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  Quotations - Invest  
[Quote No.36307] Need Area: Money > Invest
"Coming events cast their shadows before." - Proverb

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[Quote No.36310] Need Area: Money > Invest
"Cost of Living and ILBs [Inflation-Linked Bonds = the Australian version of the US Treasury Inflation-Protected Securities, or TIPS, which provide protection against inflation.] Households are feeling the pinch with higher petrol and utilities prices and if, as we expect, they feed through to higher inflation, investors without a direct hedge against inflation risk having their lifestyles compromised. Inflation linked bonds (ILBs) are the best available direct hedge against inflation, and returns can even rival equity returns. If prices of necessary household items continue to rise, then investors can expect an elevation in the CPI and an increase in the volatility of the CPI. --Expense Side of the Household Balance Sheet: This pressure on household budgets is highlighted in the recent Westpac/Melbourne Institute Consumer Confidence survey, where a component of the index, expectations of family finances, has deteriorated sharply over the past twelve months. Importantly, this component is now approaching low, possibly recessionary, levels. As Westpac comment, '... we saw some disturbing movements in the components of the Index ... we note that the Family Finances Index is at its lowest level since July 2008 and there has only been one other read of the Index (June 2008) which has been lower since the early 1990’s when families struggled in the aftermath of Australia’s last recession.' (Bill Evans, Chief Economist, Westpac, 'Consumer sentiment edges lower', 18 May 2011). Petrol and utility charges, two components of household spending, have risen substantially over the past 12 months. Utility charges have risen, as FIIG has already highlighted, because of re-investment in underlying infrastructure; nothing much to do with the RBA and petrol costs have risen because of variations in global demand again, a price outside the control of the RBA. The longer petrol prices are elevated, the more likely the price of oil will seep into the broader price indices, such as the CPI [Consumer Price Index]. On top of both of these, the RBA [Reserve Bank of Australia] has increased interest rates substantially over the past year. While expenses have risen, incomes are not rising enough to compensate consumers, so the household budget is being squeezed. Investors, who rely on fixed income streams, need to plan for periods of higher inflation especially in products and services that are needed in day to day living. Inflation linked bonds, whose coupons are tied to the CPI provide a solution. --Income Side of the Household Balance Sheet: Investors need a cashflow which hedges against an increase in the CPI. Otherwise, expenses may outstrip investment income. ILBs provide a direct solution, unlike other asset classes. For example, equity returns suffer in high inflation environments and do not provide an effective inflation hedge in the short or medium term. Investing in Commonwealth and state government ILBs can reduce your overall risk by around half, while cutting return by roughly 1.50%. Investors can achieve higher returns if they consider corporate ILBs. For example, Sydney Airport ILBs, can achieve a 5.4% real return over CPI or assuming CPI is 3%, then a total return of 8.4%. While the volatility of return will be higher with the Sydney Airport, when compared to the UBS Government Index, the higher return compensates for the additional return volatility. This means that investors can invest in an ILB that does not dilute equity returns, while both dampening return volatility substantially, as well as providing a much more effective hedge against inflation. --CPI and Volatility of the CPI: Hence, not only might inflation rise, partly due to an elevation in commodity pricing, in a way that is beyond the control of the RBA, the volatility of the CPI may also rise, given the impressive gains already made... Although this ...shows a trend of increasingly lower CPIs and lower CPI volatilities, it can be argued that, over the investment period of the next twenty years, a change in trend may well eventuate. Specifically, if inputs prices, such as fuel and utilities continue to rise, then upside risk to inflation, possibly outside the control of the RBA, may arise. This possibility, apart from other things, comprises an underlying rationale for investing in ILBs. --Conclusion: While the above [falling CPI and volatility] ...would normally lull investors into a state of complacency, recent experience with increased expenses is sounding alarm bells; the effects are starting to impact household balance sheets. Specifically, it is argued that the trend in the level and volatility of inflation has been one way [down] for thirty years. Elevation in utility prices and petrol prices are not something that the RBA can adequately control, so that may mean a change in trend; something that suggests that ILBs should be preferred to other investments." - Dr. Stephen J. Nash
'The Wire', 1 June 2011. [FIIG Securities Limited (Fixed Income Investment Group) www.fiig.com.au ]
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[Quote No.36311] Need Area: Money > Invest
"Asset allocation: In periods of deflation or very low inflation it is best to have cash and government bonds - which as interest rates fall will mean that the price of your fixed interest bonds will rise. As deflation makes paying back loans harder with time as the real value of the loans increases with time best to avoid corporate bonds and shares. Some gold can be helpful as low interest rates mean people aren't missing out on big rates as neither gold nor bonds pay good rates in deflation. If the country tries to instigate inflation with 'money printing', sometimes called quantitative easing or debt monetization, that should dilute and devalue the currency as the money supply is increased as velocity falls. If it is US dollars - as done in 2009 -2011 - then in US dollars gold will rise so good to have some. But if not in US need to consider your currency in relation to the US Dollar, the global reserve currency which denominates gold. When inflation is not too low or not too high shares are good to have. When inflation gets too high or you get hyperinflation, companies again have difficulties with costs and so shares and company bonds should be avoided. Inflation linked government bonds are good as is gold which rises quickly in these times." - Seymour@imagi-natives.com
Refer [http://moneywatch.bnet.com/investing/blog/investment-insights/beyond-gold-inflation-protection-for-your-portfolio/1076/ ]
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[Quote No.36314] Need Area: Money > Invest
"Bonds weaker [in price but better yield] as GDP drops most in 20 years: The [Australian] domestic bond market closed weaker, after official data showed Australia had fallen into its biggest economic slump in almost two decades. At 1630 AEST on Wednesday, the June 10-year bond futures contract was trading at 94.720 (implying a yield of 5.280 per cent i.e. 100 - 94.720 = 5.280), down from 94.795 (5.205 per cent) on Tuesday. The June three-year bond futures contract was at 95.050 (4.950 per cent), down [in price] from 95.140 (4.860 per cent). Gross domestic product (GDP) fell 1.2 per cent in the quarter, after an upwardly revised 0.8 per cent rise in the December quarter, the Australian Bureau of Statistics reported (ABS) on Wednesday. It was the first fall in GDP since the September quarter of 2008, at the height of the global financial crisis, and the largest quarterly contraction since the recession of the early 1990s. FIIG [Fixed Interest Investment Group] associate director Andrew Hicks said Australian bond yields rose about 10 basis points [a basis point is 0.01%, therefore it rose 0.1% after the GDP report. From the paragraph above you can see the yield rose...from 4.860 per cent (95.140) to 4.950 per cent (95.050) on the June three-year bond futures contract.] 'The market had a lot of negativity priced into it and the result was pretty much as expected,' Mr Hicks said. [Bond prices often fall on bad news as demand for them decreases. When prices fall on a fixed interest investment the yield the buyer gets on the fixed payment amount, called a coupon, that is attached to the bond, as a % of the decreased price obviously rises. For example if the bond with a face value of $100 and paying a coupon of $10 per year so 10% a year falls due to a lack of demand at that price to $80 dollars before someone will buy it then the $10 fixed amount coupon payment the buyer will receive works out to be a yield of 12.5%.] The weak GDP figures didn't support the argument for an immediate cash rate hike by the Reserve Bank of Australia (RBA). [So the seller decided to take a capital loss if he bought earlier at a higher price . He knows as the coupon amount is fixed that his interest rate is fixed at the price he originally bought it at, but if he sells it quickly before it loses any more in price he can use the money elsewhere, in his business, or to invest somewhere else, hopefully for a better result. The buyer may have been looking for an investment that would give him a 12.5% yield cashflow over the life of the bond to cover living expenses or to park his money until he may need it later for his business or for his children's university fees, etc.]..." - Australian Associated Press
AAP Australian Associated Press provides news coverage for both public and private media companies. This news story was published on tradingroom.com.au on 2011-06-01 [ http://www.tradingroom.com.au/apps/view_article.ac?articleId=2399422 ]
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[Quote No.36317] Need Area: Money > Invest
"All...thinking [especially regarding investing] for years past has been vitiated [debased] in the same way. People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome." - George Orwell

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[Quote No.36363] Need Area: Money > Invest
"There are some ideas so wrong that only a very intelligent person could believe in them. [A lot of these ideas are found in investing, economics and politics.]" - George Orwell
[1903 – 1950], George Orwell was the pen name of Eric Arthur Blair, who was an English author and journalist. His work is known for its keen intelligence and wit, profound awareness of social injustice, and an intense opposition to totalitarianism. He is best known for the satirical novella ‘Animal Farm’ (1945) and the dystopian novel ‘Nineteen Eighty-Four’ (published in 1949) — they have together sold more copies than any two books by any other twentieth-century author.
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[Quote No.36379] Need Area: Money > Invest
"Whoever is winning at the moment will always seem to be invincible [but many leaders, over time, for many reasons, have become laggards]." - George Orwell
[1903 – 1950], George Orwell was the pen name of Eric Arthur Blair, who was an English author and journalist. His work is known for its keen intelligence and wit, profound awareness of social injustice, and an intense opposition to totalitarianism. He is best known for the satirical novella ‘Animal Farm’ (1945) and the dystopian novel ‘Nineteen Eighty-Four’ (published in 1949) — they have together sold more copies than any two books by any other twentieth-century author.
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[Quote No.36409] Need Area: Money > Invest
"Austrian economics bases its free market credo on the natural behavioral patterns of spending by people and the money supply and demand dynamics...it is said that as far as making macro investing analysis, applying the principles of Austrian Economics leads to the right conclusions. Noted investors who use Austrian Economics: George Soros is the legendary investor who started Quantum Fund in the 1960s and is a [self-made] multi-billionaire as a result of some winning macro trades. Soros' prescription for healing broken economies cannot be mistaken for Austrian Economics, but Soros' analysis of markets as expressed in his books seems to borrow a lot of influence from the Austrian Economists. Jim Rogers is acknowledged as one of the most successful investors of all time. Making an early start when he was in his twenties, he was able to build a huge fortune [in the billions] with an initial investment of just $600 by the time he was 37. A firm believer in Austrian economics, he advocates investing in China, Uruguay and Mongolia. Marc Faber was born in Switzerland and received his PhD in Economics from the University of Zurich at age 24. He was Managing Director at Drexel Burnham Lambert from 1978-1990, and continues to reside in Hong Kong. He is famed for his insights into the Asian markets, and his timely warning about market crashes earned him the name of Dr.Doom. In 1987 he warned his clients to cash out before Black Monday hit Wall Street. In 1990 he predicted the bursting of the Japanese bubble. In 1993 he anticipated the collapse of U.S. gaming stocks and foretold the Asia Pacific Crisis of 1997-98. A contrarian at heart, his credo has always been: 'Follow the course opposite to custom and you will almost always be right.' James Grant, a newsletter writer who publishes 'Grant's Interest Rate Observer' is also a follower of Austrian Economics. Ron Paul, a Republican Congressman for the Texas State, is also a believer of Austrian Economics. Interestingly enough, Howard Buffett, the father of [self-made billionaire investor] Warren Buffett is also an Austrian Economics follower. His son, Warren, however, seems to be more inclined to the Keynesian method of healing broken economies as opposed to the strict and rigid ones espoused by Austrian economists. Warren Buffett did acknowledge in a recent TV interview that one will have a hard time finding a paper based currency that appreciates in value over time. [Also refer to perhaps the most famous management consultant ever, Peter F. Drucker, whose ideas were deeply influenced by Austrian economics.]" - dailystocks.com
http://www.dailystocks.com/forum/showtopic.php?tid/2623
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[Quote No.36411] Need Area: Money > Invest
"'We Were All Keynesians Then': One thing history teaches is that the person who conceives a great idea may not get the credit for it. In 1961, a little-known economist at Carnegie Tech named John Muth published a piece in the journal 'Econometrica' demonstrating that people thoughtfully use available information to predict future prices and then make economic decisions based on those 'rational expectations.' Muth's insight seems obvious today [January, 2006], but it was radical in 1961, during the heyday of Keynesian economics. Keynesian economics was built on the belief that people were slow-witted and couldn't be trusted to make rational economic decisions. That's why Keynesians concluded that the government needed to steer the economic ship on a steady course - they were convinced that entrepreneurs and workers were too dim to get it right on their own. Because Muth challenged the Keynesian belief by saying that that workers and entrepreneurs are at least as smart as government bureaucrats [economists and politicians], his article received little initial attention. Discouraged at the lack of a response, Muth soon abandoned this line of research. But in the decades that followed, rational expectations gained credence within the profession, eventually uprooting Keynesian economics and paving the way for the supply-side revolution. [Monetarism emerged in the 1960's under the leadership of Milton Friedman, who received the Nobel Prize in 1976. Friedman taught at the University of Chicago during this period, developing monetarism as a branch of Frank Knights' famous 'Chicago School' of economics. Monetarists emphasize the role of money and the government's monetary policy in economic affairs; they vigorously defend the free market in their work. Supply side economics, another modern branch of free market economics, emphasizes the harmful role of impediments to production (such as taxes). Robert A. Mundell is often considered the father of this modern school of economic thought. He explained his basis of supply-side thinking between 1962 and 1971 and influenced another, now famous economist - Arthur Laffer (one of his former students). This school of thought advocates government policies that would stimulate increased overall economic production, rather than to redistribute existing production (i.e. redistributive taxes for example, rather than the 1980's - Republican President Ronald Reagon's 'Reagonomics', 'supply-side' or 'trickle-down' economics which referred to the policy of providing tax reform with across the board tax cuts or benefits to businesses, such as tax breaks, in the belief that this will indirectly benefit the broad population, because