This kind of thing always confuses me. I mean, where does the money go? Does everyone just pull out and stick it under their mattress? Are they going to leave it there?
It isn't "money" it's "value." Theoretically, one share of Ford stock was worth $14 on Friday. If you had one share of Ford stock, odds are spectacular that someone would have given you at least $13.95 in exchange for that one share of stock. There's a lot of Ford stock and a lot of people want to own it. That doesn't mean your share of Ford stock is magically convertible to $14 - someone needs to trade cash for it. Then China dropped 8% one fine Sunday night and now all the people who wanted to buy your stock for $13.95 are a lot more interested in keeping their cash in their pockets because they're afraid of the future. They'll still buy your Ford stock, but at a discount because people would rather have something other than Ford stock. So if you want to turn your Ford stock into cash, expect to get $12.95 or so. Other than that brief shining moment when it was trading at $11.36, anyway. Here's the thing - it was never money. It was only ever the perception of money, which only becomes real money when you try to pull it out. Markets are like Schroedinger's Box - once you put money in them, it's neither alive nor dead but in a state of quantum superposition where everyone argues about it without really knowing until you open the box. So whenever you see pundits talking about "trillions of dollars lost" recognize that they're talking about weird shit going on inside the box, not anything of actual value being destroyed. The thing that blows my mind is that people's opinions on the box matter far more than the cash in or the cash out. That's the stock market: it doesn't matter what actually happens. Oh, sure, people pay lip service to "fundamentals" but those are boring and nobody really cares. People aren't hyping the shit out of SnapChat because they think it's worth something, they're hyping the shit out of SnapChat because they think they can convince someone else it's worth something. Here's the reality of the situation: an 8% drop in Shanghai is an aggregate opinion of everyone who trades in Shanghai that everything they own is actually worth 8% less than they thought it was worth on Friday. A bull market is literally a bunch of MBA jackholes sitting around thinking they're all that. And they all have opinions, and they all want you to know that everything you know is wrong, and your economy is their hostage, and that's why people hate capitalism.
That sounds like a system where people who don't hate it are deeply involved in it or don't understand it. I heard quantitative easing is driving wealth inequality. Is that true and can you explain how it's doing so? I think I have a bare understanding of it but I'd like to see it explained straightaway
Deeply involved or don't understand it sounds about right. I have a really foggy idea what "arbitraging leveraged equity derivatives" means. Jerome Kerviel? Lost $6.8 billion of Societe Generale's money doing it. So you know how in the land of Econ 101 if you want people to borrow money, you lower the interest rate? And how if you want people to stop borrowing money, you raise the interest rate? Some teacher or pundit somewhere probably told you this is what central banks do. Unfortunately, you don't lower the interest rate lower than zero or shit gets spooky. Economists can't really agree on what flavor of spooky it is, but they all agree they'd rather not. But you still want people to borrow money. You still want to increase lending because lending greases the economy and when the economy ain't greased, it seizes up. Since you can't drop the rate below zero, you have to do weird shit, like buy things from the banks. Literally notes on shit. Like, houses and boats and shit. This can be viewed as driving wealth inequality because it's the government going "Hey, Jamie Dimon - I know you're evil as fuck and you totally flew your bank into the ground. As a reward, how about I offer to buy a shit-ton of your troubled assets so that you still have money to lend?" The argument against buying assets and securities from JP Morgan-Chase is that they're evil vampire squids that drove millions out of their homes and why the fuck are we rewarding such predatory behavior? Why don't we just give the stimulus to the citizens? The argument for buying assets and securities from JP Morgan-Chase is that they're evil vampire squids that will shove that money right the fuck back into circulation where it will actually grease the economy, unlike Ma and Pa Carpetbagger who are going to use it to drive down their debts and freeze the economy up as tight as a drum. Simply put? Yes. It creates wealth inequality through stimulating the wealthy. The alternative is creating wealth equality through wealth destruction and while that would be a lot more "fair" it would also probably be a lot more dystopian.
I don't know much about how money works, but this sounds interesting. Could you elaborate?The argument for buying assets and securities from JP Morgan-Chase is that they're evil vampire squids that will shove that money right the fuck back into circulation where it will actually grease the economy, unlike Ma and Pa Carpetbagger who are going to use it to drive down their debts and freeze the economy up as tight as a drum.
