a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

*karl marx joek, plz keep up

c&p yr puzzling concepts and claims and phrases below and together we can doubtless balance the books! all yr 🚀 are belong to us!!

how many yards is a coat going for these days

I'll start by addressing the pinefox's question from the other thread:

For instance, I don't really know in what way a mortgage is an item that can be bought or sold. In fact the very idea of a mortgage is an idea that I struggle to hold in my head.

A mortgage loan is an agreement between a lender and a borrower, in which the the borrower receives $$$$$ upfront to purchase an asset, then pays off the debt in installments of $ until either the entire debt is paid, or they fail to make the scheduled payments and the lender takes possession of the asset.

From the standpoint of a lender (e.g. a bank), holding a mortgage means having some reasonable expectation that I will continue to receive $ in mortgage payments from the borrower at regular intervals. If I, a mortgage-holder, am in need of quick cash, I can sell this mortgage to someone else (e.g. a second bank) for some agreed-upon value which is based on the number of outstanding payments which remain and the likelihood that the borrower will be able to keep up with them.

Because the continued flow of $ to a mortgage holder is dependent upon the continued income of a single household, mortgages have not generally been thought of as especially secure, in comparison to government issued bonds and the like. What happened during the lead-up to the 2007-08 crisis is that some financial innovators convinced regulatory agencies that a bunch of say 100 mortgages bundled together represented a less-risky investment, because even if one defaults, the other 99 are still making their payments, so holding a 1% share of that pool of mortgages means I will continue to receive (0.99 x $) at regular intervals.

The holders of the mortgages (in many but not all cases, the banks that originally issued them) then sold shares of these pooled mortgages (aka "mortgage-backed securities") to pension funds and other investors that are not typically interested in holding risky assets like mortgages, because the regulatory agencies had rated them AAA, the safest possible kind of investment.

Thanks, poster snowy.

I think I have a problem with the idea of someone buying debt from someone else. It sounds like buying illness.

think of it like this pinefox:

— you borrow £10 from me, tell me you'll pay me back in two weeks
— two days later i realise i very urgently need a box of quality street but right this minute have no cash
— i see piedie gimbel walking by and borrow £10 from him
— instead of owing him i tell him (and later you) that he'll get it back from you in two weeks
— i buy my quality street and then give piedie some for helping me out in a pinch

piedie has bought your debt (with interest: a fistful of brightly wrapped chocolates)

If Pinefox runs short of cash and demands his £10 is returned by mark s before 2 weeks, there's a potential liquidity crisis.

Derivatives (where debt is bundled up) and traded as 'futures' and options', along with mechamisms like 'hedging' and 'leverage', are where it starts to gets complicated. John Lanchester (who ilx seems to hate) wrote some good articles on this in the LRB post 2008.

it's called a "potential liquidity crisis" bcz pinefox has found himself in a pub unable to buy a pint

also i lent him £10, let's not obfuscate that!

this is where the muddle starts

I like Mark S's story and am touched by its detail, but it lost me very quickly.

How would one 'go short' on Quality Street?

poster luna schlosser has i think correctly identified the point where confusion arrives (and the anxious sense of any inability to process further)

it's when quite ordinary exchanges (street exchanges if you like) are not only formalised, but at the same time supplied with generalising jargons (such as leverage, hedging, derivatives, futures, options, bundling) which render them mysterious. can all these jargons be translated back into street language?

leverage can for example: it's simply when you borrow money to fund a project that will at some point earn you more than enough to pay back what you borrowed

i don't agree with luna s abt lanchester but that's a different argument: i will allow that he largely understands what he's claiming to explain, but his skill seems much more to be convincing ppl that they get something that they haven't actually internalised at all (my copy of whoops! is slathered with review quotes excaliming how marvellously clear it all now is; i am absolutely willing to bet that nearly none of these reviewers would get acceptable marks in a snap quiz on the subject matter)

suppose at the moment i realised i needed my quality street (shop price £7) you poster ward fowler were walking past with a full new tin of same and sold it to me for £6 there and then: this is shorting

i mean more technically shorting is a mass practice = lots of traders selling something for less than its then-price appears to be, bcz they're betting this price will go down further -- eg to £5

this wd be a bad bet if it's just ward with one tin outside one shop

Mark S's statement about Lanchester seems supported by the fact that I read, closely, all those LRB articles, and still know nothing about any of it.

more technically still (lol): ward's short selling of the quality street is only the first stage of the short selling of quality street

even excluding the likely collective nature of the technical process, "shorting" as a practice is only really completed as a trading triumph if and when he buys the tin of chocs back from me for less then he sold them to me for

which is the point at which the chocs have stopped being something of value as chocs and begun to be a traded commodity whose *price* is trumping their deliciousness at one level (bcz PROFIT matters more to poster ward than biting into the nut cluster)

however a good deal of shorting is speculative and not always completed to the profit stage (without being stripped of the term "shorting")

John Lanchester (who ilx seems to hate) wrote some good articles on this

this is nothing: my credit default swap explainer was by matt taibbi

of the genre i remember thinking nomi prins' it takes a pillage was good?

(i seem to recall one ilxor -- possibly poster lag∞n? -- who was extremely scornful of taibbi's writing long before MT's swerve to the right)

(also some of the UK fintwit commentators have long noted that MT's basic position seemed more libertarian than not economically)

Re John Lanchester - I wouldn't like to face a snap quiz on the subject after reading his articles. But I think his strength is showing the simple principles of debt and derivatives and how it speedily builds to a bewildering complexity that almost no-one can understand, outside of a few Nobel Prize winning economists (e.g the Black - Scholes model (the infamous 'financial instrument of mass destruction').

Disclaimer: your reading capital is at risk. The value of authors can go down as well as up. Always take independent advice from a registered literary critic.

i was v contemptuous of taibbi's style when i was in high school but had warmed a lil during the obama years. its later incentives have not been ideal

Lol Luna

I think the great pop-cultural example of shorting is Segar's J Wellington Wimpy: "I'll gladly pay you Tuesday for a hamburger today" - but only if he intends to sell the hamburger on now for say $10 on the assumption that the price he'll have to pay on Tuesday will be say $8, which is admittedly not often ever the angle.

unpredictable human behavior (e.g., pandemic spending and saving patterns)
https://press.princeton.edu/books/paperback/9780691145921/animal-spirits

xp it's a better pop-cultural example of "leverage" really -- at least if we consider JWW eating the hamburger as a kind of profit

in general these tricky terms achieve their arcane finance-ness when they're recognised as being (possibly misleading) snapshots of a vast flow of interlinked decisions and exchange

we can grasp the atomised exchange well enough -- but the fact of the use of the jargon is what reflects this huge pullulating half-visible landscape all around (and the fact that to a trader, awareness of dozens if not hundreds of such exchanges is what drives their decisions and shapes their perceptions)

A pullulating half-visible landscape once a week.

A thesis for traders as misunderstood artists of the floating empire of (financial) signs !

this is fredric jameson's (i think slightly different) argument

maybe worth coming back to mine and decoding it somewhat (but instead i have real paid rewrite work to finish this afternoon)

My definition of finance in one short sentence would be: finance is the business of buying and selling claims on future cash flows.

Reading the thread and I do wonder about the block many of us have in getting any sort of idea about economics.

When I read something by Lanchester I sorta fool myself into getting it but a week later it just goes. Concepts go in but don't stay.

It's like a muscle that needs constant attention and exercise.

Lots of subjects like that, it's unfortunate that economics has such an impact in our lives. Whereas as higher mathematics and inorganic chemistry, not so much.

Stuff like this. Why can't we just abolish high inflation? I'm sure someone will take me through the logic. I am mostly interested in how 'economics' can work for people.

I mean unironically yes https://t.co/BssQhI7306

— suzuki ingmar burgman (@xoayquanh) October 6, 2022

inflation has some good sides! like devaluing debt.

this thread is good because i really struggle with financial concepts. i can get to the point where i grasp them, just, but building on them, or 'chunking' them... beyond me apparently. it isn't at all intuitive for me, and i intrinsically sympathise and agree with pinefox in his exclamations, whether of disgust or bafflement.

i have tried to learn myself a bit, but not very successfully. in mark s' 'what have you *actually* learned from reading lanchester test' my only answer would be 'lol lanchester'.

i'll take two examples, which, through sufficient repetition to myself I am able to repeat back, but not really understand in my bones, viz: a deposit of money in a bank creates money.

The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent. Where something so important is involved, a deeper mystery seems only decent. The deposits of the Bank of Amsterdam just mentioned were, according to the instruction of the owner, subject to transfer to others in settlement of accounts. (This had long been a convenience provided by the Bank’s private precursors.) The coin on deposit served no less as money by being in a bank and being subject to transfer by the stroke of a primitive pen.

Inevitably it was discovered—as it was by the conservative burghers of Amsterdam as they reflected incestuously on their own needs as directors of the Dutch East India Company—that another stroke of the pen would give a borrower from the bank, as distinct from a creditor of the original depositor, a loan from the original and idle deposit. It was not a detail that the bank would have the interest on the loan so made. The original depositor could be told that his deposit was subject to such use—and perhaps be paid for it. The original deposit still stood to the credit of the original depositor. But there was now also a new deposit from the proceeds of the loan. Both deposits could be used to make payments, be used as money. Money had thus been created. The discovery that banks could so create money came very early in the development of banking. There was that interest to be earned. Where such reward is waiting, men have a natural instinct for innovation.

Galbraith, John Kenneth. Money (pp. 22-23). Princeton University Press. Kindle Edition (my secondhand paperback edition with a cariacature of JKG on its cover, is in disarray)

oh, a coda:

In the 1960s, Mr. George W. Ball, an eminently successful lawyer, politician and diplomat, left public office to become a partner of the great Wall Street house of Lehman Brothers. “Why,” he was heard to ask a little later, “didn’t someone tell me about banking before?”

I get it, but I still do not *get it*.

Second, the following principle: markets generate gains from trade.

Markets generate gains from trade; one of the most important observations in all of economics is that buying and selling creates value. The Rwandan refugees focused their labor. Some scavenged meat, others grew vegetables; some gathered firewood, others worked as tailors or cooks. Then they traded what they produced. In the prison camp, nonsmokers sold cigarettes to buy food, while vegetarian Indians exchanged canned beef for jam and margarine. The ability to trade meant the refugees and prisoners were better off than if, like Robinson Crusoe, they could consume only their own allocations.

McMillan, John. Reinventing the Bazaar: A Natural History of Markets (p. 16). W. W. Norton & Company. Kindle Edition.

Again, I get how fluid exchange, esp via money, generates value, but it doesn't sit intrinsically in my simple understanding of the world. a little bit like the way people think of national debt like household debt. i am those people.

i had more to write but it's too long already and potentially making diffuse a useful thread.

oh, just an xpost, inflation is a relatively new phenomena, and where you have low to no inflation it results in wealth staying very static and rentier capitalism - as per Piketty's v good analysis of Jane Austen iirc. (Again this is me being conceptual and totally justifying the response, 'tell me how that works in close detail please'.)

like devaluing debt

...which, because debtors tend to be less wealthy than lenders, often has the effect of improving their relative positions in favor of the less wealthy, but this only really happens if the inflation leads to higher wages/incomes.

Also inflation only tends to devalue older debts incurred before the inflation happened. Unfortunately, lenders are very quick to respond to inflation and charge higher interest rates, so debts incurred after inflation goes up aren't really helped by from the devaluation effect.

At the risk of further occulting the "economic principles" some folks struggle with, I heartily endorse historian Fernand Bradley Civilization and Capitalism, 15th-18th Century, vol. 2: The wheels of commerce. Having some knowledge of how bills of exchange functioned in the early modern period may help one to understand how and why banking today came to look the way it does.

*Fernand Braudel, damn you autocorrect

looool, it was as if you were reading my next post, which i deleted...

fuckit, I've just poured myself another glass of wine, so i'm going to carry on. where's my list. i should probably state outright that i find capitalism an extraordinary and great invention, with rentier captalism a filthy and degrading downside, and the doubtful likelihood of a strong and benevolent government a necessary requirement.

Braudel's treatment of the invention, development and definition of capitalism in The Wheels of Commerce, the second volume of his incredible Civilization and Capitalism, 15th-18th Century is brilliant.

i didn't because i feared 'further occulting'. i was going to cite his muleteer...

In Montaldeo, a certain Bettoldo, a *huomo nuovo*, drew down upon himself the wrather of the marquis Giorgio Doria. He was one of the muleteers who had made a small fortune (this was in 1782) transporting the village's wine to Genoa; no doubt he was known for the violent behaviour often attributed to muleteers. 'The insolence of the said Bettoldo much worries me,' the marquis wrote to his factor, 'as does the facility with which he blasphemes.... He must be punished, since he is incorrigible... In any case, he must be deprived of any employment from us; perhaps hunger will improve him.

a huomo nuovo such as Bettoldo upended feudalism and introduced the new age, with his foul manners and ability to defend himself and attack at a whim.

It's a very colorful history!

there are other 'capitalist types'

my next person or image, is a (more or less invented) Syrian merchant in Cádiz, standing on a typical Gaditana tower each morning, spying for news of the ships they'd invested in or insured.

https://www.espanaguide.com/images/cadiz/torre-tavira/torres-de-cadiz.jpg

The investment of capital is the investment of your capital in a risky enterprise. The higher the risk, the more likely you will lose your money, the higher the return should your ship come home. Insurance enabled the spreading of that risk, and provoked people to speculate and travel beyond their home. This ofc eventually led to colonialism, but I'm not clear the mechanism by which you refuse a person making a buck, other than by insulating your realm.

Break to cite a curiously oracular utterance by JM Keynes:

The premium we pay the insurance company is only one of many certain costs we incur in order to avoid the possibility of a larger, uncertain loss, and we go to great lengths to protect ourselves from the consequences of being wrong. Keynes once asked, “[Why] should anyone outside a lunatic asylum wish to hold money as a store of wealth?” His answer: “The possession of actual money lulls our disquietude; and the premium we require to make us part with money is the measure of our disquietude.”

Bernstein, Peter L.. Against the Gods (pp. 275-276). Wiley. Kindle Edition.

Maybe I'm skipping, because inherent in this is the notion of trust. A remarkable invention is the promissory note, an early version of the bank note, whereby its very existence assures the possessor that should it be required they will be paid the sum represented. The bedrock of trade and of banking is that you do not need to carry a sum in goods around with you in order to transfer wealth. The ability to carry out transactions but at a distance is, again, a remarkable invention. But at a distance doesn't just require trust in people or institutions you do not know, but also the fates - the storms on the sea, the barbary corsairs, the sunk with all hands and vanished without a trace.

However, without these structures of financial trust 'at a distance' you are left with the world represented in Diego Gambatta's The Codes of the Underworld, or also explored in Dan Davies' book on fraud, Lying for Money – if you don't have trust relationships at a distance, you are heavily reliant on familial and local relationships (such as the mafia). the extension of trust beyond personal relationships is a significant capability of that original capitalist urge. power and wealth remains tightly controlled in a circle of familiarity.

more wine.

the big problem is the management of externalities. what happens when the reward is available to one person, but the risk is carried by others? A simple example of externalities would be driving - the driver has the reward of getting from a to b at a speed and level of comfort that they enjoy. the pollution their car emits while doing so is borne by the people who they pass on their journey. They get the reward, but do not bear the risk.

in my examples of the 'exciting and speculative wonders of capitalism' the risk and the reward is borne by the same group of people.

2008 and the global financial crisis, followed by the bailout was this model on a huge scale. High risk taking bankers got the reward, society bore the risk to a massive degree.

so, if you can't stop capitalism with the muleteer, or the merchant, when does this all become so out-of-control that *someone or something* needs to draw a line? I think we're really talking about national governments here, and the birth of constitutional liberalism.

Governments, by one definition, are there to manage problems of co-ordination and externalities.

This is the capitalist, liberal, democratic mode.

But is it sufficient? I'm an instinctive social democrat - I don't like the trade-offs in freedom you get with communism - of the loss of 'spending on your balls what you earn by your pen' to quote byron, but 2008 has to tell us it's not at all clear that social democracy is capable of balancing the interests of the wealth and capital owning classes with those of the wage earning classes (which btw goes v high up the salary scale - as modern marxists like Erik Olin Wright have said, this very much includes middle classes.

none of this is helping this thread i know. and i hope a load of people come along and demolish my pub handwaving here.

reconsider communism

my basic mode is that all people deserve good quality of four things
housing
transport and other communications generally (ie including broadband)
healthcare
education

and work or sufficient welfare to lead civilised within whatever definition you like of civilised there.

i think countries are sufficiently wealthy to achieve that, so my preference is socialism over communism. but i think speculative capitalism has a place as long as the risk is borne by the risk takers.

n my examples of the 'exciting and speculative wonders of capitalism' the risk and the reward is borne by the same group of people.

Maybe I missed something, but what about all the sailors who died on those boats? I'm also wondering where transatlantic slavery and settler colonialism fit in to these stories.

sorry, this is a really unhelpful tangent, and it *really* wouldnt be helpful to go down a “preferences of economic distribution” route. but i am fascinated by capitalism as a mode of human being, and don’t think it’s easy or even desirable to prohibit, though the extent to which it should be regulated or canalised is definitely an urgent question.

transatlantic slavery, colonialism and sailors drowning are ofc all part of it - essentially they are again externalities, where other people bore the risk of indivual’s reward. that sounds morally dry. i’m not defending it. but i’m not sure what process or desirable form of regulation could have prevented it prior to democratic or popular institutions. and even then, there is no sign that democratic or popular institutions on the national level desire to prevent it.

im speaking in purely economic terms. morally many of the consequences are foul. the desire to trade over borders is not inherently evil tho.

god i’m posting waaaay beyond courtesy or utility here, apologies. i dislike corporatism and financialisation, public private partnerships and other forms of “high finance knowledge at the expense of everyday living” intensely. but the history and value of the market remains interesting.

I don't understand most of this thread because it's econ but capitalism isn't an inevitable natural phenomenon or transhistorical expression of human nature it has a specific history

my biggest problem with social democracy is the nationalism which in practice seems to preclude international solidarity due to demand for border controls and reliance on colonial/neocolonial extraction to fund welfare states (which always seem to end up being broken down by capital anyway)

i think i agree with both of those points.

my intention, if i had a clear intention in those rambling posts, was to suggest that the foundations of some of the opaque terminologies and transactional processes that exist around us now are fascinating, absolutely not inevitable, and are effectively technical *inventions* based on trust and risk, really coming back to mark s' box of quality street. they exist for a reason, and it's hard to consider how they might not exist, without significantly constraining a natural desire for exchange - that creation of value cited upthread.

it is not - just in case it isn't clear - a case of moral advocacy. just one of fascination.

That makes sense and to be sure, lots of marxists are equally obsessed with the origins of capitalism.

I find early trade history that excludes Europe especially interesting (e.g., Indian Ocean trade routes in antiquity). I would be into one that detailed pre-1492 american history

i was watching some Tiktok recently (lol) where somebody was "explaining banks" in a way that i have encountered before, mainly just after the financial crisis of 2007/8, where the structuring argument is that governments don't create money, banks create it out of thin air. i think that is actually right as far as it goes but then it's inevitable that the person saying this will then start talking about how the City of London is "not actually in the United Kingdom" and i start questioning everything they've said but i think the kernel is true, that banks create money out of thin air every time somebody takes out a mortgage. they've extracted a promise from you, and gotten you to write it down in contractual form, that you will pay them a certain amount over a certain number of years, and that promise is worth something, it has a very definable value, and can then be traded and sold to other entities as if it were a barrel of oil or a sack of fish. again i'd heard this stuff before but it helps hearing it again to understand it. the promise becomes a tradeable asset.

the other thing this guy said which kind of blew my mind was that you don't deposit money in a bank. the word "deposit" has no legal meaning. when your paycheck lands into your bank account what you're actually doing, legally, is loaning the bank money. and you can ask them to make good on that loan at any time, theoretically. (by "withdrawing".) they pay you interest on that loan. at an extremely pitiful rate, often something like 0.75%. but guess how much interest they want if they loan YOU money though, eh??

xp Rob, the new Graeber and Wengrow book is interesting and persuasive about the many means *other than* trade by which goods circulated in pre-Colombian america. Games of chance were very popular, especially among women!

if you don't have trust relationships at a distance, you are heavily reliant on familial and local relationships (such as the mafia). the extension of trust beyond personal relationships is a significant capability of that original capitalist urge. power and wealth remains tightly controlled in a circle of familiarity

I wonder if there are any good books on how "capitalism" works in criminal enterprises. I imagine there is very little trust involved, and if someone breaks their end of a deal, the only recourse is violence. A judicial system that enforces contracts seems one of the necessary underpinnings of any capitalist system of sufficient scale.

the other thing this guy said which kind of blew my mind was that you don't deposit money in a bank. the word "deposit" has no legal meaning. when your paycheck lands into your bank account what you're actually doing, legally, is loaning the bank money. and you can ask them to make good on that loan at any time, theoretically. (by "withdrawing".) they pay you interest on that loan. at an extremely pitiful rate, often something like 0.75%. but guess how much interest they want if they loan YOU money though, eh??

― Tracer Hand,

Hence why I safely deposit under my mattress. When my paycheck goes in, I lend the mattress money.

xp Rob, the new Graeber and Wengrow book is interesting and persuasive about the many means *other than* trade by which goods circulated in pre-Colombian america. Games of chance were very popular, especially among women!

― My name is Mike Cyclops. I work for (bernard snowy), Tuesday, October 25, 2022 8:04 PM (two days ago)

thanks! I was already planning on reading that eventually, so that's great to know

can't read all the tl;dr posts itt but i'm currently in my last year (give or take) of a phd in economics and if anyone wants to ask questions about topics they are confused about i can try my best to answer them. i didn't specialize in finance or monetary areas so i don't have any particular insight to some of the current discussions, but it may be useful to get a perspective that is a bit more "mainstream" than the other povs in this thread (read braudel/graber, watch tiktok, consider communism, etc). i only check ilx 1-2 times per week but will keep an eye on this thread

I think I'd rather read anyone else in this thread other than a complete fucking tool like thee!

?

no idea who you are + don't recall ever interacting, sorry

i like all the posters itt fwiw

sorry probably harsh, but I won't be asking you any questions.

I read your post as very contemptuous of the thread on my first read, but it was probably an overreaction

this thread was started because pinefox was asking questions about economics/finance concepts in the ILB thread

The (S)word in the Autumn Stone: What Are You Reading, Fall 2022?

most people itt get their econ from popular journalism and/or more left-heterodox writers. if people want an inside pov on the mainstream academic econ take on various issues, i'd be happy to help try and give it

didn't mean to be presumptuous that people want to hear my opinion, just offering in the spirit in which the thread was started

xp- not intended contemptuous. i was mostly just teasing fizzles with the tl;dr comment

when your paycheck lands into your bank account what you're actually doing, legally, is loaning the bank money

I guess that's true, but in the US at least, there is the concept of federal deposit insurance, so even if you don't trust your bank to stay liquid, your "loan" is guaranteed by the government up to some dollar amount (in the low hundreds of thousands, IIRC).

same in the uk thanks to the fscs, up to about £85k per person per bank(ing group).

can't read all the tl;dr posts itt but i'm currently in my last year (give or take) of a phd in economics and if anyone wants to ask questions about topics they are confused about i can try my best to answer them

I'm confused about Erdogans continued policy of lowering interest rates as inflation increases. The oft-given reason given of 'Islamic economics' seems unconvincing. Other reasons given are aims to reduce unemployment, and reduce bond yields.

Either way lowering interest rates when there is high inflation runs counter to orthodoxy, right. So where does this end up, is there a rabbit to be pulled out of the hat here in the next 6 months or so?

FDIC insurance is $250k (per account w/ limits - like you can't have 10 Wells Fargo checking accounts with $250k each to stash your $2.5mn)

xp- not intended contemptuous. i was mostly just teasing fizzles with the tl;dr comment

Haven't got to the end of this piece though you could possibly insert a few funny phrases and...maybe it could work in a novel.

This is a solid critique of Diamond-Dybvig. Firstly, the Nobel Committee got the model's central insight wrong. Secondly, even if that flaw is fixed, the model still has no relevance to modern banking!https://t.co/YniFNjf10t

— Rethinking Economics (@rethinkecon) October 21, 2022

Either way lowering interest rates when there is high inflation runs counter to orthodoxy, right.

I don't believe there is an accepted model of inflation in mainstream economics, in the sense that everyone agrees on what factors affect it and to what degree, like in the form of a mathematical formula. It does seem fairly widely accepted though that in "normal times" raising interest rates lowers inflation and vice versa. However, there are famous counter-examples, such as the recent experience of central banks lowering interest rates to even negative numbers in an effort to generate inflation which failed to materialize.

hi teenwolf's dad

I'm confused about Erdogans continued policy of lowering interest rates as inflation increases. The oft-given reason given of 'Islamic economics' seems unconvincing. Other reasons given are aims to reduce unemployment, and reduce bond yields.

Either way lowering interest rates when there is high inflation runs counter to orthodoxy, right. So where does this end up, is there a rabbit to be pulled out of the hat here in the next 6 months or so?

― anvil, Friday, October 28, 2022 12:34 AM (one hour ago) bookmarkflaglink

yes, it's extremely unorthodox. however, there is one quasi-orthodox-adjacent theory that recommends cutting interest rates to fight inflation: neo-fisherism

it's kind of a weird theory and doesn't really have any contemporary proponents. for a brief period during the econ blogosphere era it was associated with Steve Williamson and John Cochrane, but i believe both have renounced or distanced themselves from it (at least, i haven't seen either of them cheer on Erdogan's policies recently—though here's a video of Williamson on Bloomberg TV defending Turkey's monetary policy back in 2018)

i'll try to explain the gist of it

neo-fisherism derives from a relationship known as the "fisher equation" (after Irving Fisher) which states that the nominal interest rate equals the real interest rate plus expected inflation

the real interest is the return on investment in units of goods (as opposed to prices denoted in dollars). i.e., if i invest 10 linens today, in a week i get 11 linens back, real interest rate is 10%

expected inflation is the expected rate of growth of prices. i.e., i expect that linen will cost 2% more in dollars next week

the fisher equation says that if the real interest rate is 10% and the expected inflation rate is 2%, then the lowest nominal interest i would agree to is 12%. if i lend you 10$, you need to promise to give me at least 11.20$ next week.

the fisher equation is a "no arbitrage" condition. if i had the option to invest in linen at the real interest rate of 10% or to buy a bond at a nominal rate of 13%, then i could get a risk-free profit by exploiting the difference in prices. no arbitrage assumes prices have adjusted so that all such risk-free profit opportunities exist. when the fisher equation holds, i am indifferent between investing in linen and buying the nominal bond

the fisher equation holds in the data very robustly over the long run. the neo-fisherian proposition, however, comes from interpreting the fisher equation causally. the central bank manipulating nominal interest rates to be lower will reduce inflation

my understanding is that it is somewhere in the jump from "a pattern that holds in the long-run" to "a manipulable relationship policymakers can exploit" that things fall apart

it's also not entirely clear just how wrong neo-fisherism is. japan has had rock bottom rates and under-target inflation for decades. episodes like the volcker shock would seem to reject it, but central banks at that time didn't target nominal interest rates directly. turkey's experiment is probably the strongest evidence against it

mainstream academic macro has mostly not engaged with neo-fisherism. there are two exceptions i'm aware of that published in top journals

one is a paper by leading new keynesian macro-economist Michael Wooldridge. the idea is to study the "stability" of the neo-fisherian equilibrium when people in the economy don't immediately converge on the correct values of future prices. rather than have "perfect foresight", they have to grope around, guess, adjust, etc. it turns out that neo-fisherism is very sensitive to the slightest relaxations of perfect foresight

the other is an empirical paper by Martin Uribe. the paper makes the distinction between transitory (short-term) increases in nominal interest rates and permanent (long-term) changes. transitory increases should have negative short-term effects on inflation, but no long-term effect. permanent increases should have positive long-run effects on inflation (consistent with the fisher effect). the author does some sketchy macro-econometrics (nothing against his technical skills, but macro-econometrics is a fundamentally sketchy endeavor) and finds this to be the case in the data

for the most part, people ignore it and think anyone who believes it is a bit crazy

Interesting to see this thread developing. I wasn't understanding it well back when Mark S was talking, charmingly, about Quality Street, so I would probably understand less now.