through this the top income earners would be able to invest more into the business infrastructure and equity markets, which would in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals). Supply-side economists emphasize the role of property rights and of sound currencies in encouraging the growth of production and an improved standard of living.] His article is now one of the most widely cited papers in the social sciences, and Muth's work - especially his belief that workers and entrepreneurs do a good job making economic decisions - is an accepted part of the canon of economics. While his idea receives broad acclaim today [in 2006], the same cannot be said for John Muth himself. Muth passed away on October 25th of last year [2005], never rising out of obscurity despite his contributions to the discipline. It was Muth's former colleague, Robert Lucas, who won the Nobel Prize for rational expectations, with Muth's contribution scarcely mentioned in the awards announcement. His work merits at least a perfunctory account. The idea of rational expectations is deceivingly simple: Buyers and sellers who need to forecast future prices do not merely assume that they will be the same as current prices. Instead, they use all available information to make an educated guess as to what prices will be - at least when it is worth their while to do so. What's more, their educated guess will, on average, be correct - people will make mistakes, but they will not be consistently wrong. Muth demonstrated that in a market for hogs, which had been thought to exhibit wide, predictable price swings, rational expectations explains prices quite well. Muth's paper was published at the very time that Keynesian economics had become ascendant in the policy world - the Phillips Curve had recently been unveiled and was ripe to be exploited. Behind it lay the notion that policymakers can permanently reduce unemployment by inflating the money supply and increasing inflation. The rationale underlying the Phillips Curve says that higher inflation fools workers, who mistake a rising dollar wage for a real rise in their buying power. As a result, people take jobs they might not otherwise take and work more hours than they would otherwise work, increasing employment and output. Given the exceptional performance of the economy in the 1960s, few had any reason to question the economic orthodoxy of the time. Muth's rational expectations model languished before Lucas thought to use Muth's concept to explain why the Phillips Curve stopped working during the 'stagflation' era of the 1970s. Rational expectations said that the Phillips Curve was nonsense - people may not make the economically optimal decisions all of the time, but they can't be consistently fooled by government policies. The idea utterly transformed the discipline. In short order it changed the conversation amongst macroeconomists and policymakers from managing aggregate demand - that is, steering the economic ship - to talk of providing a stable, healthy economic environment that would serve to increase the supply side of the economy. It's no coincidence that supply-side economics developed in the wake of rational expectations. Today, the impact of rational expectations remains enormous. For instance, Federal Reserve Board chairman-elect Ben Bernanke's stated desire to target inflation to between one and two percent, a policy praised by many today, would have been seen as foolhardy before the ascension of rational expectations. Muth went on to have a long and productive career at Indiana University, where he made important contributions to operations management and was also one of the first to study artificial intelligence. While he would have appreciated the recognition of a Nobel Prize, Muth was a shy gentleman who would have been uncomfortable with the notoriety that comes with the prize. He was much more at home at the various pubs in downtown Bloomington, where he was not averse to holding his office hours. The world of economics owes him a debt of gratitude for his work, and his passing shouldn't come without at least a nod in his direction for putting in motion a seismic change in how economists view the world. President Richard Nixon famously said in 1971 that we are all Keynesians now. Because of John Muth, virtually none of us are today. [While this was true in 2006, after the Great Financial Crisis of 2007-9, which was second only to the Great Depression in financial damage, Keynesian ideas of government fiscal and monetary policy stimulation to make up for the loss of aggregate demand became, the common media refrain, by frightened financial commentators, Keynesian, big-government - statist economists and, government policy all around the world. A small band of Austrian economists however thought the crash was well explained as the result of the 'rational' choices of a private and business public 'fooled' by government fiscal policy of over-spending - deficits - and central bank monetary policy - that was too loose for too long, in comparison to a non-discretionary monetary policy determined by a Taylor Rule, that interferred with 'natural, free market' price signals - for example savers would have wanted more in interest than the central bank dictated so they saved less and borrowed more - and deceived the private and business public into overcommitting to unsustainably 'cheap' debt to live beyond their means. This is just as Austrian economics would predict regarding this interference in free - really 'open', not free - market price signals from the capital markets - as opposed to communist government dominance of, rather than interference in, the economy in their 'planned,' rather than 'free/open' markets.]" - Ike Brannon
He is an economist in Washington, D.C. This article appeared on cato.org on January 9, 2006.
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[Quote No.36412] Need Area: Money > Invest
"'We are all Keynesians now' is a now-famous phrase coined by Milton Friedman and attributed to U.S. president Richard Nixon. It is popularly associated with the reluctant embrace in a time of financial crisis of Keynesian economics by individuals such as Nixon who had formerly favored monetarist policies. ---History of the phrase: The phrase was first attributed to Milton Friedman in the December 31, 1965 edition of 'Time' magazine. In the February 4, 1966 edition, Friedman wrote a letter clarifying that his original statement had been 'In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.' In 1971, after taking the United States off the gold standard, Nixon was quoted as saying 'I am now a Keynesian in economics', which became popularly associated with Friedman's phrase. The phrase gained new life in the midst of the global financial crisis of 2008, when some economists and pundits called for massive investment in infrastructure and job creation as a means of economic stimulation. The February 2009 cover of 'Newsweek' played on the phrase with the headline, 'We are all socialists now,' referring to the growing trend of American politicians of both parties to favor the centralization of power through the mutual expansion of government. Graphically, this was symbolized by a cover picture featuring a red hand (Republican) shaking a blue hand (Democrat)." - wikipedia.org
http://en.wikipedia.org/wiki/We_are_all_Keynesians_now
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[Quote No.36413] Need Area: Money > Invest
"'The Comeback Keynes': We are all Keynesians now. It's a phrase that entered public discourse as the headline of a 'TIME' cover story in 1965. Now it's coming back into fashion. This does not signify that we are all - as was Englishman John Maynard Keynes - Cambridge University economists with lucrative side jobs as investment managers, spectacular art collections, lots of famous friends and Russian-ballerina wives. At least I don't fit that description. Do you? The resurgence of interest in Keynes also doesn't represent a full return to 1960s-style Keynesianism - the belief, shared by many economists and politicians in those days, that government could tame the business cycle and guarantee good economic times indefinitely. Instead, what we are seeing now in Washington and other world capitals is fear we might be headed for an economic collapse caused by a collapse of demand caused by a collapse of credit [debt]. Confronted with that threat, governments seemingly cannot help turning to the remedy formulated by Keynes during the dark years of the early 1930s: stimulating demand by spending much more than they take in [deficit spending], preferably but not necessarily on useful public works like highways and schools. 'I guess everyone is a Keynesian in a foxhole,' jokes Robert Lucas, a University of Chicago economist who won a Nobel Prize in 1995 for theories that criticized Keynes. Keynes' argument was that when private citizens and businesses panicked and hoarded money [refer 'the paradox of thrift'], the only way to prevent depression was for government to become the spender of last resort. It's certainly acting like that now - the U.S. federal budget deficit may top $1 trillion in the current fiscal year, and everybody in Washington seems to be looking for ways to make it bigger. Federal Reserve Chairman Ben Bernanke backs more fiscal stimulus, and President [George W.] Bush is on board too. Democratic congressional leaders are thrilled by the prospect. Even the Concord Coalition, founded to battle the big deficits of the early 1990s, doesn't object. Easy money [loose monetary policy, with its very low interest rates] was another remedy proposed by Keynes, although he didn't think it alone was enough to end a deep slump. Bernanke's Fed is giving us that too, with short-term interest rates at 1.5% [later they went to 0.25%] and program after new program to keep cash flowing to banks and businesses. Contrary to popular belief, Keynesian thinking was not a big part of Franklin Roosevelt's New Deal. Deficit spending and monetary easing were both first put to work in a really big way by the U.S. government in the 1940s - out of wartime necessity, not economic conviction. The economy responded with rapid growth, and after the war, Keynesianism became gospel. Its central tenet, this magazine explained in its 1965 cover story, was that 'the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government.' A few pages later came the now famous quote from economist Milton Friedman: 'We are all Keynesians now.' Friedman later objected that it was taken out of context - all he meant was that everybody used Keynesian language and concepts. But the phrase stuck. It's often attributed these days to [US] Republican President Richard Nixon, but what Nixon actually said, in 1971, was the less expansive 'I am now a Keynesian.' Friedman wasn't a Keynesian at all. He distrusted government and didn't believe that bureaucrats could fine-tune the economy for long. His student Lucas offered another criticism: for Keynesian fiscal policy to work, taxpayers had to be awfully shortsighted. Otherwise, they'd see that deficit-financed tax cuts or government spending would eventually have to be paid for, and they'd set money aside for that rainy day - thus counteracting the stimulus. The out-of-control inflation of the 1970s wreaked havoc with Keynesian fine-tuning and seemed to confirm the criticisms of Lucas and Friedman. [Eventually to tame inflation US Federal Reserve Chairman, Paul Volker, would have to put up interest rates to over 20% to get people to reduce leverage, pay down debt, believe in saving again and restore confidence in the global reserve currency, the US dollar.] But their victory was never complete. The U.S. economic boom of the 1980s was at least partly the result of deficit spending [Refer 'Reagonomics', 'supply side economics' and 'trickle down economics']. As financial crises battered much of the world in the 1990s, governments turned to tools devised by Keynes simply because other approaches didn't work. And behavioral economic research has since shown that most humans are awfully shortsighted. There are aspects of Keynes that haven't worn so well, his disdain for long-run economic considerations among them. (i.e short-termism - related to 'instant gratification' and 'conspicuous consumerism' - 'In the long run we are all dead,' he wrote in 1923. He would make it to 1946, but we're all still here.) When there's an immediate crisis to battle, though, Keynes makes for a reassuring companion. While he is sometimes depicted by U.S. conservatives as a wild-eyed socialist, his actual mission in the 1930s was to save capitalism [but what sort of capitalism will remain: - crony capitalism - corporatism; 'open' rather than true 'free' market capitalism, etc.?]. Now that capitalism may need saving again, is it any wonder that we turn again to Keynes [or should we consider a more imaginative solution, for example, Austrian economics and true free market capitalism along with a public campaign to educate people about managing money and the types and roles of economics in a democracy dedicated to individual liberty, private property and the rule of law]?" - Justin Fox
Published in 'Time' magazine, Thursday, Oct. 23, 2008. [http://www.time.com/time/magazine/article/0,9171,1853302,00.html ]
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[Quote No.36414] Need Area: Money > Invest
"Keynesian Economics: Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output [GPP] and inflation. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. The first three describe how the economy works. 1. A Keynesian believes that aggregate demand is influenced by a host of economic decisions — both public and private — and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies. Some decades ago, economists heatedly debated the relative strengths of monetary and fiscal policies, with some Keynesians arguing that monetary policy is powerless, and some monetarists arguing that fiscal policy is powerless. Both of these are essentially dead issues today. Nearly all Keynesians and monetarists now believe that both fiscal and monetary policies affect aggregate demand. A few economists, however, believe in debt neutrality — the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below). 2. According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output [inflation adjusted GDP] and employment, not on prices. This idea is portrayed, for example, in phillips curves that show inflation rising only slowly when unemployment falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we [especially policicians and democratic governments] live in the short run. They often quote Keynes’s famous statement, 'In the long run, we are all dead,' to make the point. Monetary policy can produce real effects on output and employment only if some prices are rigid — if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So Keynesian models generally either assume or try to explain rigid prices or wages. Rationalizing rigid prices is a difficult theoretical problem because, according to standard microeconomic theory, real supplies and demands should not change if all nominal prices rise or fall proportionally. But Keynesians believe that, because prices are somewhat rigid [or at least inflation takes time to move through the economy from resources and manufacturing, as measured by the Producer Price Index (PPI) to consumers, as measured by the Consumer Price Index (CPI) eventually to wage demands and wages as measured by wage inflation], fluctuations in any component of spending [refer equation defining GDP] — consumption, investment, or government expenditures — cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it [although there is now in 2011 a number of studies suggesting that the multiplier is not a useful or accurate concept, especially if the velocity of the money supply is below one or in other words very slow]. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero. 3. Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand [refer 2 above regarding inflation], resulting in periodic shortages and surpluses, especially of labor. Even Milton Friedman acknowledged that 'under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.' In current parlance, that would certainly be called a Keynesian position. No policy prescriptions follow from these three beliefs alone. And many economists who do not call themselves Keynesian would nevertheless accept the entire list. What distinguishes Keynesians from other economists is their belief in the following three tenets about economic policy. 4. Keynesians do not think that the typical level of unemployment is ideal — partly because unemployment is subject to the caprice of aggregate demand, and partly because they believe that prices adjust only gradually [refer 2 and 3 above]. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Keynesians also feel certain that periods of recession or depression are economic maladies, not, as in real business cycle theory [as proposed by the Austrian schoolof economics], efficient market responses to unattractive opportunities. 