Simply put? Yes. It creates wealth inequality through stimulating the wealthy. The alternative is creating wealth equality through wealth destruction and while that would be a lot more "fair" it would also probably be a lot more dystopian.
Okay. There's a great movie, though, called "Money as Debt" which is definitely biased, definitely simplistic, definitely anti-establishment and a pretty good watch: So money doesn't do anything unless it's moving. Money in the bank? Useless to the economy. DEAD. Money under your mattress, money in your wallet, money in your sock drawer, might as well not be money. The only time money is useful is when it's being used in transactions. Money is so useful, in fact, that banks don't need to have it to lend it out. Well, it's not quite that simple, but fractional reserve banking basically means that if I've got a nickel, I can loan up to a dollar. If I loan that dollar to another bank, they can loan 20 dollars. if another bank borrows that 20 dollars, they can loan 400 dollars. And the only thing that's real is the fuckin' nickel. Head hurt yet? Start to see why "runs on banks" are uber-bad things? And why the whole system is predicated on trust? I"m in the process of building a birth center. I'm not a pauper but I sure can't field six figures of biomedical build-out. Confidence is high it will be a money maker, and will pay taxes, and hire employees, and take in fees from expectant mothers, and before that pay the wages of a dozen contractors, architects, designers and all the rest, but there needs to be a loan to make it happen. And that loan needs to come from a bank that's solvent and is willing to risk its precious, precious deposits on my has-every-chance-of-failing unsecured birth center. It's in the government's best interests to have that birth center built. It'll provide jobs. It'll pay taxes. It's a part of the durable goods economy. Yadda yadda yadda. But it's not in the bank's best interest to have that birth center built unless it knows for sure we'll pay back the loan with interest. If that interest rate is too high, we won't build the birth center 'cuz we can't afford to. So it needs to be cheap for the bank to loan money to us and when the government has literally made it free to borrow money from the government (the prime rate) they run out of options other than quantitative easing. Now say that instead of giving that money to a bank, the government gives it directly to me. I'm going to get a piece, but not a piece big enough to build a birth center with. The contractors will get a piece, but not enough to grow their businesses (and nobody can afford to build anything anyway, unless they have cash). The banks will get a piece, but their fraction won't be nearly what it is if the government floats them by buying their previous obligations (like, other people's birth centers, for example). Everyone gets money, but no one gets any incentive to spend it. This is why the "Bush tax cut" was so resoundingly panned by everyone - what the fuck are average americans going to do with $296? how's that going to help the economy? Lost in the subterfuge was the fact that the Walton siblings split $38 billion in tax cuts and the Waltons spent like mad. Think of what Walmart did between 2002 and 2008. So. Wealth inequality yes, market liquidity yes. Wealth equality yes, market frigidity yes. Make sense?
That does make some sense then. So let me ask a follow up question then. People criticize the whole argument of "The Trickle Down Effect" because they say that those with the money to trickle down just hoard it. Are they actually hoarding it, or are they reinvesting it in themselves and therefore somehow still stimulating the economy?
An easy one! (not) The argument for "trickle-down economics" is that the wealthy will spend it, and that spending is a stimulus that helps everyone. The argument against is not that the wealthy will hoard it, it's that they'll spend it on things that are a lot less impactful on other taxpayers. One Gulfstream G650 is $65 million. Say you have a stimulus that lets ten more billionaires buy G650s. That's $650 million into the economy of Savannah, GA, Long Beach, CA, dozens of other places where subcontractors work, etc. Those ten jets are a real economic stimulus for maybe 20,000, maybe 30,000 people. But maybe eight of them don't buy Gulfstreams. Maybe eight of them buy bigger mansions. That already exist. That happen to be in Monaco, Bermuda, St. Tropez, Kingston, etc. So that's maybe 500 of your $650 million that didn't give anyone a job. A lot of it stone-cold left the country. Now instead of a $650 million gulfstream stimulus, you decide to rebuild some roads. Best guess? $4k per mile, you're rebuilding 162,000 miles of highway. Center for American Progress estimates that's 120,000 jobs created. And it's really tough to off-shore that shit. Besides which, now everybody can use that road, not just ten billionaires. Liz Warren has said a thing or two about infrastructure and the leverage effect it has. She's a clever lady. I'll bet she's anti-G650. it's a different argument than "quantitative easing increases wealth economy." The argument against "trickle down" is it why would you want a trickle when you can have a flood?