It does seem like the meta-issue is how something seemingly so important, which ought to refer logically to real things we can recognise, is so incomprehensible.

But then lots of idioms that try to describe reality are, to me, also incomprehensible - most of science for instance.

if/when i have time my plan is to continue to drag at least certain topics towards small attempts at pinefox-friendly translation! (i hope others also attempt this, including ppl far more deftly familiar than me with the rebarbative topics at hand)

i also plan to explore why such translation often fails and what's going on when probably needful jargons congeal into multiple alienating monoliths

I am reminded that I actually read Lanchester's LRB short cuts on the mini-budget yesterday. It was full of swearing and blokeishness, in the Lanchester way I do not like. But again, overall, I did not comprehend it.

pinefox it could be fun if you'd c/p some stuff you read and didn't understand into the thread and ppl can try to talk about it in plainest terms

It does seem like the meta-issue is how something seemingly so important, which ought to refer logically to real things we can recognise, is so incomprehensible.

the level of economics which is recognizable to someone based on their day-to-day experience is a very small part of what economics considers. most people only have to make decisions about how they spend their time and deal with their personal finances. there is a part of economics that is concerned with this, but it's small--and arguably a bit boring

most of economics implicitly takes the perspective of a government setting laws and regulations, or a central bank setting interest rates

unlike an individual person's day-to-day choices, the choices of these large systemic actors will affect all aspects of the economy, and taking these into account requires thinking about all kinds of concepts that just don't matter to an individual person

if i buy 4 yards of linen or 5, that won't have any effect on the price of linen. but if the government imposes a tax on linen, it'll affect the price of linen, the price of other goods similar to linen, the wages of workers who are employed making linen, and so on, in ways that are hard to predict or discern ex post

it's a pretty unnatural and alien point of view to anyone imo. i don't think one should expect their day-to-day life to give them insight or intuition into how it works

FDIC insurance is $250k (per account w/ limits

this is why a lot of affluent people in the US (at least back in the early 2000s, most of these were also old people, so idk if this is still a thing) would have accounts at many banks, so they can have the FDIC insurance on all of their income.

unlike an individual person's day-to-day choices, the choices of these large systemic actors will affect all aspects of the economy, and taking these into account requires thinking about all kinds of concepts that just don't matter to an individual person

idk there are certain aspects of economic policy (e.g. tax policy) that have moral/ethical assumptions built into them, as well as making moral/ethical judgments. These things definitely affect an individual's day-to-day choices and they do kinda matter, if the person were to think about it, or be in a position where they had to think about it?

I'm only interested in individual persons. All the markets, the political managers who make hideous macroeconomic decisions subservient to the markets - that ultimately impoverish or kill millions of people, the billionaires that own them - they all need to be liquidated in a BIG death pit. Along with all the hideous posh wanker think-tank ghouls who constantly speak like this is the only way to manage economies.

idk there are certain aspects of economic policy (e.g. tax policy) that have moral/ethical assumptions built into them, as well as making moral/ethical judgments. These things definitely affect an individual's day-to-day choices and they do kinda matter, if the person were to think about it, or be in a position where they had to think about it?

i 100% agree w this and didn't mean to imply otherwise

the decisions policy makers make affect people's day-to-day lives/choices, but for the most part any individual normal person's day-to-day choices don't affect the broader economy. so the choices people make in their own lives are different from the choices governments or central banks make, in the chains of cause and effect they have to consider

Poster flopson: since you asked:

I didn't understand this:

Under normal circumstances, the fall of sterling would have limited immediate consequences for most citizens. (Big stress on ‘immediate’.) Bad news if you’re going on holiday, and likely to lead to higher interest rates in the undistant future, but not a systemic crisis. What was different this time was that thanks to innovations in the UK pension system, pension funds were exposed to derivatives risks linked to UK bond prices.

Or this:

During QE, the government printed electronic money and used it to buy back its own bonds – that is, its own debt. That made the price of bonds go up, which in turn made the yield on bonds – the interest rate, in effect – go down. This policy had upsides and downsides. One principal criticism of QE has always been that it would be difficult to undo. The bank’s plan was – officially, still is – to divest itself of £80 billion of QE-bought bonds a year. But now the bank is overwhelmingly likely to raise interest rates. A crash in the currency is a sign that people don’t want to invest in your country. Unfortunately, the government needs to borrow money to pay its bills. To get doubters to lend you money, you have to pay them more – and when you raise interest rates that’s effectively what you’re doing. It’s the opposite of buying your own debt; the opposite of QE, which makes interest rates go down.

same

if you folks don’t mind me adding: i think i lack even just the most primitive understanding of how bond markets work. i know that they are essentially loans. governments can “issue” bonds. the buyers of these bonds are either private individuals, or investment firms, or pension funds, or whatever. and the reason they’re buying them is because after a set period of time they will get back the money they paid for them plus an agreed percentage (the bond’s “yield”). what i don’t understand is how the yields can fluctuate. i thought when you bought the bond it came with a guarantee on its yield. if it’s a 5-year bond the yield will be (x). which is why bonds are safer than stocks, whose prices can rise and fall on the basis of, like, what elon musk happens to be tweeting that day. but during the truss debacle people were talking about bond yields changing by the minute! so.. what is that about?

i THINK the answer is: all of that is right, but: people can buy and sell bonds they hold, and the price they're buying and selling can certainly change based on demand etc. and if the price goes up, the yield, in effect, goes down.

I THINK

Casino economics!

I have trouble formulating my basic question coherently, but it think it is:

what is/are 'the markets'?

With sub-questions:

- do they really give an instant reaction to political decisions that is easily interpreted/understood?
- how free are we politically to develop policies that 'the markets' don't like?
- do/does 'the markets' understand long-term policies or are they always focussed on immediate actions.
- can you develop a coherent economic policy if you have an instant market judgement each day?
- do 'the markets' understand that without some kind of net zero/sustainability policy, economies are likely to collapse in the medium/long term?

I agree with poster Schlosser. I do not know what 'the markets' are.

in the old days the "markets" were the various big-city stock exchanges -- the london stock exchange, the new york stock exchange, the tokyo stock exchange -- where sellers physically gathered duting opening hours to find ppl who wd buy what they were selling*, and buyers gathered to find ppl who selling what they wished to buy. different spaces focused on different kinds of ware (hence markets)

there's a scene in the film trading places which gives you sense of such a space (hubbub verging on hell: one of the villains literally has a heart attack)

from the late 19th century some of the buy and selling switched to the telephone and a layer of stock brokers came to the fore who had the requisite knolwdge of prices and relevant movement of prices and (for a fee) handled the exchanges in question, at which point the "markets" began to move off into a virtual and even a conceptual space, and also an ever more unified and connected space

in the digital age the physical element is no longer especially of consequence: the markets take place on-line and never really sleep (the nikkei is awake when london sleeps and vice versa) and tho human stockbrokers still play a role, many active brokers are now basically robots and algorithms programmed to repond to minute fluctuations: again different "types" of market can still respond in different ways but they are ever more tighly integrated -- asymptotically we are always approaching just one single cap-M market (and the smaller, specifics-dedicated markets are no longer able to behave untouched by the activity of the single cap-M market)

*(commodities in paper form akak stocks, bonds etc, rather than actual barrels of apples or whatever)

tl;dr: *a* market is any space where buying and selling is happening, "the market" is the (still perhaps imagined, or anyway not-yet-measurable) totality of all buying and selling, "the markets" is the sum of the first as it tends towards the second

like it.

and if the price goes up, the yield, in effect, goes down.

literally every single wall street journal article mentioning bonds in any way explains this, usually in a parenthetical, seemingly as a point of style. v funny imagining the stereotypical business-minded wsj reader constantly having to be reminded of this, each morning, how does it go again, a moment of blank panic, oh right.

Pertinent to this is that many trades are automated and rely on computers being able to get the jump on other computers by a few nanoseconds. This article probably won't help the pinefox but illustrates how high stakes these are https://www.wsj.com/articles/high-frequency-traders-push-closer-to-light-speed-with-cutting-edge-cables-11608028200

*(commodities in paper form akak stocks, bonds etc, rather than actual barrels of apples or whatever)

I don't think I understand this.

I have heard about the high electronic speed of trading via articles by Donald Mackenzie in the LRB. But I usually didn't get to the end of the articles.

literally every single wall street journal article mentioning bonds in any way explains this

I note this, but, not having read the WSJ, I don't understand it, though I think I have also seen it mentioned in the UK press.

*(commodities in paper form akak stocks, bonds etc, rather than actual barrels of apples or whatever)

just that if you turned up unannounced at shrewsbury markethall with a barrel of apples you probably could set up a stall and sell them but if you turned up at the stock exchange with a barrel of apples you would probably be chased away by a policeman: what's for sale at a stock exchange is basically documents -- and stocks, bonds and so on are (or were) objects made of paper, tho in the digital age this may be less the case

(akak is a typo for aka viz "also known as", which didn't help clarity i agree)

amazing explanatory post, mark s!

if i remember right, the 'grain' chapter of William Cronon's Nature's Metropolis tells a pretty engaging tale of the birth of large-scale modern-ish commodity and 'futures' trading, situated in late 19th century Chicago. pretty amazing book overall IIRC (it's been 7-8 years and i definitely binged it).

FWIW, i took dlh's "literally every single wall street journal article..." remark as the beginning of an (imo amusing) meditation on the nature of that explanation appearing so frequently in the publication. in other words, this all highlights how normal and reasonable it is that anyone here wouldn't understand it - people who read the WSJ regularly aren't expected to recall it from the last time it got pointed out.

xp - Frank Norris' "The Octopus" deals with a similar subject and is situated around the same time. Also, around that time was the conceptual beginnings of the Federal Reserve Bank in the U.S. ... I forget the name of the book I read a year or so back that was a really good history of the Federal Reserve and what America was like before central banking.

I started to reflect that rather than attempting something like Blakeley (I gave up) I should try something like, say, an A-level Economics book. But would I understand that? Actually, no. Maybe there is a lower level - Economics for age 12, or something.

IIRC Animal Spirits was approachable and interesting in general and in terms of understanding (1) the 2008 recession and (2) challenges within economics as a discipline.
https://press.princeton.edu/books/paperback/9780691145921/animal-spirits

https://www.investopedia.com/terms/b/bond.asps

xp - in terms of the 2008 recession, that youn mentions, another possibly good recommendation for pinefox is "Diary of a Very Bad Year" (published by n+1) -- basically it's conversations between a hedge fund guy and a literary person interviewing him.

DC is correct re my post yes, sorry if thrust appeared to be “well no shit, don’t you read the wall street journal”

I doubt there is any simple way to interpret finance to pinefox or the rest of us, apart from a few of the most basic ideas. there are far too many different kinds of financial instruments, with new ones being invented constantly, each one with their new bits and bobs of intricacy, designed to squeeze out a bit more profit or shift a bit more risk away from the issuer. to an outsider like me it looks much like chaos.

For those interested, there’s a couple podcasts/YouTube channels that will help suss out the history and convoluted development of capitalism & economics, and also point out the deficiencies in Graeber & Wingrowe’s analysis.

-Derick Varn’s VarnVlog - https://varnvlogvoice.buzzsprout.com/
-What is Politics? - https://podtail.com/podcast/what-is-politics/
-The Regrettable Century - https://regrettablecentury.buzzsprout.com/

Specifically this one: https://www.youtube.com/watch?v=rbz4iAOzc7g
—
Also, this essay by History Prof Chris Wickham:

Chris Wickham, THE OTHER TRANSITION: FROM THE ANCIENT WORLD TO FEUDALISM, Past & Present, Volume 103, Issue 1, May 1984, Pages 3–36

(Those shows all handle things from more of a Marxist, anthropological one, rather than say an anarchist one)

what i don’t understand is how the yields can fluctuate. i thought when you bought the bond it came with a guarantee on its yield. if it’s a 5-year bond the yield will be (x)

OK, I'll bite. The fixed yield that you're referring to, the one that is set when you buy the bond, doesn't fluctuate. It stays fixed for the life of the bond. But that's not what people in the market mean when they talk about yields fluctuating. The fixed payment that you are guaranteed to receive is usually called the "coupon" (since in the very old days it was literally a paper coupon that you clipped off of your bond and exchanged for your interest payment). Perhaps the easiest way to think about yield is that it's the going coupon for new bonds sold today. If yields are going up, that means people now expect a higher coupon on a newly purchased bond than they did yesterday, and bond sellers must offer that higher coupon if they want their bonds to sell.

gotcha

Pretty sure I could still draw the Perfect Competition diagram, and explain the Laffer Curve. I’m just showing off.

Economics/finance is a massive blind spot for me too. I've been trying to understand central banks, and if I've got this straight, they can just print as much money as they like, when they like - ie, for quantitative easing they are basically buying government debt and paying for it by magicking up money out of thin air. Obviously this puts more money into circulation, which leads to inflation. But why is inflation such a bogeyman, why isn't it just a zero sum game? Let's say for example that instead of taxing people, governments simply printed the money they needed. Yes, this would lead to massive inflation, which would diminish the value of people's money. But at the same time, people wouldn't be paying tax and the extra money they had would compensate for the reduction in the value of the currency. Wouldn't it? I guess not, or all governments would be doing this!

i think you are in a prime position to read about modern monetary theory! https://en.wikipedia.org/wiki/Modern_Monetary_Theory

Thanks for that, interesting! I find the whole idea of fiat money fascinating - it's like a collective illusion or something, it only exists because people will it into existence...

no different than the gold standard - an arbitrary rock that people collectively will into believing has value

But why is inflation such a bogeyman, why isn't it just a zero sum game? Let's say for example that instead of taxing people, governments simply printed the money they needed.

it's a great question. some level of inflation actually is desirable

one reason why is that deflation is very undesirable as it leads to a "deflationary spiral": if consumers anticipate that prices will be lower tomorrow, they will delay purchasing, this then lowers demand, causing prices today to fall further, with causes firms to layoff workers and incomes to fall, which makes demand falls further, and so on. a positive inflation rate provides a "buffer" against deflation. this is especially important over the business cycle since prices tend to fall at the onset of a recession. during the early period of the great depression prices fell by something like 7% every year. central banks nowadays try really hard to avoid this

another reason is that monetary policy becomes ineffective at the "zero lower bound". nominal interest rates can't go (far) below zero (since at some point it becomes profitable to store cash under your mattress rather than buying bonds), which blunts the ability of central banks to stimulate the economy through rate cuts. a higher inflation rate pushes the economy further from this point

there has been a discussion over the last 10+ years about the fed increasing its inflation target for exactly these reasons. there's lots of speculation today that rather than aim to get inflation back to its previous target of 2%, the fed may "settle" at a new permanent higher rate of 3% or 4%

what's usually undesirable isn't inflation itself, but accelerating inflation, or more generally unstable inflation. in theory any given level of inflation should be "neutral" in the way you describe as long as it is stable

accelerating or unstable inflation can be a problem because it increases uncertainty in the economy, which is usually a bad thing. one way this manifests is that at the margin a higher baseline level of uncertainty will make people invest in safer (usually lower return) assets rather than riskier (higher return) ones

unstable inflation can also create lots of arbitrary and unequally distributed costs. many contracts are either written in nominal terms (i.e., no inflation-adjustment, or the inflation adjustment is only updated irregularly) and so people who signed a contract with an ex post low inflation indexation will get large wage cuts if inflation surges

How did I miss this thread for the last week??? Need to catch up.

Thanks flopson, that all makes sense - I can see that accelerating and unstable inflation is destructive, and maybe inflation in inherently unstable. But if it's possible to take that out of the equation - and maybe it isn't - then it seems to me that inflation is still the zero sum game, where value is transferred from people holding money to governments, or to people holding debt or other assets - but the value itself is not destroyed.

As for the gold standard being the same as fiat currency in terms of people willing it to believe it has value - I don't think that's quite right. Gold has an inherent scarcity value that fiat money doesn't. Governments can simply print more money, but you can't just print gold - you have to buy it or dig it up from the earth. Also gold has a use value (or did more obviously so when it first became a currency) because it has an aesthetic value as decoration.

Gold has an inherent scarcity value that fiat money doesn't.

okay yeah, but what you're saying is that humans value scarcity, not gold. for example, at various points in history people have valued cowrie shells, or wampum, on a similar basis to gold, believing these items to be similarly scarce. and governments can artificially create scarcity too - by just not issuing too much money. or, to put it a different way, to only make one entity (the government) capable of issuing money, and carefully regulating that process.

Also gold has a use value (or did more obviously so when it first became a currency) because it has an aesthetic value as decoration.

aesthetic value not limited to gold! why gold and not other items that had aesthetic value at the time? perhaps you mean some other property of gold? and what of non-western societies that were never on the gold standard?

flopson, I don't have an interesting econ question, but I am vulgarly interested in whatever juicy academic econ beefs various schools or luminaries have with each other, but the only thing that I've subconsciously absorbed from popular media is that the chicago school is some kind of abstract jerk generator, and that the behavioral economists think the non-behavioral economists are peddling scientology bracelets (or is it vice versa?), but as for professional talking-to-the-media economists, they all seem pretty polite and deferential to each other.

What's the inside scoop? Are there secret vicious twitter beefs between Ha-Joon Chang and Tyler Cowen we don't know about? Bitter school rivalries that only reveal themselves at seedy invite-only parties after conferences?

re: intrinsic properties of gold, just want to chime in to say that (like other precious metals) gold is extremely resistant to oxidation

Yeah I accept that there's an arbitrary quality to the gold standard - why gold and not cowrie shells - but ultimately it still constrains money as something that the issuer promises to exchange for an actual thing. With fiat money, there's no 'thing' at the bottom that the system is based on. It's just a lot of people agreeing to accept that a complete abstraction has value, so it seems to me to be on a different conceptual level.

it's tempting to think that the physical (and weighty!) nature of gold represents a less abstract 'value' than fiat money, but when you examine it carefully the value of gold used as money is no different than paper bills or digits written on an account sheet, for the simple reason that money itself is entirely abstract and that must always be its inherent nature no matter what "thing" represents it.

flopson, I don't have an interesting econ question, but I am vulgarly interested in whatever juicy academic econ beefs various schools or luminaries have with each other, but the only thing that I've subconsciously absorbed from popular media is that the chicago school is some kind of abstract jerk generator, and that the behavioral economists think the non-behavioral economists are peddling scientology bracelets (or is it vice versa?), but as for professional talking-to-the-media economists, they all seem pretty polite and deferential to each other.

What's the inside scoop? Are there secret vicious twitter beefs between Ha-Joon Chang and Tyler Cowen we don't know about? Bitter school rivalries that only reveal themselves at seedy invite-only parties after conferences?

― Philip Nunez, Tuesday, November 1, 2022 10:54 PM (eighteen minutes ago) bookmarkflaglink

this is probably going to be very disappointingly boring

the old freshwater/saltwater divide in macro has both weakened and geographically dispersed. the schools keeping the freshwater spirit alive today are minnesota, nyu and ucla. chicago's free-market identity has softened, too, although it's still known for having rude seminar culture and treating its grad students like shit

i would say the main beef right now is over the role of economic theory in empirical research in economics. specifically, there is a lot less economic theory in empirical research today, and some people are mad about it. berkeley, harvard and mit are on the atheoretical side (we call it "reduced-form") side while yale and chicago are more on the theoretical side ("structural"). princeton is somewhere in between. departments aren't really the main split and you see it more in sub-fields. fields like public finance, labor and development tend to be in the reduced-form camp, while macro, industrial organization and trade are more structural. josh angrist at MIT is probably the most outspoken advocate of the reduced-form approach, and the hugely influential graduate textbook he wrote over a decade ago ("Mostly Harmless Econometrics") takes a very confrontational approach, openly criticizing previous work for being opaque and "harmful"

purely theoretical economics, which used to be both what the majority of economists did and the most highly respected, is small today and many economists see theorists as weird nerds solving dinky math problems. most theorists are lucky if they can convince 1-2 graduate students a year to specialize in the field

i don't think things like behavioural economics are very controversial anymore. some economists have an aversion to behavioural explanations, in the sense that they'd rather an explanation that doesn't rely on people acting irrationally, and see the proliferation of behavioural "heuristics" as ptolemaic fudges whereby behavioralists explain every new phenomenon by positing a new bias. however there's now a lot of really good behavioural work and some of the biases are now very well-documented so you don't hear much complaining about it

If yields are going up, that means people now expect a higher coupon on a newly purchased bond than they did yesterday, and bond sellers must offer that higher coupon if they want their bonds to sell.

― o. nate, Tuesday, November 1, 2022 2:43 AM (yesterday) bookmarkflaglink

this has been covered elsewhere in the thread, but when the news is talking about yields going up its because bond prices have gone down on the secondary market - not because the coupon rate has increased.

"bond prices have gone down on the secondary market"

okay but i don't know what this means :/

secondary markets = people buying and selling bonds that have already been issued

suppose interest rates decrease. it then becomes worth it for someone to buy a bond which was purchased at an earlier date with a higher coupon rate. this pushes up the price of the earlier bond in the secondary market and decreases yield (since coupon is held fixed and yield = coupon/price)

this is why bonds are thought to convey expectations about changes in interest rates through the yield curve, a graph with yield on vertical axis and maturity on horizontal axis. the yield curve is typically upward sloping: higher maturity bonds (e.g. 10y) have higher yields than short (2y). this is due to the liquity premium (among other things). all else equal it's better to have a 2y than a 10y bond. even if you want a 10y bond, if they cost the same price, you could recreate a 10y bond by buying five 2y bonds, and then you'd have the option of re-evaluating each year whether you want to buy again. 10y bonds therefore have to sell at a lower price (higher yield) to make them attractive

if the yield on 10y bonds decreases relative to 2y, this suggests that people expect interest rates to decrease and stay low for a long time (which usually happens during a recession). this can cause the yield curve to flatten or invert

even if you want a 10y bond, if they cost the same price, you could recreate a 10y bond by buying five 2y bonds, and then you'd have the option of re-evaluating each year whether you want to buy again

this is a bit unclear. you could "re-create" a 10y bond by buying a 2y bond, waiting 2 years, then buying another 2y bond, etc. you have the option to re-evaluate (maybe a better investment opportunity comes along) every 2 years

A friend of mine has a very rare 70s folk album that he offers to sell me for £400. I say no thanks, but instead ask to borrow it for a month, paying him £80 for the pleasure. He agrees, hands over the vinyl, and I immediately sell it to someone else for £500. A week later the record is reissued on CD and the value of original pressings falls: I'm able to buy it back for £300, return it to my friend and keep the £120 profit.

I haven't been able to follow the thread, but that last statement doesn't make sense, as if you have only borrowed an item, you cannot sell it to someone else.

while i feel if you pay him to "borrow" it for a short period you're in fact renting it

There's nothing in our agreement to stop me selling it; as long as he gets it back at the end of the month he's happy, and he's made £80 from something that was otherwise sitting on his shelf doing nothing.

The risk is mine: if it hadn't been resissed and the artist had died, the value could've increased and I'd've lost money.

i think pinefox and i are disagreeing w/you abt terminology here

I think one can only sell something that one owns.

If Mark S lends me a copy of A HIDDEN LANDSCAPE ONCE A WEEK, I cannot sell it.

It is not mine to sell.

in the world of market-trading discussed in this thread (of stocks, bonds etc), something *like* fetter's manoeuvre is not just common, it is normal

• viz items passed across from trader A to trader B for a specified period
• trader B sells them to a third party C and repurchases them (ideally for a little less, so that trader B makes a small profit)
• the item is then returned per specified period

— what's different is that
(a) this is not the kind of unique item fetter is talking about, set about the benjaminian-auratic irreplaceability, but (very often) one document among many in the market at large so similar as to be identical (meaning that replaceability is not often an issue)
(b) the market culture is expecting and indeed encouraging such activity, so that if the word "borrow" or "elnd" or "rent" is used, it doesn't vitiate the possibility of such behaviour (quite the opposite)
(c) ownership is more a contractual matter (with specified penalties if the project goes awry) than the kind of moral-personal matter entailed by borrowing between pals

• the item is then returned per specified period

this shd say: the item is then returned to trader A per specified period

given the nanosecond nature of sales in the digital context, trader B may well undertake such a project many many many time before returning it to trader A

Mark S: what you say indicates that the market world you mention is different from the normal world. So analogies between the two point up the distinction or incommensurability between them, rather than showing a continuum in which the finance world is really just like ours.

yes! i think we are moving back and forth between different worlds like an example from wittgenstein

except when i was out getting a coffee i thought of a COUNTEREXAMPLE (which some would call an EDGE CASE)

suppose:
• i am walking past __________ where you work and you come out and see me, and i say "pinefox! just the chap! can you lend me a tenner till tuesday?"
• and you (luckily for the story) say "of course my fine fellow!" and hand over the relevant crisp plastic note
• and then on tuesday i seek you out and hand you the correct crisp plastic note

i feel we would both find it unexpected behaviour if you then said "well mark, i happen to know that you took my ten pound note to a CAKE SHOP and immediately bought several items that you then ate on THAT VERY BENCH OVER THERE -- so in conclusion this is NOT the note i let you borrow but merely another exactly like it… and we can no longer be friends"

in conclusion: money itself passes between these worlds more comfortably (this is kind of the point of it: that it was never not your ten pounds but i am allowed to do as i please with it as long as you get it back in good time and in kind)

(of course this is somewhat why some argue that friends shd never lend to or borrow from friends: it blurs the worlds)

Interesting. I am quite convinced by this post.

