Central Banks

I am away

No. You're still here.

Kate P wrote:

Recommended reading anyone?

General Theory: John Maynard Keynes

Wealth of Nations: Adam Smith

Theory of Moral Sentiments: Adam Smith( I *heart* Adam Smith)

Principles of Political Economy: John Stuart Mill

The Republic: Plato

And, lately: The Undercover Economist: Tim Harford

Right I've downloaded the first 2 hours of Money Masters so I'll watch it over the next day or 2.

Did you read all those books AT ?

EvotingMachine0197 wrote:

Right I've downloaded the first 2 hours of Money Masters so I'll watch it over the next day or 2.

Did you read all those books AT ?

I've read the last one and abridged versions of the remaining. Plato has been argued to be the first proto-socialist. He would more than likely have used a central bank much like people use pacemakers to regulate cardiac activity. I'm not convinced he'd advocate the independence exhibited by the BoE and ECB.

I don't think it's possible to measure the impact of Smith's Wealth of Nations. Either it's impact on the wider world or on my self.

I tried to read some of Plato and Smith but found them very boring and heavy going. On typing in federal reserve in Amazon you get a good list. Both pro and con. Number 10 on the list called Greenspan Bubbles is just out and I intend to get it. I disliked him when he was there and now that he is advising the arabs to abandon the dollar and talking doom I dislike him more.

The bond market is the mechanism where the US treasury borrows whatever money is needed above what is collected in taxes to fund operations. Other entities like cities , states companies and other countries use the bond market as well. A bond is just a fancy name for an IOU. When the pruchaser buys a bond he lends the seller the money for a certain period of time. He is repaid his money and an interest on it after a certain period of time. The interest is determined by the buyers bidding for the bonds. The time periods vary and are given different names. Each Monday 3 month and 6 month bonds are auctioned. Less frequently they auction 4 week duration, 1 year duration and 2 year duration. Every 3 months on 3 successive days they auction 5, 10 and and 30 year durations and they call this the quarterly refunding. The short durations are called bills, the intermediate duration are called notes and the long duration are bonds. They are all the same though. The longer the duration the higher the yield usually but on rare occasionions the yields on longer terms will be lower than the 3 month and 6 month bills. This is because the expectation will be that the interest rates will be lower in a year or two from recession expectations. This is referred to as An Inverted Yield curve which is gotten by plotting the durations horizontally and the yields vertically. It is given as a sign of a coming recession when it happens. To take an example, the treasury sells a 30 year bond today, it will be called by the date it matures so it is the March 2038 bond. Lets say they are selling 20 billion dollars of these and the interest rate that they will expect to pay is 8%. If there were buyers willing to buy exactly that amount at that exact rate you could just sell them as is but that is never the case. There may be more demand or they may be less. This being the case the are sold by auction until the entire 20 billion is sold. Using a base of 100 which would be the price to give the 8% rate we can see how it works. If the demand is strong then they will be bidding against one another and the price will rise above 100. A highest bid of say 104 might buy a 3 billion chunk for the first guy. Then the next highest bidder might get 2 billion at 103.85 and this continues till it is all sold with the last bit sold at say 103.60. Those that bid less get zero. The difference between the highest and lowest bid is called The Tail and the smaller it is the better for the Treasury. The important thing is to understand how the interest rate is determined by the strenght of the demand. At a 100 dollars the treasury would be paying 8% but because they got 103.75 dollars approx the interest rate they pay is not 8 divided by 100 it is now 8 divided by 103.75. So because the demand was strong the interest rate was lowered below 8%. The amount of money paid back on this bond is fixed for the 30 years. However if the demand was weak the opposite would take place. If the average bid needed to sell the whole lot was 95 then the interest rate the treasury would have to pay is now 8 divided by 95 which is above 8%. The size of bids received compared to the bond amount on offer is called the Bid To Cover Ratio and the greater this is the better for the treasury. As far as the treasury is concerned the bonds are sold and they don't have to worry about them any more. However the buyers can sell them on at any time and the vast amount of these bonds in existance are bought and sold each day in the bond market. If the origonal bond that was bought for 103.85 is sold and it now commands a hefty price of 107 then an interesting thing happens. The money paid by the government is constant so now the interest rate the new buyer will be getting is 8 divided by 107 which is lower again than it was. The vital thing to know is the higher the bond price goes the lower the interest rate drops. If the price instead drops to 90 then the interest rate is 8 divided by 90 or almost 9%. If investors can get 9% by buying second hand bonds it means that the treasury rate at the next auction will reflect this. This is what people are talking about when they are worried about foreigners selling the US bonds. The selling if great could push interest rates to 20% in the blink of an eye. Interest rates are set by the market and not the Fed. The Fed controls just 2 interest rate which are the fed funds rate and the discount rate. The fed fund rate is the rate banks charge one another on overnight funds. The discount rate is the rate charged by the Fed to banks who borrow short term from the discount window. It is the same procedure when companies sell bonds. What was seen recently was such a lack of buyers that interest rates went to 20% for The Ny Port Authority and the auctions were cancelled.

