tag:blogger.com,1999:blog-7820485130017459619.post5548929753770044325..comments2023-10-24T01:46:47.151-07:00Comments on CynicusEconomicus: Central Banks and Their Role in the CrashUnknownnoreply@blogger.comBlogger24125tag:blogger.com,1999:blog-7820485130017459619.post-68609109334851633652009-02-10T13:28:00.000-08:002009-02-10T13:28:00.000-08:00Hi Ishmon.I am with you.The blame 1st with the vot...Hi Ishmon.I am with you.<BR/>The blame 1st with the voters.<BR/>2nd the polititions of the last nearly 40 years.But more so the last 20 years.<BR/>Central banks are in with the polititions.<BR/>3rd bankers greed.<BR/>The voters becouse they went for jam today,with out a thought about tomorrow.honest johnhttps://www.blogger.com/profile/07203305387237076514noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-14443218665412962472009-02-10T08:58:00.000-08:002009-02-10T08:58:00.000-08:00Hi Cynicus! I am an avid reader of this blog, and...Hi Cynicus! <BR/><BR/>I am an avid reader of this blog, and still struggling to get to grips with all the issues you are presenting here. <BR/><BR/>My dad has always taught me that borrowing is bad and I should pay my own way for everything, and therefore have always seen the massive amount of borrowing of governments and consumers must be a problem eventually. Hence I really agree with what you are saying on this blog.<BR/><BR/>I also argue with my friends that the bankers are not to blame for the current crisis, however they just don't listen to me! Everyone in the media right now seems to be pointing their fingers at the bankers with their high bonus and short term risk taking strategies and essentially saying "you crashed the economy"! I really don't think that is true, I think they were in part to blame but there were underlying problems which would have surfaced anyway. However, noone I know agrees with me on that!<BR/><BR/>I would be interested in your opinion on what the effect of the banker's "short termism" has had on the situation, and what would have happened had they been more frugal in their investments? Did they really crash the economy?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-9715368811395383302009-02-10T05:18:00.000-08:002009-02-10T05:18:00.000-08:00A somewhat alarming excrement-hitting-fan article:...A somewhat alarming excrement-hitting-fan article: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.htmlAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-15048455703305880292009-02-10T04:25:00.000-08:002009-02-10T04:25:00.000-08:00Forgive me but I am still munching on the subject....Forgive me but I am still munching on the subject.<BR/><BR/>Continuing logically after my second post:<BR/><BR/>If the purpose of Central Banks is the control the amount of money in the economy (targeting interest rates)… <BR/>1 -Does a Central Bank, like the Fed for example, know how many dollars are stocked as Foreign Exchange Reserve in China and Japan?<BR/>2 - In any case, has the Fed any control on that money? I strongly doubt it.<BR/><BR/>It seems that allowing the accumulation of too much of their currencies in the hands of foreign states, Central Banks forfeit their role, at least in part.<BR/><BR/>Isn’t printing money (besides lowering its value and diluting the amount of currency in the hands of foreign states) a way for Central Banks to regain control on their currency?<BR/>I leave further thoughts to you.<BR/><BR/>Phil in CyprusAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-4106069301307796902009-02-10T00:11:00.000-08:002009-02-10T00:11:00.000-08:00On a second thought, I have to rectify the assessm...On a second thought, I have to rectify the assessment of the money actually in circulation from the Central Bank’s point of view:<BR/>The amount of money printed<BR/>- minus the amount of money unused still sitting in the Central Bank<BR/>- minus the Fractional Reserve Banking (the percentage that commercial banks have to keep as reserve)<BR/>- minus the money that has been materially destroyed.<BR/><BR/>Phil in CyprusAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-67880700215542754602009-02-09T22:59:00.000-08:002009-02-09T22:59:00.000-08:00Hi,Great post. One question:If you are printing mo...Hi,<BR/><BR/>Great post. One question:<BR/><BR/><I>If you are printing money such that the base money supply increases by 5% per year, and interest rates are zero, you can borrow that money, invest in a country offering 7% interest, and actually make a currency whose value should be falling, increase in value.