Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: AC Flyer who wrote (51462)	7/8/2004 5:18:17 PM
From: Maurice Winn	Respond to of 74559

Hi ACF. Interest rates shouldn't zoom too high. My guess is back to the age old levels of around 8% instead of 1%. There is an intrinsic force which puts a floor on interest rates and that's the risk of dying without spending one's money. The upper limit is competition with other savers. Interest is the risk of deferred consumption. Living for the day has some attraction and if one's money is spent today, then the enjoyment is had. If one saves one's money for tomorrow, one might die today and die richer. Interest is the compensation for that risk. Living for today can mean an impoverished tomorrow, which is no fun either. Finding the balance is tricky for most people. Added to that is the risk that the outside world supporting the money will fail, leaving one owning money, but nobody to provide the goods and services in exchange for it. Given the prevalence of wars, political monetary shenanigans, the prospect of bolide impact, and other glitches in things carrying on nicely, there is some risk of never being provided goods and services in exchange for the saved money. There is always too the constant attrition due to profits of control as the monetary controller dilutes one's holdings and spends that new money themselves. Age-old inflation! - 3% for death risk [which has reduced as lifespans of savers have increased over the past 100 years to something like age 80 these days, from about 60 a century ago]. - 3% for catastrophic risk [war, insurrection, bolides] - 3% for inflation which isn't a risk but a metaphysical certitude. Also to cover the risk of total collapse in currency value due to hyperinflation, derivatives implosion or simply total worldwide panic. That's 9%, not 7%. Hope springs eternal and there's always a bit of hope that cash holding is a good thing and that the crash won't come on my shift. Plus people have to hold some cash to buy the groceries etc. Debt is often criticized, but it seems a good thing, though I don't have any as paying the debt has to be done out of tax-paid, inflation-adjusted, transaction-charged earnings. To pay $100 interest, one has to earn a gross of $200 or $300 before tax and expenses. That makes debt untenable unless the alternative is worse, such as renting a house [which has to be charged at a high rate because the landlord has expenses, risk, tax and transaction costs to deal with too]. Housing interest rates are typically lower and therefore usually a good idea instead of renting. Excuse all this. I'm just thinking out loud, figuring out how this stuff works and what interest rates "should" be. I'm not telling you something I think you don't know [or anyone]. One problem I haven't resolved at all and Warren Buffett has also worried about, which makes me think my nervousness is not just paranoia, is the stacked to the rafters derivatives industry. I wonder what happens when derivatives are stress-tested. I'm assuming that there will be a chain of counter-party crunching but as the margins are mowed through and positions terminated, then as happened with the margin-collapse of Y2K in the biotelecosmictechdot.com cruch, the positions with margin will be closed as prices fall. The question is whether positions can be closed fast enough and market clearing arranged before those holding the securities are caught up in the crunch. In the share-market crunch, positions were cleared in a timely fashion and everything was tidied up. In the derivatives market, it seems that we have a similar situation but on steroids. I wonder whether there might not simply be an implosion of what I understand is many $trillions of positions. What do you think of this possibility? I'm hoping that the derivatives market on the contrary is a stabilizing influence as things are set down way into the future, so markets move less rapidly now. Debt does a similar thing. It pushes consumption planning out into the future. The USA has performed a remarkable feat which is creating tomorrow today in financial markets because we know that oil prices, exchange rates, pork bellies and what have you, will be at some certain level in future because we have contracted for that today. Billions of bets push market prices of many things to certain levels and hold them steady for longer than would otherwise be the case if sold at auction on any given day. Enough fruitless pondering! Mqurice