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Stag Deflated
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I think its wrong to think that inflation will just naturally come because we are printing more and spending more, we have printed a tremendous amount of money over the past decade and have not generated inflation. What we have generated is inequality, because of who that printing has benefited. IMHO, what we are likely to see is not $20 bread, its slightly more expensive bread that less people can afford. Inflation needs a mechanism of transmission, and that mechanism that is lacking right now is wage inflation. Goods inflation is supposed to lead to wage inflation, whereby workers bargain for higher wages which gives them more disposable income and allows for higher prices, and provides a healthy backdrop for economic growth. The bargaining power of workers right now due to a number of factors is significantly impaired, largely, imho, as a lingering effect of the global financial crisis which forced many workers to settle for lesser positions/hours and has never really reflated out of. Inflation measures have lagged the federal reserve's target pretty significantly over the past decade.
Toggle Commented Oct 8, 2020 on Harris was awful ... at Sic Semper Tyrannis
This thinking has been wrong, repeatedly so, for the last 10 years. The idea that there is just one more pedal to push down to jumpstart the economy belies the truth that we have experienced the most accommodative and expansive monetary policy on a global level in modern times. Aside from the lack of efficacy, which I may look to discuss at length later on, there is another striking thing about this plan, and that is how it will be paid for. The reason is not the traditional "where will the money come from" I know where it will come from, cheap US debt, but it tells us two key things. The first is that the functional ideas of Modern Monetary Theory (MMT) that you can basically just issue debt and have your central bank both monetize it and keep the interest payments low and use that to fund largely unlimited government spending have for the most part been endorsed by those on the left as a mechanism to deliver on their grand plans. The second thing that is striking though is what they want to spend the money on, which is military spending and infrastructure and not healthcare and a green new deal. This calls into question what alignment there is on the cadres of the left or the possibility that starting with infrastructure is a way to run cover to expand these fantasy economics to social projects without reorienting the economy towards their achievement.
Can you please tell me how it is part of their constitution? I'm just curious.
Toggle Commented Jul 15, 2016 on Coup attempt in Turkey at Sic Semper Tyrannis
I think first its important to understand that a lot of things, in several different areas, had to go wrong in order to experience a crisis of the magnitude that we did. I tend to think about the crisis in two different pieces, the first being mortgage related and the second being credit related. To start, its important to realize that there are two fundamentally different mortgage markets in the United States, an Agency mortgage market and a Non-Agency (or private label) mortgage market. The agency mortgage market, which is a much larger share of the market, are mortgage bonds that have their principal and interest insured by a GSE (Fannie Mae, Freddie Mac, Ginnie Mae). While non-agency bonds are underwritten by financial institutions and have no insurance against loss of principal (unless its built into the bond structure, but that is an aside). The beginnings of the crisis occured in the Non-Agency area, where all of subprime is located. I think there was at first a fundamental disconnect between the poeple making the loans, many of which were predatory on unqualified borrowers (NINJA and no doc loans etc), and the people who traded/invested in the bonds created by those loans. Investors do not typically analyze individual loan data (remember there can be thousands of loans, this is why burry's analyst was so aghast when asked to pull the data in the movie) but rather look at aggregates and trends. Then to tie it all up and really make it all worse, through functionally alchemy the street created very complex financial instruments, and asked very non-complex (traders) people to trade them. The issue was that the pricing of these instruments is extremely sensitive to a small number of key assumptions that where based on a very small and limited data set. Without getting into the real nitty gritty the fundamental error in the assumptions was that a default in one part of the country would not be related to a default in another part of the country, which obviously turned out the be scarily false in the wake of a broader economic recession. Greed and other incentives led traders and investors to both take for granted the quality of the underlying loans and to make aggressive assumptions in their models that led to a drastic bubble. However, I do not think the mortgage crisis alone would have created the financial crisis on the scale that we experienced, the real issue was the system risk inherent in the financial system. There are two not very well understood aspects of the financial system that I think led primarily to what ultimately happened. The first is the reliance on overnight and very short term funding Banks and other financial institutions fund themselves by borrowing overnight on a secured basis vs securities that they place on hold with the lender as collateral. Naturally, as more and more of these non-agency bonds where made, they were used more and more as collateral, which was fine when the prices where going up since a higher price could justify more borrowing (see the vicious circle?), but when prices are going down that collateral all of a sudden doesn't look as good, and if for one day (JUST ONE DAY) your counterparties are too scared to lend to you becuase they are worried about your solvency, you fail. This is exactly what happened to Bear Stearns, a firm that had been profitable since the civil war, but which funded a quarter of its balance sheet overnight. The other issue, that is probably even less understood, is the interconnectedness of the street via derivative contracts. This is complicated but essentially imagine a loan you take out from the bank, and imagine you repay that loan, but instead of you just giving the bank cash, you actually keep the old loan, and create and offsetting loan with the bank. The net exposure is 0, in that neither you nor the bank owes each other money, but instead of one legal document saying you owe the bank money that is then cancelled, there will be two offsetting legal documents that say you two owe each other the same money. If we expand this concept to the real world, there are millions (im guessing, maybe tens of millions?) of legal contracts kind of just out there in the ether that all net to 0. BUT they only net to 0 if you and the bank continue to be going concerns, if one of you fails, then what was then a hedged position is now a massively naked risk position. Magnify this by the trillions and you begin to understand why these banks are too big too fail, since a domino effect of one bank dropping out of their derivative commitments leading other banks to default on their commitments and so on and so forth until the whole system collapses. To this end, a lot of the post crisis regulation has looked to solve these two issues (and by virtue create new ones, but so it goes) through the requirement of more stable funding sources and derivative clearing, but we are not nearly out of the woods yet. I hope this was helpful, there are many many aspects to the crisis and many good books about it, but I tried to highlight what I thought were the main drivers.
I'm a long time lurker and appreciator of this site, I'm also a former mortgage bond and interest rate derivative trader, although I was not there during the crisis. I just wanted to offer to try and answer any questions you all may have.
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Jan 30, 2016