Once again, I thank you for the charming narrative and personal quality of your fictional examples.

i haven't read the book you abandoned but i wonder if passing between worlds through the barrier of seeming incommensurability isn't roughly what grace blakeley means by "financialisation": viz the turning of something not ordinarily seen as money into money (with all its curious attendant customs and assumptions)

"A commodity appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties. … The form of wood, for instance, is altered, by making a table out of it. Yet, for all that, the table continues to be that common, every­day thing, wood. But, so soon as it steps forth as a commodity, it is changed into something transcendent. It not only stands with its feet on the ground, but, in relation to all other commodities, it stands on its head, and evolves out of its wooden brain grotesque ideas, far more wonderful than 'table­ turning' ever was."

this is why bonds are thought to convey expectations about changes in interest rates through the yield curve, a graph with yield on vertical axis and maturity on horizontal axis. the yield curve is typically upward sloping: higher maturity bonds (e.g. 10y) have higher yields than short (2y). this is due to the liquity premium (among other things). all else equal it's better to have a 2y than a 10y bond. even if you want a 10y bond, if they cost the same price, you could recreate a 10y bond by buying five 2y bonds, and then you'd have the option of re-evaluating each year whether you want to buy again. 10y bonds therefore have to sell at a lower price (higher yield) to make them attractive

if the yield on 10y bonds decreases relative to 2y, this suggests that people expect interest rates to decrease and stay low for a long time (which usually happens during a recession). this can cause the yield curve to flatten or invert

― flopson, Wednesday, November 2, 2022 4:47 AM (five hours ago)

a simpler way to explain why the yield on a 10y bond is higher than the yield on a 2y bond (usually expressed as a higher interest rate on the 10y bond than the 2y bond, if both bonds are issued at the same time) is that the 10y bond is a riskier investment, so the higher interest rate is supposed to compensate you for that increased risk. it is riskier for a number of reasons - risk of default by the issuer (if issued by a company and not the government - not so much if issued by the government, because governments are viewed as close to risk-free as you can get via ability to print more money), but also riskier to you in that central monetary authority in your country to move interest rates against you, making your bond worth less than it was before for the various reasons we've discussed itt

(a) this is not the kind of unique item fetter is talking about, set about the benjaminian-auratic irreplaceability, but (very often) one document among many in the market at large so similar as to be identical (meaning that replaceability is not often an issue)

the word you're looking for here is fungibility, which is key to selling short. shares of common stock are the most common example in financial markets, because a share of common stock is completely fungible with another share of common stock. but you can extend this to other fungible items too, like bushels of corn, or megawatt hours of electricity, etc.

ok but my explanation is better than just saying "fungibility" (a word i admit i had forgotten) (also a word i like, bcz it looks like it means "can turn into a mushroom")

I think one can only sell something that one owns.

If Mark S lends me a copy of A HIDDEN LANDSCAPE ONCE A WEEK, I cannot sell it.

It is not mine to sell.

― the pinefox, Wednesday, November 2, 2022 6:29 AM (three hours ago)

putting aside one's principles here, the key to mark's example is that a buyer is indifferent as to whether the seller actually owns or doesn't own the item he is selling, so long as there are no consequences to the buyer if the buyer accidentally buys stolen goods. the law generally works this way too - any recourse by a wronged party here (i.e. if the copy of A HIDDEN LANDSCAPE ONCE A WEEK were in fact stolen from someone else) is against the seller, not against the buyer (assuming the buyer didn't know it was stolen). intuitively, that makes sense - when you buy a book online, do you first ask the seller "hey I just want to make sure this copy of A HIDDEN LANDSCAPE ONCE A WEEK wasn't stolen?"

that said, the government has an interest in making sure that items of high value like cars and houses can't be stolen and flipped so easily, so there is a titling system run by the government that then shifts some of the responsibilities back onto the buyer, such that if you're buying a used car or house, you do have some responsibility to do due diligence and make sure that you're getting a clean title of ownership etc. - ignorance no longer works in your favor here!

Yeah I accept that there's an arbitrary quality to the gold standard - why gold and not cowrie shells - but ultimately it still constrains money as something that the issuer promises to exchange for an actual thing. With fiat money, there's no 'thing' at the bottom that the system is based on. It's just a lot of people agreeing to accept that a complete abstraction has value, so it seems to me to be on a different conceptual level.

― Zelda Zonk, Tuesday, November 1, 2022 11:26 PM (yesterday)

this may be a bit unfair / putting words in your mouth, but it feels to me what is appealing about the gold standard to you is that gold is something that is out of the government's control to make more of without great effort on its part - that perhaps you distrust the government to make the right decision about its ability to print more money in a fiat money economy. in which case, may i introduce you to something called bitcoin!

i don't think zelda is saying the gold standard is attractive, just that it's conceptually different, which is true. monetary policy is very different under gold standard and fiat

With fiat money, there's no 'thing' at the bottom that the system is based on.

i guess it depends on what you mean by "thing"

the value of currency is targeted by the central bank to a level at which a meticulously measured index of prices (weighted to match the "basket of goods" a "typical" household consumes) grows at 2% per year

the central bank may fail at that task, but it has incredibly powerful tools to achieve it. and it's politically shielded to use them even when unpopular--it can even induce recessions

whether or not that consitutes a "thing" seems besides the point. an incredibly powerful institutional arrangement determines its value

It's just a lot of people agreeing to accept that a complete abstraction has value, so it seems to me to be on a different conceptual level.

"the value of [x] is not determined by its intrinsic quality but by how other people value it" is true not just of money but of everything. it's true that part of the value of gold is determined by people who like shiny objects, but if we used a gold-backed currency that would be a negligible share of its value. (and if a "law of one price" holds, the premium from its shiny-object value will get arbitraged away)

Mark S: I have read Marx on the commodity many times, and each time I seem to have understood it less.

And isn't that meant to be the easiest chapter in the book?

It would be good for the thread (most of which I don't understand) if Mark S embarked on a close reading (and posting) of Grace Blakeley's STOLEN. (Most of which I might not understand.)

Come to think of it, this title STOLEN seems to chime with the apparent claim above, that the economy is based on people selling stolen things.

this is probably going to be very disappointingly boring

the old freshwater/saltwater divide in macro has...

That was pretty interesting -- thanks! Are there any pop economists that are considered charlatans or well past their sell date by academia? For example, I get the feeling Chomsky's status is firmly in the emeritus box by most working linguists.

re: gold
apparently all the gold mined throughout all of history would be enough to make less than a dozen solid gold life-size Gundam robots
https://img.kyodonews.net/english/public/images/posts/ae6aaa18fca7838e0a6264898141e49c/photo_l.jpg

I guess I'd rather have a solid gold Gundam than one made of crypto...

ts: Marx vs Mark S

we are the real-life life-size gundam robots

https://ichef.bbci.co.uk/news/976/mcs/media/images/66662000/jpg/_66662411_wimbledon_gold_624.jpg

a simpler way to explain why the yield on a 10y bond is higher than the yield on a 2y bond

Except that currently the yield on the 10y bond is lower than the yield on the 2y bond.

that’s an inverted yield curve, means we’re headed for a recession baby

https://en.m.wikipedia.org/wiki/Inverted_yield_curve

https://www.nytimes.com/2022/11/02/business/treasury-yields-bond-market.html

News says that interest rates are going up.

Does that mean that whatever money I have in the bank is finally going to gain interest?

only you're with a bank that is interested (pardon the pun) in passing on interest to you - nothing that says they have to!

for example, here in the states a savings account with bofa right now pays 0.01% in interest, while a savings account with ally pays 2.5% - a difference of 250%! both banks are making at least the current benchmark rate on deposits of 3.75-4% , except bofa is keeping all of that interest for itself and passing on pennies to its customers! bank wisely!

lol bofa

from the NY Times article:

When an investor owns a Treasury bond until it matures, the return an investor will receive is fixed, but because government bonds are publicly traded, their value can rise or fall just like a stock price and that means yields move higher or lower, too.

because while the coupon doesn't change, the price the bond is bought and sold at does change, so the effective yield does too.

just reading that sentence i would assume that return and yield (and value / price) are simply different things

or perhaps subtly different things

yield = coupon/price

Coupons are going up on newly-issue bonds. Old bonds trading in the secondary market that have lower coupons will decline in price (because why would you pay full price for a lower-coupon bond when there are newly-issued bonds available at higher coupons?). Yield is a mathematical formula which basically says that buying this old bond at a lower price is approximately equivalent to buying a newer bond with a higher coupon in terms of the interest you will receive relative to the amount you paid.

wait yield equals coupon divided by the price??

Not exactly, no. But yield increases with coupon and decreases with price. So it gives you an approximate sense of the relationship.

sorry o nate that was a good explanation i’m just feeling amazingly dim

when you say “yield decreases with price” you mean “yield decreases as price increases” correct? e.g. what we always hear trotted out in articles about bonds

Yes. The price of an old bond with a lower coupon has to decrease so that its yield increases enough to make it a good value relative to a new-issue bond with a higher coupon.

some bonds change their yield percentage on a schedule, too
ex: US i-bonds https://www.treasurydirect.gov/savings-bonds/i-bonds/

Series I savings bonds protect you from inflation. With an I bond, you earn both a fixed rate of interest and a rate that changes with inflation. Twice a year, we set the inflation rate for the next 6 months.

I believe the fixed rate was near 0% earlier this year (it's 0.4% now) so the interest is paid twice per year at a fluctuating rate

obviously this is a government bond, results may vary, etc

I-bonds are a different beast altogether.

It’s difficult to see the social benefit in much of this, apart from being helpful to government cash flow

I guess we have the Venetians to thank.

https://ritholtz.com/2013/12/birds-boats-and-bonds-in-venice-the-first-aaa-government-issue/

meat stone is great altho i

It’s difficult to see the social benefit in much of this, apart from being helpful to government cash flow

*with interest

i think that’s a mischaracterisation. what I don’t see the benefit of is the overnight, lightning fast moves to eke out a few hundreths of a percentage point here and there. All that stuff - it seems to me - is less about borrowing and lending money, facilitating cash flow and capital expenditure in the long term etc and more just about trying to game trades to make money for oneself or one’s bosses

but that is precisely what facilitates cash flow, by which I presume you mean liquidity. liquidity is what encourages lenders to lend. unfortunately, as long as liquid markets exist, there will be arbitrageurs and high frequency traders who will try to eke out those 1, 2, 3 basis point gains. if you want to be charitable, those market participants provide something very important: liquidity!

From that Venice article:

As with any bond, as the price of the prestiti went down, the yield went up.

It's amusing to think that people have been reading this sentence and scratching their heads since probably at least the 12th century.

*points furiously at table as it flips on its head*

it's weird out there people (things turning into money)

https://pa1.narvii.com/7781/2594f7301ac2d1776fc9b8290c70ad144d3f7241r1-480-270_hq.gif

LRB 3.11.2022

https://www.lrb.co.uk/the-paper/v44/n21/paul-taylor/academic-benefits

I read this new article on pensions. I did not comprehend it. A pity as I have one of these pensions.

I particularly lost track around here.

One great attraction of government bonds is that powerful countries with their own currencies don’t default – if all else fails they can print the money required to meet their obligations. Another is that they pay a guaranteed rate of interest. The only problem, as far as pension funds are concerned, is that you can’t predict the interest rates on bonds the government might issue next year or the year after. If interest rates go up, then bonds already issued, which pay the old, lower rate of interest, will seem less valuable. If you want to sell those bonds you will have to accept a lower price. In a world where bonds are continually traded, it makes sense to think of the income generated by the bond as a proportion of the current rather than the initial price. Traders talk about the yield rather than the interest: if the price of a bond goes down, then since the interest it pays stays the same, the yield will go up.

In a simple world, a pension fund manager could use the contributions from employees to buy bonds, and the fund’s liabilities and assets would be perfectly matched. But fund managers have traditionally put at least some funds into riskier investments, such as stocks, to generate higher returns. The risks are manageable because pensions are long-term investments and can ride out market fluctuations. The managers of closed schemes, however, are primarily focused on balancing the books, so invest in bonds rather than stocks. In recent years they have used a strategy called Liability Driven Investment (LDI) to guard against the risk that the yields from their assets will be lower than the yields used to calculate their liabilities. A key element of LDI is hedging – for example, protecting a fund against low or falling bond yields by betting that yields will go down. If yields go up, you can buy high-yielding bonds and not worry about the bets you lost. If yields go down, you will have to buy more bonds to get the same return, but at least you have an additional income from the bets you won. For the last ten years, bond yields have stayed low, LDI has been a winning strategy and many schemes have moved into the black.

I revert to the reflection that it is frustrating, for me, that a publication to which I subscribe prints things that I cannot comprehend.

Never mind the fact that this apparently directly relates to my life.

https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls

this may be an easier explanation for you?

pension funds are a whole new exciting concept for this thread! It also goes back to math and nerds solving math problems. Pension Fund Managers (the people who are responsible for making sure there is enough money in the pension fund to pay out) are generally some of the most conservative investors (i.e. risk averse), because they aren't investing/managing money for rich people, but for old people who rely on the pension in order to live, and the pension itself was something contributed by the employer on behalf of the worker, as in, the worker lacks control over the money that will pay for their comfort in their old age or disability. The worker trusts the employer, and the employer trusts the pension fund manager.

Pensions are what are called (at least here in the US) "Defined Benefit Plans" -- as in, the pensioner is guaranteed to get a certain amount out of the fund when they retire. The concept is, "they will have enough to live comfortably until they die".

So, then someone has to determine what that amount is. And a lot of the problems that pension funds have had in the past 20 years (perhaps more), is the "until death" aspect of the calculation. People live longer. Therefore the pension fund needs to have more money (and earn more money from investments) in order to cover that expense. This is why you see pension funds investing in riskier things (e.g. the mortgage backed securities in 2008 that caused the recession), so that the pension fund will have enough money to pay the pensioners.

I think the largest problem pension funds have had in the last 20 years beyond that is that they have nearly ceased to exist outside of a handful of unions. Most corporations switched to a 401k-with-some matching model and the legacy pension obligations just get traded to whatever company loses in mergers/spinoffs

Literarily speaking, one could draw examples from "Lord of the Flies" in a description/analysis of pension funds ...

I think I was one of the last people through the door eligible for the pension fund when I started a job, and that was back in the early 00s. They completely killed it a year or so after I was vested

I think the largest problem pension funds have had in the last 20 years beyond that is that they have nearly ceased to exist outside of a handful of unions

many of these are government workers though. So, they are nowhere near "vestigial" in terms of impact on current economics ... I'm sure we've had this discussion on other threads but, a lot of US Cities have budget problems due to pension obligations to Police and Fire retirees, who tend to retire earlier than the average worker.

going back in a way to Marx ... this is another thing to blame cops for.

poster [unreadable symbol], I can't access that article.

I actually do understand sarahell's post about pensions above.

Does anyone else comprehend the LRB article?

LDI
Here is a simple model of a pension fund. You know you will need to pay out a bunch of money 30 years from now, so you buy some 30-year government bonds and hold them to maturity. When the bonds mature in 30 years, you have money, which you give to the pensioners, and you’re done. This model is obviously oversimplified, 1 but it’s a good start.

Let me make three points about this model. First, a financial point: Doing a pension fund this way is expensive. Thirty-year UK gilts (government bonds) paid about 2.5% interest this summer. If you want to have £100 in 30 years, and bonds pay 2.5%, you’ll need to put aside about £48 now, which will grow at 2.5% over 30 years into £100. 2 If you are a company or government, you might not be jazzed about putting aside almost half the money now to pay pension obligations in 30 years. What if you bought some stocks instead? If stocks return 8% a year on average, you can put aside just £10 now to get back £100 in 30 years. That’s a much better deal, for you, now. Of course the gilts pay 2.5% guaranteed, while the 8% stock-market return is just a guess; in 30 years, you (and your pension beneficiaries) might regret your riskier choice. But it saves you money now, and it’ll probably work out fine. Or, you know, you do some mix of super-safe gilts and riskier corporate bonds and stocks, etc., still targeting £100 in 30 years but putting less money in now and taking more risk to get there.

Second, a financial-stability point: Structurally, pensions are about the safest form of investing. Most big investors in financial markets are, to some degree or other, structurally short-term, in ways that make markets fragile. Banks borrow most of their money short-term (from depositors, from capital markets), and if there’s a run on the bank then the bank will need to dump assets to pay back depositors. Mutual funds let their investors take money out every day, and if a lot of investors want out then the funds will have to dump stocks to give them their money back. Hedge funds let investors take money out and also tend to borrow money from prime brokers; if their assets go down then they will get margin calls from brokers and will have to sell assets to meet them. The common theme is:

You buy some assets with other people’s money.
The assets go down.
The people — depositors, investors, prime brokers — call you up and say “you used my money to buy assets, and the assets went down, so now I want my money back.”
They have the right to do that.
You have to sell assets to pay them back.
This makes the price of the assets go down more.
Go to Step 2.
More or less every bad story in financial markets is this story, a “deleveraging” or “run on the bank.” Pensions are immune to this. Pension funds own assets (gilts, stocks, etc.) with other people’s money, in the sense that they are ultimately supposed to use those assets to pay benefits to pensioners. But the beneficiaries can’t take their money out if the fund has a bad year. They just have to wait. There are no runs on pensions. The pension has to come up with £100 in 30 years, but that’s it; it can’t be forced to sell early along the way.

This means, for one thing, that if you run a pension you can confidently invest in risky assets like stocks: If stocks go down one year, you can make it up next year; you’re not going to have to shut down your pension fund because investors withdraw money after a year of bad returns. It also means that pensions are not supposed to destabilize financial markets: They are long-term investors and are not forced to sell when markets go down.

Third, an accounting point. Take the simple model of a pension: You buy a bond today to pay £100 in 30 years. I said above — with some simplification — that you pay about £48 for that bond. That is the value of that bond: The value of getting £100 in 30 years is £48 today. How do you account for that? What does the balance sheet look like? At some conceptual level, the balance sheet looks like “in 30 years I will have pension liabilities of £100 and assets of £100,” so it balances. But in practice accounting doesn’t work that way. In practice you will record the value of the bond as an asset, today, at £48. But by the same logic, you will record the value of your liability at £48: The cost of paying £100 in 30 years is £48 today, so you have assets of £48 and liabilities of £48 and it all balances.

What happens if interest rates change? Let’s say that the interest rate on 30-year gilts falls to 2%. This means that the market value of your bond goes up, to about £55. Do you have a windfall profit? Can you sell a portion of the bond? No, of course not. The market value of your bond has gone up, but you don’t care about that. The bond, for you, is a long-term, hold-to-maturity investment. For you, the bond pays £100 in 30 years; you don’t care about its market price now. But by the same logic, the present value of your liabilities goes up: Your obligation to pay £100 in 30 years is now “worth” £55, using a 2% discount rate. So your balance sheet still balances.

In the simple case, none of this matters and it is sort of a confusing fiction. You have to pay £100 in 30 years, you have an asset that pays £100 in 30 years, you’re done; market fluctuations don’t affect you at all. Accountants will want you to record the value of your asset and the value of your liability at their discounted present value, and that value will fluctuate with market interest rates. As rates go up, the value of your bonds will go down but the discounted cost of future pension benefits will go down; as rates go down, the bonds will go up but your cost will go up too. In the simple case these things will always offset and won’t trouble you very much.

But once you move beyond the simple case this gets worse. Let’s say you have to pay £100 of benefits in 30 years, and you plan to pay for that using half bonds (gilts worth £24 today) and half stocks (stocks worth £5 today). If gilts yield 2.5% and stocks return 8% per year for 30 years, that will give you £100 in 30 years, enough to pay those benefits. But today, you have assets of £29 (£24 of gilts and £5 of stocks), and liabilities of £48 (the present value of that £100 pension obligation in 30 years at a 2.5% discount rate). So your pension is underfunded, by £19. 3 It happens! It might be fine, if you get the returns you want. But it could make you nervous. One way to overcome this nervousness is to invest in even riskier assets with higher returns, so that next year you have, you know, £33, and are less underfunded.

The bigger problem is what happens when interest rates change. Again, say that the interest rate on 30-year gilts falls to 2%. Now you have £55 of liabilities (the present value of your pension obligations discounted at 2%). The value of your gilt holdings has gone up to £27.50 as rates fell. The value of your stock holdings might not have, though; stocks don’t move automatically with interest rates. Still, let’s say that your stocks have gone up, by 20%, to £6. Now you have £55 of liabilities and £33.50 of assets. You are underfunded by £21.50 instead of £19, which is worse. You have “lost money,” in a very accounting-fiction-y sense. Your actual pension obligations (how much you need to pay in 30 years) have stayed the same, and the market value of your assets has gone up. But your accounting statements show that you have lost money.

Notice that what this means is that, on a reasonable set of assumptions, pensions are short gilts: They lose money (in an accounting sense) whenever interest rates go down (and gilt prices rise), and they make money (in an accounting sense) whenever interest rates go up (and gilt prices go down). 4 Notice also how counterintuitive this is: In its simplest form, a pension fund just is a pile of gilts. The basic default move for a pension manager is to take a bunch of money and put it in gilts. Intuitively, she is long gilts: She has a pile of government bonds, and as rates go down the value of her holdings goes up. But as long as she doesn’t put all of it in gilts, and as long as the pension is underfunded, then she is as an accounting matter short gilts.

I said above that pension funds are unusually insensitive to short-term market moves: Nobody in the pension can ask for their money back for 30 years, so if the pension fund has a bad year it won’t face withdrawals and have to dump assets. Still, pension managers are sensitive to accounting. If your job is to manage a pension, you want to go to your bosses at the end of the year and say “this pension is now 5% less underfunded than it was last year.” And if you have to instead say “this pension is now 5% more underfunded than it was last year,” you are sad and maybe fired; if the pension gets too underfunded your regulator will step in. You want to avoid that.

And so the way you will approach your job is something like:

You will try to beat your benchmark, buying stocks and higher-yielding bonds to try to grow the value of your assets.
You will hedge the risk of rates going down. If rates go down, your liabilities will rise (faster than your assets); you are short gilts. You want to do something to minimize this risk.
The way to do that hedging is basically to get really long gilts in a leveraged way. If you have £29 of assets, you might invest them like this:

1. £24 in gilts,
2. £5 in stocks, and
3. borrow another £24 and put that in gilts too.

That way, if rates go down, the value of your portfolio goes up to match the increasing value of your liabilities. So you are hedged. You were short gilts, as an accounting matter, and you’ve solved that by borrowing money to buy more gilts. In practice, the way you have borrowed this money is probably not by actually getting a loan and buying gilts but by doing some sort of derivative (interest-rate swap, etc.) with a bank, where the bank pays you if rates go down and you pay the bank if rates go up. And you have posted some collateral with the bank, and as interest rates move up or down you post more or less collateral.

This all makes total sense, in its way. But notice that you now have borrowed short-term money to buy volatile financial assets. The thing that was so good about pension funds — their structural long-termism, the fact that you can’t have a run on a pension fund: You’ve ruined that! Now, if interest rates go up (gilts go down), your bank will call you up and say “you used our money to buy assets, and the assets went down, so you need to give us some money back.” And then you have to sell a bunch of your assets — the gilts and stocks that you own — to pay off those margin calls. Through the magic of derivatives you have transformed your safe boring long-term pension fund into a risky leveraged vehicle that could get blown up by market moves.

I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own.

Anyway, as I said above, 30-year UK gilt rates were about 2.5% this summer. They got to nearly 5% this week, and were at about 3.9% at 9 a.m. New York time today. You can fill in the rest. Here are Loukia Gyftopoulou and Greg Ritchie at Bloomberg News:

Fund managers running billions for pension funds faced collateral calls on strategies meant to give them exposure to long-dated assets to help match obligations that can extend decades. The so-called liability-driven investment, or LDI, funds were forced to post more collateral after receiving margin calls when gilt prices collapsed.

The central bank stepped in Wednesday after the calls threatened to push the gilt market into a downward spiral. The BOE had been warned by investment banks and fund managers in recent days that the collateral requirements could trigger a gilt crash, according to a person familiar with the BOE’s deliberations before they stepped in.

“The BOE intervention was required to prevent a vicious cycle becoming even more dangerous for pension funds forced to sell their gilt exposures,” Calum Mackenzie, an investment partner at Aon, said after the BOE intervention. “The market’s swift and significant reaction underlined the big risk faced by pension funds who have had or who could have had their liability hedges reduced.”

Firms including BlackRock Inc., Legal & General Group Plc and Schroders Plc manage LDI funds on behalf of pension clients. The pension firms use them to match their liabilities with their assets, often using derivatives.

The size of the LDI market has exploded over the past decade. The amount of liabilities held by UK pension funds that have been hedged with LDI strategies has tripled in size to £1.5 trillion in the 10 years through 2020, according to the Investment Association. These trades are typically used by defined benefit pension schemes. ...

When yields fall the funds receive margin and when yields rise they typically have to post more collateral. After the spike in gilt yields on Friday and into this week, LDI fund managers were hit by margin calls from their investment banks.

LDI collateral buffers are partly set using historical data to build models based on the likely probability of gilt price movements, according to Shalin Bhagwan, head of pension advisory at DWS Group. The sudden recent surge in gilt yields “blew through the models and the collateral buffers,” he said.

And here is the Financial Times on the BOE’s intervention:

The bank stressed that it was not seeking to lower long-term government borrowing costs. Instead it wanted to buy time to prevent a vicious circle in which pension funds have to sell gilts immediately to meet demands for cash from their creditors. That process had put pension funds at risk of insolvency, because the mass sell-offs pushed down further the price of gilts held by funds as assets, requiring them to stump up even more cash. “At some point this morning I was worried this was the beginning of the end,” said a senior London-based banker, adding that at one point on Wednesday morning there were no buyers of long-dated UK gilts. “It was not quite a Lehman moment. But it got close.” …

“If there was no intervention today, gilt yields could have gone up to 7-8 per cent from 4.5 per cent this morning and in that situation around 90 per cent of UK pension funds would have run out of collateral,” said Kerrin Rosenberg, Cardano Investment chief executive. “They would have been wiped out.”

And FT Alphaville has two very good explainers of the LDI problem, one by Toby Nangle and another by Alex Scaggs and Louis Ashworth, which I have drawn on here. And here is Nangle’s prescient LDI explainer from July. Modern finance made UK pensions vulnerable to runs, and then there was a run on those pensions, and the Bank of England had to step in to buy gilts to save them, because that’s what happens in a bank run.

" You know you will need to pay out a bunch of money 30 years from now, so you buy some 30-year government bonds and hold them to maturity. When the bonds mature in 30 years, you have money, which you give to the pensioners, and you’re done."

I don't think I follow your second sentence.