5. Many, but not all, Keynesians advocate activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems. Here, however, even some conservative Keynesians part company by doubting either the efficacy of stabilization policy or the wisdom of attempting it. This does not mean that Keynesians advocate what used to be called fine-tuning—adjusting government spending, taxes, and the money supply every few months to keep the economy at full employment. Almost all economists, including most Keynesians, now believe that the government simply cannot know enough soon enough to fine-tune successfully. Three lags make it unlikely that fine-tuning will work. First, there is a lag between the time that a change in policy is required and the time that the government recognizes this. Second, there is a lag between when the government [regarding fiscal policy and central bank's regarding monetary policy] recognizes that a change in policy is required and when it takes action. In the United States, this lag can be very long for fiscal policy because Congress and the administration must first agree on most changes in spending and taxes. The third lag comes between the time that policy is changed and when the changes affect the economy. This, too, can be many months [monetary policy usually can be seen in economic statistics after about 6 months]. Yet many Keynesians still believe that more modest goals for stabilization policy—coarse-tuning, if you will — are not only defensible but sensible. For example, an economist need not have detailed quantitative knowledge of lags to prescribe a dose of expansionary monetary policy when the unemployment rate is very high. 6. Finally, and even less unanimously, some Keynesians are more concerned about combating unemployment than about conquering inflation. They have concluded from the evidence that the costs of low inflation are small. However, there are plenty of anti-inflation Keynesians. Most of the world’s current and past central bankers, for example, [arguably] merit this title whether they like it or not. [They are more likely to advocate government use the proven 'hidden tax' policy methodology of what they euphemistically call, 'financial repression', as it achieves a similar purpose but is much less likely to be 'discovered or understood' by the tax paying and saving public and therefore has fewer negative consequences for politicians and the governments that employ it. Refer NBER and IMF discussion paper - ‘THE LIQUIDATION OF GOVERNMENT DEBT’ by Carmen M. Reinhart and M. Belen Sbrancia - http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf ].] Needless to say, views on the relative importance of unemployment and inflation heavily influence the policy advice that economists give and that policymakers accept. Keynesians typically advocate more aggressively expansionist policies than non-Keynesians. Keynesians’ belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being [and political stability] and (b) the government is knowledgeable and capable enough to improve on the free market. The brief debate between Keynesians and new classical economists in the 1980s was fought primarily over (a) and over the first three tenets of Keynesianism — tenets the monetarists had accepted. New classicals [neoclassicalism?] believed that anticipated changes in the money supply do not affect real output; that markets, even the labor market, adjust quickly to eliminate shortages and surpluses; and that business cycles may be efficient. For reasons that will be made clear below, I believe that the 'objective' scientific evidence on these matters points strongly in the Keynesian direction. In the 1990s, the new classical schools also came to accept the view that prices are sticky and that, therefore, the labor market does not adjust as quickly as they previously thought (see new classical macroeconomics). Before leaving the realm of definition, I must underscore several glaring and intentional omissions. First, I have said nothing about the rational expectations school of thought. Like Keynes himself, many Keynesians doubt that school’s view that people use all available information to form their expectations about economic policy. Other Keynesians accept the view. But when it comes to the large issues with which I have concerned myself, nothing much rides on whether or not expectations are rational. Rational expectations do not, for example, preclude rigid prices; rational expectations models with sticky prices are thoroughly Keynesian by my definition. I should note, though, that some new classicals see rational expectations as much more fundamental to the debate. The second omission is the hypothesis that there is a 'natural rate' of unemployment in the long run. Prior to 1970, Keynesians believed that the long-run level of unemployment depended on government policy, and that the government could achieve a low unemployment rate by accepting a high but steady rate of inflation [refer Luffer Curve]. In the late 1960s, Milton Friedman, a monetarist, and Columbia’s Edmund Phelps, a Keynesian, rejected the idea of such a long-run trade-off on theoretical grounds. They argued that the only way the government could keep unemployment below what they called the 'natural rate' was with macroeconomic policies that would continuously drive inflation higher and higher. In the long run, they argued, the unemployment rate could not be below the natural rate. Shortly thereafter, Keynesians like Northwestern’s Robert Gordon presented empirical evidence for Friedman’s and Phelps’s view. Since about 1972 Keynesians have integrated the 'natural rate' of unemployment into their thinking. So the natural rate hypothesis played essentially no role in the intellectual ferment of the 1975–1985 period. Third, I have ignored the choice between monetary and fiscal policy as the preferred instrument of stabilization policy. Economists differ about this and occasionally change sides. By my definition, however, it is perfectly possible to be a Keynesian and still believe either that responsibility for stabilization policy should, in principle, be ceded to the monetary authority or that it is, in practice, so ceded. In fact, most Keynesians today share one or both of those beliefs. Keynesian theory was much denigrated in academic circles from the mid-1970s until the mid-1980s. It has staged a strong comeback since then, however. The main reason appears to be that Keynesian economics was better able to explain the economic events of the 1970s and 1980s than its principal intellectual competitor, new classical economics. True to its classical roots, new classical theory emphasizes the ability of a market economy to cure recessions by downward adjustments [deflation] in wages and prices. The new classical economists of the mid-1970s attributed economic downturns to people’s misperceptions about what was happening to relative prices (such as real wages). Misperceptions would arise, they argued, if people did not know the current price level or inflation rate. But such misperceptions should be fleeting and surely cannot be large in societies in which price indexes are published monthly and the typical monthly inflation rate is less than 1 percent. Therefore, economic downturns, by the early new classical view, should be mild and brief. Yet, during the 1980s most of the world’s industrial economies endured deep and long recessions. Keynesian economics may be theoretically untidy, but it certainly predicts periods of persistent, involuntary unemployment. According to the early new classical theorists of the 1970s and 1980s, a correctly perceived decrease in the growth of the money supply should have only small effects, if any, on real output. Yet, when the Federal Reserve and the Bank of England announced that monetary policy would be tightened to fight inflation, and then made good on their promises, severe recessions followed in each country. New classicals might claim that the tightening was unanticipated (because people did not believe what the monetary authorities said). Perhaps it was, in part. But surely the broad contours of the restrictive policies were anticipated, or at least correctly perceived as they unfolded. Old-fashioned Keynesian theory, which says that any monetary restriction is contractionary because firms and individuals are locked into fixed-price contracts, not inflation-adjusted ones, seems more consistent with actual events. An offshoot of new classical theory formulated by Harvard’s Robert Barro is the idea of debt neutrality (see government debt and deficits). Barro argues that inflation, unemployment, real GNP, and real national saving should not be affected by whether the government finances its spending with high taxes and low deficits or with low taxes and high deficits. Because people are rational, he argues, they will correctly perceive that low taxes and high deficits today must mean higher future taxes for them and their heirs. They will, Barro argues, cut consumption and increase their saving by one dollar for each dollar increase in future tax liabilities. Thus, a rise in private saving should offset any increase in the government’s deficit. Naïve Keynesian analysis, by contrast, sees an increased deficit, with government spending held constant, as an increase in aggregate demand. If, as happened in the United States in the early 1980s, the stimulus to demand is nullified by contractionary monetary policy, real interest rates should rise strongly. There is no reason, in the Keynesian view, to expect the private saving rate to rise. The massive U.S. tax cuts between 1981 and 1984 provided something approximating a laboratory test of these alternative views. What happened? The private saving rate did not rise. Real interest rates soared. With fiscal stimulus offset by monetary contraction, real GNP growth was approximately unaffected; it grew at about the same rate as it had in the recent past. Again, this all seems more consistent with Keynesian than with new classical theory. Finally, there was the European depression of the 1980s, the worst since the depression of the 1930s. The Keynesian explanation is straightforward. Governments, led by the British and German central banks, decided to fight inflation with highly restrictive monetary and fiscal policies. The anti-inflation crusade was strengthened by the European monetary system, which, in effect, spread the stern German monetary policy all over Europe. The new classical school has no comparable explanation. New classicals, and conservative economists in general, argue that European governments interfere more heavily in labor markets (with high unemployment benefits, for example, and restrictions on firing workers). But most of these interferences were in place in the early 1970s, when unemployment was extremely low." - Alan S. Blinder
He is the Gordon S. Rentschler Memorial Professor of Economics at Princeton University. He was previously vice chairman of the Federal Reserve’s Board of Governors, and before that was a member of US President Bill Clinton’s Council of Economic Advisers. [http://economics.about.com/gi/dynamic/offsite.htm?site=http%3A%2F%2Fwww.econlib.org%2Flibrary%2FEnc%2FKeynesianEconomics.html ] Downloaded from the site 19th June, 2011.
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[Quote No.36415] Need Area: Money > Invest
"'The Austrian School of Economics': The Austrian school of economics was founded in 1871 with the publication of Carl Menger’s 'Principles of Economics'. Menger, along with William Stanley Jevons and Leon Walras, developed the marginalist revolution in economic analysis. Menger dedicated 'Principles of Economics' to his German colleague William Roscher, the leading figure in the German historical school, which dominated economic thinking in German-language countries. In his book, Menger argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. These choices, he wrote, are determined by individual subjective preferences and the margin on which decisions are made (see marginalism). The logic of [free] choice, he believed, is the essential building block to the development of a universally valid economic theory. The historical school, on the other hand, had argued that economic science is incapable of generating universal principles and that scientific research should instead be focused on detailed historical examination. The historical school thought the English classical economists mistaken in believing in economic laws that transcended time and national boundaries. Menger’s 'Principles of Economics' restated the classical political economy view of universal laws and did so using marginal analysis. Roscher’s students, especially Gustav Schmoller, took great exception to Menger’s defense of 'theory' and gave the work of Menger and his followers, Eugen Böhm-Bawerk and Friedrich Wieser, the derogatory name 'Austrian school' because of their faculty positions at the University of Vienna. The term stuck. Since the 1930s, no economists from the University of Vienna or any other Austrian university have become leading figures in the so-called Austrian school of economics. In the 1930s and 1940s, the Austrian school moved to Britain and the United States, and scholars associated with this approach to economic science were located primarily at the London School of Economics (1931–1950), New York University (1944–), Auburn University (1983–), and George Mason University (1981–). Many of the ideas of the leading mid-twentieth-century Austrian economists, such as Ludwig von Mises and F. A. Hayek, are rooted in the ideas of classical economists such as Adam Smith and David Hume, or early-twentieth-century figures such as Knut Wicksell, as well as Menger, Böhm-Bawerk, and Friedrich von Wieser. This diverse mix of intellectual traditions in economic science is even more obvious in contemporary Austrian school economists, who have been influenced by modern figures in economics. These include Armen Alchian, James Buchanan, Ronald Coase, Harold Demsetz, Axel Leijonhufvud, Douglass North, Mancur Olson, Vernon Smith, Gordon Tullock, Leland Yeager, and Oliver Williamson, as well as Israel Kirzner and Murray Rothbard. While one could argue that a unique Austrian school of economics operates within the economic profession today, one could also sensibly argue that the label 'Austrian' no longer possesses any substantive meaning. In this article I concentrate on the main propositions about economics that so-called Austrians believe. ----The Science of Economics: --Proposition 1: Only individuals choose: Man, with his purposes and plans, is the beginning of all economic analysis. Only individuals make choices; collective entities do not choose. The primary task of economic analysis is to make economic phenomena intelligible by basing it on individual [freedom and therefore individual] purposes and plans; the secondary task of economic analysis is to trace out the unintended consequences of individual choices. --Proposition 2: The study of the market order is fundamentally about exchange behavior and the institutions within which exchanges take place: The price system and the market economy are best understood as a 'catallaxy,' and thus the science that studies the market order falls under the domain of 'catallactics.' These terms derive from the original Greek meanings of the word 'katallaxy' — exchange and bringing a stranger into friendship through exchange. Catallactics focuses analytical attention on the exchange relationships that emerge in the market, the bargaining that characterizes the exchange process, and the institutions within which exchange takes place. --Proposition 3: The 'facts' of the social sciences are what people believe and think: Unlike the physical sciences, the human sciences begin with the purposes and plans of individuals. Where the purging of purposes and plans in the physical sciences led to advances by overcoming the problem of anthropomorphism, in the human sciences, the elimination of purposes and plans results in purging the science of human action of its subject matter. In the human sciences, the 'facts' of the world are what the actors think and believe. The [subjective] meaning that individuals place on things, practices, places, and people determines how they will orient themselves in making decisions. The goal of the sciences of human action is intelligibility, not prediction. The human sciences can achieve this goal because we are what we study, or because we possess knowledge from within, whereas the natural sciences cannot pursue a goal of intelligibility because they rely on knowledge from without. We can understand purposes and plans of other human actors because we ourselves are human actors. The classic thought experiment invoked to convey this essential difference between the sciences of human action and the physical sciences is a Martian observing the 'data' at Grand Central Station in New York. Our Martian could observe that when the little hand on the clock points to eight, there