4 ms·

To your first 3 paragraphs: Right, so the income that normal people get from their labor is like water, and the income that wealthy people get from stocks is li

To your first 3 paragraphs: Right, so the income that normal people get from their labor is like water, and the income that wealthy people get from stocks is like oil(Note: for the rest of this comment, "oil" is code for wealth assets, water is code for CPI items.). Company takes out bond, uses it to buyback its' own stock, the person that sold that stock uses it to buy some other stock, that other stock rising allows that other company to take out some bond... They don't mix. So long as they don't mix, money doesn't become neutral and the CPI doesn't rise. It's possible to balance the parameters just right so that they never mix, but every mistake drives up wealth inequality driving down long-term productivity. Now wealth income can easily be spent on large amounts of things that are typically seen as CPI items. At any moment the top 10 billionaires can choose to spend their wealth on an extravagant amount of labor, drastically rising labor incomes, but they choose not to as it lowers their long-term utility. The fed's mandate is to create a system where they don't mix. It must always be the case for wealth assets like fancy homes and stocks to on average rise in value more than CPI items. If at any point the reverse is true, all of the wealthy will liquidate their stockpiles of stocks(crashing the stock market in the process) and instantly transfer their wealth into the thing that brings the best returns. If the best returns is GPU's, gamers won't get to game. If the best returns is on beans and rice, people will starve. One of the best ways that the fed does this is by intentionally creating recessions whenever CPI inflation kicks up. Whenever oil money starts targeting water money, the fed kicks up interest rates above the 30 year[0], triggering a yield curve inversion, which triggers a recession. The recession forces employers to let employees go, which drives down the demand on CPI items, and that reduces inflation. At the same time, they put interest rates below what it was when it started, and the wealthy move their money back to oil. (Note: I'm not an economist, just a programmer with an interest in economics and an eye for details. I'm mostly posting here for feedback, and I know I'm not exactly correct, but every post is one more chance for clarity.) [0]:https://fred.stlouisfed.org/graph/?g=AzYM https://fred.stlouisfed.org/graph/?g=AzYM

johbjo 6y ago
An economic asset is valued based on expected future cash flow. In the last decades however, real estate and some stocks are mainly valued based on expected appreciation. Real estate even generates negative cash flow for most home owners, and some investors. Per se, it is speculation (in higher prices) rather than investing (in future cash flow). > If the best returns is on beans and rice, people will starve. Farmland and equipment are assets, but they are valued based on cash flow from selling produce. Produce is perishable and can only be sold as food, so it will be sold at a market prices regardless of speculation in farmland. > all of the wealthy will liquidate their stockpiles of stocks(crashing the stock market in the process) Not "all of the wealthy". Relatively little is required at the margin to crash the stock market, and the majority of "wealth" would follow the market down. Only a tiny proportion would be able to exit at the right moment. Asset depreciation is an adjustment of the relative value of labour vs. assets. A possible delineation between "water" and "oil" is whether the thing can be legally used as collateral for loans and how the value is booked. But idk.
- ItsMonkk 6y ago
  Yes, and this is why you see hyper-inflation of most CPI items during supply shocks[0][1], not during money printing. The longer something takes to spoil, the more potential it has to be hoarded. To evaluate our risk, we need to determine what items in the CPI are susceptible to these pressures. If Bitcoin goes to 1 million USD, will that drown out all other energy? Energy is a piece of the CPI, so that's something we need to watch. [0]:https://en.wikipedia.org/wiki/Great_Famine_Ireland https://en.wikipedia.org/wiki/Great_Famine_Ireland [1]:https://en.wikipedia.org/wiki/1970s_energy_crisis https://en.wikipedia.org/wiki/1970s_energy_crisis
  - adflux 6y ago
    It wont shock energy, but maybe the semiconductor market. Already theres a huge shortage for gpus
jsmcgd 6y ago
I appreciate you posting your thinking on this. I suspect others share your model. I strongly reject the metaphor of oil and water, that there are different monies. In fact if there was such a thing I wouldn't be as worried. Problems could be contained to specific domains. But as you will see one crisis will beget another and another, and no sector will be spared. One will infect the other. There are no barriers. Investors are not constrained in anyway exchange bonds for stocks in a closed system. They can, and do exchange any items of value (cash, commodities, shares, bonds, ETFs, derivatives) and they can do so in multiple markets. Governments will actually try to prevent this through shuttering markets, capital controls etc but they will be too late to prevent economic harm, to say nothing of long term damage to sentiment. Any measures taken merely delay the problem which will be waiting for them when the markets do re-open. Economies are very much complex systems, not a steady state systems. At times it behaves like a steady state, but at other times there are significant shifts that break the previous paradigm. You only have to consult any history book of the 20th century to prove this to yourself. I strongly suggest that this a Pascal type wager that you do want to take. You want to assume my argument is correct and hedge against massive inflation. Your livelihood, and possibly your life depends on it. One way you might convince yourself is if you look at similar situations in economies that were not governed by the Fed. There are many: https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperinflationary_periods https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin... I would argue that the Fed, IMF etc actually agree with my position and that is what is driving their desire for new Central Bank Digital Currencies (which IMO are a sham to profit of the public ignorance of actual cryptos and provide a smoke screen while a new global currency is rolled out that will be used to economically control everyone) however I strongly doubt that they will be able implement such a thing before the collapse begins (and it merely delays the inevitable anyway). Therefore governments (where they can) will default to precious metals to back their currencies. The major winner will be China, as it has the world's largest actual gold reserves (despite the official figures). The US will then be using a gold dollar and China will dictate its price. China now effectively rules the world.