</I><BR/><BR/>I don't understand how this works when the exchange rate is factored in. If I borrow Yen at 0%, convert it to say UKP and invest for a year at 7%, when I go to convert back to Yen (e.g. to pay off the original loan) then the exchange rate will now work against me *if* the value of the Yen has increased. So, it seems that the exchange rate will counteract any possible artefactual increases in currency value through this carry trade approach.<BR/><BR/>Unless I am missing something?<BR/><BR/>Otherwise, wonderful blog - keep up the good work.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-68072364934358529092009-02-09T05:37:00.000-08:002009-02-09T05:37:00.000-08:00CE, I still have the sensation that something is o...CE, I still have the sensation that something is out of focus.<BR/>Let’s start with how central banks creates and destroy money. <BR/><BR/>IMHO fiat money is created only when the state mint receives the order from somebody (central bank or government – let’s say the Central Bank) to actually print/coin money.<BR/><BR/>Then, money if really destroyed only when the CB orders to retire from circulation old banknotes and coins that are then materially disposed off.<BR/><BR/>As such, the money actually in circulation, from the Central Bank point of view, is given by the difference between the money printed less the amount of money unused still sitting in the Central Bank and less the money destroyed. What about money sitting somewhere else? See “Another point” further down.<BR/><BR/>Back to creation of money. Until the fiat money sits into the safe of the Central Bank, it has no effect on the market. Now we can use your example in Note 2: <I> If they decide they want to increase the money supply they simply buy something (normally some kind of government securities), and do this by simply doing the equivalent of writing a cheque for it.</I><BR/>I would say rather that they pay in CASH, otherwise how could the supply of money reach the market?<BR/><I>if a central bank wants to decrease the money supply, it simply sells the asset, and the money simply disappears...</I> Maybe, but only if the asset is sold for cash and the correspondent cash is either destroyed or more simply reintroduced in the Central Bank’s safe.<BR/><BR/>Another point: your example of the carry trade explains perfectly how the Japanese central bank could pump out new printed money without having an inflationary effect on the value of the yen. As you say <I> You are creating greater foreign reserves as a result of the return on that overseas lending, such that you are accumulating ever more foreign reserves, thereby strengthening your currency.</I> May I say that it had the same effect on the US $ but in a different way?<BR/>If we look at the <I>List of states by foreign exchange reserves</I> on Wikipedia (hoping it is correct):<BR/>http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves<BR/>we see that the first and by large most important reserves are hold by China and Japan.<BR/>I read that China in particular had, until June 2007, 70% of its reserve in US $. I.e. 1.3326 trillion dollars according to this site:<BR/>http://findarticles.com/p/articles/mi_qa5439/is_200701/ai_n21301497<BR/>Isn’t that the reason the US could finance their imports by simply printing $ that were absorbed and HOLD by countries such China and Japan? Until they stay there - in the reserves - the dollar is up. If they are used, the dollar goes down.<BR/><BR/>I mean…It occurs to me that the value of money is influenced by its availability or liquidity. If you keep it under your mattress you reduce the amount of money in circulation increasing its value, putting it in circulation does the opposite.<BR/>It’s the basic lesson of Economics I learned as school: the value of goods is determined by demand versus offer. For the same level of demand, if you reduce the quantity on offer you increase its value. <BR/><BR/>Am I right? Or perhaps I just discovered the hot water - something that was clear to anybody on this blog but not to me? In this case discard my post as superflous.<BR/><BR/>Anyway, could somebody explain to me, please, why countries like China and Japan would stock such enormous amount of dollars knowing that if they decide to spend it, they would destroy its value?<BR/>It doesn’t make sense!<BR/>It’s not like stocking resources like oil or natural gas: in a finite system, like our planet, their value is due to increase for sure – well, unless a new and cheap source of energy is discovered.<BR/>Regards,<BR/>Phil in Cyprus<BR/><BR/>P.S. <BR/>1 - Notice also the position of the USA in the “List of states by foreign exchange reserves”!