If you have the money at the start, why would you buy something else with it?

you don’t have enough money at the start for what you need to pay out in 30 years, so you buy something that allows you to do so (gilts) because gilts accumulate interest

Does gilts mean gold bars or another gold item?

it’s a britisher version of a bond, which is a basic security that pays fixed interest on a schedule until the principal is due, at which point you also get the principal… imagine a loan but the loan gets chopped up and many different people can own a piece of the loan.

what you're buying with the money "at the start" is very precisely access to this same money in 30 years time, at a guaranteed (increased) value, guarantee and increase defined by the fund in the question (perhaps bcz as 龜 says you need the increase to pay for something you can't afford right now)

it's also guaranteed to be there when you need it in the future (a shoebox under the bed can be stolen by others and raided by you): it's there to privde you with cash after you've stopped earning and to be safe from temptation in the meantime

"you have money" is an intrinsically ambiguous phrase:
• cash in hand is right there and useable but that may be a drawback (you fritter it away on books by perry anderson when you're meant to be saving up for a yacht)
• cash in the bank is less convenient (but you earn interest in addition to the original sum)
• cash in bonds or a pension fund (or various other things) can only be accessed after a certain pre-decided timelapse but it doesn't "go elsewhere" and ideally when the time has lapsed you will be able to withdraw more rhan you put in (sometimes quite a lot more)

however sadly sometimes it DOES "go elsewhere": banks and funds can fail, basically because -- for reasons relating to their other activities -- when it comes time to pay out (which means paying out to a LOT of people at once) they don't have the readies and people are queuing and pushing and fighting to get their share first before it runs out (this is called a "run on the bank")

"you fritter it away on books by perry anderson when you're meant to be saving up for a yacht"

I like this. It's very realistic.

gilts are british government bonds

a bond is a fancy iou (ie set about with all kinds of legal safetyguard), where you give the govt money for some project and they promise to pay you back after a given time at some agreed rate

they're called "gilts" bcz the docs used literally to be gilt-edged; consequently "gilt-edged" as a metaphor can mean reliable, because (unlike high street banks and other institutions), the government never runs out of money -- it can always just print more

(there are drawbacks to "just printing more": famously inflation is one of these, where it doesn't run out of money but the banknotes do "run out of value" -- a million marks for a loaf of bread, this kind of thing -- but that's matter for a different post lol)

So 'IOU' meaning - the *government* owes the citizen who buys the 'bond'?

You spend £100 and they say 'I owe you this £100 at a later date' ?

And the reason to buy it is that it comes back to you as more than £100?

If so, where does this extra money come from?

the simplest answer is the government can create more money to pay the interest on your IOU

it doesn’t “come back to you” at more than 100 pounds - you get paid back 100 pounds when the gilt matures (that is, at the date the government is required to pay you back). the extra money comes from the interest the government is required to pay you for as long as you hold the IOU. this is known as an ‘interest rate’ and is usually paid either semi annually or annually

And the extra money comes from the government 'printing' more money? (Maybe they don't literally print it?)

where it's from depends what the bond is funding: sometimes for example it's a project that will return a profit so the extra money comes from that profit (though this is more a stock than a bond i guess); and sometimes it simply goes into a financial fund which is "managed" in such a way it "grows" (i think i'm going to leave the explanation of *this* to a later post lol)

but often it's for projects that are not at all profitable in the normal sense (during wars in the past the government would issue "war bonds" to fund troops and guns, items many of which by definition would simply end up blown to pieces)

however where the government is concerned the extra money in the end can always come from their ability to control huge amounts of money (and to print more when it's need) (except in very rare case, states collpasing, hyper-inflation): a government can *always* find the extra money and so they can keep the promise they made

do they still print it? sometimes yes! but yes, they can also simply declare that a number on a screen will get bigger

It seems like the bond involves a citizen loaning money to the government.

But why would a government borrow from a citizen, as the government is almost infinitely more wealthy than a citizen?

And as was pointed out above, the government seems to be able to create more money if it wants to?

So it doesn't need to borrow our money.

thats a great question, and i can think of a couple of different answers. the first is that if the government just printed everything it needed, that would massively accelerate inflation because of all the new money the government is introducing into the money supply

another answer is that its a way to facilitate private lending by setting the “risk free” rate. because the government can always pay back its debts by printing more money, when you lend money to the government it is seen as being virtually 0 risk. compare that to lending money to your neighbor down the street, who might abscond with your money without any recourse by you!

so if lending to the government is risk free, then the interest rate paid by the government is the risk free rate. if you lend to anybody else other than the government (for example, you buy a bond/IOU issued by a company like Jaguar) you will ask for the risk free rate + a spread, that is more interest than if you were lending to the government, to compensate you for the increased risk of lending to a non-government entity. so if the government interest rate was 2%, you might ask for 3.0% for your bond from Jaguar.

since tons of private companies borrow all the time, it’s important for everybody to know what the “risk free” rate really is, in order to set a benchmark against which to price IOUs not issued by the government

regarding yachts and novels I think someone said the same about housing and his choice to live out of a suitcase which is why I think minimalist functional housing that eliminates hoarding (fear of loss of manna or the future) would be a good end but not one that I have attained yet

I think the government is betting on its tax revenue and the future governments likely to sustain that.

Thanks poster [don't know the name] for your replies, they were quite helpful.

another (more political than economical) part of an answer to "why do govt issue bonds when they could surely just print the money?" is very much that it brings the general public into the projects: as well as raising funds it's both straightforwardly informational ("this is what the government is doing! building roads!") and propagandist ("you can be part of it -- and you will be directly rewarded as well as socially rewarded!". cheaper war bonds especially were the subjects of stories and adverts in big newspapers and popular magazines, with the aim of exciting the less moneyed readership into feeling they were contributing and helping create a better future*

so wars or railways or whatever across taking place or being built in distant parts of the empire back then (i guess i'm thinking late 19 the century to between the world wars) seemed much more immediately part of "our collective national journey!" -- the investor helped build and and got fairly speedy return even if he/she never used the road or the railway him/herself

*in many if not most cases this was a highly questionable assumption

Have definitely heard of war bonds. (I think Batman and Captain America advertised them?)

So I seem to learn something here. War bonds (WWII) meant 'citizens loaning money to government to spend on tanks'.

Then presumably the citizens received the money back after WWII.

https://translate.google.com/?sl=auto&tl=en&text=%20%E9%BE%9C&op=translate

yes!

tho as 龜 notes they possibly got the yearly interest on the investment back even earlier

A recurrent statement seems to be 'creating more money causes inflation'.

I think that means: It makes the value of money (eg £1) go down?

ie: £1 would buy less - so the Perry Anderson book would cost £30 rather than £15?

I try to grasp this. Is it about scarcity, ie: things that are scarce are more valuable for some reason (unsure why), so if money is less scarce it is less valuable.

If copies of Mark S's book A HIDDEN LANDSCAPE ONCE A WEEK were given away at every railway station then the value of the book for sale would go down.

Unsure, though, if that relates to how many copies of the book exist. Maybe lots of copies could exist and all cost £20.

adding (re my cynicism abt war bonds, above): i guess if "a better future" entails the interim defeat of fascism that's not so "questionable"

i am sour abt them partly bcz i recently edited a highly entertaining biography of turn-of-the-century fraudster and politician horation bottomley, who in WW1 set up a "war bonds" scheme thru his shrieking and ultra-gammony monthly john bull, which -- to cut a long story short -- merely fleeced his readers, bcz the money entirely ended up in his own pocket (or more precisely funding the various shortfalls of multiple earlier frauds lol)

pinefox, it might be easier to start with smaller scales of government. in the USA, cities can't print money, but they CAN issue bonds. let's say the city gov't wants to build some piece of very expensive infrastructure, like a bridge or a sewage treatment plant. there's no money in the normal budget to do anything remotely this big, and raising the extra money through taxes is politically undesirable. instead they issue bonds, in other words going into debt: everybody buying a bond is effectively loaning the city $100 today for the promise of getting that $100 back, plus interest, in due time.

the city's not as worried about that bill coming due as they were about the big initial price tag, because they can spread the costs over the long term, and also bake them into the accounting for the project itself. the bridge tolls, or the few cents of additional sewer charges on everybody's water bill, will ultimately cover the loan. and if they don't, well, most people are still confident that even a puny city government, unable to print money, has powers to gin up money (raising taxes, cutting essential services, issuing more bonds). in the worst case the city could beg for a bailout from the state of the feds. the people buying bonds know that the city will always use these powers if it can, because defaulting on bonds basically would ruin their credibility, and completely wreck their ability to finance projects in this way. so even though the city can't print money, it feels like a pretty safe investment.

all the tolls-and-charges math gets very carefully examined beforehand, and (since the Progressive era) the state sets debt limits for cities, to keep them from getting in way over their heads with capital projext debt like this. so this bond stuff is one big big reason so many municipal projects are expected to be "self-financing," that is, for it to involve its own income streams that will pay for the loan. in the absence of some bigger, richer entity coming in with sacks of no-strings-attached money, like say the federal government during the New Deal, it's very very hard to get a city government to say "this is just plain worth doing, we're gonna raise taxes and pay for it with no expectation that it will break even somehow."

cities also build all kinds of non-money-generating things, like schools and libraries. here they probably also issue bonds, but dedicate a chunk of their budgets to servicing the debt, and maybe raise taxes ("vote YES on the .2% sales tax, for better schools!"). but even this stuff is expensive and unattractive. you can see why so much American urban infrastructure/buildings date from the New Deal to Great Society period, when the money was basically flowing in from above, either as cash upfront or support for the debt service on bonds. as that federal faucet was closed by the neoliberal shift, cities got broke and stingy again. (also most of their tax bases had moved out to the suburbs.)

Wasn't that book covered in an LRB SHORT CUTS for some reason? I did read about him for sure.

Thanks poster Casino - a great name for the economic thread. I find your post quite lucid.

So, a citizen could loan money to their city? Are they invited to do so? I do not think I have ever been invited to loan money to London (the Greater London Authority?). Maybe if you are in a world of loaning money, you get invited.

the question "what causes inflation and what stops it" was already raised upthread and NOT RESOLVED (bcz it's a super-complex issue which economists have not stopped fighting about in two centuries, so it will take ilx more than two weeks)

but very roughly:
i: say there are one million (1m) transactions over a certain period, and the amount of money in circulation in that period is £1m, then (insane simplification klaxon), the average *monetary* value of the average transaction will be £1

ii: hence if you print twice as much money (2m) and this is all in circulation over this same period (and for the same aggregate number of transactions), then the average monetary value of the average transaction is 2m / 1m = £2. ie the monetary value of this same (average) transaction has doubled (despite its "use value" being identical).

so this is the basic assumption model re inflation and notes in circulation (in any actual real economic model there would be another 20 elements in the forumla qualifying this, but this maybe possibly perhaps explains the underlying dynamic?)

(assuming i didn't get something very dumb wrong lol, i did it without looking anything up to check)

2 x xp yes there was an extract from the bottomley book in LRB shortcuts!

Interesting post re inflation. Actually quite comprehensible!

other variables: ability to save as reflected in the amount in circulation

Do local governments in the UK get money from the central government and how much does that influence local taxation?

youn: yes they do, though in amounts that have been diminishing for decades, at times sharply (with occasional windfalls earmarked for very specific projects)

three things i guess influence local taxation
1: what has to be paid for
2: the rates people are willing to vote for locally
3: since the 1980s, centrally imposed caps on the taxable amounts (there was a fierce political struggle over this between central govt -- = thatcher -- and certain radical municipal councils, such as liverpool, sheffield, others i now forget)

There was actually (sorry for those that bristle) a really good John Oliver explaining inflation:

https://www.youtube.com/watch?v=MBo4GViDxzc

Why is this English bloke on US TV? He sounds like Ben Elton.

for several years john oliver was "british correspondent" for the US talkshow the daily show (host jon stewart)

at some point in that he moved to new york, and at some point after that (maybe when stewart retired from the daily show?) he was evidently liked enough by us networks and audiences that he got his own spin-off

(i had to look all this up, he makes me bristle a bit tho i think his heart is basically in the right place)

On the "why do govt issue bonds when they could surely just print the money?" question:

I wonder if there's a issue of market confidence as well. Govts can print money - but can they persuade anyone to trade with them if the currency is perceived as worthless.

I've sen it stated a lot in newspapers recently that a sovereign state like the UK can never ultimately go bankrupt because as a last resort it can always print more of its own currency - but I'm really doubtful about this. If a sovereign state's reputation goes down too low - other countries will want to carry out transactions with it in a currency they trust - like the US dollar.

But then. I'm also puzzled how quickly Iceland recovered from its financial problems: it seemed to come back from the brink really easily.

English people on US media often do not seem good. Gervais, Corden come to mind, unfortunately.

#3 is pretty surprising. I hope we don't hear about it again if it doesn't already exist.

pinefox: i don't know about London, but NYC lays out its bond sale practices here: https://comptroller.nyc.gov/services/financial-matters/nyc-bonds/invest-in-nyc-bonds/buy-nyc-bonds/

point number one establishes that "Bonds are sold only through licensed broker-dealers, who can help determine if the bonds are a suitable investment. Investors must have an open brokerage account in advance of the bond sale to place orders for the bonds."

so the target market is not the average person on the street, but larger entities that deal with debt financing and long term investment all the time. banks, funds, foundations, yadda yadda... or at least, individual investors who are wealthy enough and involved enough to have their investment broker put ten grand into a municipal bond here and there.

one important aspect of this, and one thing that i think more ardent capitalists would point to as an example of how the profit motive could be socially beneficial, is that the people buying the initial bond don't have to care one bit about your city and its urgent infrastructural problems. they or their brokers just look through the figures to make sure it all adds up, and so long they're guaranteed a modest little profit over the long term, all of a sudden, almost magically, there's all this money to build infrastructure. doesn't matter to them whether they're funding a bridge in Casino City, a new park in East Ilxor, or wheelchair ramps at all the government buildings in Nowhere County. the mayor doesn't have to go around trying to sell a tax locally, or even wander the country trying to sell investors one by one on the merits of the scheme. the abstraction of the bond sale opens up this huge pool of potential lenders.

(the only thing is that the price you're selling the bonds at, and the interest rate you're guaranteeing, have to be competitive not only with other cities at the present time, but with *the present prices and yields of the secondary bond market.*. no one's going to buy your city's new bonds if existing bonds currently being traded around offer a better deal.)

P.S. I'm not an expert in this at all ---- I just had to get some sense of the basics while doing my dissertation work on municipal infrastructural *architecture*.

the mayor doesn't have to go around trying to sell a tax locally

How will the bond be paid?

I wondered that too, but I think it's in what Dr Casino said:

"the bridge tolls, or the few cents of additional sewer charges on everybody's water bill, will ultimately cover the loan."

Are those taxes generally proportional? They could have uses e.g. gas tax but I wonder about the whole mechanism as opposed to taxing directly with more proportional responsibility?

https://www.nytimes.com/2022/10/09/us/california-high-speed-rail-politics.html

someone else thinks about finance.

It makes me think that fundamentally the banks aren’t so bad after all. They keep our money for us, but they look upon it like a loan, and they pay us interest. Just like when they lend us money to buy a house, but they charge us interest. It’s the same rules.😎

— stuart murdoch (@nee_massey) November 5, 2022

But banks don't pay us interest, do they? I don't get any extra money for what money I have in a bank.

in a savings account you generally will get interest yes, in the ordinary in-and-out accounts not so much

you can definitely earn interest if you keep it at a bank that offers to pay interest on deposits. what kind of bank / account do you keep your money in now? xp

Well, I should not be too explicit talking online, but it's a current account (from which I can pay for things), which is connected to a savings account (which does not seem to pay any interest on whatever is in it).

As I mentioned upthread:

Recently it was said that "interest rates have risen". But does that mean the bank will give me more money? Presumably not. Why? I suppose because they don't want to and I can't do anything about it.

might want to change banks, I don’t know what english websites are reputable but this suggests you could be earning some interest on your savings account

https://moneyfacts.co.uk/savings-accounts/regular-savings-accounts/

You definitely earn (or should earn) interest from certain bank accounts, but not much compared to investments. You essentially sacrifice growth for the sake of security/liquidity. That's why banks are less incentivized to raise interest rates, or maybe a better way to put it, that's where things like bonds become preferable to cash, as far as investments go. As rates go up, bonds generally raise payout rates as well, to remain attractive to investors. That's where the juggling of things like bond coupons and yield and stuff come in, though that can become a full-time job, since they are constantly shifting around and coming and going, at least as I understand it.

On the "why do govt issue bonds when they could surely just print the money?" question:

I wonder if there's a issue of market confidence as well. Govts can print money - but can they persuade anyone to trade with them if the currency is perceived as worthless.

I've sen it stated a lot in newspapers recently that a sovereign state like the UK can never ultimately go bankrupt because as a last resort it can always print more of its own currency - but I'm really doubtful about this. If a sovereign state's reputation goes down too low - other countries will want to carry out transactions with it in a currency they trust - like the US dollar.

A lot of the answer involves trade with other countries. While a nation could make its own citizens accept its money at a stated value, they have less ability to do so with foreign governments or foreign individuals investing or trading with them. If a nation didn't import goods from other countries, and was entirely self-contained, then theoretically, yes, it could do this. It's less about reputation, and more about how much your nation's economy is dependent on money/goods from other, stronger countries (i.e. the US).

I am a bit surprised that we haven't gotten to this point yet in this very nice thread, and I don't want to ruin this very nice thread, but ... a prime example of this interdependence and how a nation can't just print as much money as it wants and have everything be fine is Post WWI Germany. Part of Germany's strategy was to reduce trade with other nations that had stronger currencies and be more self-sufficient. However, the German nation (as it currently existed) lacked certain resources in order to increase its self-sufficiency ... which encouraged Germany to obtain those resources by force.

sorry - I think I didn't read the italicized thoroughly enough before responding -- basically it's less about reputation and trust, and more about whether you can pay in the trading partner's currency (if they are stronger) or if you have enough goods/materials to equal or exceed what they are giving your country. Like, if your country's currency is of questionable value, but you can trade raw materials or finished goods of value (oil, lumber, diamonds, the stuff they make cellphones out of, Beatles records, etc.) then that would compensate for your crap currency. If your currency is crap and you don't have enough valuable things to trade, then you have a big problem.

"why do govt issue bonds when they could surely just print the money?"

In the USA the power to 'print money' for the government has been vested in the Federal Reserve, not the US Treasury. The Fed accomplishes this by buying US Treasury bonds using some newly created money. The jargon for this is monetizing the government's debt.

But nations kind of do just print the money don't they? I read somewhere that the Bank of England holds around 35% of the UK national debt. In other words, the UK government issues bonds, a third of which are bought by the BoE (owned by the UK govt) presumably by printing money...

xp - the existence of the Federal Reserve in the first place is another issue (for well over a century the US didn't have central banking, and there were lots of runs on banks) -- it was a concept we imported from Europe

as well as the various other things i'm not (including qualified to expound on this thread lol) i'm not an economic historian, so i only had the vaguest grasp of financial strategy in interwar germany after the hyperinflation (a hyperinflation usually explained as a consequence of the peace settlement imposed on germany by the victorious allies at versailles) (tho this is contentious, like everything else in this thread), so after reading sarahel's posts and went and looked some stuff up abt it

anyway its architect (to be fair to me i actually did know some of this this) was one hjalmar schacht -- a reactionary conservative who wasn't *strictly speaking* a nazi (he often found them annoying and disgusting) but nevertheless inarguably their invaluable collaborator for several years (he was part of the von papen / von neurath gang). unlike many nazis and the rest of that gang, he had a p good grasp of his field (economics and finance) and also a p flexible imagination: if the new deal lifted the US out of the depression, then schacht's "new plan" got there first (and helped inspire it): it being a popular largescale keynesian project of road-building and public works that more or less ended unemployment (tho as sarahel suggests, in germany and in the US, the full recovery was as much fuelled by war as civic keynesianism)

the thing i *really* didn't know was that schacht's full name at birth was horace greeley hjalmar schacht -- greeley was a pioneering US newspaperman who supported lincoln and north in the civil war (tho he later broke with the republicans over reconstruction and worked to undermine grant); he is also the editor largely credited with firewalling the opinionating op ed aspects of a newspaper from the (factual) news reports and also with the frontier-busting meme-campaign "go west young man!")

er so anyway hjalmar schacht everyone, a very shitty figure in economics who is nevertheless also fairly interesting

oh i’ve heard of horace greeley! that’s wild. i had no idea.

what an attempt at nominative determinism from the parents

(actually strictly speaking greeley didn't invent the actual op-ed page, that was herbert bayard swope in the early 20th century: but greeley is generally credited with being first to insist that news and opinion are NOT THE SAME and should be distinguishable on the page)

possibly useful, and uk centric

https://www.bbc.co.uk/sounds/brand/m001dwr7

"Understand: The Economy
Radio 4

From inflation to GDP, from the stock exchange to bonds, Tim Harford goes back to basics to explain the terms we hear every day, and what they mean for you."

i was surpeised to see some uk bank offering 4.5% on isa (fixed, for a couple of years) whereas my savings have all been earning fractions of a percent for the last decade.

I heard an episode of this programme just now. I agree that it is very relevant to this thread.

Early in the programme he gave this increasingly familiar scenario:

"I borrow money from my friend X, and give her an IOU for £100, which she then sells to her friend Y".

I stop at this point because I cannot conceive a friend, or anyone really, doing this.

If I did borrow £100 from Mark S, it is pretty much inconceivable that he would sell the fact that I owe him £100 to poster koogs. This would not be normal or comprehensible human behaviour. I borrowed the money from Mark S, I will give it back to him. That's all. If another person was involved then I would no longer understand what was going on or why.

So what is meant as a helpful analogy does not work for me.

I did not understand the rest of the programme either.

no this is a interesting point and it struck me when i was inventing explanatory examples up thread that they often sit on the boundary between different ways of describing the world -- and the nature of that boundary is scale

what i might do, after all, is myself then borrow £100 from poster koogs and afterwards say to you "you might as well pay koogs back, not me" -- likely or not, this feels like a plausible scenario, and where it becomes enstranged is that to do this, on my part, would indeed be "selling the fact that I owe poster pinefox £100, to poster koogs"

i don't naturally think of it like this, but ppl who live in a world of multiple such personal small loans in every direction evidently do (if only for book-keeping and for conceptualising purposes)

so what creates this boundary is the multiplicity: quantity becomes quality, as hegel was possibly the first to observe out loud

what i might do, after all, is myself then borrow £100 from poster koogs and afterwards say to you "you might as well pay koogs back, not me" -- likely or not, this feels like a plausible scenario

Does it?

I can't even understand why it would be mathematically logical, let alone humanly plausible.

Nonetheless I register my appreciation of your posts on this topic, Mark S - they are generous and good-humoured.

I have the heard the Hegel line - from ... Lanchester! (Has anyone ever read it in ... Hegel?) I actually think it is somewhat intuitively true.

Has anyone ever read it in ... Hegel?

not me, i own a copy of the philosophy of right but have read perhaps three (3) pages of it, the going is laborious!

the scenario would be something like this: shortly after i lend you the money i realise i actually needed it myself for something i'd completely forgotten about; rather than hurrying after you and grabbing it from yr hand (while shouting "actually, no!") i decide to approach poster koogs, who i know to be both flush and generous in such situations

interpeting "anyone" more broadly: our mutual acquaintance non-poster b3n w4ts0n* has, or so i venture -- first bcz he devotes several pages to it in his essay collection art, class and cleavage: a quantulumcunque concerning materialist esthetix, and second bcz once when i was in his flat long ago (or actually the flat of his then-gf who is very much not his present gf, this was a LONG time ago), i noticed he had the same pb edn of the philosophy of right as me, so i idly picked it up and realised it was chock-full of marginal notes in his distinctive (and rather attractive) handwriting

I stop at this point because I cannot conceive a friend, or anyone really, doing this.

If I did borrow £100 from Mark S, it is pretty much inconceivable that he would sell the fact that I owe him £100 to poster koogs. This would not be normal or comprehensible human behaviour. I borrowed the money from Mark S, I will give it back to him. That's all. If another person was involved then I would no longer understand what was going on or why.

So what is meant as a helpful analogy does not work for me.

I did not understand the rest of the programme either.

― the pinefox, Thursday, November 10, 2022 9:14 AM (forty-nine minutes ago)

pinefox, the more realistic every day scenario is that you are short on cash until your next paycheck comes in, so you borrow £100 from a loan shark. the loan shark is uninterested in actually collecting from you should you miss your payment date, so the loan shark sells it to a mafioso who will come and break your legs if you don't pay up on time.

Mark S: reading your humorous anecdote I thought that you were explaining that said non-poster had borrowed money from people and lent it to others. I was relieved to find that he had merely read a book by Hegel.

a slightly more realistic example - you buy a car on an installment plan. the initial loan you take out is with the car dealer. one year later, you miss a payment. the repo man who comes to repossess your car (if you can't make the missing payment) is not actually the car dealer, because the car dealer has sold your loan to the repo man, who now has the right to collect your car /or/ your money to satisfy the loan, whichever you're more willing to give up.

xp -- i think probably two books! the quantity/quality idea is i believe taken from the logic not the philosophy of right

tight friend groups often trade debt to each other (usually sans interest or risk)-- i got you for lunch last week so you owe me lunch but mark s got me for lunch today so if you two are hanging out together next week lunch is on you.

what's different is that in such situations mark s is usually not carefully calculating that the lunch you will buy him will probably be more expensive than the lunch he bought me and that he will thus obtain a free (portion of a) lunch-- while at the same time you (pinefox) hope that the lunch you will buy him (mark s) next week is cheaper than the lunch i bought for you last week-- while at the same time i smile smugly, already knowing that the lunch mark s bought me today was far tastier and more lavish than the lunch i bought for you last week-- thanks to my head for big meals

quantity becomes quality

I have heard this same thought expressed as "sufficiently large quantitative differences are qualitative differences". This is often mentioned in computer programming, in the sense that at certain scales, the type of solution you would use for a particular problem changes. For example, if you have to find all occurrences of a word in a document, you can use a word processor. If you have to find all occurrences of a word on the internet, you need to have a distributed map-reduce algorithm running on a large cluster of machines.

Difficult Hour, thanks for your post and droll commentary.

tight friend groups often trade debt to each other (usually sans interest or risk)-- i got you for lunch last week so you owe me lunch but mark s got me for lunch today so if you two are hanging out together next week lunch is on you.

Really? I cannot imagine this scenario happening.

Indeed, again, I cannot understand the logic of it. If you were to explain to me why it was my turn to buy lunch as per your example I would not be able to follow what you said.

In an old job, a group of coworkers who frequently lunched together and took turns paying the bill kept a spreadsheet of each person's tab. So you could pay down your tab by picking up the check, even though the person who had paid for your lunch might not be present at the lunch you paid for.

I appreciate this anecdote, o.nate.

But it then makes me think: if you are obsessive enough about who pays for lunch to start some kind of computer program about it, why not just everyone pay their own lunch?

Seems like a strangely complicated way to deal with the obsession, when the simpler solution is at hand.

pinefox, when you eat out with a group of friends, do you only pay for what you ordered or are you okay with an even split? not really related to the debt question, just curious.

why not just everyone pay their own lunch?

