Inflation / Banking / Interest Rate Question.

EvotingMachine0197 wrote:

cactus flower wrote:

youngdan wrote:

Not everyone is a loser from the credit crunch. Read this story of a poor soul By Stephen Foley In New York. Thursday April 17 2008 ... who took home $3.7bn (£1.9bn) last year, after betting on a calamity in the mortgage market. ...
www.independent.ie/.../north-america/he-bet-on-the-credit-crisis--and-took-home-37bn-last-year-1350342.html - 5 hours ago - Similar pages
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I still dont reallty understand how people make money on a falling market.

By selling stuff which they don't have, but will buy later at a lower price...I think. Short selling or something. But don't go by me, I'm fairly thick on this stuff.

Plus you can spread bet, trade the market based on deviation from an initial position and earn more money as the market moves further and further from the initial position.

Shorting the market is like this:

Intelliwex Plc is a company on the stock exchange. It sells PC components to HP and Lenovo and its supply chain is across the globe. It's mrkt cap is €5 billion and its shares are €50 each.

Now, I'm the short trader. I bet that they'll have to issue profit warnings on the back of exchange rate difficulties, slowing demand from companies and difficulties raising finance.

So, I buy the option to sell 1 million shares at, say, €40 in Intelliwex 6 months from now on the market from those who have positions they themselves have to liquidate(ie, they could be at the end of their 6 month period).

I'm betting that the shares in Intelliwex will be below €40 in the next 6 months so I can buy the shares for real and earn a profit.

What happens if thay are €45 in 6 months time ?

EvotingMachine0197 wrote:

What happens if thay are €45 in 6 months time ?

Well, that's called a short squeeze. Some shorters are put under so much pressure, they're forced to liquidate their positions and join the general rise in the market. This happened quite a lot in our erstwhile bull market.

Some short positions(depending on what they are) have in-built exit clauses which can be activated if you feel you're not going to get the best price.

It all sounds insane Ard.

There is something surely wrong with being able to legitimately sell something you don't yet own.

EvotingMachine0197 wrote:

It all sounds insane Ard.

There is something surely wrong with being able to legitimately sell something you don't yet own.

It's a bit mad, but in a way, if you are taking an order to produce 10 chairs for a customer for delivery in one month, and there are no chairs yet, is that not the same situation?

The customer is paying on the faith that you are going to produce the goods and you are accepting payment on the faith you can have the chairs ready in a month.

The chairs don't yet exist and yet they are being transacted upon.

The same goes for financial markets. Trust and faith stick markets together, that's why the loss of trust and faith in the last 7 months has been so injurious to financial stability.

True. Good analogy...always works for me.

EvotingMachine0197 wrote:

True. Good analogy...always works for me.

Thanks, and I'll continue the conversation tomorrow afternoon after I've rebooted and recharged my hard disk(I hope that's gone to sleep in EVMspeak).

I will make it simple. If you think a company will fall in price you borrow 100 shares from your broker and you sell them and put the money in your pocket. If you are right then you buy back the 100 shares you still owe the broker after the price has fallen and return them. Hopefully the price would go to zero. If you are wrong you had better pay the higher price and return the shares. The increase in price is your loss. A short squeeze is when so many have bet incorrectly that when they realise their mistake and start buying, this buying drives the price even higher. Their buying adds to their pain. Owners of the shares will hold on and the short sellers have to pay a high price for the shares and their mistake. This is basic short selling. An option is when you buy the right to purchase a stock at a certain price at a certain time. If you think a stock will rise you buy a option to purchase at a price above what it is now. The higher above the present price the less you pay but the less chance that the stock will get to that price in the time specified. The advantage is you get a bigger bang for the buck. The future markets where this guy made the big money is more complicated but if you want I will explain it

Inflation is the hidden, little understood tax that socialist countries use to great advantage because those getting screwed can not figure out who is screwing them. I see the oil price is now touching 117 dollars so petrol will be 1.50 a littre by the Mayday parades. There will be calls for the government to do something by the real clueless who can not see that the central bank is causing the inflation. The amount of denial of the obvious is a wonder to behold.

youngdan wrote:

Inflation is the hidden, little understood tax that socialist countries use to great advantage because those getting screwed can not figure out who is screwing them. I see the oil price is now touching 117 dollars so petrol will be 1.50 a littre by the Mayday parades. There will be calls for the government to do something by the real clueless who can not see that the central bank is causing the inflation. The amount of denial of the obvious is a wonder to behold.