<BR/>2 - As collateral though: so it’s right when they say (wasn’t the Austrian School?) that the function of the central banks is to control the circulation of money, cooling it down or stimulating it through its supply to the ordinary banks. The function of banks (normal banks) is to make money circulate, <B>thus creating inflation</B>.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-16794265963758098332009-02-09T03:45:00.000-08:002009-02-09T03:45:00.000-08:00Very good post.What do you think of central banks ...Very good post.<BR/><BR/>What do you think of central banks (such as the New Zealand Central Bank) using capital adequacy ratios to control bubbles (like the house price bubble)?<BR/><BR/>Perhaps this is a tool that the Central Banks do not have in the arsenal.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-48932179338167109832009-02-08T13:59:00.000-08:002009-02-08T13:59:00.000-08:00Sorry Mark, I must have missed out the link: http:...Sorry Mark, I must have missed out the link: http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/#_ftn6Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-8833319930435326602009-02-08T09:18:00.000-08:002009-02-08T09:18:00.000-08:00Mark,Another article that approaches the Central B...Mark,<BR/><BR/>Another article that approaches the Central Bank/FRB issue from a completely different angle.<BR/><BR/>According to this analyst, growth in credit money actually leads M0 fiat money, rather than follows it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-84683954625057780642009-02-08T07:49:00.000-08:002009-02-08T07:49:00.000-08:00I appreciate this is not really relevant to this a...I appreciate this is not really relevant to this article but feel it may be of interest to other readers:<BR/><BR/>In the current circumstances it seems people would be best off by looking at ways of protecting their wealth from the threat of inflation: ie by buying assets.<BR/><BR/>If someone bought index linked government bonds their wealth would be protected as the principal and coupon are both linked to inflation. However if during/after attempting to inflate its way out of debt the government went bankrupt would the bond holders simply lose their money or would they have a claim against the Government once the IMF (or whoever) steps in, or after a new system is implemented?Jonnyhttps://www.blogger.com/profile/16119442844302447926noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-44940038720771571952009-02-08T07:31:00.000-08:002009-02-08T07:31:00.000-08:00Mark,Re my second comment: I was observing that in...Mark,<BR/><BR/>Re my second comment: I was observing that in Note 3 you are saying the same thing as wrote in my first comment, namely a carry trade now is not possible. I commented without reading the notes: lesson learned!<BR/><BR/>However I still would like clarification on the question I posed in my first comment please.<BR/><BR/>ThanksJonnyhttps://www.blogger.com/profile/16119442844302447926noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-4770841588593569032009-02-07T18:32:00.000-08:002009-02-07T18:32:00.000-08:00I thought I would very quickly add something I fou...I thought I would very quickly add something I found today, which is an article in Time Magazine, talking about the difficulty in comprehending the numbers that are being floated around regarding economics. They offer this very useful tip:<BR/>-----<BR/>But that similarity trips us up when it comes time to imagine how those figures translate to the real world, where three more zeros make all the difference. "My favorite way to think of it is in terms of seconds," says David Schwartz, a children's book author whose How Much Is a Million? tries to wrap young minds around the concept. "One million seconds comes out to be about 11½ days. A billion seconds is 32 years. And a trillion seconds is 32,000 years. I like to say that I have a pretty good idea what I'll be doing a million seconds from now, no idea what I'll be doing a billion seconds from now, and an excellent idea of what I'll be doing a trillion seconds from now."<BR/>-------<BR/>I have a feeling many people simply have no idea about the scale of the borrowing that is being done in their names. I hope this helps. <BR/><BR/>An excellent article from Time...<BR/><BR/>http://www.time.com/time/business/article/0,8599,1870699,00.html?iid=perma_share<BR/><BR/>Lemming: When a central bank buys something with nothing, if it later sells it, the money can disappear in the same way that it was created. The money is effectively 'deleted'. Was that the answer you were looking for?