Frequently restaurants frown on splitting a tab too many ways. I agree it would've been about the same amount of work, except for the social opprobrium. Nowadays I think a group like this would probably settle the tab using Venmo, Zelle, or a similar payment app.

Also, it should be mentioned that even in those days of yore, no one ever carried cash. That would've been the simplest way, I guess.

Really? I cannot imagine this scenario happening.

― the pinefox, Thursday, November 10, 2022 7:37 AM (forty-two minutes ago)

the loan shark and car dealer scenarios posed upthread -- what about those scenarios?

Sarahell: that's different, though I have not personally experienced them. I accept that they, apparently, actually happen. Knowing nothing of them, I should not comment.

pinefox, when you eat out with a group of friends, do you only pay for what you ordered or are you okay with an even split? not really related to the debt question, just curious.

― 龜, Thursday, November 10, 2022

I don't express strong views about this. I don't think the difference between the figures is likely to be too great. Maybe if it is, then there could be reason for someone to object and want to split a bill more precisely.

often it is simpler to make debt fungible the pinefox, or at least it's more convenient and can dissolve problems. i am thinking of when i went to high school up the street from a burger joint, in the heady days of the early millennium:

1) 龜 and i walk down there after school; i'm skint so 龜 pays. don't worry-- i get my allowance tonight. burgers are on me tomorrow.

2) later that afternoon, 龜 buys a nintendo ds with many months of savings-- a long-planned and large-scale investment. between this and having to pick up the whole tab at the burger place, 龜 is now flat broke.

3) well, 龜 thinks, at least i won't go hungry tomorrow, since it is difficult listening hour's sacred obligation to buy me a burger after school, and i have been assured he will have the money.

3) but disaster-- when 龜 arrives at school i am not there! (i am at home vomiting because of this disgusting burger place we go to.) i will probably be back the next day and 龜 still has no doubt i will honor my debt then, but in the meantime 龜 must go burgerless. 龜's thumb already feels weaker against the crisp new nintendo ds d-pad.

4) rescue-- you, the pinefox, a mutual friend, have engaged 龜 in a passionate discussion of economics, and also you are feeling hungry after school. you invite 龜 down to the burger place, but 龜 is broke. no problem, you say (not wanting to interrupt the discourse)-- i can handle it! the only thing is that this weekend i, the pinefox, will be visiting a nearby mid-sized city that actually has decent bookstores, from one of which i am planning to buy an (already reserved) signed first edition of vol. 2 (a buyer's market) of a dance to the music of time, so i can't afford to spend too much this week. but you, 龜, can just pay me back soon, right? in the next couple days?

5) well, actually, 龜 says, i just bought a nintendo ds. it will be a while before i have treat-your-friends-to-lunch money. so no. but-- here it comes--

6) --difficult listening hour can. he owes me. he'll be back tomorrow, and he just got his allowance. buy me a burger now, and he'll pay you back tomorrow.

7) oh okay! you say, sure.

without the leap of the step 6) transfer-- in which 龜 offers to sell you my debt, for the price of a burger-- you, the hungry pinefox, would have to choose between abandoning 龜 now or cancelling your hold on the highly collectible volume of anthony powell. (龜, who is finding your company frankly more stimulating than mine and would also like to continue talking to you this afternoon, would already have chosen buying a nintendo ds over being able to do so, without even knowing that this, specifically, would be the cost.) with the step 6) leap, you can happily continue your conversation and be paid back tomorrow-- even though by then it will be 龜 who is home sick, or at least pretending to be, lying in bed playing the legend of zelda: phantom hourglass.

Difficult hour, I like the detail and passion of your narrative. Thank you.

Or imagine you are a gentleman of Venice in the 12th century. You have been obligated by virtue of your noble standing to purchase a Venetian perpetual annuity that pays you a steady fixed stream of interest payments, as required by law, year in and year out. You fall on hard times and need to raise some cash. A-ha, you say! Why don't I sell a piece of my future income so I can pay off the gondola repairman?

a perpetual annuity is also known as a "consol", which used to be issued by the english and american governments (but are no longer), and have made appearances in several books of literature, per wikipedia.

https://en.wikipedia.org/wiki/Consol_(bond)

References in literature
Given their long history, references to consols can be found in many places, including Pride and Prejudice by Jane Austen, David Copperfield by Charles Dickens, Howards End by E. M. Forster, Vanity Fair by William Makepeace Thackeray, Of Human Bondage by William Somerset Maugham and The Forsyte Saga by John Galsworthy.

https://www.immediateannuities.com/annuitymuseum/images/docs/10129-f-full-mid.jpg

I know the word annuity, but have not encountered one.

"You have been obligated by virtue of your noble standing to purchase a Venetian perpetual annuity that pays you a steady fixed stream of interest payments"

You are obliged to spend money on ... loaning money to someone?

So this is like the 'bond' discussion somewhere upthread but the law says you have to buy the bond? Which, as I recall, meant: loaning money to the government.

"Why don't I sell a piece of my future income so I can pay off the gondola repairman?" -- you've lost me there, o.nate. I don't have any future income. Only, at best, what money I have already acquired.

It was a reference to the history of the prestiti in Venice:

Venice introduced the prestiti in the twelfth century. Subscriptions were obligatory on wealthy citizens in proportion to their wealth, and the elites of Venice found forced loans preferable to outright taxation.

when you loan money to somebody, that is a form of spending money. xp

big Harold Skimpole energy in this thread

You are obliged to spend money on ... loaning money to someone?

this is like the antecedent to the famous scene in the history of the 2008 financial crisis where all the CEOs of the biggest investment banks have to come together and are forced to merge with one another and buy the worthless assets of the most failing banks

within the medieval set-up, the ruler or city-state demanding obligations of the rich and powerful was surely not uncommon: it's how fealty was manifested

(with the specifics of the obligation dependent on the circumstances) (the story of the italian invention of banking in this context -- with the church saying NO to usury and then winking at all manner of very obvious workarounds, bcz they too needed loans to get things moving -- is fascinating: look up why there's a LOMBARD STREET in every big european city and also many ports even in the US)

Just heard the last episode of UNDERSTAND THE ECONOMY. About banks.

One of the first things they said was: "the money in your bank account is loaned to the bank". I didn't understand that. Couldn't follow the rest.

Mark S would have understood the programme and probably found it too simple.

how would you describe the relationship between you, your monye, and your bank, pinefox?

a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

I guess the quasi-evolutionary explanation for why many such innovations sprang up in Italy, is that Medieval and Renaissance Italy, with its independent city-states, was kind of a petri dish for emerging forms of politico-economic organization, and the rivalry between the cities was a powerful evolutionary pressure, so these forms evolved more quickly there than elsewhere. xps

Poster, I wouldn't think about it much, but if it came to it, I might say something like "I put the money in the bank for safe keeping".

A bit like putting it in a box or a safe, except the box or safe isn't in my home but in another building.

If you ask: why do I have money in a bank? I don't know. The answer is simply: because other people do and I was told to do the same.

speculatively adding to o.nate's point abt italy that they were mostly seafaring city-states: https://en.wikipedia.org/wiki/Maritime_republics

the oldest acknowledged form of insurance (which is also functions as a kind of venture capital) is bottomry

right, I guess my next question, pinefox, is, why is it that you are able to keep your money in the bank for free? without being charged a fee?

imagine leaving other things of value with a third party, such as, for example, if you owned a gold wristwatch, or a rare first edition of das kapital, because you are afraid that if you keep them in your house they would be subject to theft or fire. wouldn't you expect to pay a fee to such third party, in return for keeping your valuables safe? why should a bank be any different? in fact, a bank will sometimes pay you money in the form of interest for keeping your money there! why?

I think banks do charge fees.

I like your example of DAS KAPITAL. I note that, probably unlike you, I do not understand that book - even in English, and even the first chapter which I have probably read about 8 times.

does your bank charge you a fee to keep your money there? if so, have you noticed that the fee goes away if you meet certain requirements - perhaps you need to make monthly deposits of at least £XXX, or keep a balance above £XXXX?

I don't know. I don't understand banks, including my own bank. It doesn't give me any money (which people say banks do), and it randomly changes my bank account in negative ways for no reason that I can see. I can't tell you why.

I suppose you might say: don't have a bank account. This sounds like a good idea. But -- a bank seems to be the only way to obtain money on which to live. Either through the electronic banking business of tapping things with a card from the bank, or, the bank has a machine that gives out cash.

I suppose in theory my employer could pay me in cash and I could store that and use it? I have never thought of this.

you certainly could store your money under the mattress! what would be the pros and cons?

also, I think you should consider switching banks, if your bank is treating you so unkind!

The majority of employers would simply refuse to pay you in cash

Even benefits like Universal Credit have to be paid into a bank account now

here is one potential con to storing your money, in cash, under your mattress:

https://www.latimes.com/archives/la-xpm-1989-05-04-mn-2339-story.html

BEIJING — The old Chinese habit of shunning banks has caused an 82-year-old farmer to lose most of his life savings to mildew, an official newspaper reported Wednesday.
When Zhang Dexiang, who had buried his life savings of about $1,200 in his courtyard five years ago, dug up the money recently he discovered it was moldy “almost beyond recognition,” the China Daily reported. The farmer in northeastern Liaoning province was able to salvage only $400, which he exchanged for new bills at a local bank, it said.

the other thing this guy said which kind of blew my mind was that you don't deposit money in a bank. the word "deposit" has no legal meaning. when your paycheck lands into your bank account what you're actually doing, legally, is loaning the bank money. and you can ask them to make good on that loan at any time, theoretically. (by "withdrawing".) they pay you interest on that loan. at an extremely pitiful rate, often something like 0.75%. but guess how much interest they want if they loan YOU money though, eh??

From upthread.

It's not like the bank is marking individual bills with "the pinefox" and putting them under a giant mattress. The bank is recording your money as an asset with a corresponding liability to pay you back. However, they now have your money and can in turn loan a portion of that money out to other customers who pay the bank interest. The reason a bank can't loan out 100% of the money you deposit with them is because by law/regulations, etc., the bank is required to keep a portion of their assets in hand to safeguard the system and prevent runs on the bank.

Poster, I think the con would be that I would have to carry the cash around and couldn't do the thing of tapping a machine with a card to make a payment.

Also the other problem that was noted ie: doesn't seem like an employer would pay me in cash so I would then have zero money.

Also - yes - the idea that the money would be physically damaged - a good point.

also, I think you should consider switching banks, if your bank is treating you so unkind!

This seems like a good proposal.

Maybe it is time to do it.

If I knew more about banks then I would be better placed to do it.

Poster, I think the con would be that I would have to carry the cash around and couldn't do the thing of tapping a machine with a card to make a payment.

also, it would be easier for someone to steal your money from you, leaving you with no money. Whereas it is much more challenging to rob a bank, plus, the bank insures your money that you have "stored" there.

Poster, I think the con would be that I would have to carry the cash around and couldn't do the thing of tapping a machine with a card to make a payment.

Also the other problem that was noted ie: doesn't seem like an employer would pay me in cash so I would then have zero money.

Also - yes - the idea that the money would be physically damaged - a good point.

― the pinefox, Friday, November 11, 2022 10:16 AM (one hour ago)

so, I think, from a first principles basis:

the cons are everything you listed and probably a lot more. the pro is, you are not trusting a third party (in finance terms, a 'fiduciary') to hold onto your money. it could be dangerous for a bank to hold onto your money, because what if one day the bank goes under, and is unable to pay out the money that everybody has deposited to the bank? (or, to make the conceptual leap - unable to pay the money that everybody has lent to the bank.)

so, the question becomes - does my money feel safer under my mattress or in a bank account? if under my mattress, you could lose it for all the reason we have discussed - termites, mold, the vagaries of nature - a fire, a flood, a tornado or hurricane could blow it all away - your cousin fagin, who has heard from your aunt beatrice of the stacks of pounds you have under your mattress, could steal into your house while away and abscond with your savings.

if in a bank, it is in an institution that you feel you have no oversight into - you don't know how the bank is doing, it could go under any minute! (maybe you have this fear because you don't understand how the bank makes money, which is why you've come to ILX to read this thread).

the government understands this second concern, because it has happened many times over in history (https://en.wikipedia.org/wiki/List_of_bank_runs). a crucial financial innovation of the 20th century has been deposit insurance! (https://en.wikipedia.org/wiki/Deposit_insurance) whereby, the government has an interest that its citizens do not spend the majority of their days guarding the pile of cash under their mattresses like smaug, because that time could be better spent doing other activities that society deems useful, such as farming, or manufacturing goods, or, even, financial services. so, the government steps in and says, please do not waste your time sitting in front of your house with a rifle and eyeing every stranger who comes by, put your money in a bank and go out and life your life, because what we will do is guarantee every deposit made to a bank in our country (up to a certain amount, of course, but which limit is certainly adequate to cover 99% of the populace), such that if your bank goes under, the insurance will kick in and you will still have your money.

all of which establishes why it is better in modern society to keep your money in a bank rather than at home, but doesn't answer your question about why is it that we have "loaned" our money to a bank, instead of "deposited" our money.

to answer that question, you can imagine the world's first bank, where somebody said, instead of keeping your cowrie shells at home, which we have established is burdensome and detracts from your quality of life, give your cowrie shells to me and I will keep them safe, in return I will give you this clay tablet which marks how many cowrie shells you have given me, just bring me the clay tablet whenever you want to retrieve some cowrie shells and I will update your tablet. what's in it for you, you ask, surely you are not the world's first altruist. well, the world's first bank says, I will charge you a fee of one cowrie shell per every 6 cycles of the moon, because I need to rent a hurt large enough to accomodate all the cowrie shells I have collected from all my other customers, and to hire the guards with mastodon femurs who will stand guard over my hut, and so on and so forth, and all of that costs cowrie shells, which costs i will spread out over all my customers.

now, let's also imagine the world's first lender. the world's first lender has made some cowrie shells by lending out her own cowrie shells to others who do not have enough cowrie shells for an immediate need, and asking only for the initial amount of cowrie shells she has lent (the principal!), and a small amount of cowrie shells - perhaps as a proportion of the initial amount of cowry shells she lent to be assessed every 6 cycles of the moon, for the inconvenience of having lent out her cowrie shells (the interest! or - the world's first financial innovation). the problem for the world's first lender, however, is that the amount of cowrie shells she can make as interest is limited by the amount of cowrie shells she can lend out - if she has lent out all her cowrie shells, she cannot make any more loans, because she has no more cowrie shells left to loan out! (later on it will be found that her activities will have led to the invention of the concept of usury, which will be enshrined as a sin. https://en.wikipedia.org/wiki/Usury)

the world's first lender realizes that she could make even more cowrie shells as a lender, if instead of lending our her own cowrie shells, she herself borrows cowrie shells from others that she can continue to make loans with. why would others lend her their cowrie shells? the same reason that she herself lends cowrie shells out - because she will pay them back with more cowrie shells, aka interest! now, here is the world's second financial innovation - the interest she has to pay out to her lenders doesn't have to be as high as the interest she will collect when she re-loans those cowrie shells out. instead, she can pass along only a portion of the interest she will earn when she loans those cowrie shells out. now, you may ask, why would you lend your cowrie shells to her, at a lower rate of interest, than directly to one of her borrowers (let's call him Bob), where you could get a higher rate of interest? you'll make more cowrie shells!

because, she'll tell you, when you ask for your cowrie shells back from her, she'll be able to pay you back no matter what - because people always owe her cowrie shells, since she is a lender, she just needs to collect from one of her other borrowers - whereas if you lend to Bob directly, who has borrowed the money to buy a farm, there is a chance that Bob will say, I spent your cowrie shells on my farm, and seeds and plows, but haven't you seen that a swarm of locusts have come around and eaten all the crops, and what the locusts didn't eat has withered and died because there has been a biblical drought, and what didn't die in the drought surely died when there was darkness for three days, and oh by the way I am moving to assyria, and I won't be leaving you my address?

you may ask, well that's all fine and dandy, but Bob's still a flight risk isn't he? she will reply - yes, that's true, but I haven't lent just to Bob, I've also lent to Alice and Cathy and Doug, who are not in the business of farming but in the business of pulling a rickshaw and building huts and crafting mastodon femurs, respectively, so I am diversified and it won't matter if Bob doesn't pay me back because Alice and Cathy and Doug will, also I will have enough cowrie shells to hire Eddie who will travel to assyria and break bob's legs and get me my cowrie shells.

so, given these choices, you may say, I'd rather lend my money to the world's first lender (let's call her difficult listening hour, because gender is a social construct) instead of Bob, because I have a higher chance of getting my cowrie shells back from her than from Bob. and let's say everything works out - the cowrie shells you have lent to dlh, are making you even more cowrie shells, in a safe way! so much so that, you go back to the world's first bank (let's call him 龜), and you say, give me all of my cowrie shells, I have been spending one cowrie shell every 6 cycles of the moon to keep them here but instead I could be lending them to dlh, where instead of paying 1 cowrie shell every 6 cycles of the moon, in fact I am earning 1 cowrie shell every 6 cycles of the moon, and dlh will also return my cowrie shells whenever I want, and is making enough from her lending to also hire guards with bigger mastodon femurs than 龜, and also her hut is bigger.

so, dlh becomes the world's second bank, and the world's first bank, 龜, goes out of business and starts going around the town square asking everyone, rather madly, "have you heard of the blockchain" before he is beaten to death by mastodon femurs wielded by large burly troglodytes.

so, that is why, when you deposit your money at a bank, you are actually lending the bank money, not "depositing" it!

(after 龜 is dead, a rumor will be spread that dlh has been using those cowrie shells she hasn't lent out to gamble at local cockfights. everybody in town, fearful that dlh has spent all of their cowrie shells betting on Big Bertha, will demand their cowrie shells at once from dlh. when dlh is unable to produce those cowrie shells, dlh will also be beaten to death by large mastodon femurs. this is the world's first bank run.)

Now do insurance!

the aristocrats!

xp - what you are omitting in this really great explanation is the role of the state and the repressive state apparatus, and that people create states to regulate themselves so that they won't constantly be beating themselves to death with mastodon femurs.

Like, this is all coming from an assumption that you, Bob, dlh, etc. have a certain assumed trust and sense of community, and aren't going to beat each other to death with mastodon femurs over cowrie shells. There is also the assumption that the cowrie shells that go back and forth are actually cowrie shells and not some lesser shell that is deemed worthless.

Like, you can also see the role of the bank in terms of utilizing the community's cowrie shells for the betterment and productivity of the community as a function of the state (as 龜 notes in their previous post) and compare it to the way the state stores, utilizes, and distributes physical force (e.g. weapons, soldiers, law enforcement). In order to maintain order and its authority, the state should have a larger collection of mastodon femurs than any individual or family or associated group within the state. The collection of cowrie shells for lending and borrowing is just another source of power for the state.

When my dad died we found a disturbing amount of cash hidden in coat pockets and such, he was a bit of a crank about banks and such

Vague stop repeating phrases challenge

Now do insurance!

― G. D’Arcy Cheesewright (silby), Friday, November 11, 2022 10:17 AM (thirty-nine minutes ago)

what kind of insurance, or just, insurance in general?

Idk whatever, I read something a while ago about police departments becoming uninsurable because of the pigs doing too much pig shit all the time and was thinking about how insurance may be the subtle engine of societal change

Also I just want to read dayo’s cowrie-shell-based explanation of risk pools or whatever

I can do insurance. And insurance has historically been an engine for societal change. First forms of insurance were insuring ships and other forms of trade over distances which allowed trade and mercantilism then capitalism to flourish. Might not be the societal change you were looking for.

Deciding which things companies can and can't be held liable for is an underrated aspect of government power. For instance, deciding that internet companies are not responsible for things users post (unlike say book publishers) basically created the internet in its current form. Or deciding that gun manufacturers are not liable for things people do with their guns.

well, it's true that the main way that insurance is different from gambling, is that the risk involved is partially determined by societal factors, as opposed to just statistical data, whereas gambling only relies on statistical data and/or superstition. Granted, you could argue it's just statistical data _about_ societal factors.

I mean, if you think about how "pig shit" (not in the Thunderdome sense) is punished/accepted and societal changes in re that ... if it is becoming way more likely that cities have to pay out large sums of money in legal settlements because of pig shit due to juries, judges, etc. determining that pig shit isn't acceptable, then insurers should determine that the financial risk to them for betting on the pigs is too great.

However, insurance, itself, is a construct. Insurance, and insurance requirements, are definitely more a factor of the Repressive State Apparatus as opposed to the Ideological State Apparatus.

You can even think about how societal factors have created certain types of insurance! Like coverage against sexual harassment, discrimination, molesting kids, etc.

Conversely allowing almost unlimited liability for certain claims has made companies very risk averse in other areas, which has stifled innovation.

First forms of insurance were insuring ships and other forms of trade over distances which allowed trade and mercantilism then capitalism to flourish. Might not be the societal change you were looking for.

I would argue that it goes back farther, to dowries and other payments made around marriages. Also, the concept of the "bondsman" (which has evolved into the oppressive bail bond industry), and people's service functioning as insurance premiums.

Also I just want to read dayo’s cowrie-shell-based explanation of risk pools or whatever

― G. D’Arcy Cheesewright (silby), Friday, November 11, 2022 2:01 PM (thirty-four minutes ago)

I don't really understand insurance that well, tbh! the way I think of insurance is the world's worst lottery.

spousal insurance, for example, is a lottery in which everybody with a spouse is forced to buy a lottery ticket every month for as long as their spouse is alive. the proceeds (or 'insurance premiums') from the lottery tickets are kept by the insurance company, who sets aside a certain amount to pay expenses, but otherwise sits on the money. the way to win the lottery, nobody wants to win - your spouse has to die unexpectedly! when your spouse dies unexpectedly, you win the lottery, even though you would rather not win! you'd rather not have your spouse die in a plane crash instead of a million dollars. unless you've been feeding your spouse arsenic with his morning tea! then, it is the world's best lottery for you.

(you might ask, is there something the insurance company can be doing with that pot of money from the lottery tickets while it waits to pay out on an insurance claim. absolutely! this has led to insurance being a very stringently regulated enterprise by the state, because you can imagine what might happen otherwise.)

Conversely allowing almost unlimited liability for certain claims has made companies very risk averse in other areas, which has stifled innovation.

― o. nate, Friday, November 11, 2022 2:23 PM (eighteen minutes ago)

the actual secret engine of capitalism, imo, is "limited liability" (https://en.wikipedia.org/wiki/Limited_liability)

where are people forced to have "spousal insurance"?

(also i just want to say everything i have been posting itt is just matt levine-lite, a bad imitation of matt levine, and if you'd like to talk about matt levine please head on over to silby's thread Matt Levine’s Money Stuff )

where are people forced to have "spousal insurance"?

― sarahell, Friday, November 11, 2022 2:45 PM (one minute ago)

sorry, that is a bad example - a better example is car insurance if you own a car, but not everybody is sad when they lose their car. i guess i could have also used health insurance - something only americans would understand, and which would not be fair to our companions across the pond.

I mean, lots of people do have life insurance for their spouses. Life insurance is one of the most common employee benefits in the US. One could argue that the "force" comes from Ideology (the pressure for care through capital security, a "responsible" adult has insurance, etc.) but not the Repressive State Apparatus, which requires one to have insurance on a car if you are driving said car, otherwise the car could be seized ... or insurance requirements for tradespeople and certain professions, where you could lose the ability to legally make a living without said insurance.

Thus, there are different models of insurance -- there is the "3rd party" insurance, which is coming out of PBKR's historical reference to the shipping industry, but for various things, it is also possible to "self insure" without a 3rd party.

And ... this notion of "self-insurance" is tied to the Pension Funds that we were talking about earlier

I will write something up later, but my professional experience in insurance is limited to US commercial property/casualty insurance so I have limited knowledge of personal lines (i.e. homeowners/auto insurance) and almost no knowledge of health insurance. Some of the very basic principles are the same though.

can you write about how commercial property insurance is related to building & fire codes?

it would be cool to have someone to bounce these things off of / discuss it with

Insurance is a risk sharing and risk spreading mechanism. Assume an insurance company, PBKR Indemnity, sells a single policy of insurance (a contract) to a business, ILXCO (the policyholder), for $100 (the premium). If ILXCO has a $1,000 claim, PBKR Indemnity may be in big trouble since it only has $100 of premium plus whatever other capital it started with. If PBKR Indemnity sells 100 such insurance policies to 100 franchisees of ILXCO for $100 each ($10,000 total premium), then if one or even a few ILXCO franchisees file claims for $1,000, then PBKR Indemnity should have sufficient funds to pay claims and continue in business.

So an insurance policy is a contract between an insurance company and its policyholder (the purchaser of the policy) whereby the insurance company will pay the policyholder in the event of certain losses specified in the policy. Some policies are considered to provide "first party" coverage: the claimant under the policy is the policyholder themself, so that if ILXCO buys a property policy from PBKR Indemnity and then has a fire that damages ILXCO world headquarters, PBKR Indemnity (the insurance co) will pay ILXCO, the policyholder, for the damages to their building. Other policies are considered "third party" coverage: the claimant under the policy is a third party making a claim against the policyholder, so that if ILXCO buys a liability policy from PBKR Indemnity and then is sued by a third party, PBKR Indemnity (the insurance co) will defend ILXCO (the policyholder) from the claim by the third party and indemnify ILXCO (pay on behalf of) any damages actually awarded to the third party against ILXCO.

So how does insurance work from the insurance company's standpoint? PBKR Indemnity sells a policy to ILXCO for $100 in premium. PBKR Indemnity bases that premium on an insurance rate that is often, but not always, previously filed with or approved by the state (in the US, insurance is regulated by the individual states, not by the Federal govt). The rate might be based on a number of factors depending on the type of insurance but always involves an actuarial projection of future losses. In the case of a property policy, rate is often based on location, construction type, age, and condition of the building. For a liability policy, rate is often based on the policyholder's headcount, revenue, or other metrics deemed relevant by the insurance company, with loss experience (prior claims of the policyholder) often a significant positive or negative factor. The state may regulate what factors can be used or not used by an insurance company in setting rates. In the past, insurance companies would base rates for personal lines (like personal auto or homeowners insurance) on income level, gender, marriage status, age, zip code, employment, race, etc. Some of these factors (but not all) are now prohibited by law.

So what does PBKR Indemnity do with the $100 premium it receives for the policy it sold to ILXCO?* Well, PBKR Indemnity knows it may have to pay claims (losses) on ILXCO's policy at some point in the future, so PBKR Indemnity sets aside (reserves) a portion of the premium for payment of these potential future claims. The amount it sets aside is again based on an actuarial analysis of likely future losses. These reserves are determined and combined in the aggregate then invested to generate a return (investment income). The amount and type of investments PBKR Indemnity can make are heavily regulated by the state. PBKR Indemnity will also use premiums to pay prior claims and current operating and other expenses.