is a bustle of movement as bodies leave these boxes, and that when the little hand hits five, there is a bustle of movement as bodies re-enter the boxes and leave. The Martian may even develop a prediction about the little hand and the movement of bodies and boxes. But unless the Martian comes to understand the purposes and plans (the commuting to and from work), his 'scientific' understanding of the data from Grand Central Station would be limited. The sciences of human action are different from the natural sciences, and we impoverish the human [social] sciences when we try to force them into the philosophical/scientific mould of the natural sciences. ---Microeconomics: --Proposition 4: Utility and costs are subjective: All economic phenomena are filtered through the human mind. Since the 1870s, economists have agreed that value is subjective, but, following Alfred Marshall, many argued that the cost side of the equation is determined by objective conditions. Marshall insisted that just as both blades of a scissors cut a piece of paper, so subjective value and objective costs determine price... But Marshall failed to appreciate that costs are also subjective because they are themselves determined by the value of alternative uses of scarce resources. Both blades of the scissors do indeed cut the paper, but the blade of supply is determined by individuals’ subjective valuations. In deciding courses of action, one must choose; that is, one must pursue one path and not others. The focus on alternatives in choices leads to one of the defining concepts of the economic way of thinking: opportunity costs [and the concept of the 'seen and unseen' consequences of choices]. The cost of any action is the value of the highest-valued alternative forgone in taking that action. Since the forgone action is, by definition, never taken, when one decides, one weighs the expected benefits of an activity against the expected benefits of alternative activities. --Proposition 5: The price system economizes on the information that people need to process in making their decisions: Prices summarize the terms of exchange on the market. The price system signals to market participants the relevant information, helping them realize mutual gains from exchange [win:win]. In Hayek’s famous example, when people notice that the price of tin has risen, they do not need to know whether the cause was an increase in demand for tin or a decrease in supply. Either way, the increase in the price of tin leads them to economize on its use. Market prices change quickly when underlying conditions change, which leads people to adjust quickly. --Proposition 6: Private property in the means of production is a necessary condition for rational economic calculation: Economists and social thinkers had long recognized that private ownership provides powerful incentives for the efficient allocation of scarce resources. But those sympathetic to socialism believed that socialism could transcend these incentive problems by changing human nature. Ludwig von Mises demonstrated that even if the assumed change in human nature took place, socialism would fail because of economic planners’ inability to rationally calculate the alternative use of resources. Without private ownership in the means of production, Mises reasoned, there would be no market for the means of production, and therefore no money prices for the means of production. And without money prices reflecting the relative scarcities of the means of production [and the public's varying aggregate subjective valuation of the importance of these], economic planners would be unable to rationally calculate the alternative use of the means of production [to maximise the satisfaction and happiness of the population, given the ultimate truth of limited resources]. --Proposition 7: The competitive market is a process of entrepreneurial discovery: Many economists see competition as a state of affairs. But the term 'competition' invokes an activity. If competition were a state of affairs, the entrepreneur would have no role. But because competition is an activity, the entrepreneur has a huge role as the agent of change who prods and pulls markets in new directions. The entrepreneur is alert to unrecognized opportunities for mutual gain. By recognizing opportunities, the entrepreneur earns a profit. The mutual learning from the discovery of gains from exchange moves the market system to a more efficient allocation of [limited] resources. Entrepreneurial discovery ensures that a free market moves toward the most efficient use of [nature's limited] resources. In addition, the lure of profit continually prods entrepreneurs to seek innovations that increase productive capacity. For the entrepreneur who recognizes the opportunity, today’s imperfections represent tomorrow’s profit. (Entrepreneurship can be characterized by three distinct moments: serendipity - discovery, search - conscious deliberation, and seizing the opportunity for profit.) The price system and the market economy are learning devices that guide individuals to discover mutual gains and use scarce resources efficiently. ---Macroeconomics: --Proposition 8: Money is non-neutral: Money is defined as the commonly accepted medium of exchange [account and store of value]. If government policy distorts the monetary unit [currency - refer fiat currency], exchange is distorted as well. The goal of monetary policy should be to minimize these distortions [so called, 'sound money']. Any increase in the money supply not offset by an increase in money demand will lead to an increase in prices [inflation]. But prices do not adjust instantaneously throughout the economy. Some price adjustments occur faster than others [because some prices are more 'sticky' than others], which means that relative prices change. Each of these changes exerts its influence on the pattern of exchange and production. Money, by its nature, thus cannot be neutral. This proposition’s importance becomes evident in discussing the costs of inflation. The quantity theory of money stated, correctly, that printing money does not increase wealth [wealth stays the same only the number of currency units that nominally 'account for', or more simply just 'count', that wealth increase]. Thus, if the government doubles the money supply, money holders’ apparent gain in ability to buy goods is prevented by the doubling of prices. But while the quantity theory of money represented an important advance in economic thinking, a mechanical interpretation of the quantity theory underestimated the costs of inflationary policy. If prices simply doubled when the government doubled the money supply, then economic actors would anticipate this price adjustment by closely following money supply figures and would adjust their behavior accordingly [remembering of course that GDP = money supply x velocity = y (the basic formula in econom for calculating GDP is: Y = C + I + E + G, where Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending]. The cost of inflation would thus be minimal. But inflation is socially destructive on several levels. First, even anticipated inflation breaches a basic trust between the government and its citizens because government is using inflation to confiscate people’s wealth [a 'hidden tax']. Second, unanticipated inflation is [unjustly?] redistributive as debtors gain at the expense of creditors. Third, because people cannot perfectly anticipate inflation and because the money is added somewhere in the system — say, through government purchase of bonds — some prices (the price of bonds, for example) adjust before other prices [refer gains for specific groups not shared with all from quantitative easing - monetisation of debt], which means that inflation distorts the pattern of exchange and production. Since money is the link for almost all transactions in a modern economy, monetary distortions affect those transactions. The goal of monetary policy, therefore, should be to minimize these monetary distortions, precisely because money is non-neutral. (The search for solutions to this elusive goal generated some of the most innovative work of the Austrian economists and led to the development in the 1970s and 1980s of the literature on free banking by F. A. Hayek, Lawrence White, George Selgin, Kevin Dowd, Kurt Schuler, and Steven Horwitz.) --Proposition 9: The capital structure consists of heterogeneous goods that have multi-specific uses that must be aligned: Right now, people in Detroit, Stuttgart, and Tokyo City are designing cars that will not be purchased for a decade. How do they know how to allocate [the limited global and local] resources to meet that goal? Production is always for an uncertain future demand, and the production process requires different stages of investment ranging from the most remote (mining iron ore) to the most immediate (the car dealership). The values of all producer goods at every stage of production derive from the [comparative and subjective] value consumers place on the product being produced. The production plan aligns various goods into a capital structure that produces the final goods in, ideally, the most efficient manner. If capital goods were homogeneous, they could be used in producing all the final products consumers desired. If mistakes were made, the [limited] resources would be reallocated quickly, and with minimal cost, toward producing the more desired final product. But capital goods are heterogeneous and multi-specific; an auto plant can make cars, but not computer chips. The intricate alignment of capital to produce various consumer goods is governed by price signals [most easily discerned in a free market] and the careful economic calculations of investors. If the price system is distorted [in an 'open rather than free' market, mixed economy, planned economy, etc], investors will make mistakes in aligning their capital goods. Once the error is revealed, economic actors will reshuffle their investments, but in the meantime resources will be lost. (Propositions 8 and 9 form the core of the Austrian theory of the business cycle, which explains how credit expansion by the government generates a malinvestment in the capital structure during the boom period that must be corrected in the bust phase. In contemporary economics, Roger Garrison is the leading expositor of this theory.) --Proposition 10: Social institutions often are the result of human action, but not of human design: Many of the most important institutions and practices are not the result of direct design but are the by-product of actions taken to achieve other goals. A student in the Midwest in January trying to get to class quickly while avoiding the cold may cut across the quad rather than walk the long way around. Cutting across the quad in the snow leaves footprints; as other students follow these, they make the path bigger. Although their goal is merely to get to class quickly and avoid the cold weather, in the process they create a path in the snow that actually helps students who come later to achieve this goal more easily. The 'path in the snow' story is a simple example of a 'product of human action, but not of human design' (Hayek 1948, p. 7). The market economy and its price system are examples of a similar process. People do not intend to create the complex array of exchanges and price signals that constitute a market economy. Their intention is simply to improve their own lot in life, but their behavior results in the market system [social and economic philosopher, Adam Smith's 'enlightened self-interest' resulting in the 'invisible hand' of the market - the moment by moment democratic vote of money at risk in the economy]. Money, law, language, science, and so on are all social phenomena that can trace their origins not to human design, but rather to people striving to achieve their own betterment, and in the process producing an outcome that benefits the public. (Not all spontaneous orders are beneficial and, thus, this proposition should not be read as an example of a Panglossian fallacy. Whether individuals pursuing their own self-interest generate public benefits depends on the institutional conditions within which they pursue their interests. Both the invisible hand of market efficiency and the tragedy of the commons are results of individuals striving to pursue their individual interests; but in one social setting this generates social benefits, whereas in the other it generates losses. New institutional economics has refocused professional attention on how sensitive social outcomes are to the institutional setting within which individuals interact. It is important, however, to realize that classical political economists and the early neoclassical economists all recognized the basic point of new institutional economists, and that it was only the mid-twentieth-century fascination with formal proofs of general competitive equilibrium, on the one hand, and the Keynesian preoccupation with aggregate variables, on the other, that tended to cloud the institutional preconditions required for social cooperation.) The implications of these ten propositions are rather radical. If they hold true, economic theory would be grounded in verbal logic and empirical work focused on historical narratives. With regard to public policy, severe doubt would be raised about the ability of government officials to intervene optimally within the economic system, let alone to rationally manage the economy [which the Austrians would argue like nature and the human brain is a spontaneously self-organising system, best left to sort out its own content and 'balance']. Perhaps economists should adopt the doctors’ creed: 'First do no harm.' The market economy develops out of people’s natural inclination to better their situation and, in so doing, to discover the mutually beneficial exchanges that will accomplish that goal. Adam Smith first systematized this message in’ The Wealth of Nations’. In the twentieth century, economists of the Austrian school of economics were the most uncompromising proponents of this message, not because of a prior ideological commitment, but because of the logic of their arguments. " - Peter J. Boettke
He is a professor of economics at George Mason University, where he is also the deputy director of the James M. Buchanan Center for Political Economy and a senior fellow at the Mercatus Center. He is the editor of the 'Review of Austrian Economics'. [http://economics.about.com/gi/dynamic/offsite.htm?site=http%3A%2F%2Fwww.econlib.org%2Flibrary%2FEnc%2FKeynesianEconomics.html ] Downloaded 19th June, 2011.
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[Quote No.36420] Need Area: Money > Invest
"'Financial repression' [where the government deliberately, legally and politically, restricts liberty in financial markets] can also be used as a tool to expand domestic debt markets [to help support a government borrowing large amounts in order to stimulate an economy by deficit spending or to pay for a war, etc for example]. In China and India today, most citizens are extremely limited as to the range of financial assets they are allowed to hold...and very few options for accumulating wealth to pay for retirement, healthcare, and children's education, citizens still put large sums in banks despite artificially suppressed returns. In India, banks end up lending large amounts of their assets directly to the government, which thereby enjoys a far lower interest rate than it probably would in a liberalized capital market. In China, the money goes via directed lending to state-owned enterprises and infrastructure projects, again at far lower interest rates than would otherwise obtain. This kind of financial repression is far from new and was particularly prevalent in both advanced and emerging market economies during the height of international capital controls from World War II through the 1980s. ('I don't know if I would use the term 'financial repression,' but it is interesting the way the U.S. banking sector is rigged to funnel money into government debt. Deposit insurance encourages people to put their money in banks. Capital regulations encourage banks to invest in government and agency debt. Of course, when they re-rigged it to encourage banks to invest in mortgage securities, the results were not exactly pretty....' quote from respected economist, Dr. Arnold Kling, September 28, 2009, regarding the Reinhart and Rogoff passage above.)[The USA was in October to suffer a massive share market drop and in the recovery this process of 'Financial Repression was discussed extensively out of public view, where the public might object, in the International Monetary Fund for example. Major bond dealer, Bill Gross, who after a career as a professional blackjack player, co-founded the now huge bond fund PIMCO, in June, 2011, stated that he had sold all the fund's US bonds and bought foreign bonds due to US 'financial repression', in the form of yields so low that they were below the real rate of inflation.]" - Carmen M. Reinhart and Kenneth S. Rogoff.