<BR/><BR/>Anonymous: The point is not to have printing presses as the basis of a currency. <BR/><BR/>Don: I liked the article, which showed a good measure of common sense. <BR/><BR/>Lord Keynes: Interesting chart from your second post. As with all these measures, it seems that GDP has been subjected to considerable 'sunny siding', to put it politely. The explanation is here on the site:<BR/><BR/>http://www.shadowstats.com/article/57<BR/><BR/>Of course, what is not considered is how utterly useless GDP is as a measure of anything meaningful to do with ggrowth in wealth. As I pointed out in a previous post, Hurricane Katrina contributed to positive GDP growth! <BR/><BR/>I have mentioned in the blog previously that I believed that we may have actually been in recession for a long time, if you strip out debt driven activity from the GDP figures. <BR/><BR/>Jonny: From your second comment I will take it I answered the question?<BR/><BR/>Anonymous: On the BoE and house prices, thanks for the contribution. This just highlights the cosiness between politics and central banks. The are mutually dependent on each other - not a good scenario, and a scenario I would like to discuss more at some time. <BR/><BR/>Anonymous: Needs and wants are very difficult ideas. Do you need or want a car (not a new car, but any car)? You might argue 'need', others that it is a 'want'.Markhttps://www.blogger.com/profile/14983165364072918091noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-19618499767980894572009-02-07T15:01:00.000-08:002009-02-07T15:01:00.000-08:00Annual US GDP Growth RatesI should also say it is ...<B>Annual US GDP Growth Rates</B><BR/><BR/>I should also say it is worth looking at the estimated annual US GDP Growth Rates at <BR/><BR/>http://www.shadowstats.com/alternate_data<BR/><BR/>Look at the 4th graph of the page.<BR/><BR/>From 1996 to early 2000, US annual GDP growth rates hovered around 1%.<BR/>(the "offical" rate was about 4%)<BR/><BR/>The US experienced <B>negative growth rates</B> between 2001 and 2004. About 2004 growth was around0.5%, but has been <B>negative</B> since 2004.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-86673453002639411052009-02-07T14:53:00.000-08:002009-02-07T14:53:00.000-08:00Some Figures on Real InflationThere is an excellen...<B>Some Figures on Real Inflation</B><BR/><BR/>There is an excellent site that calculates a more realistic measure of inflation. The site is Shadowstats.com. <BR/><BR/>Go here:<BR/><BR/>http://www.shadowstats.com/alternate_data<BR/><BR/>Have a look at the blue line on the "Annual Consumer inflation" graph (the first one at the top) for better stats on CPI in the US.<BR/><BR/>Early in 2008, US inflation nearly reached 14%. During the Clinton years, CPI was between 6 and 10% (versus the "offical" rate between 2 and 4%). <BR/><BR/>On the same page are more reliable estimates of the US money supply, unemployment, and the annual GDP growth rates.<BR/><BR/>US unemployment, measured by the methodology that was used before 1980, is now at 18%. During the Great Depression the rates varied between 24% and 14%, so the US unemployment rate is now at Great Depression levels.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-82372488362710201602009-02-07T14:08:00.000-08:002009-02-07T14:08:00.000-08:00I don't know about you, but my local mall dropped ...I don't know about you, but my local mall dropped the price of a new plasma TV. On the other hand, the price of milk in my local super market just wend up. <BR/><BR/>The inflation is creeping in the "needs" while the deflation runs in the "wants". <BR/><BR/>Mark, just keep in mind one simple thing. What part of "growth" is a need and what part is a "want".<BR/><BR/>This is why automobile industry hurts first. A new car is a "want", I can use my old car for a few years more.And a "want" is what I'll cut first.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-64108105114487636052009-02-07T13:04:00.000-08:002009-02-07T13:04:00.000-08:00If I remember correctly, it was HMG that specifica...If I remember correctly, it was HMG that specifically told the BoE to try to control a measure of inflation that excluded house prices. They did as they were told, with the result that the house price bubble could continue. Perhaps one should accuse them of not being negligent when it would have been better if they had been....Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-63503081425982014422009-02-07T05:54:00.000-08:002009-02-07T05:54:00.000-08:00Just saw you covered my previous comment in Note 3...Just saw you covered my previous comment in Note 3. Furthermore I found the second paragraph to Note 3 a very useful explanation.Jonnyhttps://www.blogger.com/profile/16119442844302447926noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-73149341178466378682009-02-07T05:44:00.000-08:002009-02-07T05:44:00.000-08:00Mark,Thank you for the update on the previous post...Mark,<BR/><BR/>Thank you for the update on the previous post.<BR/><BR/>With regards to the Japanese carry trade we can see a weak currency and low interest rates were necessary but not sufficient; a country that provided decent returns was also essential to make the carry trade pay off.<BR/>If we look at the situation today, when the BoE begins buying Govt debt (printing money), where could that money be invested abroad giving returns that offset the devaluation of the GBP?<BR/>So my point is essentially the carry trade which emanated out of Japan was able to happen when it did because of a unique set of circumstances and it is improbable that it could be repeated in the midst of a global slump. <BR/>Interestingly we can see that as a result of the carry trade Japan is one of our overseas creditors that helped fuel the recent illusory boom in the west but did so to prop up its own economy.<BR/><BR/><BR/>“If the central bank increased interest rates, it would encourage the carry trade, and the carry trade means an injection of more money into the economy. However, if the bank reduced interest rates, thereby discouraging the carry trade, then you have a situation in which the central bank is itself increasing the supply of money into the economy.”<BR/>Do you mean that by lowering the cost of borrowing they are indirectly increasing the money supply as it gives more of an incentive for banks to borrow from the central bank?Jonnyhttps://www.blogger.com/profile/16119442844302447926noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-40440916469906747972009-02-07T05:18:00.000-08:002009-02-07T05:18:00.000-08:00Interesting and pertinent article for you to analy...Interesting and pertinent article for you to analyse, Mark:<BR/><BR/>http://www.marketoracle.co.uk/Article8724.htmlAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-31518090864314336972009-02-07T04:39:00.000-08:002009-02-07T04:39:00.000-08:00This comment has been removed by the author.Jonpaulhttps://www.blogger.com/profile/10497649728172138041noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-21043635725799935142009-02-07T04:32:00.000-08:002009-02-07T04:32:00.000-08:00This comment has been removed by the author.Jonpaulhttps://www.blogger.com/profile/10497649728172138041noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-88117191141267925722009-02-07T03:36:00.000-08:002009-02-07T03:36:00.000-08:00Great post. I've always marvelled at the way the c...Great post. I've always marvelled at the way the central banks have managed to shrug off criticism of their role in the current crisis. We've seen Mervyn King explain that they didn't really understand what was happening in the financial markets and that they didn't really understand that inflated asset prices could affect the real economy. And the media have taken their words at face value - ignoring the fact that any other person making these admissions would quickly find themselves joining the dole queue!<BR/><BR/>I agree that central banks have played poacher and gamekeeper on inflation for far too long, and I would also consider that Bank of England independence from the government has been something of a charade (especially when it seems that just about any cabinet member seems to be able to 'predict' the outcomes of MPC meetings ahead of time). <BR/><BR/>But the real six billion (trillion!?) dollar question is, who takes ownership of the money printing presses if the central bank doesn't? And who could then guarantee that the independence didn't turn into the current opaque relationship between the MPC and government that we have now?<BR/><BR/>In other owrds, not only would you need a separate Money Printing institution, but an entity to police its independence too! in short a bureacratic buggers muddle!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-69644071266206566682009-02-07T01:22:00.000-08:002009-02-07T01:22:00.000-08:00Hi, Mark. you say that a central bank can increase...Hi, Mark. you say that a central bank can increase the money supply at the stroke of a pen, by buying a government security. You also say that the central bank controls the money supply with its interest rate (is this via FRB?). <BR/><BR/>Is the money created by these two processes equivalent i.e. 'temporary' in that it disappears as a debt is paid back?Anonymousnoreply@blogger.com