Each year, PBKR Indemnity will compare the premium it took in to the amount of claims (actual losses and loss expenses, plus loss reserves for claims not yet reported**) and non-claim expenses it paid during year. The losses divided by the premium are the insurance company's "loss ratio" - if PBKR Indemnity wrote $100 in policies during the year and had $63 in losses paid, loss expenses, and reserves, then PBKR Indemnity's loss ratio is 63%. If PBKR Indemnity also had $35 in (non-claim) expenses (salary, overhead, commission, etc.) during the same year, then PBKR's "expense ratio" is 35%. The "loss ratio" plus "expense ratio" is referred to as the insurance company's "combined ratio", which is a measure of the profitability of the insurance company for the year. If the combined ratio is over 100%, the insurance company lost money from underwriting for the year, if the loss ratio is under 100% the insurance company made money from underwriting for the year.

In our example, PBKR Indemnity has loss ratio of 63% and an expense ratio of 35%, for a combined ratio of 98%, meaning PBKR Indemnity's insurance operations made money for the year. Traditionally, and in high interest rate environments, insurance companies would try to write to a 100% combined ratio, meaning break even from insurance operations, and make their profit off their investment income.

*Often the insurance company pays a % of the $100 of premium (the commission) to a broker/agent who sold the policy to the policyholder. Commission % varies by type of policy/coverage, but in property/casualty is usually in the 10-15% range. This commission is one of the expenses that is factored into the insurance company's expense ratio, since it is an expense of selling the policy and obtaining the premium.

**This is very surface level and I could do a deeper dive on many of these topics, such as how an insurance company handles reserves if it would help.

thank you PBKR! ... so, we might also want to talk about these actuarial projections! For certain types of losses these projections are way easier to make (i.e. more accurate) than others, isn't that right? Like, car insurance. There are a lot of cars, a lot of drivers, a lot of incidents resulting in losses related to cars and drivers. Thus, I would assume, the actuarial projections for auto insurance are fairly accurate, because of the large data set.

For other types of losses, the projections are relying on a lot less actual data. Either because of the rarity of the type of loss, or the relative uniqueness of the facts and circumstances around them. Earthquake insurance is a good example, I would think. Fire insurance for commercial buildings is potentially another (though there are a lot more fires than earthquakes that cause significant damage and/or loss of life). Both Earthquake and Fire go into Property Insurance policies.

In the case of a property policy, rate is often based on location, construction type, age, and condition of the building.

Isn't it also based on the use of the building? And size? And then there is the issue of the factors that constitute the "condition" of the building. ... I'm gonna stop before I get super nerdy.

For certain types of losses these projections are way easier to make (i.e. more accurate) than others, isn't that right? Like, car insurance. There are a lot of cars, a lot of drivers, a lot of incidents resulting in losses related to cars and drivers. Thus, I would assume, the actuarial projections for auto insurance are fairly accurate, because of the large data set.

There are obscure/risky coverages where there is little data. Stuff like that often doesn't get written in the admitted (licensed) insurance market, but usually goes to the surplus lines market where there are far fewer regulations and consumer protections. Surplus lines insurers don't have to file rates and can pretty much charge whatever they want.
There are limits on how consumers (commercial, mainly) can access that the surplus lines market in theory.

For more routine coverages, it is less a matter of accurate or inaccurate data than it is maintaining or not maintaining underwriting discipline. Insurers will sometimes charge less than the rate (i.e. data) would indicate or under-reserve their claims to chase (short-term) profits, resulting in poor loss ratios and potential insolvency.

Isn't it also based on the use of the building? And size? And then there is the issue of the factors that constitute the "condition" of the building. ... I'm gonna stop before I get super nerdy.

Use and size both are factors, since they have bearing on the value of the building. That is the starting point of property insurance because if the building is a loss the value of the building is ultimately what the policy will pay.

I'm curious about this surplus lines market -- could you use it to get some measure of the risk of ownership for properties in flood zones or wildfire zones where most companies won't offer coverage? If not, how else could you try to estimate it? It seems like for earthquakes in particular, being closer to a faultline ought to raise your hypothetical rates even if most places won't offer actual coverage.

Actuarial tables are constantly being re-weighted and refined as new indicators are brought into the overall equations and trend lines revised by emerging data. The recent decreases in life expectancy among US adults is an example of a totally shocking trend reversal in the actuarial universe.

xp Not that familiar with earthquake or fire in CA but I would think if you can't get insurance that would tell you something about the risks of a property. Generally speaking the surplus lines market will ensure risks that the admitted market won't touch, albeit at a high cost. I'm sure there are risks/classes that surplus lines won't touch at any price.

Flood is the same way except the federal govt has created a national flood program where FEMA backstops (100% reinsurance) certain flood policies for properties that would otherwise not be insurable. One criticism of the national flood program (which I kind of subscribe to) is that this encourages more risky behavior by allowing people to build (and rebuild) in flood prone areas. Obviously global warming has exacerbated these kind of issues.

Would it be feasible to have such insurance be mandatory but with rates allowed to rise to whatever level makes sense (even if that level is absurdly high)?

Not really sure. Flood insurance isn't really insurance on some level because of the federal backstop - the program is notoriously under water (pun intended).

Flood insurance is often mandatory in one sense - a bank may require it in order for you to get a mortgage. There are other examples of mandatory insurance - auto and workers' comp.

It seems like for earthquakes in particular, being closer to a faultline ought to raise your hypothetical rates even if most places won't offer actual coverage.

I think that this really depends on the construction type of the building -- and the condition -- has it been seismically reinforced, etc. In various places, there are incentives and mandates for seismic reinforcement of certain building types ... back in 1989 it was URM (Unreinforced Masonry) and recently it's soft story buildings ... there was some super in depth article years ago about how shitty and worthless earthquake insurance was, but idk if that's still the case.

Would it be feasible to have such insurance be mandatory but with rates allowed to rise to whatever level makes sense (even if that level is absurdly high)?

Reading this again. If you are asking could the govt legislate changing homeowner behavior by mandating flood insurance even if the cost was prohibitive, I think they could though I imagine that would be politically very difficult. But I have heard that FEMA has bought damaged homes in certain flood prone areas and torn them down rather than paying the homeowner to rebuild.

Which accomplishes the same thing in essence.

re the statement discussed upthread, that depositing money in a bank is loaning money to a bank.

For instance, like loaning Mark £10 to buy his Quality Street (cf top of thread).

Some reasons that people might find this difficult:

1: it is never described this way. A bank says it will loan you money, but it never says "loan us money, by depositing money in our bank". As this is never said, it is no wonder if people do not think it is the case. Perhaps a massive deception has been going on.

2: if my employer pays me, say £1000, and it goes into my bank account (before I am even aware of it) - then this implies that the money is loaned out before I even have it myself. This contradicts the practice where I have £10 in my hand and can then decide to hand it to Mark S.

3: if I lend Mark S £10, he has it till he pays it back to me. But with the bank, I can take out £20 from a cashpoint; go into M&S and pay £10 for a box of quality street with my debit card; go on to online banking [NB this is not very easy, but it does exist] and move £100 from account A to account B ... In other words the money appears to be mostly under my control. It is pretty much as if I have the money. If I have taken out the cash from a cashpoint, it is literally the case that I have the money.

All this differs from the experience of loaning Mark S £10.

You may already be clear on this, but FWIW, in the case of 2, you "decide" this when you fill out the direct deposit paperwork with your employer.

Certainly I make an agreement that the money should be paid into the bank. "For safe keeping", as I would imagine it.

But my impression is that it's my money. Not that it's loaned to someone else before I ever have it.

Well, you're wrong then! :)

I've been reading, and trying to understand, this long post above.

you can imagine the world's first bank, where somebody said, instead of keeping your cowrie shells at home, which we have established is burdensome and detracts from your quality of life, give your cowrie shells to me and I will keep them safe

The character here doesn't say "lend me your cowrie shells". Their statement, rather, implies the idea of "safe keeping" that has already been mentioned.

The story also implies that the bank pays money (in this case shells) to its customers. But my bank doesn't do that.

Many banks do pay their customers. I get some interest on my current account, albeit only a fraction of a percent. Even if your account doesn't pay interest you're getting something for 'nothing', in that it has buildings, employees to help you and complex and hopefully secure IT systems to allow you to set up direct debits, standing orders and make withdrawals form cash machines etc.

I'm sure you don't think banks are doing this out of altruism, this infrastructure doesn't come cheap. It's a pact in that if you deposit money with them, they can use it for mortgages, business loans, currency speculation etc, in return you get cheap or free banking unless you have an unauthorised overdraft.

At the very least pinefox you should look to switch to an account which does pay interest.

That post makes sense.

I agree, I don't seem to be getting enough out of having my money in a bank. Whether there are better alternatives, I don't know.

pinefox, perhaps you could switch to one of these banks?

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

It's also worth saying that if you need access to a physical bank e.g. for depositing cash etc the Post Office allows you to do so at their branches for several banks. https://www.postoffice.co.uk/everydaybanking

These ones?

Top-pick savings accounts
Easy-access savings: allows withdrawals
Aldermore – 2.75%
Skipton BS – 2.65%
Notice savings: give notice to withdraw
OakNorth Bank – 3.07% for 90 days
OakNorth Bank – 3.2% for 120 days
Fixed-rate accounts: must lock cash away
Atom Bank – 3.95% for nine months
Kent Reliance – 4.45% for one year
RCI Bank – 4.85% for two years
Tandem – 4.9% for three years

I haven't heard of them. Don't know if that matters.

as established previously, it shouldn't matter if you haven't heard of a bank so long as that bank is covered by your country's deposit insurance regime. in the UK, it looks like that is the FSCS https://www.fscs.org.uk/ which covers up to £85,000 per person.

if one of those accounts looks pleasing to you, let us know and perhaps we could walk you through the pros and cons of it?

The character here doesn't say "lend me your cowrie shells". Their statement, rather, implies the idea of "safe keeping" that has already been mentioned.

― the pinefox, Tuesday, November 15, 2022 8:14 AM (one hour ago)

yes, the construct of the world's first bank was meant to show how a bank built around safekeeping, rather than borrowing money from its customers, would go out of business

pinefox you are very wisely aren't saying online where you bank but i will say that i am 99% certain your bank offers more than one kind of account besides a current account (the others are usually called savings accounts)

while a current account doesn't always offer any kind of interest growth to speak of (tho dan worsley's apparently does), a savings accounts generally will -- so you will not have to switch away to some obscure bank to access such a feature. the interest is how the bank "pays you" to bank with them.

there can be drawbacks with the savings accounts offered (for example you sometimes don't get speedy access). generally you have read the fine print (no one does this) or speak to someone at the bank (risk of being subtly misled; possibly less than it was in the 90s in the UK)

there is much competition between high street banks so they all offer various nice-sound things and switch them up all the time -- which can be both confusing and annoying

i bank with the co op and here's why: https://www.mirror.co.uk/news/uk-news/former-co-op-chairman-paul-flowers-3016064

pour one out for the crystal methodist

Mark S -- thanks for your helpful comments. Basically I have a current account and a savings account with the same bank and they are connected, ie: money from one flows into another - thus, in theory, a little bit of my income (less than I would like, no doubt) goes into the savings account. Except that, from today (!!), it doesn't. They have turned off that feature, for some reason, which was the main feature that made this account somewhat useful to me.

But AFAIK the savings account doesn't really pay me any interest either!

You are correct, I think, that I should talk to a banker and say: I want an account that pays me some money, or I will take it elsewhere. But do I really feel able to take my money elsewhere, with the upheaval involved? No.

"yes, the construct of the world's first bank was meant to show how a bank built around safekeeping, rather than borrowing money from its customers, would go out of business"

I don't think I comprehended this.

Transferring to a new bank should be a painless process and there's several websites which will do it for you e.g. https://www.currentaccountswitch.co.uk/ or https://www.uswitch.com/

to compress that long post into a few sentences, a bank that does nothing with the money you've deposited to it will need to charge you money to cover its expenses and to make a profit, which means it will lose out to the bank that doesn't need to charge you anything because it is loaning out the money you've deposited with it on the side and generating profit from the interest it charges. why would you bank with bank #1 that charges you money and doesn't pay you anything when you could bank with bank #2 that doesn't charge you anything and in fact may pay you interest?

I see. That seems to make sense.

So do you state that when I use them, I am not loaning money to the first bank, but am loaning money to the second bank?

correct, pretty much all banks now are in the vein of bank #2! the system has a fancy name, 'fractional reserve banking' - https://en.wikipedia.org/wiki/Fractional-reserve_banking

Do you agree that banks do not state that customers loan money to them?

So, if this is indeed what we, the customers do, a massive amount of dissembling has been going on for a very long time?

I have never even heard of this concept before this thread began.

Re UNDERSTAND THE ECONOMY's claim about banks: "the money in your bank account is loaned to the bank"

it's true that this is an unusual formulation but it remains a fact: the money that you deposit in an account is money you can get back -- and (except in certain emergency circumstances) you can make trouble if they don't give it back. well that's a loan.

so why don't ppl routinely *describe* it as a "loan"? one possible reason (ie i'm guessing) is that within banking loan has become a technical term of art with legally relevant specific characteristics and requirements attached (which aren't attached when you PF loan me MS a tenner to fritter away at the dog track)

so despite being a subset of the ordinary-usage meaning, the technical-professional term has – by virtue of advertising and the financialisation that runs our lives – has swamped and perhaps even ended ordinary-usage term (which ppl now don't use bcz it seems confusing and even inappropriate)

is something shady going on here? well it's banking so possibly yes i guess! but i feel its more of a structural pressure towards sales clarity than a wicked plot (like how ppl purse their lips when you call every vacuumcleaner a hoover! it wasn't made by hoover! but in a deeper and more accurate sense be serious yes it's a hoover)

plus as i've said several time before i think there are two language-use worlds at work here with a subtle but firm barrier to understanding between them. ppl on this very thread (the estimable tracer hand for one) have used the term "loan" in the sense that alarms you.

I would think that the reason is: the idea of me giving the bank my money for safe keeping is appealing. The idea of me loaning the bank my money is not. So, in their own interests, they have dissembled for many decades.

I agree that a barrier to understanding exists.

You are also trying to compress 500+ years of history of the development of the banking system into a couple of paragraphs. There were developments that lead to a second development that lead to the present arrangements/terminology. Just because no one uses a term today doesn't mean it was for nefarious or obfuscating purposes. I would also point out from the wiki link above:

Fractional-reserve banking predates the existence of governmental monetary authorities and originated with bankers' realization that generally not all depositors demand payment at the same time. In the past, savers looking to keep their coins and valuables in safekeeping depositories deposited gold and silver at goldsmiths, receiving in exchange a note for their deposit (see Bank of Amsterdam).

money/valuables for a note = a loan

silversmiths seething at the lost trade

when i was a kid i got a Kid Account at a medium-sized local bank and they gave me a lil cartoon pamphlet w lil cartoon kids "letting the bank use" their money for loaning out to lil cartoon adults who wanted houses and things, in dutiful return for which the bank then dispensed to the cartoon kids interest in comic-book vocabulary bold, big smiles all round, from all the organs of civilization's diverse and harmonious corpus. the truth (this one anyway) has been out there

they have dissembled for many decades

it's still a loan whether or not they refer to it as loan?

i agree that "we will keep you money safe for your convenience!" is a cheerier sell than "lend us your money!" but you ARE lending them your money whatever they call it

a rose by any other name etc

pinefox, you're right that banks do not disclose upfront what they do with your money. but consider also - and I fully realize that banks are to be kept at arm's length, perhaps at a polearm's length, can't be trusted farther than you can throw them, etc. - that from a customer's perspective, what the bank does with the money deposited with them has absolutely no effect on the customer. banking products are designed so that you, the customer, can withdraw your entire account, or move it to another bank, or whatever you want, at a moment's notice, without any impact on the bank's activities. the bank doesn't need to call in any loans, because the bank keeps enough in reserve to pay out customers who do request this. furthermore, as discussed upthread, if you are worried that your bank is acting irresponsibly with your funds, that is definitely a valid worry, but one that the government solves for by providing deposit insurance. so that, even if the coop bank goes down in flames because the CEO has spent it all on K, you, as a customer of the coop bank, can be fully guaranteed to receive at least up to £85,000 of your account back.

another way to put it: other than the principle of it all, what bothers you about the fact that you are lending money to your bank?

"but you ARE lending them your money whatever they call it"

hence my suggestion that they are dissembling, by referring to one thing as another thing.

"the CEO has spent it all on K"

what is K?

k is the drug ketamine (龜 is referring to the story i linked abt the CEO of the co op where i bank)

it's both things (looking after your money and a loan)

this is the same as the table story in marx's commodity chapter -- something is two things at once which pull in different directions and also read very differently

Poster ― 龜, Tuesday, thanks for your contributions, which are interesting and appreciated, to me.

"what bothers you about the fact that you are lending money to your bank?"

Do you feel good about lending money?

If I lend Mark S £10 for his chocolates, I don't mind because I know I have more money than that, it's not such a big amount. (I'd like to add "I know he will pay it back soon" but I don't know whether that's true. I have an idea that he now lives in a different town from me. But some people, I think, would pay it back soon.)

If I lend him all the money I have, I don't feel so good about that. Just as I wouldn't feel so good about lending him all my books. Lending things is sometimes a good and generous thing to do, but it creates a precarious situation.

Mark S, actually I didn't look up your story and thought it was a beneficial story about why the co-op was good !!

Mark S: as we have noted before, I have read the commodity chapter several times, very closely, and ultimately I did not comprehend it. A worrying thing (probably also stated before) is that I have an idea that the rest of CAPITAL is *harder* than that chapter.

I do feel good about lending money to a bank, since as discussed before, the government has my back in case the bank fails.

lending to mark s is very different than lending to barclays!

Unlike you, I don't feel good about lending money to a bank. I didn't know I was doing it till about 3 days ago.

As for the government -- well, the UK government is corrupt, and I would not feel confident about getting any money out of it for anything.

Perhaps your government is better.

If it’s reassuring at all if the government didn’t make good on its deposit insurance commitments the money you didn’t get back would probably not be worth much anyway

For the bank, it is functionally a loan. For someone with a personal account, it functionally isn't a loan. Government regulation makes both of these statements true. The modern world is full of these matters of incommensurate perspective. If you truly want to use a bank to safely store your money and have it not be a loan, rent a safe deposit box and fill it with cash. But that strategy doesn't even simplify the transaction, really. Money isn't real. You're really just buying a different kind of risk.

re KAPITAL: i am not convinced that the rest of the book *is* harder that that chapter -- but i have only read small sections of it. it's a famously poetic chapter, which some may see as making it the hardest? personally i feel that the chapters preceding it (which are largely definitional) are *much* harder. they're certainly more boring.

there are later chapters that are both more entertaining and more straightforward as storytelling (albeit of pertinent examples in political economy and so on)

re governments: there's an ongoing story right now in south korea about the governor of a prefect who decided unilaterally not to pay for something his predecessor promised to pay for -- it has caused immense chaos and collapse in trust in governmment bonds!

https://foreignpolicy.com/2022/11/10/legoland-south-korea-bond-market-crisis/

One might gloss that with the advent of fiat currency “money” as such ceased to be a “thing” you can “have”, on some level money is all debt. (This may not be orthodox economics.)

"For the bank, it is functionally a loan. For someone with a personal account, it functionally isn't a loan."

Interesting statement! Might actually clarify things (... by ... making them less clear).

"The modern world is full of these matters of incommensurate perspective."

Can you give any more examples? Are they all about money?

what was money before the advent of fiat currency?

Mark S: I agree that it's very rhetorical, at least. I'm not sure that's why I find it incomprehensible. I think it's just the concepts. After reading it very closely I didn't know what it said.

This makes me think that Marx, in translation, as I have read him, is not a very clear writer. Though nor were any of the philosophers before him.

big sacks of precious-metal specie I guess xp

silby: yes, sorry, i was being dumb

forgot what fiat referred to

I mean it's hard to put my finger on exactly what the difference is between having a claim on the bank for a chest full of doubloons and having a claim on the bank for a database entry that says you have $69,420 but it has a different vibe. To the point that some crazy people are still mad about it!

If a bank really did lose all my money, then I would no longer have enough money to pursue a claim to recover it from the government (for instance, I couldn't use a mobile telephone or internet).

I cannot imagine being confident that the UK government would give me £85,000 in any circumstances.

Not to complicate the conversation by bringing in an entirely different financial instrument, but the collapse of the FTX crypto exchange is a nice illustration of why we have bank regulations and what they do. FTX more or less operated like a bank — people could deposit money there and then easily use it to buy whatever cryptocurrencies they wanted. Theoretically, FTX was supposed to make money by charging a tiny commission on each transaction (making it somewhat more like a credit card company than what we think of as a bank). But it turned out that in addition to that, FTX was actually lending out its customers' money — to a separate crypto trading company that was actually owned and controlled by the same guy who owned FTX. So he was functionally accepting people's deposits and then lending their money to himself — which is the kind of thing that regulated banks have a whole lot of limits and safeguards against.

The crypto world doesn't have any of that, and nobody realized what was going on until crypto tanked and all of that money he'd borrowed (about $10 billion) basically disappeared as his own investments via the other company tanked. And when people got panicked and came to get their deposits out of FTX, a lot of them couldn't because the money was no longer there. (He had essentially issued IOUs to FTX in the form of a cryptocurrency he created out of thin air, which had no collateral backing at all.) This kind of thing used to happen in real-world banking too, which is why most developed economies now have lots of rules about exactly how banks can use their customers' money and what kind of collateral they are required to keep, and they also have the backup of government insurance of their deposits up to certain amounts.

Of course, those regulations are still pretty fallible and corruptible too, as the 2008 crash illustrated. In that case, banks had made excessively risky loans in the form of mortgages that people were not actually going to be able to pay, and then resold those mortgages to other banks and investors with the (false) promise that they were "good" loans. Then the music stopped and there was no more cash coming into the system and people couldn't pay their mortgages and the banks and investors holding the loans were out gazillions of dollars, collectively.

As for the government -- well, the UK government is corrupt, and I would not feel confident about getting any money out of it for anything.

Perhaps your government is better.

― the pinefox, Tuesday, November 15, 2022 12:53 PM (thirty-one minutes ago)

interesting - and totally fine, a lot of people hold the same perspective - the banks are corrupt and the government is not that much better.

there is an interesting contradiction here though - you don't trust the government to stand behind their deposit insurance guarantee, yet you do trust the government to stand behind the pound that it has printed

xp but to flesh that^^^ out

pinefox i don't know when you last sat down and read the words on a (UK) bank-note: alongside various less pertinent legends (which perhaps refer e.g to the person depicted etc) it says "i promise to pay the bearer on demand the sum of ten* pounds" -- and across from this is a signature, currently of the chief cashier on behalf of the "governor and company of the bank of england"

well those guys are the government and that promise is what keeps all the balls in the air. because i guess it's kind of a fungible promise -- the bank of england makes it so every bank signs on and every shop and every company and more or less every person, even me. we do't just say "this is a bit of paper with writing on it" we say "ok it;s money"

and it's why politicians and others often talk about confidence (as you just did): because confidence wavering is basically ppl thinking "that promise? will they pay? is this still money"

if enough ppl conclude they won't and it isn't then things go south pretty fast :) 👍🏽🚀

*or however many pounds it is, it's ten on the jane austen

here, it is appropriate to introduce the concept of what constitutes 'legal tender' https://en.wikipedia.org/wiki/Legal_tender

the hoohah abt insolvenet pension funds from the liz truss era was the tale of the govt (in the shape of the sotra-kinda autonomous bank of england) promising to step in to stop a "bank run" on a pension fund (in fact several pension funds)

in the event this promise alone calmed things down i believe, and they didn't have to make good on the last-ditch purchase they promised if things got too bad

the political fall out is that (a) the liz truss govt fell instead of the pension funds and (b) there is beef that the BoE acted deliberately to topple her by intervening this way

ps in relation to pension funds i've been meaning to read the LRB piece abt academic pension funds that you talked abt upthread, when i have a moment i will and we can talk that through also

Mark S: yes, I have definitely often heard of those words / that aspect. I have never really understood it. Perhaps it means ten pounds (weight) of gold, or something. They will hand over this weight in gold if you give them the note?

You are convincing in noting that this is 'the government' in which we have ... confidence?

But there is much evidence of corruption in the UK government - this is a fact - take eg:

https://www.lrb.co.uk/the-paper/v42/n21/peter-geoghegan/cronyism-and-clientelism
https://www.lrb.co.uk/the-paper/v43/n09/peter-geoghegan/short-cuts

I agree that we continue to trust the state for many things - health care, for instance (I hope).

But as I said, would you trust the UK state to give you £85k, if you had no money to make any claim for it (eg to use the internet)? Seems unlikely.

there is a very easy, practical, fix for that problem - keep your money in two banks. the chances of both banks failing at the same time are pretty slim in the modern era - even during 2007/2008, I don't believe any commercial banks (i.e. the kinds of banks you'd have accounts with) failed (the ones that were taken out to the back of the shed and shot were investment banks, which aren't retail-facing.)

There were commercial banks like Wachovia that got taken down by their mortgage lending, but even in those cases your average account-holders were OK because of federal insurance. It was the banks' shareholders that got screwed.

I actually quite like poster Jaime Pressly's statement above, that to a bank, money in a bank is a loan, and to a customer, it isn't.

This would give a rationale for banks not telling us that we are loaning them money.

I like this list of defunct banks in the UK: https://en.wikipedia.org/wiki/Category:Defunct_banks_of_the_United_Kingdom

customers of cocks biddulph bank, where are they now?

pinefox i went to see how you would go about an FSCS (financial services compensation scheme) claim and it's true that the first big picture you see is of someone with red-painted fingernails about to start typing on a laptop!

https://www.fscs.org.uk/making-a-claim/

but they do include a snail-mail address so all you ultimately need is a pencil, a sheet of paper and i guess a stamp (plus the relevant paperwork proving it was yr account and so on)

here it is just in case:
Financial Services Compensation Scheme
PO Box 300
Mitcheldean
GL17 1DY

If you truly want to use a bank to safely store your money and have it not be a loan, rent a safe deposit box and fill it with cash. But that strategy doesn't even simplify the transaction, really. Money isn't real. You're really just buying a different kind of risk.

― Jaime Pressly and America (f. hazel), Tuesday, November 15, 2022 12:56 PM (one hour ago)

that is another solution for the pinefox, to withdraw all his money from his bank and to keep it under lock and key, perhaps in a safe deposit box (which would also be at the bank.)

historically, the chinese have been distrustful of banks, and some are like the pinefox in that they prefer to keep their money in a safe deposit box rather than the bank itself, to the point that when banks open a branch in chinatown, they outfit the branch with more safe deposit boxes than usual: https://www.nytimes.com/2005/07/08/nyregion/keeping-luck-under-lock-and-key.html

A feng shui master has already checked the new Commerce Bank building that will open today at 155 Canal Street in Chinatown to confirm "that everything is facing the right way," said William G. Leung, the manager of the new branch.