English banks seem very jumpy too - sorry about long link

BoE moves to rescue UK banks

Fixed link, take out the underlining and place URL text in between tags and it should look better

Standard and Poor is a rating company whose job it is to afix a rate to other companies and their bonds so that investors will have an idea on how safe their investment will be. When the market was closed yesterday they lowered the outlook for goldman Sacks and Lehman. The shares would have dropped badly due to this action. It said that it might lower the bond ratings on these 2 companies. This will raise the interest rate that the companies will have to pay next time they want to borrow. Even worse for a company is when the bond rating falls below a certain level called investment grade. When this happens many funds are not allowed by law to hold the bonds by law and they must be sold. This is bad news when that happens.

You can not beat the BBC for grabbing your attention. The news shows here are not worth watching. The financial stations are ok though

YD,

can you link to where S&P said they might drop the bond rating? Is it on the main statement? The only one I can see, they are affirming AA- and A+? (BTW at those current rates the AAA funds will not be holding anyway and the mid-As shouldn't be affected. Investment grade is a long way away)

I went back and reread the the report on Bloomberg just now. They lowered the outlook for the bonds from neutral to negative. They did not lower the actual ratings but the outlook being negative the expectation would be that they will be lowered. If they had lowered the actual rating yesterday after the markets being so close to meltdown then that would be some stab in the back altogether. Even as it was they thought it better to drop this bad news while the markets were closed. How the share prices move Monday will be interesting to see. I have failed to link things here but the story is easily found

youngdan that's a generous post on the Bond market there. Municipalities, cities and companies raising capital by getting a type of loan. The auction essentially means that they are competing for the best interest rate.. ? Does this happen all over the world does anyone know? And is it largely6 about leveraging your reputation as a city, company etc.? What's the minimum size of a conglomeration do you need? Could somewhere the size of Limerick (50,000 people) issue Bonds?

Quick answer. I don't know much about Limerick but just about anyone can issue a bond. The difference will be the interest rate that they will end up paying. A good credit risk will have good demand and a dodgey outfight will have less demand and the buyers will be bidding a lot less than they would for treasuries with the result the interest rate will be a lot higher than treasuries for the same time duration. This difference is called the yield Spread over treasuries. As doubts over a municicalities ability to continue making payments rise the holders of these bonds will sell them so the interest rate rises as explained before even though the municipalities dollar payment does not change. If they had to sell new bonds they would be paying the higher rate. So the treasury is indeed trying to get the lowest rate and they are hoping to see a ton of dealers bidding. The total quantity oy bids compared to the bond amount is called The Bid to Cover Ratio and the higher the better. If the number of bidders is low it means that the last few chunks are picked up chaper and the interest rate for these last few chunks will be higher. This Tail Spread is not a good thing. It is reported so that people will not only know how much bids were gotten but how high the bid was that walked away with part of the bond issue. There was a lot of talk on P.ie over a 6 billion Euro bond offering from Ireland by people who had a simplistic concept of the way bond markets work

Sorry for the long post but here goes ..


Just to maybe ask you a few questions here youngdan and Pax too if he's around or anyone else in relation to the p.ie thread on the folly of central banks being independent ..
http://www.politics.ie/viewtopic.php?f=161&t=39248

I'm not sure if I agree with Cael and yourself that these institutions are dodgy in terms of inflation although I'm not sure what's on your mind.