It was apparently tried in the 1890's - didn't work then, either. It was called "horse-and-sparrow" theory - 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'
Indeed - Keynesian economics is sometimes called "trickle-up". As I understand it, Keynesian economics is more about stimulating a sluggish economy, by lowering interest rates, public-works spending, etc; whatever works; but I'm no expert on it.
I think that's where people misunderstand Keynes. I'm no expert either, but Keynes was for stimulating the economy by government spending and other tools in economic downturns, but also for raising taxes and cutting spending during good times. We always only hear about the downturn half, but the problem is the downturn half doesn't work so well when you're always cutting taxes and encouraging spending independent of what the economy is doing. For example, during the boom between the dot com bubble and the housing bubble, what did we (the US) do? Cut taxes, spent a trillion dollars on a war, and encouraged people who couldn't afford it to borrow as much money as they possibly could, all while keeping interest rates low enough that those poor people could afford it (kind of...in the immediate term...yay interest only loans!). Leave it to W to fuck up a boom.As I understand it, Keynesian economics is more about stimulating a sluggish economy...
Was confused, until the google convinced me that you meant "Ben" not "Mark"
Yeah. That douchecamel. Ryan Holiday recommended the book at one point, without mentioning that it's a VC bragging about how rough it is being a VC because you need to lay people off without pissing off the people who stay. Cue some bullshit DMX quote.
Hmm. That's actually a pretty compelling argument, and one I can get behind. Thanks for taking your time to share a thing or two tonight.It's a different argument than "quantitative easing increases wealth economy." The argument against "trickle down" is it why would you want a trickle when you can have a flood?
Crazy thing just happened. I actually like something kleinbl00 has to say. I wish I could tell him how much I appreciate his explanations on this as it is something I have been eager to learn about and he seems to be very knowledgeable in this category. Alas I can't so maybe this will find its way to him.
If you can't send him a PM (due to blocking), you can send it to me and I'll forward it to him, if you like.
It's no big deal. He doesn't particularly like me. If you want to send it to him cool, if not it's w/e. I just don't like not being able to coexist and I enjoy the different view points. So when I appreciate what one such as he says I feel the need to put it out there in an attempt to build a bridge of understanding.
I have no particular desire to be a messenger boy - if you can send him a PM, then feel free to do so (as per the wish you expressed).
One interesting aspect (theory?) of the US QE is that the banks couldn't find enough great ROI on that free money in the US so they put it in "emerging markets". This lending created a boom and great returns in emerging markets for a time. But those debts need to be paid, and as emerging market currencies fall in value in respect to the USD, they become more and more expensive to service which limits profitability and the ability to borrow more. There is also the notion that rate hikes will mean more options for parking money, and less reasons to lend it to emerging markets. So those markets are no longer emerging, and some are submerging.I heard quantitative easing is driving wealth inequality.
We got a rippin' mortgage through QE. Our bank offered us a stupid deal and we said "fuck off, it's too good to be true." Then our planner said "no, no - they have to give it to you or else they have to give it to mortgages in trouble and their chances are much higher they'll get their money back from you. Take the money." We went from a 30 year with 27 years left to a 15 year at the same payment. I calculated it's gonna save us $80k. Income inequality.
This is all true. But it should be remembered that in addition to stocks, what people are willing to give you for money changes as well. This time last year, 1 USD would give you 1.08 CAD, today it buys you 1.32 CAD. On top of that, if you want a loan, the bank looks at your in-the-box stock value and your in-the-box house value when determining how good you are for it. Stocks are a very crazy box, but not even money gets you out of boxes. In fact, if the Fed had it's way, the money box would shrink to 1/2 its size every three decades.
It's all an aspect of "currency" to be sure, and nobody with any real understanding of economics is crying out for a gold standard. But at a bare minimum, commodities and forex are more resistant to manipulation. Last guy who wanted my help a la Youngluck was facint 15-25 for market manipulation. By 22, he'd defrauded a pension fund out of $32m through stock price manipulation.
In all seriousness, I do wonder about who sells on a morning like today, and who buys. Without any evidence to base it upon, I would guess that there are more institutionally held shares and less privately held shares than there were this morning. Algorithms are likely less squeamish. If that is the case, a loss of diversity might have ramifications going forward.
I sold a bit to tax loss harvest. If the market does a super drastic change I'll buy and sell to re-balance.