Befitting its prominent corner location in Chinatown, at Bowery Street, the bank will have trilingual cash machines in Chinese, English and Spanish. And its 30 employees will converse in Cantonese and Mandarin, as well as in English.

It is hardly a coincidence, furthermore, that today, the eighth, because some people of Chinese descent consider eight a lucky number, "is a fortunate day, good for business," said Mr. Leung.

Oh. One more thing.

The new bank will have 7,500 safe deposit boxes, instead of 500 in the average Commerce branch. "Culturally, this is something very different for us," said Gregory B. Braca, a senior vice president of the company who manages the 38 branches in New York City.

In fact, construction work on the bank was nearing completion in January until "we began hearing that we needed more safe deposit boxes," Mr. Braca recalled. "We didn't know. So we began rebuilding from the bottom up, until we had a brand new building -- and an extra floor, just for the boxes."

Chinatown, in fact, is safe deposit box country, one aspect of the highly competitive, and escalating, bank war in the neighborhood. Across the street from the new banking interloper, the domed HSBC branch at 58 Bowery has 21,000 safe deposit boxes. And the HSBC branch at 11 East Broadway has 12,000.

What is going on here?

"There is a waiting list for safe deposit boxes in Chinatown, and that can become Commerce Bank's competitive advantage," said Charles Lai, executive director of the Museum of Chinese in the Americas at 70 Mulberry Street. A safe deposit box "gives you a sense of privacy," said David S. Chen, the executive director of the Chinese-American Planning Council, a community group that provides social services. "Chinese don't flaunt their wealth, especially the old-timers. And when you have a bank statement, anyone could know how much you have."

Some Chinese immigrants live principally in a cash economy, with many family members pooling their income, Mr. Chen said.

And immigrants sharing rented rooms "don't want to keep their valuables around," Mr. Lai said, "since keeping everything under the mattress was for the 1940's and 1950's."

Many apartments are small, and so residents entrust to the boxes items like cash, significant paperwork, bankbooks, checkbooks, sentimental photographs, mementos and jewelry, "because it's portable and can be worth a lot of money," Mr. Chen said.

"My parents are a good example," said Paul W. Ho, senior vice president for the Asian market domain at HSBC Bank U.S.A., a unit of HSBC Holdings Corporation. "Every time they get invited to a wedding, they go to the safe deposit box. They retrieve their jewelry, and go to the wedding. Then they put it back. That's my mom."

It is the first Commerce Bank assault on the neighborhood, where some other competitors are long established. For example, as the modern-day descendent of the Hong Kong and Shanghai Banking Corporation, HSBC established its first Chinatown branch 28 years ago at 50 Bowery Street. Now it has three branches, Mr. Ho said, "and we're opening up another one soon."

Indeed, there are more than 30 bank branches in Chinatown, Mr. Leung said, and the number continues to grow. Within three blocks of the new Commerce branch are a Citibank, an Abacus Federal Savings Bank, a United Orient Bank, a Chinatrust Bank and a Bank of East Asia.

Why so many? "It's like the man said when they asked him why do you rob banks?" Mr. Braca said. "Because that's where the money is."

Financial institutions are responding to the high savings rates of Chinese-American residents, Mr. Lai said. "Saving isn't just for a rainy day -- when you see your entire life as a rainy day," he added. "Saving is an important part of the safety net -- in a mattress or in a bank."

Banks are also proliferating because "though Chinese may live in other neighborhoods, many open their accounts in Chinatown," Mr. Chen said. "When I came here 30 years ago, I lived in Brooklyn but I opened up my bank account on Mott Street."

Indeed, Manhattan has only 24 percent of the city's Chinese-Americans, or 90,158, according to the 2000 census ; 71 percent live in Brooklyn and Queens. Those of Chinese descent make up the largest Asian-American group in New York City, nearly half of the Asian-Americans in the city. Three-fourths of them are immigrants.

As a consequence, "Chinatown is an important economic engine for the banking industry in the city," Mr. Lai said. The aggregate deposits in Chinatown bank branches exceed $5.4 billion, according to a study by the Asian American Federation of New York, a nonprofit public policy organization.

"Plenty of competition is good for everybody," said Mr. Ho of HSBC.The 7,000-square-foot Commerce Bank branch will feature speckled white marble floors, blond figured-anigre wood, jazzy red neon striping and the company's distinctive red logo, "a fortunate coincidence," Mr. Braca said, "since our color signifies good luck."

Deposit boxes at the new branch will cost $50 to $250 a year, depending on their size. The bank will be open seven days a week; its Sunday hours will be 11 a.m. to 4 p.m. However, "Chinatown had seven-day banking more than a decade ago because it's busier on the weekend," Mr. Chen said. "Many Chinese who moved out of the neighborhood come back on weekends to shop, to buy food, to get a newspaper, and to visit relatives."

Like some of its other competitors, Commerce Bank will provide customer-service workers to make it easy for patrons to wire money transfers and buy money orders "since many immigrants have families back home, and they send them money," Mr. Lai said.

Like its Chinatown competitors, Commerce Bank will go after retail consumers, small businesses and nonprofit organizations. "It's so important to know everyone here," said Kelvin Kan, the commercial banking director in the new Commerce branch. "In Chinatown, it's all about credibility."

Therefore, the bank has sought local expertise in hiring its personnel, including Mr. Kan, who worked for HSBC for 10 years, and Mr. Leung, who has been a manager at North Fork Bank and Citibank.

To attract customers, the bank is sponsoring a lion dance promotion today at noon, as well as clowns, balloons, free hot dogs, pretzels and, bien sûr, dim sum.

And since it's Chinatown, there will be a raffle for the luckiest deposit box of them all: 888, since "many depositors want an account with lucky number eight at the end or the beginning," Mr. Leung said.

Not to mention four raffles today and tomorrow, Mr. Leung said, "for prizes of $888 in cash."

re defunct banks, i remember feeling a great pang as a child when i learned (how?) that martin's bank had been folded into barclay's -- bcz my uncle is called martin and he is a very sweet man and i somehow felt the family was under attack. i asked my dad why we hadn't been banking at martin's bank and as i recall he gave no very satisfactory answer

The name GIROBANK is familiar.

lol just found a webpage devoted to the relevant branch of martins: http://www.martinsbank.co.uk/11-80-70%20Shrewsbury.htm

(this answers the "how" i think: this is an extremely prominent spot in shrewsbury so someone will have commented on the frontage change)

but, safe deposits aren't safe. crucially, they are not insured by the government! so if a bank misplaces your safe deposit box, you have even less of a chance of getting anything back than you do with deposit insurance.

https://www.nytimes.com/2019/07/19/business/safe-deposit-box-theft.html

There are an estimated 25 million safe deposit boxes in America, and they operate in a legal gray zone within the highly regulated banking industry. There are no federal laws governing the boxes; no rules require banks to compensate customers if their property is stolen or destroyed.

Every year, a few hundred customers report to the authorities that valuable items — art, memorabilia, diamonds, jewelry, rare coins, stacks of cash — have disappeared from their safe deposit boxes. Sometimes the fault lies with the customer. People remove items and then forget having done so. Others allow children or spouses access to their boxes, and don’t realize that they have been removing things. But even when a bank is clearly at fault, customers rarely recover more than a small fraction of what they’ve lost — if they recover anything at all. The combination of lax regulations and customers not paying attention to the fine print of their box-leasing agreements allows many banks to deflect responsibility when valuables are damaged or go missing.

“The big banks fight tooth and nail, and prolong and delay — whatever it takes to wear people down,” said David P. McGuinn, the founder of Safe Deposit Specialists, an industry consulting firm. “The larger the claim, the more likely they are to battle it for years.”

Seemingly Girbobank was a public utility, then became part of a private bank.

I expect we were swindled somehow, as usual.

https://en.wikipedia.org/wiki/Girobank

re the "government refunds £85k" claim, what about people who have more than £85k in a bank? They lose the rest of the money, I assume.

Still not good value for the government to pay the £85k.

pinefox i don't know when you last sat down and read the words on a (UK) bank-note: alongside various less pertinent legends (which perhaps refer e.g to the person depicted etc) it says "i promise to pay the bearer on demand the sum of ten* pounds" -- and across from this is a signature, currently of the chief cashier on behalf of the "governor and company of the bank of england"

one cool thing about hong kong is that the legal tender there is all issued by banks, not the government. so a ten hong kong dollar note could be issued by standard chartered, the bank of china, or HSBC. it looks like this is the de facto norm in commonwealth territories? i have never been to england.

re the "government refunds £85k" claim, what about people who have more than £85k in a bank? They lose the rest of the money, I assume.

Still not good value for the government to pay the £85k.

― the pinefox, Tuesday, November 15, 2022 2:24 PM (five minutes ago)

an easy way around this is, if you have more than £85k, to split it up at two separate bank accounts. i'm not sure what the best choice of action is when you're obscenely wealthy - my suspicion is that if you're obscenely wealthy, you don't actually keep your value as cash, but instead you have it in investments in stocks, real estate, asset classes, and you only keep around enough cash to pay your bills.

Bank branch burns down, good luck getting your cash in the safety deposit back.

At least in the US there is a commonly accepted concept of “too big to fail”. If your bank is big enough, presumably the government can’t afford to let it fail. So for example when Washington Mutual failed in the 2008 financial crisis the government arranged it so no depositors lost money even if they held more than the insured limit. However a smaller bank, IndyMac, also failed, and though the government did retroactively raise insured limits to try and protect as many depositors as possible, some of them with particularly large deposits did lose money.

Just looked up cash savings in the UK.

https://www.finder.com/uk/saving-statistics

>>> Whether you’d rather hide money under your mattress or more wisely put it into a savings account, savings are key to helping people plan their future, deal with accidents and secure a comfortable retirement. How much has the average person saved in the UK? And are we getting better or worse?

Quick overview
In 2022, the average Brit has £7,509 saved.
On average, savings in 2022 have increased 11% since 2020.
1 in 5 (20%) Brits have no savings at all in 2022.
Among the regions, East England (£10,398) had the highest average savings in 2022 and Northern Ireland (£5,340) had the lowest
Among the cities, people in Edinburgh had the highest average savings of £11,791 and Nottingham had the lowest at £4,248.

In 2021, almost half of Brits (47%) of people made sure that they saved for their retirement. How much does the average British person have in savings? According to our 2022 survey, 1 in 5 (20)% of the respondents had no savings at all. The average savings in 2022 was £7,509. There is an 11% rise in savings compared to 2020 when it was £6,757. It is recommended that people should have 3 months of expenses saved.

£7k won't go far if you lose all your income, will it? You might burn through it in, say ... 3 months? Maybe that's a conservative estimate, I realise some people pay huge amounts for rent.

I'm sure you don't think banks are doing this out of altruism...

When I was little...3...4 years old?...my mum would take us into the bank to get some cash before going round the supermarket. I genuinely believed at that time that banks were offices where rich people would give money to poor people so that they could go shopping. I now realise that isn't the case.

under communism,

the best choice of action is when you're obscenely wealthy - my suspicion is that if you're obscenely wealthy, you don't actually keep your value as cash, but instead you have it in investments in stocks, real estate, asset classes, and you only keep around enough cash to pay your bills.

https://www.kkr.com/images/insights/62-images/charts-6.png

turns out the seriously rich have more of their money in cash than the merely very rich (via https://www.kkr.com/global-perspectives/publications/wisdom-compounding-capital).

UHNW = ultra high net work, > $30m in assets
HNW = > $1m

one cool thing about hong kong is that the legal tender there is all issued by banks, not the government. so a ten hong kong dollar note could be issued by standard chartered, the bank of china, or HSBC. it looks like this is the de facto norm in commonwealth territories? i have never been to england.

still true in scotland - the royal bank of scotland printed one pound notes long after they'd been withdrawn by the bank of england. technically scottish notes aren't 'legal tender' in the uk but they can and should be accepted, i've flummoxed a few shopkeepers with them but never had one refused.

South Korean media have compared Kim to disgraced former British Prime Minister Liz Truss, an apt analogy. "For purely political reasons, both leaders caused an entirely gratuitous self-inflicted wound to their countries’ economies, destroying trust in what was supposed to be a sure thing—pension funds for Truss, government-backed bonds for Kim. The same lesson applies to Britain, South Korea, and everywhere: Electing bad politicians leads to a bad economy."

https://foreignpolicy.com/2022/11/10/legoland-south-korea-bond-market-crisis/

I am taking different lessons from this story. More like, economics: wtf have we done?!

That South Korean story also worth keeping in mind as we approach yet another dumb debt-ceiling standoff in the U.S.

BBC radio news says that the UK PM is returning to the UK to tackle inflation.

I think inflation means something like: money can no longer buy so much. The value of money has decreased.

I don't know why. Nor what the PM would do to change it.

Strange that a decrease in the value of money is called inflation rather than ... deflation?

one cool thing about hong kong is that the legal tender there is all issued by banks, not the government. so a ten hong kong dollar note could be issued by standard chartered, the bank of china, or HSBC. it looks like this is the de facto norm in commonwealth territories? i have never been to england.

Come to Scotland, the Bank of Scotland, the Royal Bank of Scotland and the Clydesdale Bank all produce bank notes.

still true in scotland - the royal bank of scotland printed one pound notes long after they'd been withdrawn by the bank of england. technically scottish notes aren't 'legal tender' in the uk but they can and should be accepted, i've flummoxed a few shopkeepers with them but never had one refused.

I've had them refused and certainly scrutinized and questioned. The thing is banknotes are not legal tender in Scotland, so if Scottish banknotes are refused in the England then English banknotes can be refused in Scotland by the same (spurious ) reasoning.

Oh and four banks in Northern Ireland produce banknotes: Bank of Ireland, First Trust Bank, Danske(!) Bank and Ulster Bank.

To complicate things further. The Isle of Man, Jersey and Guernsey all produce their own banknotes (including £1 notes). Alderney produces coins but no notes.

I turned on Radio 4 today. They were talking about cuts and taxes. It was the main item, the central idiom. Probably things that will help bad people and hurt good people. 'Austerity' and how they can avoid calling it austerity. The BBC accepted it all.

The decrease in the value of money is necessarily an increase in the price of things - that is what inflation / deflation refers to.

That makes sense.

I have an idea, for some reason, that the price of something going up is connected to scarcity. If there is less of a substance, then its price goes up. That would be 'inflation', for that particular substance?

So if there are 100 cows, a pint of milk is 80p. If 50 cows are taken away, the pint goes up to £1.60. If only 1 cow is left, a pint is £80. Is that true? I can't really see why except that the person selling the milk is mercenary and can choose to charge more so only a very rich person can buy it.

Is that what 'inflation' is about?

Examples work better using quality street and lunches.

I think you might be describing price elasticity. Inflation is a rise in prices over time, for which there could be various reasons (scarcity may be one).

I see. I had a feeling that what I was trying to describe wasn't the same as the inflation thing that everyone is talking about.

inflation is a -measure- of the purchasing power of your currency relative to previous years... it's calculated by taking a representative sample of various goods and comparing how much they cost compared to previous years. the actual price of a specific good changing can be attributed to supply and demand or any number of other relatively concrete things, while the cause of inflation (since it's an abstract measure) can be argued about. economists can make some good conjectures about the causes of inflation but they do not really KNOW. but if Taylor Swift tells everyone to buy a red iPhone and they suddenly double in price, you can be pretty sure you know why red iPhones have gone up in price.

One possible inflation scenario:

The amount of cows remains the same at 100, but mark s receives a bequest and decides to give everyone £50. There’s now more money chasing the same amount of milk - and prices go up.

An increase in the quantity of money seems to be a leading suspect in many historical cases of inflation. e.g. the Price Revolution that occurred in Western Europe between the 15th and 17th centuries, which many suspect was related to the influx of gold and silver specie from the New World via primarily Spain.

"but if Taylor Swift tells everyone to buy a red iPhone and they suddenly double in price, you can be pretty sure you know why red iPhones have gone up in price."

I can see that if ms Swift recommends something, many people will want it. But does that mean its price will go up? Why?

Aren't the prices of such items quite stable?

If I try to imagine another credible example ... say TS says that she likes the sequel to KNIVES OUT, and her fans go to see it. It won't cost them more than it would have done if she hadn't recommended it.

"The amount of cows remains the same at 100, but mark s receives a bequest and decides to give everyone £50. There’s now more money chasing the same amount of milk - and prices go up."

But why? I don't understand this either. It's not the milk-seller's business how much money the other people have. That's their private business. It doesn't seem logical to me that the price of things should go up for those people who happen to have gained more money.

in both the advertising (Taylor) and inflation (milk) examples, the people selling things want to get the most money they can for the sale. if people are willing to pay more than the price was yesterday, the sellers may well adjust their prices.

i feel like we're gradually whittling our way down to first principles of classical liberal economics (Adam Smith, law of supply and demand), like Daffy turning into a pencil drawing in Duck Amuck. it's fun!

In the US, prices are apparently propped up by a giant strategic cheese stockpile.

It's possible this cheese stockpile is more voluminous than all the gold ever mined in human history.

"if people are willing to pay more than the price was yesterday, the sellers may well adjust their prices."

I think I understand that idea, but does it happen?

The price of things (spaghetti, say) does go up, but not because people are richer and can afford it more easily - does it? Isn't it because it has become more expensive to produce spaghetti, for some reason, so the price has to go up to cover costs?

Maybe the idea seems counter-factual or counter-intuitive to me because people have not actually become richer, in my society (the UK), in such a long time (15-20 years maybe?), so I can't remember it happening but it did use to happen.

imagine it like this:

doctor casino owns 100 cows that produce 100 pints of milk a day, each pint sells for £1, there are 100 people who want to buy 1 pint each. great.

overnight, 20 cows mysteriously die from cattle mutilation (attributed to aliens). 80 cows are left producing 80 pints for that day. dr. casino still sells each pint for £1, there are still 100 people who want to buy 1 pint each, but now there are only 80 pints. the last pint of the day is sold to philip nunez. 20 people were not able to buy any milk. as philip nunez walks out of dr. casino's barn, o. nate (who was waiting in line but now realizes the milk is sold out) follows philip nunez into a corn maze and says, i've got a kid at home who desperately needs calcium, sell me that pint of milk - i'll even give you more than you paid, i'll give you £1.20. philip nunez, who likes milk but doesn't like it enough to not be a fat cat capitalist, says you got yourself a deal. dr. casino, who's closed up shop, walks by and overhears the exchange. he realizes that he is leaving £.20 on the table by still selling it at £1 a pint, why should philip nunez get that extra £.20 and not him? after all, dr. casino is the one who owns the cows, philip nunez hasn't added any value here other than being earlier in time to the barn than o. nate. dr. casino is determined to capture that value!

so, the next day, dr. casino starts selling the milk for £1.20. of the 100 people, 20 think £1.20 is too high, but 80 will begrudgingly accept the price hike because they need the milk. £1.20 is therefore the market-clearing price, equilibrium is reached once again.

tah-dah!

^ you can also imagine a world in which the noble dr. casino never increases his price, despite losing 10 cows a day to aliens. doesn't the milk stay at £1 in that world, you might ask? well, sort of - only to those who are lucky enough to buy at the £1 price for the purpose of consumption. there will be a healthy secondary black market for milk where the milk will trade for prices higher than £1, and as the milk supply decreases every day (due to cattle mutilation) the price on the secondary market will increase, leading to more and more scalpers muscling in on the daily milk drop.

one missing component here is how much of my milk earnings i will blow in the cow-and-alien-themed pinball machine Attack From Mars

The amount of cows remains the same at 100, but mark s receives a bequest and decides to give everyone £50. There’s now more money chasing the same amount of milk - and prices go up.

I'm almost certainly getting confused/missing something but here goes anyway. So I've heard that sellers will increase prices if there's more money floating around, as per the example above. But surely if one seller keeps their prices the same while other sellers raise theirs then people will just go to the place that's still relatively cheap?

In the US, prices are apparently propped up by a giant strategic cheese stockpile.

It's possible this cheese stockpile is more voluminous than all the gold ever mined in human history.

― Philip Nunez, Friday, 18 November 2022 01:26 (seven hours ago) bookmarkflaglink

Amazing! Also 'giant strategic cheese stockpile' sounds like the worst prog album ever

overnight, 20 cows mysteriously die from cattle mutilation (attributed to aliens). 80 cows are left producing 80 pints for that day. dr. casino still sells each pint for £1, there are still 100 people who want to buy 1 pint each, but now there are only 80 pints. the last pint of the day is sold to philip nunez. 20 people were not able to buy any milk. as philip nunez walks out of dr. casino's barn, o. nate (who was waiting in line but now realizes the milk is sold out) follows philip nunez into a corn maze and says, i've got a kid at home who desperately needs calcium, sell me that pint of milk - i'll even give you more than you paid, i'll give you £1.20. philip nunez, who likes milk but doesn't like it enough to not be a fat cat capitalist, says you got yourself a deal. dr. casino, who's closed up shop, walks by and overhears the exchange. he realizes that he is leaving £.20 on the table by still selling it at £1 a pint, why should philip nunez get that extra £.20 and not him? after all, dr. casino is the one who owns the cows, philip nunez hasn't added any value here other than being earlier in time to the barn than o. nate. dr. casino is determined to capture that value!

This is a good explanation. I can follow this. Thanks for this helpful narrative.

But this seems to relate to the theme of scarcity - a substance becoming rarer and thus its price going up.

But not to the other scenario that was posited, which was: a substance is recommended, or consumers have more money, so the price goes up.

"But surely if one seller keeps their prices the same while other sellers raise theirs then people will just go to the place that's still relatively cheap?"

Also seems a good argument (though I suppose doesn't apply to the fictional world where only one merchant for a substance exists, eg: Dr Casino).

On the non-scarcity side, if there’s more money circulating in the economy why should the milk-producer simply cover their costs and maintain their existing prices? They’ll want to see what pricing the market will bear - and people will be able to pay more.

also: the companies who supply me with milk bottles, cow maintenance equipment, etc., have all been inching up their prices --- because they can also get away with that, because everybody has more money. so if i don't raise my prices, i will actually be making less money on my milk sales, in real terms.

More money circulating = higher prices because it increases the chance that one of those with more money but no milk will buy at an above market rate on the secondary milk market in the example above, which will tend to push up the primary market price.

Milk tends to be very highly regulated. You might not be able to set up a secondary market as easily as this is suggesting.

But not to the other scenario that was posited, which was: a substance is recommended, or consumers have more money, so the price goes up.

― the pinefox, Friday, November 18, 2022 4:32 AM (five hours ago)

right, so the example i gave was a shock to the supply side. now, imagine this: doctor casino has reached a pact with the aliens such that they are no longer mutilating his cattle, and he's got 100 cows, there are 100 people wanting 100 pints of milk at £1 a pint. everybody's happy.

one day, the milk and taylor swift appreciators of hereford roll into town, 25 of them. taylor swift has sampled doctor casino's milk and has declared it to be the best milk ever - it's from grass-fed, free-range cows that are happy because aliens are no longer mutilating them and also doctor casino gives a great cow massage, and only 100 pints are produced a day! so, the milk and taylor swift appreciators of hereford are here for a week and they are demanding to appreciate doctor casino's milk! but, there's a problem - there are now 125 buyers of doctor casino's milk (100 + 25 taylor swift appreciators), but doctor casino can still only coax his cows to produce 100 pints a day. so what happens? well, luna schlosser, head of the milk and taylor swift appreciators of hereford, spying that PBKR was able to buy the last pint of the day, corners him in a dark alley, and says i've give you £2 here for that bottle of milk (i have some extra pounds because i was scalping taylor swift tickets off ticketmaster), and this story is starting to sound familiar...

this is what happens when you increase the demand side of the supply/demand equation.

to really hammer this home: what the back-alley scalper examples highlight is that if demand is going up, and there are enough people willing to pay more, the price will eventually go up - UNLESS i, Farmer Casino, am oblivious to the scalpers, or profoundly committed to making sure that original customer base will always have affordable milk. that kind of philanthropic attitude is rare!

note that no actual scalpers need truly materialize - i could also simply guess that with the Tay-hive coming, i can surely get away with the price hike. (i know in the back of my head that unless i raise my prices to whatever the customers will bear, the scalpers could materialize and take the money that could be mine!) i might also notice that another ILXor's farm has raised their prices and gotten away with it, so again I'm leaving money on the table.

Good story.

But in reality, can shopkeepers see that people have more money?

What is the signal for WH Smith to put up the price of ballpoint pens? I understand "it's getting harder and more expensive to secure ballpoint pens - sadly, the price we charge for them must go up". But I don't understand "some our customers are looking more smartly dressed these days - perhaps they have more money for some reason. Let's raise the price of ballpoint pens."

OK --- so to the extent that you're asking about inflation: under inflationary conditions, the price of everything is going up. The price that W.H. Smith is paying for the pens is going up. The wages their workers expect to be paid is going up. The rent and the electricity bill are going up. Etc. So they raise the price of the pens. Good luck identifying the "first mover." But it's what happens.

But certainly, if a shop is located in an increasingly posh neighborhood, the suits people are wearing might well inform the owner's pricing decisions! It might also inform the decision of the landlord to raise rents on the pen shop, which is also going to affect the shop-owner's next moves. This isn't the same thing as inflation, though, where the buying power of a given unit of currency is going down across the economy.

Manufacturers and retailers put a lot of resource into pricing and also keep up with what their competitors are doing, state of the market, current financial conditions etc.

I guess in the old days when prices were routinely haggled over between buyers and sellers, part of the skill set of a seller was determining the highest price that the buyer was willing to pay, perhaps by watching their facial expressions and body language, bluffing, etc. In the modern era of posting prices for all items, these personal and interactive ways of sussing out how much buyers are willing to pay have been most likely replaced with modern analytical practices, but the goal remains the same.

You can still experience it in street markets the world over tho. Or when you try to cancel your internet service. Literal offer I got last week when I did that (because of course they force you to call some guy in an answering center who then reads a script designed to keep you): "What if we cut your bill by 17 percent and boost your speed from 100 mb to 500 mb?"

I should try that with my bank, as noted before.

>>> "under inflationary conditions, the price of everything is going up. The price that W.H. Smith is paying for the pens is going up. The wages their workers expect to be paid is going up."

That sounds different from our actual conditions, where the price of things is going up, but nobody's wages are going up - in fact many of us are looking at getting paid less.

"The rent and the electricity bill are going up." - I understand as a reason for price rises. But as I mentioned earlier, the fact that wages never seem to go up may be a reason I can't picture this world where people have more money and then prices rise.