Carmen M. Reinhart is an economist with the University of Maryland and the NBER [National Bureau of Economic Research]. Kenneth S. Rogoff is an economist with Harvard University and the NBER. Quote from their book, 'This Time is Different: Eight Centuries of Financial Folly', p66. The book assembles a data set spanning 66 countries and eight centuries, which the authors use to examine four kinds of financial crises: defaults on sovereign debt, banking crises, foreign exchange crises, and rampant inflation. Dr. Arnold Kling received his Ph.D. in economics from the Massachusetts Institute of Technology in 1980. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986. He was a senior economist at Freddie Mac from 1986-1994. In 1994, he started Homefair.com, one of the first commercial sites on the World Wide Web. (Homefair was sold in 1999 to Homestore.com.) Kling is an adjunct scholar with the Cato Institute and a member of the Financial Markets Working Group at the Mercatus Center at George Mason University. He teaches statistics and economics at the Berman Hebrew Academy in Rockville, Maryland. Kling is the author of five books, four on economics and one on starting an internet business. His quote comes from The Library of Economics and Liberty. [http://econlog.econlib.org/archives/2009/09/questions_about_1.html ]
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[Quote No.36426] Need Area: Money > Invest
"Aluminium prices have risen by 65 per cent over the past three years to record levels as rising energy prices have pushed production costs sharply higher. Energy accounts for about 45 per cent of the cost of producing finished aluminium [which is used for example in coke cans. That is why aluminium is sometimes called 'frozen electricity'.] " - Jenny Wiggins and Chris Flood
Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/05bcc69c-59e3-11dd-90f8-000077b07658.html#ixzz1PoRCp1gx Quoted from the 'Financial Times' article, 'Coke to shrink size of cans in Hong Kong', published July 25 2008. [http://www.ft.com/intl/cms/s/0/05bcc69c-59e3-11dd-90f8-000077b07658.html?nclick_check=1#axzz1PoPcArJr ]
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[Quote No.36428] Need Area: Money > Invest
"What are options? [First a little background or, in other words, a true story - with a message about imaginative foresight, planning and investing.] The History of Options Trading: Around 600 B.C. there was a Greek named Thales. Like many other Greeks, Thales liked to think about how the world worked. Olives were a big commodity back then, and they still are today. During those times, olives were used for everything from cooking, soap, lamp oil and even as a skin softener. For several seasons around that time he wondered why the olives weren't blossoming, which was sending many citizens and farmers into distress. He studied how olives went from the trees to olive presses and tried to predict when the harvest would come once again. He was more of a mathematician than a philosopher, and by tracing previous weather patterns and examining the stars above he was confident that the olives would grow abundantly in the coming year. An astute businessman for his time, Thales cut a deal with many of the farmers, buying the 'right' to use their olive presses within a given period of time in exchange for a nominal fee. The farmers, skeptical that the olives would never come again, largely accepted his offer because they figured that getting some profit, no matter how small, was better than getting nothing at all. If the olives never came, Thales would have no use for the presses but they would get to keep the fee he gave them regardless. Alas, the olives came!! With the agreements with Thales intact, the farmers could not cash in, since Thales was the one with the rights to use the presses. He had essentially cornered the olive market by purchasing the 'option' to take control of virtually all the olive presses in the region. Legend says that he never exercised these options and let the farmers slide, partly because he had no time to get involved in the olive business. In any case, this is believed to be one of the very first options trade on record. Modern-Day Options: Options have been around since the 1970s and are offered primarily on the Chicago Board Options Exchange. The Options Industry Council defines an option as 'a contract to buy or sell a specific financial product officially known as the option's underlying instrument or underlying interest.' You may have worked for a company that offers you stock options in lieu of some salary or compensation, allowing you to purchase shares of the company stock after a specified period of time and at a specific price, even if that price is lower than the current market value. These are more or less the same options as those offered in the market. Let's try an example... Suppose I have a cell phone valued at $100, and let's pretend for the moment that it's a share of stock, fluctuating along with the market. In exchange for $5, I'm going to give you the option to buy the cell phone from me for $100 within the next 60 days. Now, what if the value of the cell phone reaches $150 within 20 days, should you buy it from me for $100? The answer is yes, since you could take the phone and resell it to the market for $150, and your profit would be $45 ($150 - $100 - $5 = $45). What if it hits $50, should you buy it then for $100? No, since you'd be losing money if you resold to the market at $50. Then your loss would only be $5, the price of the option contract. After 60 days, the contract has expired and it would be worth nothing, so you'd only lose $5. The above example is called a 'call,' meaning the right to buy. A 'put' by contrast, is the right to sell. A put is not the same as shorting a stock, for you stock traders familiar with the technique. This is because you are not borrowing shares, just buying contracts to have the right to sell. There are many other trading techniques other than calls and puts, but this site is intended to keep things simple, so it will only concentrate on these two methods. Moreover, there are other kinds of options out there, such as those offered on commodities or on the forex market, but again, we'll stick to stock options. Now, do you actually have to exercise the right an option gives you in order to make money? The answer is no, because the actual value of the option will change along with the stock price. In the example given, the $5 option would increase significantly in value if the stock reached $150. You can actually resell that $5 option to the market. As a ballpark figure, it would probably be worth $45 in this case, a huge percentage profit on your part. With puts, the same holds true. In fact, how could you buy the right to sell a stock at a specific price if you don't even own shares in the first place? This is because you're only trading the right to sell itself, not necessarily exercising the right to sell. Should you actually exercise options, instead of just trading them? The answer is yes, but for the sake of simplicity we'll concentrate more on trading them. The section below 'Options as a Hedge' provides information on using puts effectively if you're already a shareholder. Options as a Hedge: During the dot-com era many stocks rose to unthinkable limits, only to come plumetting down in time. Many investors and Silicon Valley employees made millions, only to come back down to earth. Many got greedy, refusing to sell their stock. Should they have sold early enough, they may have kept their Ferraris and million dollar homes in the process. The truth is, options could have kept them wealthy, even after the dot-com bust. Let's say tech stock XYZ was at around $350 dollars, which wasn't uncommon for some shares back then. Let's also say that there's a put option on that stock that you could've bought for $5, giving you the right to sell the stock for $340 within say, the next 730 days. Now, poof, the bubble bursts, and XYZ's price starts to slowly slide. It's passes $340, then $300, then $200, and then... $10!! Again, not uncommon in those days. If it was at $10 and you had been smart enough to invest in a $5 put option for every share that you owned, then guess what??!! You could've sold your shares at $340 a piece (assuming it's within the 730 days), despite the horrific market price of the stock at the time of your sale!! Think about it, just $5 per share would've saved many people's fortunes. This is an effective way to use options as a hedge if you already own shares. You can exercise the options, of course, but it's also a good way to protect your financial assets." - basicoptionstrading.com
http://basicoptionstrading.com/aboutus.aspx
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[Quote No.36430] Need Area: Money > Invest
"I deny emphatically that because the market has all the information it needs to establish a correct price, that the prices it actually registers are in fact correct." - Ben Graham
Famous share investor who is considered 'The Father of Value Investing'.
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[Quote No.36431] Need Area: Money > Invest
"...I contend that financial markets never reflect the underlying reality accurately, they distort it in some way or another and those distortions find expression in market prices." - George Soros
Famous investor and hedge fund manager
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[Quote No.36432] Need Area: Money > Invest
"[In nature, life, economics, business, investing, etc., not everything is completely and precisely quantifiable.] Not everything that can be counted counts, and not everything that counts can be counted." - Albert Einstein (attributed)
[1879 - 1955], US (German-born) physicist.
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[Quote No.36440] Need Area: Money > Invest
"One shall invest in art [refer price of publicly listed, high end auction house, Sotheby's - US stock ticker/symbol BID] in heyday [share market booms] and own gold in troubled times [share market busts]." - ancient Chinese saying

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[Quote No.36441] Need Area: Money > Invest
"Stock [Market] Warning! One of the indicators that helped forecast the 2008 stock market crash is flashing a red warning again! The S&P 500 is considered by many financial professionals as the best representation of the overall US Stock Market... Note how the stock market started to top out in the summer/fall of 2007 followed by a decline leading to the massive crash in 2008. Would your investments be better off today if you could have had a warning? This next chart did exactly that almost a year before the stock market crash. It is a chart that shows [relative performance of] how the Banking sector is doing relative to the overall stock market. It is simply the Banking Index prices divided by the S&P 500 Index prices. When the line is trending upwards that means the bank stocks are outperforming the overall market. When the line is trending downwards that means the bank stocks are underperforming the stock market. So why did this forecast the stock market move? Today’s economy is overwhelmingly driven by borrowed money. Whether it is a home mortgage, car loan or simply a nice dinner put on a credit card, in a credit based economy (like we absolutely have today) this bank credit is what makes the economic wheels turn. If the banks aren’t doing well enough to loan aggressively, not as many loans are made and the economy slows. So the banking sector is a very important part of our economy to keep a close eye on. Here is the chart of Bank stocks versus the S&P 500 during the exact same time period. Here is the same chart of the S&P 500 from above so you can line them up and see how the banking sector underperformance was setting off alarm bells for anyone who would listen close to a year in advance. You can see the bank under-performance led the stock market crash and they both started their bounce roughly in the same period. Now for the troubling part for stock investors currently. Even though the stock market has had a nice bounce, the bank stocks are not keeping up with this stock bounce. Compare the charts above again and notice the bank versus S&P 500 chart has bounced along sideways since summer of 09 and have not confirmed the S&P 500 bounce. Unless the banks join the party quickly we should be in for another very serious round of stock declines or a crash. Even more troubling: The bank vs. S&P 500 chart may be forming a technical pattern called a 'Head and Shoulders' pattern. This is a 'topping pattern' and can indicate falling prices ahead. The red line below this pattern is called the neckline. If the line is crossed then the pattern is confirmed- and watch out below." - GoldSilver.com
[http://goldsilver.com/article/stock-warning/ ], June 1st, 2011.
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[Quote No.36442] Need Area: Money > Invest
"Don’t fight the emotionality on the market – take advantage of it!" - Przemyslaw Radomski
founder, owner and the main editor of www.SunshineProfits.com.
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[Quote No.36443] Need Area: Money > Invest
"I keep on accumulating gold. Not to own any gold is to trust central bankers [not to deliberately devalue the government's unsound, fiat currency to surreptitiously inflate away debt and the purchasing power of your savings], and that you don't want to do." - Marc Faber
Noted economist, investor, financial commentator, author and publisher of the 'Gloom, Boom and Doom' report.
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[Quote No.36444] Need Area: Money > Invest
"The stock market usually cycles between being great for several years [boom-feast] and then being bad for a year or so [bust-famine]." - Seymour@imagi-natives.com

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[Quote No.36445] Need Area: Money > Invest
"Past performance does not indicate future results." - Common legal disclaimer in share investing

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[Quote No.36449] Need Area: Money > Invest
"Whenever you have proliferation of fraud on a massive scale... it’s a very very clear symptom of a bubble of a mania." - Marc Faber
Successful share investor and commentator. Publishes the financial newsletter, 'Gloom, Boom and Doom Report'.
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[Quote No.36450] Need Area: Money > Invest
"Foreign Official Dollar Reserves (FRODOR): A term coined by economist Dr. Ed Yardeni relating international liquidity to the effect of foreign central banks on U.S. monetary policy. It is measured as the sum of U.S. Treasury and U.S. agency securities held by foreign banks. FRODOR is an extremely pro-cyclical economic indicator. As the growth of FRODOR rises, so do the prices of stocks, commodities and real estate, while the U.S. dollar declines. The opposite is seen when the growth of FRODOR decelerates." - investopedia.com
http://www.investopedia.com/terms/f/FRODOR.asp#ixzz1QP4nHPL5
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[Quote No.36451] Need Area: Money > Invest
"[Financial crises are as old as money. Here's an example from history. While the names sound different the processes and people's reactions are very 'modern'.] The famous 'panic' of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury. The resulting dearth of circulating medium was made worse by the drain of money eastward in exchange for luxuries. Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and money-lending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash, and the crisis rose. When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply with the new law, the firm announced its bankruptcy. At the same time the failure of an Alexandrian firm, Seuthes and Son due to their loss of three ships laden with costly spices and the collapse of the great dyeing concern of Malchus at Tyre, led to rumors that the Roman banking house of Maximus and Vibo would be broken by their extensive loans to these firms. When its depositors began a 'run' on this bank it shut its doors, and later on that day a larger bank, of the Brothers Pettius, also suspended payment. Almost simultaneously came news that great banking establishments had failed in Lyons, Carthage, Corinth, and Byzantium. One after another the banks of Rome closed. Money could be borrowed only at rates far above the legal limit. Tiberius finally met the crisis by suspending the land-investment act and distributing 100,000,000 sesterces to the banks, to be lent without interest for three years on the security of realty. Private lenders were thereby constrained to lower their interest rates, money came out of hiding, and confidence slowly re-turned." - Will Durant
Famous historian. Quote from Chapter 15 from 'Caesar and Christ: History of Roman Civilization and of Christianity from their beginnings to AD 325'.
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[Quote No.36452] Need Area: Money > Invest
"I agree that it is difficult to time the market. That doesn’t mean that it is not worth trying to do it on an intermediate-term basis. Follow the credit cycle in the corporate bond market, and you will have a good idea of where stocks are likely to go. When corporate lending falls apart, so do stocks." - David J. Merkel
CFA, FSA. From 2003-2007. He was a leading commentator at the investment website RealMoney.com. In 2008, I became the Chief Economist and Director of Research of Finacorp Securities.
