approve or dissaprove of. In Reality, tax revenues are not enough to pay for the growing role of government and the public sector so money must be borrowed via bonds known as treasuries. As any debtor would, the government wants to pay the lowest rate possible so they have an auction for the debt similar to lendingtree in which the largest banks in the world known as primary dealers (for Primary Dealers include Lehman, Bear Sterns, Merrill, etc.) bid on the debt in order for debtor to get the lowest interest rate possible.
What is with all the demand for treasuries?
Now why would banks bid treasuries to near below inflation/CPI levels when they could use that capital for other higher yielding investments? In order for this to be the case there must be some mechanism to stimulate the demand of these banks very similar to what happened in the housing crisis...
Why did lenders make so many bad mortgages, cause they didn't have to hold the loans they could just turn around and sell it to Fannie or Freddie so this created artificial demand for mortgage debt pushing lending rates low. A similar mechanism is used with treasuries since these treasuries can be used in a variety of ways in dealing with the central bank, the federal reserve.
The central banks primary role in this is to keep fueling the demand for treasuries by entering in repurchasing agreements with these primary dealers. In these agreement the central bank promises to buy back these treasuries and to do so the central bank must expand the money supply (inflation). Also, these primary dealers can use these treasuries as collateral for loans from the discount window in order to get emergency funds when these banks overlend or practice bad banking. Essentially, in exchange for facilitating the financing of government operations the banking system are given their own life support system in the form of the federal reserve bank.
So as government increases it's deficits need the demand of treasuries to increase meaning more pressure on the federal reserve to buy these treasuries from the bank with new money (aka monetizing the debt). So as the federal reserve inflates the money supply to facilitate government spending the increase reserves of these bank effectivly lowers lending rates sending a flase signal to the economy of non-existant savings causing the mal-investment charachterized in the austrian theory of the business cycle.
The effects of all this on investment and risk taking
At the same time, this inflation of the money supply will put upward pressure on price levels which increases the neccessary return from investment needed to maintain purchasing power. Also the increasing government debt puts upward pressure on taxes which means even more must be yielded from investment to make up for the tax burden. So effectively, when you combine the burden of inflation and taxes the return needed to make any profit is so high that modest medium risk investing just doesn't yield enough putting pressure on investors and investment institutions to have to take on risker investments to just walk away with anything at all.
Moral of the story:
- Inflation and Taxation only stimulates risk taking and distorts economic calculation of investors
- Inflation and Taxation are a product of growing government spending
- In order to maintain this Government Spending a strong relationship between Government and Banking must be established
- To be truly against bank bailouts and for main street you must be against the central bank and runaway spending which creates the moral hazard that strips the nation of their savings and retirement
- To believe in government entitlement programs you must be for the bank bailouts, cause without the bailout government cannot continue it's funding of programs like medicare and social security
- Money lent to the growing public sector is money not lent to the private sector, so as one grows the other must shrink along with the countries productive capacity increasing the burden over time as more and more people find themselves pushed out of an economy that can support less and less people everyday.
by Alex Merced
In todays world investment revolves around US Treasury debt cause it's AAA rating. Since the return yielded from treasuries is considered the "risk free" rate of return it establishes the minimum return someone should make from their investments. So since this interest plays sucha pivotal role in the investment decision and risk taking learning a little bit about how it works would be pretty important to understanding excessive risk taking by the banking system.
What is Treasury Debt?
We believe that it's taxes that pay for military, medicare, and all the other government services and programs we may approve or dissaprove of. In Reality, tax revenues are not enough to pay for the growing role of government and the public sector so money must be borrowed via bonds known as treasuries. As any debtor would, the government wants to pay the lowest rate possible so they have an auction for the debt similar to lendingtree in which the largest banks in the world known as primary dealers (for Primary Dealers include Lehman, Bear Sterns, Merrill, etc.) bid on the debt in order for debtor to get the lowest interest rate possible.
What is with all the demand for treasuries?
Now why would banks bid treasuries to near below inflation/CPI levels when they could use that capital for other higher yielding investments? In order for this to be the case there must be some mechanism to stimulate the demand of these banks very similar to what happened in the housing crisis...
Why did lenders make so many bad mortgages, cause they didn't have to hold the loans they could just turn around and sell it to Fannie or Freddie so this created artificial demand for mortgage debt pushing lending rates low. A similar mechanism is used with treasuries since these treasuries can be used in a variety of ways in dealing with the central bank, the federal reserve.
The central banks primary role in this is to keep fueling the demand for treasuries by entering in repurchasing agreements with these primary dealers. In these agreement the central bank promises to buy back these treasuries and to do so the central bank must expand the money supply (inflation). Also, these primary dealers can use these treasuries as collateral for loans from the discount window in order to get emergency funds when these banks overlend or practice bad banking. Essentially, in exchange for facilitating the financing of government operations the banking system are given their own life support system in the form of the federal reserve bank.
So as government increases it's deficits need the demand of treasuries to increase meaning more pressure on the federal reserve to buy these treasuries from the bank with new money (aka monetizing the debt). So as the federal reserve inflates the money supply to facilitate government spending the increase reserves of these bank effectivly lowers lending rates sending a flase signal to the economy of non-existant savings causing the mal-investment charachterized in the austrian theory of the business cycle.
The effects of all this on investment and risk taking
At the same time, this inflation of the money supply will put upward pressure on price levels which increases the neccessary return from investment needed to maintain purchasing power. Also the increasing government debt puts upward pressure on taxes which means even more must be yielded from investment to make up for the tax burden. So effectively, when you combine the burden of inflation and taxes the return needed to make any profit is so high that modest medium risk investing just doesn't yield enough putting pressure on investors and investment institutions to have to take on risker investments to just walk away with anything at all.
Moral of the story:
- Inflation and Taxation only stimulates risk taking and distorts economic calculation of investors
- Inflation and Taxation are a product of growing government spending
- In order to maintain this Government Spending a strong relationship between Government and Banking must be established
- To be truly against bank bailouts and for main street you must be against the central bank and runaway spending which creates the moral hazard that strips the nation of their savings and retirement
- To believe in government entitlement programs you must be for the bank bailouts, cause without the bailout government cannot continue it's funding of programs like medicare and social security
- Money lent to the growing public sector is money not lent to the private sector, so as one grows the other must shrink along with the countries productive capacity increasing the burden over time as more and more people find themselves pushed out of an economy that can support less and less people everyday.
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