Ah, inflation. I have figured out a thing or 2 about that.
I bought an investment property about 2 years ago, paying interest only on the mortgage. The tenant is paying the interest for me. Inflation is reducing the principle sum for me. I effectively owe the bank approx 6% less than I borrowed 2 years ago. Even though I haven't paid a dime.

youngdan wrote:

I will make it simple. If you think a company will fall in price you borrow 100 shares from your broker and you sell them and put the money in your pocket. If you are right then you buy back the 100 shares you still owe the broker after the price has fallen and return them. Hopefully the price would go to zero. If you are wrong you had better pay the higher price and return the shares. The increase in price is your loss. A short squeeze is when so many have bet incorrectly that when they realise their mistake and start buying, this buying drives the price even higher. Their buying adds to their pain. Owners of the shares will hold on and the short sellers have to pay a high price for the shares and their mistake. This is basic short selling. An option is when you buy the right to purchase a stock at a certain price at a certain time. If you think a stock will rise you buy a option to purchase at a price above what it is now. The higher above the present price the less you pay but the less chance that the stock will get to that price in the time specified. The advantage is you get a bigger bang for the buck. The future markets where this guy made the big money is more complicated but if you want I will explain it

Thanks youngdan - got it now. Works best when money is cheap.

youngdan wrote:

Inflation is the hidden, little understood tax that socialist countries use to great advantage because those getting screwed can not figure out who is screwing them. I see the oil price is now touching 117 dollars so petrol will be 1.50 a littre by the Mayday parades. There will be calls for the government to do something by the real clueless who can not see that the central bank is causing the inflation. The amount of denial of the obvious is a wonder to behold.

Ah, but with the wonderful machine which is capitalism, those gains will eventually fan out into the whole global economy. OPEC and non-OPEC countries may be raking in the billions from the rest of us now in relation to high prices for oil, but they're going to have to spend those billions on something as time goes by.

They're going to buy services from Western contractors, engineering equipment, telecommunications, banking services, haulage services and all other sorts of goods and services from other economies. Even the Hermes bag bought by the scion of a Saudi oil barony is aiding this circular flow of income to and from the oil-producing nations.

Eventually, the global economy finds its balance with the wonderful machine of capitalism distributing goods efficiently. At the moment, they are not distributed efficiently, so we will have to wait for things to settle.

They are settling, youngdan. An example of this would be the idle capital of sovereign funds of the Middle East being used to rescue distressed lenders in the US. Capital is being re-allocated to where it is needed and where it will have the greatest effect.

More free trade, less barriers and greater capital flows will aid this process and get the global economy working even better than it is now.

Ard-Taoiseach wrote:

youngdan wrote:

Inflation is the hidden, little understood tax that socialist countries use to great advantage because those getting screwed can not figure out who is screwing them. I see the oil price is now touching 117 dollars so petrol will be 1.50 a littre by the Mayday parades. There will be calls for the government to do something by the real clueless who can not see that the central bank is causing the inflation. The amount of denial of the obvious is a wonder to behold.

Ah, but with the wonderful machine which is capitalism, those gains will eventually fan out into the whole global economy. OPEC and non-OPEC countries may be raking in the billions from the rest of us now in relation to high prices for oil, but they're going to have to spend those billions on something as time goes by.

They're going to buy services from Western contractors, engineering equipment, telecommunications, banking services, haulage services and all other sorts of goods and services from other economies. Even the Hermes bag bought by the scion of a Saudi oil barony is aiding this circular flow of income to and from the oil-producing nations.

Eventually, the global economy finds its balance with the wonderful machine of capitalism distributing goods efficiently. At the moment, they are not distributed efficiently, so we will have to wait for things to settle.

They are settling, youngdan. An example of this would be the idle capital of sovereign funds of the Middle East being used to rescue distressed lenders in the US. Capital is being re-allocated to where it is needed and where it will have the greatest effect.

More free trade, less barriers and greater capital flows will aid this process and get the global economy working even better than it is now.

But how am I going to pay for my Hermes bag, Ard-Taoiseach (scarf actually, the blue on with the sea shells on it) when the other guys have the oil?

cactus flower wrote:

But how am I going to pay for my Hermes bag, Ard-Taoiseach (scarf actually, the blue on with the sea shells on it) when the other guys have the oil?

Eh...well if you possess a comparative advantage in a particular industry, I recommend specialising in that field and trading the rest of your requirements(ie, the Hermes bag). You could sell geological imaging services, engineering support, insurance, catering supplies or any other vast variety of goods and services to those who have the oil and participate in that beautiful thing called the circular flow of income!