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[Quote No.36453] Need Area: Money > Invest
"[There is a relationship between debt and asset prices. The following article explores this.] ----'Start your US Depression engines' - According to America's National Bureau of Economic Research, the 'Great Recession' is now two years behind us, but the recovery that normally follows a recession has not yet occurred – worse still, US growth levels are already trending down. Growth needs to exceed 3 per cent per annum to reduce unemployment and needs to be substantially higher still to make serious inroads. Instead, growth has barely peeped its head above the preferred level. It is now below it again, and heading south. Obama was assured by his advisors that this wouldn’t happen. From the first Economic Report of the President he received from Bush’s outgoing Chairman of the Council of Economic Advisers Ed Lazear, he was told that real growth would probably exceed 5 per cent per annum – a detail confirmed to me by Lazear himself after my session at the Australian Conference of Economists in 2009. I disputed this forecast then, and events have certainly borne out my viewpoint. ----Culpable drivers? So why has the conventional wisdom been so wrong? Well, largely because it has ignored the role of private debt. Neoclassical economists, like Ben Bernanke [US Federal Reserve Chairman] and Paul Krugman [Nobel Laureate in economics], ignore the level of private debt, on the basis of the argument that 'one man’s liability is another man’s asset'. By their logic, the aggregate level of debt has no macroeconomic impact because the increase in the debtor’s spending power is offset by the fall in the lender’s spending power. They are profoundly wrong on this point. The empirical fact that 'loans create deposits' means that the change in the level of private debt is matched by a change in the level of money, which boosts aggregate demand. The fact that many economists ignored private debt levels (and, like Alan Greenspan running the Fed, at times actively promoted its growth) is why this is no 'garden variety' downturn. [Refer the works of the famous economists, Irving Fisher - 'The Debt-Deflation Theory of Great Depressions' and Hyman P. Minsky - 'Induced Investment and Business Cycles' or 'Stabilizing an Unstable Economy'] -----Full throttle: The downturn was supposed to end when the growth of private debt turned positive again and boosted aggregate demand. And for a while, it looked like a recovery was afoot as growth rebounded from the depths of the Great Recession. Clearly the scale of government spending, and the enormous increase in base money by Bernanke, had some impact – but nowhere near as much as they were hoping for. However the main factor that caused the brief recovery – and will also cause the dreaded 'double dip' – is the Credit Accelerator, or the Credit Impulse. The Credit Accelerator at any point in time is the change in the change in debt over the previous year, divided by the GDP figure for that point in time. The rate of change of asset prices is related to the acceleration of debt. It’s not the only factor obviously – change in incomes is also a factor, and there will be a link between accelerating debt and rising income if that debt is used to finance entrepreneurial activity. Our great misfortune is that accelerating debt hasn’t been primarily used for that purpose, but has instead financed asset price bubbles. -----Accelerated assets: There isn’t a one-to-one link between accelerating debt and asset price rises: some of the borrowed money drives up production (think SUVs during the boom), consumer prices, the fraction of existing assets sold, and the production of new assets (think McMansions during the boom). Accelerating debt should lead change in output in a well-functioning economy; we unfortunately live in a credit-drunk economy where accelerating debt leads to asset price bubbles. In a well-functioning economy, periods of debt acceleration are followed by periods of deceleration, so that the ratio of debt-to-GDP cycled but did not rise over time. In an unhealthy economy, like the US’s and many others, the acceleration of debt remains positive most of the time, leading not merely to cycles in the debt-to-GDP ratio, but a secular trend towards rising debt. When that trend exhausts itself, an economic depression ensues – and that’s where we are now. Deleveraging replaces rising debt, the debt-to-GDP ratio falls, and debt starts to reduce aggregate demand rather than increase it as happens during a boom. However, even in such a situation, the economy can receive a temporary boost because debt is still accelerating even when aggregate private debt is falling – as it has since 2009. That’s the force that generated the apparent recovery from the Great Recession. ------Pumping the pedal: The factor that makes the recent recovery phase different to all previous ones – save the Great Depression itself – is that this strong boost from the Credit Accelerator has occurred while the change in private debt is still massively negative. The recent recovery in unemployment was largely caused by the dramatic reversal of the Credit Accelerator – from strongly negative to strongly positive – since late 2009... The Credit Accelerator also caused the temporary recovery in house prices... And it was the primary factor driving the Bear Market rally in the stock market... Variance in the change in debt growth can impact rapidly on some markets – notably the stock market. And the already high correlations in... graphs [of the above factors] are higher still when we consider the causal role of the debt accelerator in changing the level of aggregate demand by lagging the data.... -----Emergency braking: The confirmation of a casual relationship between the acceleration of debt and the change in asset prices exposes the dangerous positive feedback loop in which the economy is trapped. This is similar to what George Soros calls a reflexive process: we borrow money to gamble on rising asset prices, and the acceleration of debt causes asset prices to rise. This is the basis of a Ponzi Scheme – because it relies not merely on growing debt, but accelerating debt, ultimately that acceleration must end, otherwise debt would become infinite. When the acceleration of debt ceases, asset prices collapse. From the more recent quarterly changes in the Credit Accelerator it’s apparent that the strong acceleration of debt in mid to late 2010 is petering out as stimulus from accelerating debt diminished. Another quarter of that low a rate of acceleration in debt – or a return to more deceleration – will drive the annual Credit Accelerator down or even negative again.... In a well-functioning economy, the Credit Accelerator would be above zero in boom times, below during a slump, and over time tend to exceed zero slightly because positive credit growth is needed to sustain economic growth. This would result in a private debt-to-GDP level that fluctuated around a positive level, as output grew cyclically in proportion to the rising debt. ------Remedial course: From now on, unless we do the sensible thing of abolishing debt that should never have been created in the first place, we are likely to be subject to wild gyrations in the Credit Accelerator, and a general tendency for it to be negative rather than positive. With debt still at levels that dwarf previous speculative peaks [debt to GDP and debt to annual income], the positive feedback between accelerating debt and rising asset prices can only last for a short time before it reaches its end point. In the meantime, we’re likely to see period of strong acceleration in debt (caused by a slowdown in the rate of decline of debt) and rising asset prices – followed by a decline in the acceleration as the velocity of debt approaches zero. With the Credit Accelerator going into reverse, asset prices plunge – which further reduces the public’s willingness to take on debt, which causes asset prices to fall even further. The process eventually exhausts itself as the debt-to-GDP ratio falls. But given that the current private debt level is perhaps 170 per cent of GDP above where it should be, the end game here will be many years in the future. The only sure road to recovery is debt abolition [deleveraging and saving/capital accumulation - based delayed gratification rather than instant gratification and conspicuous consumerism on credit], but that will require defeating the political power of the finance sector and ending the influence of neoclassical economists on economic policy. That day is still a long way off." - Steve Keen
He is Associate Professor of Economics & Finance at the University of Western Sydney, Australia and author of 'Debunking Economics' and the blog Debtwatch. Published on businessspectator.com.au 15 Jun 2011. [http://www.businessspectator.com.au/bs.nsf/Article/debt-crisis-recession-ponzi-house-prices-credit-US-pd20110613-HRVK3?OpenDocument&src=kgb# ]
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[Quote No.36454] Need Area: Money > Invest
"Benign economic circumstances...invite increasingly aggressive financial market wagers [with excessive leverage-credit-debt]. Innovation in finance is a signature development in a capitalist economy. Once leveraged wagers are in place, small disappointments can have exaggerated consequences [- so-called (Hyman) 'Minsky Moments']" - Robert Barbera

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[Quote No.36456] Need Area: Money > Invest
"[The Balance of Payments, Terms of Trade and exchange rate are all related:] A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item. In international economics and international trade, terms of trade or TOT is (Exports)/(Imports), or (Price Exports)/(Price Imports). In layman's terms it means how much is exported per import. 'Terms of trade' are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it has to pay less for the products it imports. That is, it has to give up fewer exports for the imports it receives. Thus terms of trade are widely used instruments to measure the benefits derived by a nation from international trade. In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date." - Bhasi Bahuleyan
http://au.answers.yahoo.com/question/index?qid=20101028203310AAyUzBP
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[Quote No.36457] Need Area: Money > Invest
"'Unemployment and other measures of labour underutilisation': The headline measure of excess labour capacity in an economy is the number of unemployed persons [the unemployment rate]. Such a measure, however, has its limitations. One major criticism of the count of unemployed persons is that a person need only work as little as an hour a week to be counted as employed, even if more time than this was spent in search of a job. Another criticism is that the unemployed represent only one form of excess labour capacity, and that consideration also needs to be given to the underemployed and the ‘hidden unemployed’. A further concern is that the number of unemployed persons is a headcount measure only and does not measure the volume of labour sought by the unemployed... While the unemployment rate is the most commonly used measure of excess labour capacity, it is by no means a comprehensive measure. Another measure of the level of unused labour resources is one that takes into account both the underemployed and persons marginally attached to the labour force. When this is done, the level of excess labour capacity rises—in September 2006, from 4.8 per cent (the unemployment rate) to 9.8 per cent (the labour force underutilisation rate) [= the unemployed rate plus the underemployed rate plus the rate of those who have given up looking for work.] to 10.6 per cent (the extended labour force underutilisation rate). Each of these measures is based on a headcount of individuals. A further measure, however, looks at the number of potential hours of labour not used. When this is done, the result is an unemployment rate (in September 2006) of 3.8 per cent and a labour force underutilisation rate of 5.9 per cent. [In the US the system is known by different names. The US Bureau of Labor Statistics provides concise current Employment Situation Summary, updated monthly, which categorises labor force statistics in the following way: --- U1: Percentage of labour force unemployed 15 weeks or longer. --- U2: Percentage of labour force who lost jobs or completed temporary work. --- U3: Official unemployment rate per the ILO [International Labour Organization] definition occurs when people are without jobs and they have actively looked for work within the past four weeks. --- U4: U3 + 'discouraged workers', or those who have stopped looking for work because current economic conditions make them believe that no work is available for them. --- U5: U4 + other 'marginally attached workers', or 'loosely attached workers', or those who 'would like' and are able to work, but have not looked for work recently. --- U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons (underemployment).]" - Tony Kryger
Statistics Section - Parliamentary Library, Department of Parliamentary Services, Parliament of Australia - RESEARCH NOTE: Information, analysis and advice for the Parliament 14 May 2007, no. 18, 2006–07, ISSN 1449-8456. [http://www.aph.gov.au/library/pubs/rn/2006-07/07rn18.pdf ]
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[Quote No.36458] Need Area: Money > Invest
"A crisis of unemployment and underemployment in an economy can be the result of a 'structural' mismatch between skills and jobs or due to a lack of sufficient demand in an economy. Diagnosing the problem accurately dictates the correct policy response from retraining initiatives to stimulating demand with fiscal and monetary policy, etc." - Seymour@imagi-natives.com

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[Quote No.36459] Need Area: Money > Invest
"[In a market downturn or at worst a 'bust'] If the institutions responsible for the lender-of-last resort function [in an economy - ie the central bank and the government] stand aside and allow market forces to operate, then the decline in asset values relative to current output prices will be larger [according to theory] than with intervention; investment and debt financed consumption will fall by larger amounts; and the decline in income, employment and profits will be greater. [In other words, without government bailouts, there can be a downward spiral; A vicious rather than a virtuous cycle!] " - Hyman P. Minsky
An economist famous for his 'financial instability hypothesis' and 'Minsky Moments' in an economy. Some of his key ideas include: --the natural inclination of complex, capitalist economies toward instability; --Booms and busts as unavoidable results of high-risk lending practices; --'Speculative finance' significantly effects investment and asset prices; --Government has a role in bolstering consumption during times of high unemployment; and the need for strong central bank oversight of banks. He wrote a number of books about his ideas that with the Great Financial Crisis of 2007-9 became much more popular as economists tried to understand what happened and not only how to fix it but also how to avoid it happening again.
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[Quote No.36460] Need Area: Money > Invest
"Hyman P. Minsky was an economist famous for his 'financial instability hypothesis' and 'Minsky Moments' in an economy. Some of his key ideas include: --the natural inclination of complex, capitalist economies toward instability; --Booms and busts as unavoidable results of high-risk lending practices; --'Speculative finance' significantly effects investment and asset prices; --Government has a role in bolstering consumption during times of high unemployment; and the need for strong central bank oversight of banks. He wrote a number of books about his ideas that with the Great Financial Crisis of 2007-9 became much more popular as economists tried to understand what happened and not only how to fix it but also how to avoid it happening again." - Seymour@imagi-natives.com

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[Quote No.36461] Need Area: Money > Invest
"[Gold is not always safe in a market bust as the following shows:] Gold prices slumped to a one-month low just above $1,500 as fresh concerns about [Greek debt and increasingly possible sovereign bond default in] Europe triggered steep declines in stocks and commodities and forced some traders to sell the safe-harbor asset to meet margin calls. Gold is considered a refuge from financial risk, but prices can tumble amid a market-wide selloff as traders sell profitable holdings to raise cash and cover losses elsewhere. 'This downdraft could break $1,500 for a short time,' said George Gero, vice president with RBC Capital Markets Global Futures. 'There's fund liquidation going on in gold.' [It is also important to remember that is a crash investors want safety and for that they usually want US Treasuries as the world reserve currency bonds, and so they have to buy US dollars, which increases demand and the exchange rate and that will drive down the price of gold which is denominated in US dollars.]" - Tatyana Shumsky
The Wall Street Journal, 25th June, 2011.