That sounds different from our actual conditions, where the price of things is going up, but nobody's wages are going up - in fact many of us are looking at getting paid less.

nominal wage growth in the uk is over 5%, highest it's been in 15 years. so wages are going up for most people, on average. but they aren't going up as fast as inflation, so real wage growth is negative (around -2%)

similar story in the US too https://www.forbes.com/sites/qai/2022/10/01/us-wage-growth-fails-to-keep-up-with-rising-prices-for-17-consecutive-months/?sh=154d34b1b007

It's not that anyone claims inflation figures are anything but gross and often arbitrary estimates but it seems like there ought to be a more granular breakdown that would be more relevant to most people. Like "I have to work X more hours to feed myself now vs 10 years ago, but now I can get a big screen TV with 3 dead pixels for free on the curb that would have been a week's worth of wages 10 years ago."

Or "the rent was too damn high 10 years ago vs now where the rent is too GOTT DAMN high"

Who in the UK is experiencing 5% wage increases?

Maybe billionaires and multimillionaires, skewing the statistic somehow.

I don't think any normal person has seen any wage increase in many years.

tesco workers had their pay increase by ~5% earlier this year

https://www.nationalworld.com/lifestyle/money/tesco-staff-pay-rise-2022-how-much-will-wages-increase-and-how-do-they-compare-to-other-supermarkets-3647234

How much will Tesco staff get paid?
Tesco staff will see their hourly wage increase by 55p an hour.

Workers are currently paid £9.55 an hour, but this will increase to £10.10 in the summer.

Tesco store workers in London will get a similar increase to bring their hourly pay up to £10.78 per hour.

The pay increase has been agreed following talks with union Usdaw.

The move will see workers paid at least 60p above the National Living Wage.

The National Living Wage, which applies to workers over the age of 23, increased in April from £8.91 per hour to £9.50 per hour from this month. For those aged 21 to 22, this amount has gone up to £9.18.

but yeah, wage stagnation since the 1970s is a big driver of the wealth gap and which has made the US/UK into kleptocracies pretty much

nominal wage growth in the uk is over 5%, highest it's been in 15 years. so wages are going up for most people, on average. but they aren't going up as fast as inflation, so real wage growth is negative (around -2%)

― flopson, Saturday, 19 November 2022 15:55 (yesterday) bookmarkflaglink

if wage growth is behind inflation, which it has been as long as I've been in full-time work, then it still doesn't make sense that wage growth is driving inflation.

> seems like there ought to be a more granular breakdown that would be more relevant to most people.

the last cpi was lower than realistic because of the relative cheapness of second hand cars and fuel, neither of which I've ever bought

"The increase to the annual inflation rate in October 2022 reflected, principally, the changes to the cost of domestic energy supplies. There were also increases from rising food and non-alcoholic beverage prices, and from items for recreation and culture. There were large, partially offsetting, downward effects from the transport section, more specifically from the price of motor fuels and second-hand cars."

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/latest#notable-movements-in-prices

(A CPI that included anonymous demographics or consumer behavior would be interesting.)

Most people I know are taking wage cuts or being fired.

Meanwhile I hear that taxes are going up and services will be cut.

Apparently this is because of the last bad 'mini-budget'. This seems criminal. Whoever is responsible should be in jail for life. Instead they will presumably be sent to the House of Lords and given millions of pounds for the rest of their life.

Wage increases sounds a nice idea but does not appear in my reality.

if wage growth is behind inflation, which it has been as long as I've been in full-time work, then it still doesn't make sense that wage growth is driving inflation.

― plax (ico), Saturday, November 19, 2022 8:02 PM (yesterday)

i'm not an economist/statistician nor am i a britisher but doing a little googling and the uk gov apparently keeps some pretty official looking numbers on a site. again not a statistician but if you click on the top level hits for economy -> inflation and employment/labor market -> people in work you get:

https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23

https://i.ibb.co/7J401Gh/image.png

and

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/timeseries/kac3/lms

https://i.ibb.co/XtNJDvb/image.png

now i have no idea how they calculate either and you can imagine the wage growth one being skewed by high earners etc. but from the uk government's perspective wage growth has outpaced inflation until covid.

my intuition is that policy makers have a target for inflation that matches or is slightly under wage growth, but would be curious as to what insights flopson has on the subject.

oh whoops, the same image embedded twice. here:

inflation:

https://i.ibb.co/7J401Gh/image.png

wage growth:

https://i.ibb.co/v19hN07/image.png

my intuition is that policy makers have a target for inflation that matches or is slightly under wage growth, but would be curious as to what insights flopson has on the subject.

― 龜, Sunday, November 20, 2022 7:29 AM (eleven hours ago) bookmarkflaglink

the inflation target doesn't have anything to do with wage growth; it's just set at 2% (usually with some caveats like "flexible" and "average" thrown in) and that's it. some central banks (like the US, new zealand and australia) have a dual mandate that includes "full employment"

if wage growth is behind inflation, which it has been as long as I've been in full-time work, then it still doesn't make sense that wage growth is driving inflation.

― plax (ico), Saturday, November 19, 2022 8:02 PM (yesterday) bookmarkflaglink

yeah i think most people agree the nominal wage growth that's happening now is "following" inflation rather than driving it. i'm not sure how strong the evidence for the wage-price spiral ever was. from a new report by the IMF:

How often have wage-price spirals occurred, and what has happened in their aftermath? We investigate this by creating a database of past wage-price spirals among a wide set of advanced economies going back to the 1960s. We define a wage-price spiral as an episode where at least three out of four consecutive quarters saw accelerating consumer prices and rising nominal wages. Perhaps surprisingly, only a small minority of such episodes were followed by sustained acceleration in wages and prices. Instead, inflation and nominal wage growth tended to stabilize, leaving real wage growth broadly unchanged. A decomposition of wage dynamics using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels that are consistent with observed inflation and labor market tightness. When focusing on episodes that mimic the recent pattern of falling real wages and tightening labor markets, declining inflation and nominal wage growth increases tended to follow – thus allowing real wages to catch up. We conclude that an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.

Who in the UK is experiencing 5% wage increases?

Maybe billionaires and multimillionaires, skewing the statistic somehow.

I don't think any normal person has seen any wage increase in many years.

― the pinefox, Saturday, November 19, 2022 5:46 PM (yesterday) bookmarkflaglink

the 5% wage increase comes from a survey that asks a random sample of about 10,000 households every month how much they earned at work that month. 5% growth means the average number this year was higher than the same number last year

if you want to remove the influence of millionaires and billionaires skewing the numbers, you can look at growth in median wages. from the office for national statistics (look at section 3). median pay growth was about 6.9% for september. industries in which wage growth was highest

people getting laid off doesn't count as a zero wage, so that wouldn't affect these numbers. that's one of the limitations of looking at wages. the unemployment rate is 3.6% which is historically low (link from ONS)

since this is an average, it's consistent with you and all the people you know having zero wage growth. it's not clear whether nominal wages going up means people getting raises or new workers being hired at higher wages. i'll see if i can find anything with details on that. data that can go into that level of detail usually takes a while to come out

Presumably if they're counting raw salary, millionaires and billionaires aren't being paid millions and billions?

I had an encounter of sorts with a 'secondary market' today when I tried to find tickets to a pop music concert online.

I was on a site called, I think, viagogo?, that was selling tickets at high prices and I think I later realised that these were people selling on tickets they had already bought.

Oddly, tickets were still available from slightly more direct sources. 'Slightly' because these are still online firms that make things difficult in all kinds of way and overcharge for anything and everything.

After I'd spent a large amount of money, I realised that I had to 'download the venue app', which I managed to do, but not to enter. So after all that I still don't have a ticket.

All this made me reflect on how extremely bad certain particular uses of digital technology have been for our society and economy, and how these have advanced inexorably at the expense of ordinary people with no consultation or obstacle in their way. Everyone has simply had to agree and go along with these things though they are very bad.

I note that when I say that 'certain particular uses of digital technology' are utterly appalling, I am not saying that digital technology or technology, in general, is bad. That would, presumably, be foolish.

This piece supports pinefox in that while their are benefits, it excludes those who are poor, not tech savvy or want to get involved in the digital economy. https://www.theguardian.com/money/2022/nov/26/britons-digital-banking-shopping-parking

Technological/practical "backward steps" we all just accept now

I agree with poster Worsley, and agree that lots of tech involves backward steps that has made our lives worse.

Ticket touting was an annoying and bad practice before it met digital technology.

Yes, FWIW my own complaint is not about ticket touting as in 'unscrupulous individuals' in the street or online. That was just the initial observation above (re 'secondary market'). My own complaint is about big corporations and their complex digital mechanisms.

Perhaps these corporations can also be called touts? Maybe, but they're official in a way that touts, I think, are not.

back in the day I remember I had friends that were paid to stand in line to buy tickets in person where they would only sell a certain number of tickets to any given individual. Thus, ticket "touts" would pay people like my friends to stand in line. These tech ticket systems have eliminated this valuable job

The jobs that I think are most beneficial, that have been lost, are basically "human being on the end of a telephone line" or even "across a counter".

Tech developments may be thought to have made these redundant, but this is not the case because tech has a tendency either to go wrong or to be opaque, and to need explanation or navigation by a human being.

It is increasingly rare to be able to find such a being, and thus one is confronted with a wall of technology with no way in and no recourse when anything goes wrong.

This seems basically to be a case of cost-cutting which is malign and bad for people's lives. Like other such tech developments, it has never been voted on. No-one ever went and cast a vote for "less human support, more impersonal interfaces that may or may not work". But the world went this way anyway.

I admit this is now not on topic of "finance" but that's how I started it - re: economic transactions being technologised.

> No-one ever went and cast a vote for "less human support, more impersonal interfaces that may or may not work".

elsewhere on ilx there are people writing in favour of the self-checkouts when they were introduced

I didn't know that. But even at self-checkouts in supermarkets, if that's what you mean, human support is needed. Almost literally every time I use one, something goes wrong and I have to wait for a human being to come over. Without them I would simply never be able to buy any food. The checkout example is actually a great demonstration of this principle.

At scale, I suppose, ie in big supermarkets, self-checkouts must have efficiency gains (like being able to employ less meat puppets), but in the Tesco metros and sainsburys locals that I mostly shop in they seem a waste of time for all concerned, as you need staff on hand for when things fuck up, 'assistance is coming' lol

thats still just and example of how you can easily get away with like 90% less human interaction and be ok

I'm all about reducing my human interaction but I still hate self-checkouts

I wasn't personally saying that self-checkouts are bad.

My view is that what is bad is financial / technological transactions where human assistance is not available for when things go wrong (as they usually do) or there is uncertainty (as there usually is).

I agree that in principle, self-checkouts could be OK, if human assistance is always available (it usually is), though probably we should have more of that (two people not one).

OTOH the fact that self-checkouts do so often go wrong is an argument against them. They add to life's frustration.

Clearly 'cutting jobs' is good for employers if it saves them money, but it's not good for others (the people who needed the jobs, and the services, shops etc in which those people's wages would have been spent).

cutting jobs and menial work is fine. the problem now is that the surplus value is being distributed to the rich and not to the workers

The jobs that I think are most beneficial, that have been lost, are basically "human being on the end of a telephone line" or even "across a counter".

As someone who has had one of those jobs, (and I know there are other ilxors who have had them as well) these jobs are generally shitty for the person doing them. The pay is shit. The customers treat you like shit. You have limited agency in ways to help, which tends to make customers increasingly treat you like shit. ... There is more dignity in standing in line and buying tickets for a scalper/tout than there is many of these customer service jobs.

fwiw - I very rarely have any problems with self checkout machines.

> No-one ever went and cast a vote for "less human support, more impersonal interfaces that may or may not work".

People have arguably voted with their feet and their wallets: with the rise of budget airlines, online banks etc.

i submit that not one person, given the choice between an automated push-button phone menu system, and a human who actually works at the business you're calling, would ever pick the former! the people who voted with their wallets were the corporate actors who realized this kind of technology could save them a fortune in clerical labor, not the public who have to actually call in and deal with the system. because, of course, the automated systems also demand a whole lot more of the caller's patience and energy, with no way to really know if they got what they were calling for, or if by the end of it they'd found themselves in a blind rage from desperately trying to get the machine to do something it refused to do. it's funny, basically every place has signed themselves up to have the public affection level of AT&T in the Lily Tomlin "Ernestine" era. cutesy tweets are probably a desperate attempt to claw back some of the lost affinity people might have once had for their products and services.

sarahell also makes great points though. i wonder how much those are specific to call-center type situations (whether outsourced, or internal to large organizations), versus other forms of clerical labor, or retail employees who can answer the phone at the counter. the call center situation definitely seems extraordinarily soul-sucking and emotionally taxing, putting the workers constantly in contact with people frustrated by the limited script/agency. really they're attempts to turn phone calls into a mass-production, factory-floor kind of thing, which is really in conflict with what a human conversation actually is. the push-button systems are a further attempt to fully automate/mechanize those kinds of interactions.

again, i recommend this thread as very relevant to the current conversation: Technological/practical "backward steps" we all just accept now

ATMs on the other hand, a true innovation!

i submit that not one person, given the choice between an automated push-button phone menu system, and a human who actually works at the business you're calling, would ever pick the former!

In a word: price. People choose to use businesses all the time that have notoriously bad customer service. It’s a trade off for price.

Sorry - I might be a bit too insistent in arguing this.

In an economy dominated by mega-corporations it often happens that people are forced to choose among a limited number of providers, all of whom have notoriously bad customer service. This is not a choice based on price vs. service, because there is no "excellent customer service" option available.

xpost Speaking for myself, it's been interesting to ponder on today!

i submit that not one person, given the choice between an automated push-button phone menu system, and a human who actually works at the business you're calling, would ever pick the former!

nah, I definitely have days when I just want the stupid automated menus and do want to engage with another human being.

sarahell and micah otm. automate everything and let customers build some character.

Briefly playing around with ChatGPT makes me think that automated push-button phone menu systems will be replaced by AI customer interaction sooner than expected.

Like other such tech developments, it has never been voted on.

Well, in the UK, technology developments are eventually often subject to specific regulations and also be compliant with existing regulations that are put in place over time by governments that are voted for.

We didn't have a David Cameron style referendum - that is true. Those could lead to some strange developments. If we'd have such a vote on the adopting the internet and wwww back in the '90s, there'd no doubt be a small but powerful 'leave' faction in Parliament wanting us to disconnect and 'take back sovereignty'.

There is more dignity in standing in line and buying tickets for a scalper/tout than there is many of these customer service jobs."

I find this a non-sequitur. For one thing it compares the customer experience with the employee experience, whereas the customer experience needs to be compared with a different customer experience.

For another, the fact that a job, unfortunately, is not always pleasant, does not mean that the job is not beneficial and a relatively good thing for society to have.

Presumably, if the jobs are that bad, then ideally they should be improved - better pay, union recognition, etc. That doesn't mean they shouldn't exist.

In general, my point would remain: given the complexity of processes, it is often beneficial, or necessary, to be able to talk to a human being. If we can't have that then we are in a very bad way. Which I think we are.

And again, as noted, self-checkouts rarely work without human assistants.

Agree with Doctor Casino's excellent post. Also, as poster Aimless says, most of the time we are not presented with a real choice.

As Doctor Casino also says, this is not necessarily about saying we need more call centres. Take a library. Libraries are endlessly cut and closed down. But most of us would want a library to have real people - librarians - running it, not to be something you could only relate to by downloading a program to a device.

One thing that could matter is whether or not you have to stay in that job. There is an interesting perspective on that in The Boys by Katie Hafner: if you have a higher calling, perhaps you can endure a lot; in addition, it helps to be young and to believe that things will improve (not all of this is implied by the novel but is partially my elaboration on a tenuous thread). Part of this is simply motivated by wanting to help and relishing human contact.

In an economy dominated by mega-corporations it often happens that people are forced to choose among a limited number of providers, all of whom have notoriously bad customer service.

Well, competition law has an important role in economies - especially in regard to the disruptive role of tech-based companies who may have monopolising potential.

But to expand on my budget airline example, a lot of people in the UK have embraced using Ryan Air and EasyJet etc because of the cheapness of the service. The downside is that if there’s any problem there’s no, or very limited help, and you’re virtually left to your own devices.

I think there's a couple of things being jammed together in "automated phone system" - it's true that when I am ringing, for example, my bank, I'm looking to talk to a person. There are an increasing number of useful things that I can do in the phone banking system, but they're all available on the bank's website - if I'm ringing up then almost by definition I want something "off-menu". But that's a feature of me being as comfortable with the internet as with phones - if I preferred phones then I'd be happy with the automated system.

On the other hand if all it's doing is replacing Ernestine, to get me to my eventual destination, then yes absolutely automate away.

I had not thought that "what's with the self-service checkouts?" was anything but a decade-old stand-up cliche at this point - every supermarket I go to is filled with people using them without error or fanfare.

I should probably throw a qualifier in there - it's not without flaw, but I'd estimate the percentage of times that there's a problem that requires manual assistance to be in the low single figures.

My main gripe is that it still needs a human age verification check when I am buying alcohol-free/low alcohol drinks. You’d think they could update the software for that.

Andrew F: clearly we are talking from our different experiences. What I say about checkouts has nothing to do with stand-up clichés and all to do with the fact that if you shop at Lidl SE13 then it will go wrong, in some way or other ... perhaps 50% of the time, as against your low single figures.

It occurs to me that the banal truth may be that people's views on these things may relate to such material, factual differences in life. Maybe people who shop at Bath Spa Waitrose do find that checkouts are, in one way or another, all fine, whereas in SE13 Lidl they're not.

A note: I am not stating that you, as an individual, live in Bath. That example was hypothetical.

some people just have an easier time using/adapting to self check-out machines than other people ... I don't think it is realistic to universalize this in either a pro or anti- way

True - though se13 Lidl might want to consider calling in an engineer.

Someone should ask another finance or economics question to move things on.

Question: it seems like fraud is very easy to do and a good way to get rich, what am I missing apart from the part where you screw up and get arrested

i have https://www.simonandschuster.com/books/Lying-for-Money/Dan-Davies/9781982114947 on my list, which iiuc gets into that question silby.

i just started https://global.oup.com/academic/product/the-world-for-sale-9780197651537?lang=en&cc=us, which may be of interest to readers of this thread.

i picked up a copy of black edge at a thrift store for a few bucks, maybe this will be the spur i need to take it off the shelf and read it

Yeah I read Lying for Money that was a good time, I guess the message of that was that you basically can’t stop once you start bc there’s no place to go and you probably have a psychological need to keep lying

don't click this link until tomorrow unless you cross picket lines but this feature is absolutely nuts https://www.nytimes.com/2022/11/29/health/lying-mental-illness.html.

Question: it seems like fraud is very easy to do and a good way to get rich, what am I missing apart from the part where you screw up and get arrested

― G. D’Arcy Cheesewright (silby), Thursday, December 8, 2022 12:17 PM (forty-five minutes ago)

not much tbh ... it really just depends how much you fear the Repressive State Apparatus (or have a conscience/ethics about stuff related to the mechanism by which you commit the fraud)

like going back to the self checkout machines ... every time I use one to buy groceries, I do think of how I would go about significantly reducing the amount I have to pay by ... taking certain actions.

personally I would like to sell water with food coloring in it to audiophiles at grossly inflated prices

I guess it's like most crime deterrence. You have a low chance of getting caught for any particular infraction, but the consequences are generally bad enough if you do get caught, that for most people, it's not worth it.

yeah that grocery store is way too conveniently located to risk being banned from

Question: it seems like fraud is very easy to do and a good way to get rich, what am I missing apart from the part where you screw up and get arrested

― G. D’Arcy Cheesewright (silby), Thursday, December 8, 2022 3:17 PM (five hours ago) bookmarkflaglink

just a hunch but i wager there would be a lot more fraud if people only did the rational expected value calculation. fraud pays. morals and norms (rather than deterrence) actually do a lot of work keeping it at bay. same with crime. it's an oft-made point (usually as a critique of the "homo-economicus" assumption invoked by most economic theories that everyone is a purely selfish sociopath) but markets in general would fail without some minimum baseline level of trust and integrity

i just started https://global.oup.com/academic/product/the-world-for-sale-9780197651537?lang=en&cc=us, which may be of interest to readers of this thread.

― 𝔠𝔞𝔢𝔨 (caek), Thursday, December 8, 2022 3:38 PM (five hours ago) bookmarkflaglink

this looks great. commodities are so fascinating to me. best odd lots episodes by far are the ones where they have some commodities nerd on explaining in insane detail like what's been going on with the market for corn the last few years and it's like a dramatic epic with all this geopolitical depth (worst odd lots episodes are the crypto ones obv)

anyone read or reading brad delong's new book slouching towards utopia? i'm like 50 pages in and... kinda hating it tbh

xp - i have a college friend whose economic expertise is around fisheries and global markets for fish ...

he eats well imo

anyone read or reading brad delong's new book slouching towards utopia? i'm like 50 pages in and... kinda hating it tbh

why?

I remembered an economics question in the supermarket today.

The price of everything (eg: food) is going up and getting high.

Will it ever go down?

My guess is: no, because people who sell it won't want to do that and we can't make it happen.

So we'll be stuck with these high (and higher) prices forever, though the amount of money we get doesn't go up.

Some prices will go down based on weakening demand or oversupply, but when the price of everything goes down it's call deflation and generally speaking that is worse than inflation for just about everybody.

So you don't want the prices of the thousands of things that have gone up, to go down.

But if they don't go down, we will all just remain comparatively poorer, because prices have gone up but our money has not.

During a deflation money evaporates out of the economy. This is what happened during the financial crisis of 2008-2009. Trillions of dollars went *poof* in a few weeks. Cash flows disappear. Companies go bankrupt. Jobs disappear. Incomes disappear. Tax revenues shrink. Oh, and prices go down.

I remember some exception to supply & demand from school. During rough times, you can kinda price gouge on cheap food like potatoes & bread, but people will still buy them since they're so much cheaper than anything else. I guess ramen would fall into this now, or the fast food 'dollar' menu

Hang on … Lots of products types have come down in price over time, especially mass- manufactured products. Also, travel and holidays.

TVs are a good example. In the 1980s a 19 inch color TV would set you back about $400-500 (not adjusted for inflation) and it was massive and weighed a ton. Today you can get a much higher resolution, flat-screen 24-inch TV for under $100.

re: last few posts, doesnt this depend on the cause of inflation? Or even what inflation is

If the price of one good (or a range of goods reliant on that one good) goes up...is that inflation or relative value? Oil goes up and we call it inflation but oil goes down and we dont call it deflation

here's what i wrote in a post upthread about why deflation is undesirable

one reason why is that deflation is very undesirable as it leads to a "deflationary spiral": if consumers anticipate that prices will be lower tomorrow, they will delay purchasing, this then lowers demand, causing prices today to fall further, with causes firms to layoff workers and incomes to fall, which makes demand falls further, and so on. a positive inflation rate provides a "buffer" against deflation. this is especially important over the business cycle since prices tend to fall at the onset of a recession. during the early period of the great depression prices fell by something like 7% every year. central banks nowadays try really hard to avoid this

I get why deflation is bad and worse than inflation, but isn't there a distinction between prices rises/falls in one product or area and generalized inflation? Price rises/falls aren't necessarily inflation/deflation if its a change in relative value to other products?

yep

Absolutely true that that some things (like electrical goods) do come down in price over time due to technological change etc.

But meanwhile, most foods have gone up in price, quite a lot, in the last year.

Once again, if those prices don't come down (which I don't expect them to), then we will all remain relatively poorer (at least in relation to sustenance), because our money has not increased.

Theories of deflation and inflation don't seem to change that fact.

petrol has come down from its super high prices of a year or two ago.

Well the idea is that we don't want deflation and prices dropping due to deflation is bad. But prices of individual goods like oil or foods coming back down isn't bad - especially if those goods prices increased relative to other things (like incomes), that relationship changed.

A paprika costs x minutes of labour, if that goes up to 2x minutes of labour, its not bad if it then returns to x minutes of labour. Thats a relative change of value. But if the paprika AND the wages go up, then its still x minutes of labour

There’s a lot of variables behind price rises for food in the UK: with supply chains impacted by covid pandemic, Russia invasion of Ukraine, Brexit resulting in increase cost and complexity of trade, and weaker sterling being some of the big factors. And there’s extreme weather/impact of climate change.

It’s difficult to say what will happen in the future and when with much certainty.

My guess is: no, because people who sell it won't want to do that and we can't make it happen.

So we'll be stuck with these high (and higher) prices forever, though the amount of money we get doesn't go up.

― the pinefox, Friday, December 9, 2022 5:53 PM (yesterday)

food seems to me to be a category of goods on which we can rely on that classical economics stalwart to control, competition. what you're suggesting is that everybody will end up colluding to keep prices high, which is a real fear. that's why most countries have antitrust/competition enforcement agencies whose job it is to keep an eye out for anticompetitive behavior. what constitutes anticompetitive behavior is actually a pretty interesting question nowadays given the rise of big tech and has led to the rise of a school of thinking called "hipster antitrust" which is a name i think ilx will appreciate.

in case it gets lost in the big block of text:

https://www.competitionpolicyinternational.com/wp-content/uploads/2019/06/APRIL-2018-1-238x300.jpg

what you're suggesting is that everybody will end up colluding to keep prices high

...including the notorious WH Smith ballpoint pen cartel, outed upthread.

There is ample proof of food megacorps price-gouging, that shouldn’t really be a subject for debate.

Afaic, many consumer goods are not actually necessary, and so their comparative low prices now as opposed to 20, 10, or even 5 years ago doesn’t mean much, and I know I’m not alone in that. Fuel (for both transport and heat, etc) and food are the things that actually matter to consumers.

Like I know I’m in the minority here, but Id certainly rather spend $1200 less at the grocery store every year than have a fucking cheaper teevee.

Maybe not so much of a minority as you might think. whether you're indexing your opinion against ilx, or the USA, or the world there are plenty of people out there living hand to mouth or nearly so.

"hipster antitrust" which is a name i think ilx will appreciate.

haha I did appreciate it! I am about to read the linked article -- and just wanted to mention that the ad atop the page is for outsourcing administration of defined benefit plans ... because pensions are outdated

not to be confused with hipster anti-thrust - soaking isn't just for Mormons

Airline mergers and agricultural monopolies and oligopolies have raised consumer prices above competitive levels but lowered prices that suppliers can charge below market levels, she argues, transferring hundreds of billions of dollars each year to the economic elite.

I probably mentioned the issue re suppliers in one of the numerous threads where I "kinda lol but mostly sad"-ed how people in ag-towns loved to shop at wal-mart even while wal-mart was instrumental in decimating small to mid-size agricultural businesses by paying less for products than it took to produce them, which would often result in either: increased poverty (e.g. walmart's cheap prices are the most we can afford because we can barely survive because walmart pays us too little for our products) or consolidation of agricultural land/businesses to corporate interests outside the region.

What is meant by 'price-gouging'?

It is true that some things, like food to survive, are more important than others. But it would be misleading to say that many other things 'don't matter'. Music, fiction, poetry, are things that matter to many of us. If the prices of those became impossibly expensive, it would be bad. (I'm not saying that has actually happened or will happen.)

And again, as noted, self-checkouts rarely work without human assistants.

(Then I read further and saw that it was discussed, sorry.)