6 Matching Annotations
  1. Sep 2022
    1. Where these things settle will be around the levels that are most tolerable, all things considered i.e., if one thing is intolerable e.g., too high inflation, too weak economic growth, etc. it will be targeted by central bankers to be changed, policies will be changed, and other things will change to bring that about. So, the process of figuring out what will happen is an iterative process, like solving a simultaneous equation optimizing for a few things that matter most. 

      This is insane. Is like trying to control the ocean, the wind and the natural forces of life itself.

    2. Then it goes to interest rates. Central banks determine the amount of money and credit that is available to be spent. They do that by setting interest rates and buying and selling debt assets with money they print e.g., quantitative easing and quantitative tightening.

      Money printing, a free and self-funding machine. Easy money to make bad investments.

    3. When central banks create low interest rates relative to inflation rates and when they make plenty of credit available, they encourage a) borrowing and spending and b) the selling of debt assets e.g., bonds by investors and the buying of inflation-hedge assets, which accelerates economic growth and raises inflation (especially when there is little ability for the quantity of goods and services to be increased). And, of course, the reverse is true i.e., when they make high interest rates relative to inflation and make the supply of money and credit tight, they have the reverse effect. 

      Again, easy money to inflate prices with low interest rates controlled instead of letting the market (people) to adjust naturally based on savings and investments.

    4.  Interest rates rising relative to inflation causes prices of equities, equity-like markets, and most income-producing assets to go down because of a) the negative effects it has on incomes, b) the need for asset prices to go down to provide competitive returns i.e., “the present value effect”, and c) the fact that there is less money and credit available to buy those investment assets.

      After every boom created with easy money, the collapse is inevitable, and the, of course, with less money and credit to spend, prices of equities, equity-like markets, and most income-producing assets start to go down.

    5. Since the price of anything is equal to the amount of money and credit spent on it divided by the quantity of it sold, the change in prices i.e., inflation is equal to the change in the amount of money and credit spent on goods and services divided by the change in the quantities of goods and services sold.

      Inflation raises as the amount of money and credit spent increases with the printing of new money and credit out of nothing, no value or productivity added.

    6. What rate of inflation is undesirable? It's a rate that creates undesirable effects on productivity; most people agree and central banks agree that it's about two percent for reasons that I won't now digress into. So, most everyone and most central banks want strong growth and low unemployment on the one hand, and the desired inflation rate on the other. Since strong growth and low unemployment raise inflation, the central banks deal with the inflation-growth trade-off which leads them to pick the greater problem and change monetary policy to minimize it at the expense of the other. In other words, when inflation is high (above 2 percent), they tighten monetary policy and weaken the economy to bring it down. The higher the rate is above their target, the more they tighten.

      Who can think of been omnipotent to try to control the supply and demand of the markets leaving disastrous results for the whole economy?