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[Quote No.36462] Need Area: Money > Invest
"'Get Ready to be Financially Conscripted into Financial Repression': A new financial policy initiative known by the label 'Financial Repression' may soon become our worst nightmare. ‘Repression’ rhymes with ‘depression’ which could be what we have to look forward to as rampant price inflation and permanently lower living standards take hold. Get ready to be conscripted into a citizen army assembled for the greater cause of saving the nation from being swamped by a tsunami of debt. Let me explain. What is Financial Repression? Financial Repression is a policy cocktail comprised of large doses of monetary inflation, commonly known as money creation far in excess of the growth in the economy, coupled with interest rates that are below the real rate of inflation. While that may not sound particularly scary, the policy is designed to cause asset and price inflation which is reflective of, and caused by, a devaluing dollar. A much lower standard of living is the inevitable outcome. What’s the Purpose of Financial Repression? The purpose of Financial Repression is to allow the US federal government to cope with its overwhelming accumulated debt and unfunded promises for future Social Security, Medicare, Medicaid and employee pensions. It also prevents a proud nation from having to ‘restructure’ its debt as run-of-the-mill dead beat nations periodically are forced to do. Insolvency is just plain un-American for the world’s largest economy, the only remaining super power and the owner of the world’s reserve currency. To declare the equivalent of a private sector bankruptcy is just not in the cards. In order to make Financial Repression work, the FED needs to keep a cap on nominal interest rates preferably at four percentage points below the real rate of price inflation. Aside from the highly negative impact of decimating the nest eggs of citizen-savers, it has the beneficial effect of inflating away debilitating, pesky and otherwise unmanageable financial obligations of the federal government. Will Financial Repression Work? A four percent interest rate below the real rate of inflation, compounded over ten years, reduces in half the ‘real’ value of payments to the government’s debt holders and entitlement recipients [Rule of 72 = 72/4 = 18 years to double the buying power or in this case you'd need twice the nominal value of dollars to purchase the same amount therefore in 10 years you'd need an extra 50% for the same purchasing power - something that used to cost $10 will now cost $15]. Imagine what it does to the purchasing power of social security payments. Everyone gets the number of dollars promised, but they just don’t buy as much. Magical, isn’t it, especially if citizens think they are getting richer because their pay checks rise and their houses start to increase in price, thanks to inflation. In the absence of large foreign buyers of US government debt, we the citizens will be conscripted to fill the gap, all for the greater good of the nation’s future. A captive audience of citizen-savers and investors are expected to be a compliant army of civic minded patriots herded into the role of federal bond buyers in order to save the nation for future generations of Americans. Of course we will be assisted by the FED with a rejuvenated and renamed QE3 program...designed to drive dollar devaluation and inflation. How Will Financial Repression Work? So how will this new and improved effort at national financial rejuvenation and restoration scheme work? A fixed percentage of all pools of capital - including savings, investments, pension and retirement funds of individuals and institutions - will be mandated to own Treasury bonds as a part of their savings and investment portfolios. [This can already be seen in the form of insurance companies and banks who are now required by law to hold more government bonds bought with your money as part of the government's financial reregulation that increases their capital adequacy ratios of highly liquid assets -namely government AAA bonds - even though they are expected to be poor inflation adjusted investments] Will Financial Repression Be Voluntary? As with all conscriptions involving a national crisis [think like as in a war], this one will be anything but voluntary. Your personal 401k and IRA are likely to be conscripted to become part of this 'greater good'. Bank assets, insurance company investments, university and other public institution endowments, pension funds and virtually all pools of money will be forced to join the cause of the greater good for America’s future. How Can Financial Repression Be Avoided? You could decide now to place some of your money in more friendly investments than US federal government bonds. Bill Gross, head of the nation’s largest bond fund, took exactly this decision a few months ago by unloading all of Pimco’s US government bonds. However, it is entirely probable that Pimco will find itself owning US Treasury paper once again. If you decide to transfer some of your cash outside the country you should do it soon simply because ‘Capital Controls’ restricting the movement of money outside the US are likely to become increasingly problematic. Rules are already in place to restrict money laundering derived from illicit drugs or the movement of money which facilitates terrorism. Expect more restrictions under the guise of fighting drugs and terror when, in fact, it is designed to ensure there is a large and captive market for increasingly unmarketable Treasury debt. When Will Financial Repression Begin? When does this process get underway? As soon as possible, but given the inclination of politicians to present purely positive pictures prior to elections, one could reasonably conclude that it will not be implemented, or talked about publicly, until after the November 2012 election. Political leadership on this issue will remain invisible until electoral risk subsides or until there is absolutely no alternative to a rapidly burgeoning debt crisis. What Will Cause Financial Repression to Commence? Financial Repression will be imposed upon us when normal market demand for the massively growing quantities of US Treasury debt dries up. China, the biggest foreign customer for US government bonds, is developing a bad case of cold feet when it considers US Treasury bond ‘investments’. Instead they are mopping up the world’s natural resources from their pot of surplus dollars derived from burgeoning manufactured exports. The Japanese now need to cash in their Treasury debt to pay for tsunami damage, essentially dropping them to bit player status in the bond market. The Saudis and other mid-east oil Sheikdoms need their US petrodollars to buy protection and to insulate themselves from the unsettling consequences of the ‘Arab Spring.’ Why Financial Repression is Coming – to YOU: If foreign buyers with the deepest pockets are deserting the regular Treasury auction of bonds, notes and bills, who is available to pick up the slack? The existing official debt is $14.3 Trillion and the current year fiscal [US] deficit is projected to add another $1.7 Trillion. Since much of the ‘old’ debt continues to mature, it too must find new purchasers. These troubling realities leave US domestic buyers to do the heavy lifting of buying US government debt. Who might these US domestic buyers be? Think FED and its $100 Billion of magical digital dollars per month, or $600 Billion in total, over the past six months under the guise of Quantitative Easing, commonly known as QE2. While difficult to confirm, it would appear that the FED has bought approximately 70 percent of the debt during this period. What about the period immediately ahead now that the FED says it will stop the QE2 program? Why Financial Repression is Unavoidable: US sovereign debt is VERY serious. It currently stands at $14 Trillion - the allowable ceiling. Moreover, the federal government is presently running an annual deficit of $1.7 Trillion with deficits of similar dimensions projected into future years. As such, Congress is now playing political games for voter consumption which will lead inevitably to raising this debt head room by a further $2 Trillion, thereby allowing current politicians to get re-elected in November 2012. Given the fact that 42 cents of every dollar spent by the federal government is borrowed money, not tax dollars, the debt ceiling is going to have to be lifted, year after year, by Billions of additional dollars. That is not the worst of it, however. Projected future deficits are even more overwhelming in that promises to citizens for Social Security, Medicare, Medicaid and other obligations for other services are mind numbing in scale. The worst part is that these promises are dramatically underfunded. Depending on whose numbers are used, what assumptions are made about future economic growth, inflation, rates of interest and similar considerations, unfunded future liabilities range from $60 Trillion to over $100 Trillion. Obviously, growth of the economy and massive tax increases are totally incapable of meeting the debt challenge. What Can We Expect to Unfold in Years to Come? Citizen taxpayers and benefit recipients should expect more and higher deficits forcing an ever growing mountain of debt. Current fifty year low interest rates are guaranteed to rise which will make servicing the humongous debt an insurmountable challenge. So what is going to happen? The U.S. could declare 'Banana Republic' style insolvency and embark upon debt restructuring, but that would be the ‘easy’ route out of the debt morass. The US is the world’s largest economy, the only remaining super power and owns the world’s reserve currency. Alpha nations like the US don’t declare the public sector equivalent of a private bankruptcy. Instead, the US and other first world economies that are reaching similar zombie debt status, will adopt brutally tough austerity measures starting with painful reductions in social security and health care benefits. Tax increases should be expected too, as well as ever more digital dollar printing. The end result of Financial Repression will be rampant price inflation and permanently lower living standards. Get ready to be conscripted into a citizen army assembled for the greater cause of saving the nation from being swamped by a tsunami of debt." - Arnold Bock
He is an economic analyst and financial writer. This article was published Jun 29, 2011 on the Market Oracle website. [http://www.marketoracle.co.uk/Article28968.html
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[Quote No.36463] Need Area: Money > Invest
"'Cost-Push Inflation Versus Demand-Pull Inflation': Do you remember how much less you paid for things even two years ago? This increase in the general price level of goods and services in an economy is inflation, measured by the Consumer Price Index and the Producer Price Index. But there are different types of inflation, depending on its cause. Here we examine cost-push inflation and demand-pull inflation. -----Factors of Inflation: Inflation is defined as the rate (%) at which the general price level of goods and services is rising, causing purchasing power to fall. This is different from a rise and fall in the price of a particular good or service. Individual prices rise and fall all the time in a market economy, reflecting consumer choices or preferences and changing costs. So if the cost of one item, say a particular model car, increases because demand for it is high, this is not considered inflation. Inflation occurs when most prices are rising by some degree across the whole economy. This is caused by four possible factors, each of which is related to basic economic principles of changes in supply and demand: •Increase in the money supply. •Decrease in the demand for money. •Decrease in the aggregate supply of goods and services. •Increase in the aggregate demand for goods and services. In this look at what inflation is and how it works, we will ignore the effects of money supply on inflation and concentrate specifically on the effects of aggregate supply and demand: cost-push and demand-pull inflation. ----Cost-Push Inflation: Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been 'pushed up' by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation). ----Production Costs: To understand better their effect on inflation, let’s take a look into how and why production costs can change. A company may need to increases wages if laborers demand higher salaries (due to increasing prices and thus cost of living) or if labor becomes more specialized. If the cost of labor, a factor of production, increases, the company has to allocate more resources to pay for the creation of its goods or services. To continue to maintain (or increase) profit margins, the company passes the increased costs of production on to the consumer, making retail prices higher. Along with increasing sales, increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcity of raw materials, an increase in the cost of labor and/or an increase in the cost of importing raw materials and labor (if the they are overseas), which is caused by a depreciation in their home currency. The government may also increase taxes to cover higher fuel and energy costs, forcing companies to allocate more resources to paying taxes. ----Putting It Together: To visualize how cost-push inflation works, we can use a simple price-quantity graph showing what happens to shifts in aggregate supply.... [It would show] the level of output that can be achieved at each price level. As production costs increase, aggregate supply decreases... (given production is at full capacity), causing an increase in the price level... The rationale behind this increase is that, for companies to maintain (or increase) profit margins, they will need to raise the retail price paid by consumers, thereby causing inflation. ----Demand-Pull Inflation: Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence 'bid prices up', again, causing inflation. This excessive demand, also referred to as 'too much money chasing too few goods', usually occurs in an expanding economy. ----Factors Pulling Prices Up: The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. For example, an increase in government purchases can increase aggregate demand, thus pulling up prices. Another factor can be the depreciation of local exchange rates, which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases, thereby raising the overall level of aggregate demand (we are assuming aggregate supply cannot keep up with aggregate demand as a result of full employment in the economy). Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. Finally, if government reduces taxes, households are left with more disposable income in their pockets. This in turn leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation. The results of reduced taxes can lead also to growing consumer confidence in the local economy, which further increases aggregate demand. ----Putting It Together: Demand-pull inflation is a product of an increase in aggregate demand that is faster than the corresponding increase in aggregate supply. When aggregate demand increases without a change in aggregate supply, the ‘quantity supplied’ will increase (given production is not at full capacity). Looking again at.. [a] price-quantity graph, we... [would] see ...If aggregate demand increases... in the short run, this will not change (shift) aggregate supply, but cause a change in the quantity supplied... The rationale behind this lack of shift in aggregate supply is that aggregate demand tends to react faster to changes in economic conditions than aggregate supply. As companies increase production due to increased demand, the cost to produce each additional output increases... The rationale behind this change is that companies would need to pay workers more money (e.g. overtime) and/or invest in additional equipment to keep up with demand, thereby increasing the cost of production. Just like cost-push inflation, demand-pull inflation can occur as companies, to maintain profit levels, pass on the higher cost of production to consumers’ prices. ----Conclusion: Inflation is not simply a matter of rising prices. There are endemic and perhaps diverse reasons at the root of inflation. Cost-push inflation is a result of decreased aggregate supply as well as increased costs of production, itself a result of different factors. The increase in aggregate supply causing demand-pull inflation can be the result of many factors, including increases in government spending and depreciation of the local exchange rate. If an economy identifies what type of inflation is occurring (cost-push or demand-pull), then the economy may be better able to rectify (if necessary) rising prices and the loss of purchasing power." - Reem Heakal
Posted: Jan 20, 2005 [http://www.investopedia.com/articles/05/012005.asp#axzz1QjPGj1NR ]
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[Quote No.36464] Need Area: Money > Invest