As you rightly say, wages have grown by 5000% if what my father sometimes tells us what he was earning back in the sixties is anything to go by - let's say he earned £5 a week. I always ask him to tell me about the prices of things then just to get an idea of the relative spending power - which is a real reflection of inflation - and he talks in the 2s 6d number system which I'll never understand and anyway he has to try to remember how many times a week he would go to the pictures and how much fags and drink he'd buy (he didn't drink then and it hasn't changed much since)

Anyway, today money is in a different order - people earn hundreds per week now, not tens (but penny sweets still cost a penny ) and I'd guess that spending power has gone up since the sixties. Even though house prices were a lot lower, people didn't get mortgages as readily because interest rates were 18% or something unbelievable back then.

So now it's different - more people not only have more money but there's a lot more stuff to buy now with the more money so shouldn't the money supply naturally be expanding by perhaps 2% per year?

Even for the simple reason that the world population is expanding by 1.73 million people per week - surely that means that the money supply has to expand so that those people at least get the dole or whatever they have in other countries. Each week 1.73 million people are born and probably that number all reach their income-earning years together so doesn't it make sense that the money supply should expand somewhat just for that alone?

Another reason the money supply should expand is the take-up of new industry or expenditures by a whole swathe of the population together; as a new technology like mobile phones get taken up then doesn't the money supply have to expand to support the infrastructure, manufacture, use of such industries?

Auditor #9 wrote:

As you rightly say, wages have grown by 5000% if what my father sometimes tells us what he was earning back in the sixties is anything to go by - let's say he earned £5 a week.

So what? Compound interest is a powerful thing. Multiply 100 by 2% on your calculator and see how quickly those numbers add up. That 5000% is a non-issue for the most part.

Auditor #9 wrote:

Anyway, today money is in a different order - people earn hundreds per week now, not tens (but penny sweets still cost a penny ) and I'd guess that spending power has gone up since the sixties. Even though house prices were a lot lower, people didn't get mortgages as readily because interest rates were 18% or something unbelievable back then.

Spending power has indeed increased vastly since then. Look at real GDP per capita. It has soared over the decades with people being able to afford a greater variety of goods and services on a scale unimaginable to past generations. How many people in the 50s could claim to be able to have a large house, own several cars, go on holiday a number of times a year and have property/shares? Those growth rates of GDP are adjusted for the inflationary effect, and when you adjust for population growth to see the rise in personal living standards, we're improving by about 2-3% a year.

So at least you are in agreement Ard Taoiseach that the money supply has to expand - or, prices have to fall while wages stay the same in order to cater for at least two things
- the growth of population
- the growth of people's appetites

I don't mean food in the second, I mean for education, holidays, things, activities.

Now, can we see that this process will have some sort of a ceiling at some point? e.g. when population growth eventually plateaus then perhaps the money supply will stop expanding in the same way ..

Auditor #9 wrote:

So at least you are in agreement Ard Taoiseach that the money supply has to expand - or, prices have to fall while wages stay the same in order to cater for at least two things
- the growth of population
- the growth of people's appetites

I don't mean food in the second, I mean for education, holidays, things, activities.

Now, can we see that this process will have some sort of a ceiling at some point? e.g. when population growth eventually plateaus then perhaps the money supply will stop expanding in the same way ..

Well, we have to cater for our appetites, so the money supply should continue to grow and grow. I'm not that bothered by Cael's exhalations. The fact is that millions of jobs have been created under the ECB in the eurozone, unemployment has reached lows in Germany not seen for almost two decades, inflation has been(up until a few months ago) quite low and within the bounds of their mandate to keep price inflation down to around 2%. Inflation expectations have been restrained and we have avoided a major crisis in European banking under the sound stewardship of the ECB.

I trust Jean-Claude Trichet and his team to keep a watch on things. I wouldn't trust Cael's vista of a Tower of Babel setting our monetary policy. It would be chaotic at best.

Germany has 9% unemployment or something cool like that and they have a budget deficit of sweet fanny adams too so all this bull about the dolies causing the end of the world is complete cak. In fact it might be better to have more people on the dole, smoking hash and not consuming so much because sustainability might be an issue if everyone had big mad appetites for 4 holidays a year, a Lexus you can live in, a waistline with a gravitational field of its own, 4 rottweilers etc. you get the idea.

Apparently Argentina has an unemployment level of 15% or something but the IMF don't care because their inflation is low.

So anyway do you think the rate of money expansion will ever slow down because of international stagnation or will it expand indefinitely and in 40 years time we'll be getting four grand a week on the dole and a pint of milk will cost 200 quid and all that.