Ard-Taoiseach wrote:

cactus flower wrote:

But how am I going to pay for my Hermes bag, Ard-Taoiseach (scarf actually, the blue on with the sea shells on it) when the other guys have the oil?

Eh...well if you possess a comparative advantage in a particular industry, I recommend specialising in that field and trading the rest of your requirements(ie, the Hermes bag). You could sell geological imaging services, engineering support, insurance, catering supplies or any other vast variety of goods and services to those who have the oil and participate in that beautiful thing called the circular flow of income!

Good thing I buy vintage, or this would be a week's earnings.

cactus flower wrote:

Ard-Taoiseach wrote:

cactus flower wrote:

But how am I going to pay for my Hermes bag, Ard-Taoiseach (scarf actually, the blue on with the sea shells on it) when the other guys have the oil?

Eh...well if you possess a comparative advantage in a particular industry, I recommend specialising in that field and trading the rest of your requirements(ie, the Hermes bag). You could sell geological imaging services, engineering support, insurance, catering supplies or any other vast variety of goods and services to those who have the oil and participate in that beautiful thing called the circular flow of income!

Good thing I buy vintage, or this would be a weeks earnings.

Well, if you move up the value chain through sufficient re-skilling and re-optimising of your comparative advantage, you would only be paying a day's earnings.

This is my little story on inflation. I got off a plane in Shannon and drove up to Galway city and parked in Woodquay. As I walked away some woman said to me that I would get a cramp if I didn't get someone up the pole. I told her that it was a while since I got anyone up the pole and that I would be carefull. She looked at me as if I was crazy and then I figured she must be a foreign hooker. Anyway when proper communication was established I realised that she was telling me that I was going to get a clamp if I didn't get a sticker from the box up on the pole. So I got screwed sure enough and continued into a breakfast shop to cheer myself up. I paid no attention to price and ordered away because it made no difference to me. While enjoying my breakfast a lady well into her late 60s came in and asked about an apple tart . She was told that a slice was 2.60 Euro and before I had time to react and offer to get it for her she had turned on her heel and left. She would have worked and saved when 2.60 pounds was enough for the groceries for a week. Now she did not have enough money to buy a miserable slice of pie. That is inflation and a crime on humanity.

Uhuh

Have horrible feeling the world's central bankers are about to put the interest rates up. If we thought we were in trouble already, think again. Bye, bye property market!

http://www.finfacts.ie/irishfinancenews/article_1013708.shtml

Don't rising interest rates contribute to the inflation rate, at least in the inflation calculation used in Ireland??

expat girl wrote:

Don't rising interest rates contribute to the inflation rate, at least in the inflation calculation used in Ireland??

Raising interest rates, on a most basic level, tends to lower inflation. Of course there are a multitude of other factors at work in an economy other than base rates of interest. However, the basic rule is that when you raise interest rates you lower inflation because money gets more expensive.

I don't know if the interest rate is taken into account in the published rate of inflation. I agree with johnfás that high interest rates exert downward pressure on inflation because less money is chasing the same quantity of goods.

If the average person is in a lot of debt an interest rate rise must increase the cost of living for them. But as it reduces the amount of money available for new spending people cut back on other things, exerting downward pressure on prices.

Stagflation is where we really don't want to be, so lets hope Ard Taoiseach is right about oil prices.

cactus flower wrote:

I don't know if the interest rate is taken into account in the published rate of inflation. I agree with johnfás that high interest rates exert downward pressure on inflation because less money is chasing the same quantity of goods.

Well, yes, exactly. That's the theory, and it is put into practice in the EU's HICP which does not account for the cost of money in its calculation of the inflation rate. This is good and proper for the following reasons:

1.Borrowing is usually over a long time-scale of 5-25 years and therefore distorts a gauge of inflation which should concentrate on short-term, current expenditure.
2.Borrowing is investment and not consumption. The CPI is the Consumer Price Index, not the Investor Price Index so should therefore ignore the cost of purchasing money.

Quote :

If the average person is in a lot of debt an interest rate rise must increase the cost of living for them. But as it reduces the amount of money available for new spending people cut back on other things, exerting downward pressure on prices.

Exactly, a restrictive monetary policy restrains aggregate demand and therefore helps curb demand-pull inflation.

Quote :

Stagflation is where we really don't want to be, so lets hope Ard Taoiseach is right about oil prices.

Stagflation is the worst possible outcome for an economy since it messes everything up. I feel oil is over-priced at these levels and should be back to 80 dollars by New Year. We should only see 130 again come 2011-12 when supply tightens further. I'm a long-term and short-term bull on oil, but a medium-term bear.

Oh and btw...