"'Understanding Supply-Side Economics': Supply-side economics is better known to some as 'Reaganomics', or the 'trickle-down' policy espoused by former U.S. president Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest and produce economic benefits that trickle down into the overall economy. In this article, we summarize the basic theory behind supply-side economics. Like most economic theories, supply-side economics tries to explain both macroeconomic phenomena and - based on these explanations - to offer policy prescriptions for stable economic growth. In general, supply-side theory has three pillars: tax policy, regulatory policy and monetary policy. However, the single idea behind all three pillars is that production (i.e. the 'supply' of goods and services) is the most important determinant of economic growth. The supply-side theory is typically held in stark contrast to Keynesian theory, which, among other facets, includes the idea that demand can falter, so if lagging consumer demand drags the economy into recession, the government should intervene with fiscal and monetary stimuli. This is the single big distinction: a pure Keynesian believes that consumers and their demand for goods and services are key economic drivers, while a supply-sider believes that producers and their willingness to create goods and services set the pace of economic growth. ----The Argument That Supply Creates Its Own Demand: In economics we review the supply and demand curves... aggregate demand and aggregate supply intersect to determine overall output and price levels. (...output may be gross domestic product and the price level may be the Consumer Price Index.) ...the supply-side premise: an increase in supply (i.e. production of goods and services) will increase output and lower prices... Supply-side actually goes further and claims that demand is largely irrelevant. It says that over-production and under-production are not really sustainable phenomena. Supply-siders argue that when companies temporarily 'over-produce', excess inventory will be created, prices will subsequently fall and consumers will increase their purchases to offset the excess supply. As put by the Fountainhead Capital Group, 'After all, what would cause consumers and businesses to stop demanding goods and services and force the economy into a recession or a depression? Keynes had no idea, and said as much...' This essentially amounts to the belief in a vertical (or almost vertical) supply curve... ----Three Pillars: The three supply-side pillars follow from this premise. On the question of tax policy, supply-siders argue for lower marginal tax rates. In regard to a lower marginal income tax, supply-siders believe that lower rates will induce workers to prefer work over leisure (at the margin). In regard to lower capital-gains tax rates, they believe that lower rates induce investors to deploy capital productively. At certain rates, a supply-sider would even argue that the government would not lose total tax revenue because lower rates would be more than offset by a higher tax revenue base - due to greater employment and productivity. On the question of regulatory policy, supply-siders tend to ally with traditional political conservatives - those who would prefer a smaller government and less intervention in the free market. This is logical because supply-siders, although they may acknowledge that government can temporarily help by making purchases, they do not think this induced demand can either rescue a recession or have a sustainable impact on growth. The third pillar, monetary policy, is especially controversial. By monetary policy, we are referring to the Federal Reserve's ability to increase or decrease the quantity of dollars in circulation [ - the 'money supply'](i.e. where more dollars means more purchases by consumers, thus creating liquidity)[and possibly inflation, if the velocity of that money is high, - refer the Quantity Theory of Money]. A Keynesian tends to think that monetary policy is an important tool for tweaking the economy and dealing with business cycles, whereas a supply-sider does not think that monetary policy can create economic value. While both agree that the government has a printing press, the Keynesian believes this printing press can help solve economic problems. But the supply-sider thinks that the government (or the Fed) is likely to create only problems with its printing press by either (a) creating too much inflationary liquidity, or (b) not sufficiently 'greasing the wheels' of commerce with enough liquidity. A strict supply-sider is therefore concerned that the Fed may inadvertently stifle growth by contributing to deflation and encouraging investors to horde dollars. ----What’s Gold Got To Do with It? Since supply-siders view monetary policy not as a tool that can create economic value, but rather a variable to be controlled, they advocate a stable monetary policy or a policy of gentle inflation tied to economic growth - for example, 3% to 4% growth in the money supply per year. This principle is the key to understanding why a supply-sider often advocates a return to the gold standard [rather than fiat currency]- which may seem strange at first glance. (And most economists probably do view this aspect as dubious.) The idea is not that gold is particularly special but rather that gold is the most obvious candidate as a stable 'store of value'. The supply-sider argues that if the U.S. were to peg the dollar to gold, the currency would be more stable, and fewer disruptive outcomes would result from currency fluctuations. [The government would be restrained from over-promising, borrowing to meet those promises and then needing to print money and create inflation to pay back those debts, by the restricted availability of gold and the convertibility ratio of gold to dollars in a currency with a gold standard]. As an investment theme, supply-side theorists say that the price of gold - since it is a relatively stable store of value - provides investors with a 'leading indicator', or signal for the direction of the dollar. Indeed, gold is typically viewed as an inflation hedge. And, although the historical record is hardly perfect, gold has often given early signals about the dollar.... ----Conclusion: Supply-side economics has a colorful history. Some economists view supply-side as a half-baked economic theory - economist and New York Times columnist Paul Krugman even called its founders 'cranks' in a book dedicated to attacking the theory ('Peddling Prosperity'). Other economists ...[see] it as offering nothing particularly new or controversial to an updated view of classical economics. We have discussed the three pillars, and, based on this, you can see how the supply side cannot be separated from the political realms: if true, it implies [the exact opposite of Keynesian economic theory, namely...] a reduced role for government and a less progressive tax policy." - David Harper
Published May 14, 2010 on the Investopedia website. [http://www.investopedia.com/articles/05/011805.asp#axzz1QjPGj1NR ]
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[Quote No.36465] Need Area: Money > Invest
"'What Is the Quantity Theory of Money?' The concept of the quantity theory of money (QTM) began in the 16th century. As gold and silver inflows from the Americas into Europe were being minted into coins, there was a resulting rise in inflation. This led economist Henry Thornton in 1802 to assume that more money equals more inflation and that an increase in the money supply does not necessarily mean an increase in economic output. Here we look at the assumptions and calculations underlying the QTM, as well as its relationship to monetarism and ways the theory has been challenged. ----QTM in a Nutshell: The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service. Another way to understand this theory is to recognize that money is like any other commodity: increases in its supply decrease marginal value (the buying capacity of one unit of currency). So an increase in money supply causes prices to rise (inflation) as they compensate for the decrease in money’s marginal value [so low as the velocity of money does not decrease]. ----The Theory’s Calculations: In its simplest form, the theory is expressed as: MV = PT (the Fisher Equation) Each variable denotes the following: M = Money Supply V = Velocity of Circulation (the number of times money changes hands) P = Average Price Level T = Volume of Transactions of Goods and Services The original theory was considered orthodox among 17th century classical economists and was overhauled by 20th-century economists Irving Fisher [famous for his explanation of the 20th Century's Great Depression, detailed in his famous book, 'The Debt Deflation Theory of the Great Depressions', who formulated the above equation, and Milton Friedman. It is built on the principle of 'equation of exchange': Amount of Money x Velocity of Circulation = Total Spending [= Nominal GDP] Thus if an economy has US$3, and those $3 were spent five times in a month, total spending for the month would be $15. ----QTM Assumptions: QTM adds assumptions to the logic of the equation of exchange. In its most basic form, the theory assumes that V (velocity of circulation) and T (volume of transactions) are constant in the short term. These assumptions, however, have been criticized, particularly the assumption that V is constant. The arguments point out that the velocity of circulation depends on consumer and business spending [and saving] impulses, which cannot be constant. The theory also assumes that the quantity of money, which is determined by outside forces, is the main influence of economic activity in a society. A change in money supply results in changes in price levels and/or a change in supply of goods and services. It is primarily these changes in money stock that cause a change in spending. And the velocity of circulation depends not on the amount of money available or on the current price level but on changes in price levels. Finally, the number of transactions (T) is determined by labor, capital, natural resources (i.e. the factors of production), knowledge and organization. The theory assumes an economy in equilibrium and at full employment. Essentially, the theory’s assumptions imply that the value of money is determined by the amount of money available in an economy. An increase in money supply results in a decrease in the value of money [currency deflation] because an increase in money supply causes a rise in inflation. As inflation rises, the purchasing power, or the value of money, decreases. It therefore will cost more to buy the same quantity of goods or services. ----Money Supply, Inflation and Monetarism: As QTM says that quantity of money determines the value of money, it forms the cornerstone of monetarism. Monetarists say that a rapid increase in money supply leads to a rapid increase in inflation [if the velocity of money does not decrease correspondingly or even more]. Money growth that surpasses the growth of economic output results in inflation as there is too much money behind too little production of goods and services. In order to curb inflation, money growth must fall below growth in economic output. This premise leads to how monetary policy is administered. Monetarists believe that money supply should be kept within an acceptable bandwidth so that levels of inflation can be controlled. Thus, for the near term, most monetarists agree that an increase in money supply can offer a quick-fix boost to a staggering economy in need of increased production [for example in a market crash or period of deflation]. In the long term, however, the effects of monetary policy are still blurry. Less orthodox monetarists, on the other hand, hold that an expanded money supply will not have any effect on real economic activity (production, employment levels, spending and so forth). But for most monetarists any anti-inflationary policy will stem from the basic concept that there should be a gradual reduction in the money supply. Monetarists believe that instead of governments continually adjusting economic policies (i.e. government spending and taxes), it is better to let non-inflationary policies (i.e. gradual reduction of money supply) lead an economy to full employment. ----QTM Re-Experienced: John Maynard Keynes [of Keynesian economic theory fame] challenged the theory in the 1930s, saying that increases in money supply lead to a decrease in the velocity of circulation and that real income, the flow of money to the factors of production, increased. Therefore, velocity could change in response to changes in money supply. It was conceded by many economists after him that Keynes’ idea was accurate. QTM, as it is rooted in monetarism, was very popular in the 1980s among some major economies such as the United States and Great Britain under Ronald Reagan [ie 'Reagonomics' and 'supply-side' economics] and Margaret Thatcher respectively. At the time, leaders tried to apply the principles of the theory to economies where money growth targets were set. However, as time went on, many accepted that strict adherence to a controlled money supply was not necessarily the cure-all for economic malaise." - Reem Heakal
Published on May 2, 2010 on the Investopedia website. [http://www.investopedia.com/articles/05/010705.asp#axzz1QjPGj1NR ]
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[Quote No.36466] Need Area: Money > Invest
"Basic Futures Terms: Back Month: [also deferred contract] Futures delivery months other than the spot or front month (also called deferred months). [Contango: a term used in the futures market to describe an upward sloping forward curve (as in the normal yield curve). Such a forward curve is said to be 'in contango' (or sometimes 'contangoed') [The reverse is called 'backwardisation']. Futures Contract: A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location. Futures Exchange: A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts. Initial Margin: The minimum value on deposit in your account to establish a new futures or options position, or to add to an existing position. Initial margin amount levels differ by contract... it may change at any time [at the market maker or exchanges discretion]. Increases or decreases in Initial Margin levels reflect anticipated or actual changes in market volatility. Also called 'Initial Performance Bond.' Maintenance Margin: The minimum value that you must keep in your account in order to continue to hold a position. The Maintenance Margin is typically less than the Initial Margin, and also differs by contract. If your account falls below the Maintenance Margin requirement, you will receive a margin call. If you wish to continue to hold the position, you will be required to restore your account to the full Initial Margin level (not to the Maintenance Margin level). Also known as the Maintenance Performance Bond. Spot: Market of immediate delivery of and payment for the product. Tick: Smallest increment of price movement possible in trading a given contract. " - Lind Waldock
Futures Brokers, Commodity Brokers and Online Futures Trading. [http://www.lindsimulated.com/education/glossary/basic_futures.shtml ]
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[Quote No.36479] Need Area: Money > Invest
"Circus performers know that they can break their necks falling into a net; it is the uncertainty which keeps them skillful and careful. They know also that the net can save their lives; it is this confidence which makes them daring." - S. Helen Kelley

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[Quote No.36490] Need Area: Money > Invest
"There are two times in a man's life when he should not speculate: when he can't afford it, and when he can." - Mark Twain

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[Quote No.36497] Need Area: Money > Invest
"You just have to have growth in debt for the economy to have GDP growth [refer the Credit Theory of Money]... And [this time, with the US debt ceiling reached] the Fed is not going to do it because Republicans aren't going to let that happen." - John Taylor
Chief Investment Officer at currency fund, FX Concepts, which oversees $8.4 billion in assets and is the largest currency hedge fund in the world. [http://www.reuters.com/article/2011/02/01/us-usa-economy-taylor-idUSTRE7107WI20110201 ]
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[Quote No.36499] Need Area: Money > Invest
"The United States sells its debt to investors through auctions that are held weekly - sometimes four times per week - by the Treasury's Bureau of the Public Debt, in batches ranging from $13 billion to $35 billion at a time. Investors can buy the bonds directly from the Treasury at auctions, or through any of the 20 elite 'primary dealers,' Wall Street firms authorized to bid on behalf of customers. The Treasury limits the amount any single bidder can purchase to 35 percent of a given auction. Anyone who bought more than 35 percent of a particular batch of Treasury securities at a single auction would have a controlling stake in that batch. By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters. Using a method of purchases known as 'guaranteed bidding,' China was forging gentleman's agreements with primary dealers to purchase a certain amount of Treasury securities on offer at an auction without being reported as bidders in that auction, according to the people interviewed. After setting the amount of Treasuries the guaranteed bidder wanted to buy, the dealer would then buy that amount in the auction, technically on its own behalf. The practice kept the true size of China's holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes - more than 35 percent - in some of the securities the Treasury issued. The Treasury department, too, came to believe that China was breaching the 35 percent limit, according to internal documents viewed by Reuters, though the documents do not indicate whether the Treasury was able to verify definitively that this occurred. Guaranteed bidding wasn't illegal, but breaking the 35 percent limit would be. The Uniform Offering Circular - a document governing Treasury auctions - says anyone who wins more than 35 percent of a single auction will have his purchase reduced to the 35 percent limit. Those caught breaking auction rules can be barred from future auctions, and may be referred to the Securities and Exchange Commission or the Justice Department. At the beginning of 2009, Treasury officials began discussing the issue of guaranteed bidders, with a focus on China's behavior, internal documents seen by Reuters show. The culmination of their efforts was a change to the Uniform Offering Circular published on June 1, 2009 that eliminated the provision allowing guaranteed bidding. In the first auctions conducted after guaranteed bidding was banned, a key metric rose sharply: the percentage of so-called indirect bidders, those who placed their auction bids through primary dealers. Indirect bidders are seen as a proxy measure for foreign central bank buying, because foreign central banks most often bid through primary dealers. With the elimination of the guaranteed bidder provision, far more buyers were put in this class in reports to the Treasury Department... When the US runs a deficit, some other nation must (as a function of pure math) accumulate US assets. Those assets could be dollar reserves, treasuries, investments in US companies, US property, or US equities." - Mike 'Mish' Shedlock
He is a registered investment advisor representative for SitkaPacific Capital Management. Published Sun, Jul 3, 2011. [http://globaleconomicanalysis.blogspot.com/ ]
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[Quote No.36501] Need Area: Money > Invest
"...if year-over-year GDP [US - Gross Domestic Product] growth dips below 2%, a recession always follows [in the US]." - Richard Yamarone
Senior Economist - Bloomberg Economics BRIEF. [http://www.marketoracle.co.uk/Article29028.html ]
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[Quote No.36502] Need Area: Money > Invest
"[Don't try to predict the distant future. Remember the old Chinese proverb:] When men speak of the future, the Gods laugh." - old Chinese proverb

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[Quote No.36504] Need Area: Money > Invest
"Not considering the economy when considering investing in a company's shares is the same as not considering the forest, when considering buying a tree in that forest. The part of the forest just over the hill and with the wind blowing your way may be on fire. So remember this even when value investors repeat the great investor, Peter Lynch's famous quote, 'If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes'. In fact, it is vital to go the extra mile and learn economics, as well as fundamental value analysis, and then you yourself will also be able to understand the economy and its business cycles that the company you are considering is a part of. That way you are making your decision from the bottom up and the top down. It doubles your chances of buying a good company at the right time. If you then also learn and apply inter-market and technical analysis you really start to improve your odds, which is the name of the game in investing well and profiting over the short and long run." - Seymour@imagi-natives.com

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[Quote No.36553] Need Area: Money > Invest
"The central principle of investment is to go contrary to general opinion [sentiment], on the grounds that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive." - John Maynard Keynes
[1883 – 1946], a British economist whose ideas have profoundly effected the theory and practice of modern macroeconomics, as well as the economic policies of governments. His ideas are the basis for the school of thought known as Keynesian economics. Keynes’s fame as an economist and his personal success in the markets led to his being offered and accepting positions managing money on behalf of King’s College, Cambridge and the National Mutual and the Provincial Insurance companies. Keynes enjoyed great success managing these portfolios - particularly King’s College’s Chest Fund. The Chest’s initial capital was £30,000 in 1924. By the time Keynes died in 1946 the fund had grown to £380,000 - an annual compounding rate of just over 12 per cent. This might not seem very remarkable but for the facts that: --This performance was achieved during a period that encompassed both the crash of 1929 and the build up to World War Two, both of which proved disastrous for British stocks; --In the same period of time, the British stock market fell 15 per cent; --The growth in the value of the Chest Fund was entirely due to capital appreciation. There was no dividend reinvestment because Keynes spent all of the dividends on the college.
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