Auditor #9 wrote:

Germany has 9% unemployment or something cool like that and they have a budget deficit of sweet fanny adams too so all this bull about the dolies causing the end of the world is complete cak. In fact it might be better to have more people on the dole, smoking hash and not consuming so much because sustainability might be an issue if everyone had big mad appetites for 4 holidays a year, a Lexus you can live in, a waistline with a gravitational field of its own, 4 rottweilers etc. you get the idea.

Apparently Argentina has an unemployment level of 15% or something but the IMF don't care because their inflation is low.

Well, it's inflation rate is rather high(over 10%) and it should be this which is tackled through fiscal austerity, high interest rates and a reduction in lending. Inflation is a bigger problem to the economy than unemployment. If inflation is low and stable, businesses can invest and expand and create the economic conditions we need to reduce unemployment. Inflation has to be reduced before we can deal substantively with unemployment.

Quote :

So anyway do you think the rate of money expansion will ever slow down because of international stagnation or will it expand indefinitely and in 40 years time we'll be getting four grand a week on the dole and a pint of milk will cost 200 quid and all that.

I'd imagine we will. We've gone from paying only a few pennied for milk 40 years ago to €1.30 now, there's no reason why it can't go to 10 or 20 euro in 40 years. It's just compound interest which causes an exponential rise in prices. I'm not that bothered.

Ard-Taoiseach wrote:

It's just compound interest which causes an exponential rise in prices. I'm not that bothered.

But if all prices are rising then what does it mean overall? It has to reflect something real, this growth and expansion. It either reflects real growth and expansion of infrastructure, property, business or it reflects a deepening of consumer choice and living styles as long as it's sustainable. If it's not sustainable there will be a bubble, which is a particular form of inflation that also deflates dramatically and means more demand than supply, so the Nissan qashqai should be rising in price but is it ?

Blast this but it's too hard this time of night ...

Auditor #9 wrote:

Ard-Taoiseach wrote:

It's just compound interest which causes an exponential rise in prices. I'm not that bothered.

But if all prices are rising then what does it mean overall? It has to reflect something real, this growth and expansion. It either reflects real growth and expansion of infrastructure, property, business or it reflects a deepening of consumer choice and living styles as long as it's sustainable. If it's not sustainable there will be a bubble, which is a particular form of inflation that also deflates dramatically and means more demand than supply, so the Nissan qashqai should be rising in price but is it ?

There is a general trend of rising prices which is brought on by a rising supply of money and as well as that by shortages in some areas like oil. The shortage of oil has driven oil prices up and this has contributed to a general rise in prices. There are also wage-price spirals, the desire for more pay and other things which lead to inflation being there and causing things to rise in price in the long-term.

Quote :

Blast this but it's too hard this time of night ...

It is a bit weighty, I agree.

Now for something a bit lighter ...

Eventually they will run out of ideas about shite to sell us; eventually there will be no new products just a collage made of all old ones. Eventually all the combinations of all the individual components will be tried and what will people do then ?? Use the Internet to demand that the Cadbury's Wispa come back

Quote :

Cadbury is to bring back the Wispa chocolate bar for good after a campaign on social networking websites demanded its return.

The chocolate company said 20 million bars were sold in seven weeks during a trial limited run last year.

The project to bring back the aerated chocolate bar has seen thousands join groups on sites such as Facebook and MySpace dedicated to its return.

Cadbury spokesperson Tony Bilsborough said: “Wispa is a true icon loved by its fans everywhere.

“We brought it back temporarily to see if the desire was genuine, but fans are still rallying so we took the decision to bring it back for good.

“We know others have looked at Wispa and tried to copy its success by bringing back other brands, but we don’t believe anyone has managed to recreate the same excitement.”

The bar will return to permanent sale on October 6 and cost 45p. It originally cost 16p.

Wispa was first brought out in 1981 for a trial in the North East. The bar with a bubbly centre was seen by many as a rival to Nestle’s Aero bar with the slogan “Bite it and Believe It”.

Television adverts included Yes Minister’s Paul Eddington and Nigel Hawthorne, Victoria Wood and Julie Walters and Hi-De-Hi’s Simon Cadell and Ruth Madoc.

Sales began to fall in the 1990s and it went out of production in 2003 as Cadbury concentrated on other brands.

http://www.breakingnews.ie/business/mhqlcwmhmhkf/