johbjo 6y ago

An economic asset is valued based on expected future cash flow. In the last decades however, real estate and some stocks are mainly valued based on expected appreciation. Real estate even generates negative cash flow for most home owners, and some investors. Per se, it is speculation (in higher prices) rather than investing (in future cash flow). > If the best returns is on beans and rice, people will starve. Farmland and equipment are assets, but they are valued based on cash flow from selling produce. Produce is perishable and can only be sold as food, so it will be sold at a market prices regardless of speculation in farmland. > all of the wealthy will liquidate their stockpiles of stocks(crashing the stock market in the process) Not "all of the wealthy". Relatively little is required at the margin to crash the stock market, and the majority of "wealth" would follow the market down. Only a tiny proportion would be able to exit at the right moment. Asset depreciation is an adjustment of the relative value of labour vs. assets. A possible delineation between "water" and "oil" is whether the thing can be legally used as collateral for loans and how the value is booked. But idk.

ItsMonkk 6y ago
Yes, and this is why you see hyper-inflation of most CPI items during supply shocks[0][1], not during money printing. The longer something takes to spoil, the more potential it has to be hoarded. To evaluate our risk, we need to determine what items in the CPI are susceptible to these pressures. If Bitcoin goes to 1 million USD, will that drown out all other energy? Energy is a piece of the CPI, so that's something we need to watch. [0]:https://en.wikipedia.org/wiki/Great_Famine_Ireland https://en.wikipedia.org/wiki/Great_Famine_Ireland [1]:https://en.wikipedia.org/wiki/1970s_energy_crisis https://en.wikipedia.org/wiki/1970s_energy_crisis
- adflux 6y ago
  It wont shock energy, but maybe the semiconductor market. Already theres a huge shortage for gpus

jsmcgd 6y ago

I appreciate you posting your thinking on this. I suspect others share your model. I strongly reject the metaphor of oil and water, that there are different monies. In fact if there was such a thing I wouldn't be as worried. Problems could be contained to specific domains. But as you will see one crisis will beget another and another, and no sector will be spared. One will infect the other. There are no barriers. Investors are not constrained in anyway exchange bonds for stocks in a closed system. They can, and do exchange any items of value (cash, commodities, shares, bonds, ETFs, derivatives) and they can do so in multiple markets. Governments will actually try to prevent this through shuttering markets, capital controls etc but they will be too late to prevent economic harm, to say nothing of long term damage to sentiment. Any measures taken merely delay the problem which will be waiting for them when the markets do re-open. Economies are very much complex systems, not a steady state systems. At times it behaves like a steady state, but at other times there are significant shifts that break the previous paradigm. You only have to consult any history book of the 20th century to prove this to yourself. I strongly suggest that this a Pascal type wager that you do want to take. You want to assume my argument is correct and hedge against massive inflation. Your livelihood, and possibly your life depends on it. One way you might convince yourself is if you look at similar situations in economies that were not governed by the Fed. There are many: https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperinflationary_periods https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin... I would argue that the Fed, IMF etc actually agree with my position and that is what is driving their desire for new Central Bank Digital Currencies (which IMO are a sham to profit of the public ignorance of actual cryptos and provide a smoke screen while a new global currency is rolled out that will be used to economically control everyone) however I strongly doubt that they will be able implement such a thing before the collapse begins (and it merely delays the inevitable anyway). Therefore governments (where they can) will default to precious metals to back their currencies. The major winner will be China, as it has the world's largest actual gold reserves (despite the official figures). The US will then be using a gold dollar and China will dictate its price. China now effectively rules the world.