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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: orkrious who wrote (70198)	9/25/2006 2:22:52 PM
From: ild	Respond to of 110194

@pm sentiment -- trotsky, 14:05:22 09/25/06 Mon both quantitatively and anecdotally (anecdotally e.g. per number of bearish articles published) it strikes me to be as bleak as it gets. within the parameters of this market since the bull began at least, we're definitely at a sentiment extreme. as i've mentioned before, given that this happens as the market appears very oversold and has already declined a lot, such a sentiment extreme makes additional downside highly unlikely in the short term. mozel@time value, part 2 -- trotsky, 13:26:47 09/25/06 Mon you wrote further: "Does the act of granting the use of real money create real money ? No. Gold and silver coin neither increase nor decrease by the act of transfer or change of possession. A coin transferred from hand to hand by a million will neither increase nor decrease. How, then, can interest or the fee for the use of money be truly accounted as gain when in reality there is no increase from the act of transfer ?" here you seem to assume that all of this is part of some sort of static closed system universe, in which one person transfers money to another, and then that's it. however, in reality, everybody is both a consumer AND producer. someone who owns capital must have first created and saved it (if it's inherited then someone that came before him has created and saved it). capital and the money that is used to store it and facilitate economic exchanges does not exist in a vacuum. the employment of capital constantly creates MORE wealth. as long as the wealth created exceeds the interest rate charged on capital that is lent, everybody gains. when interest rates rise and exceed the expected returns on capital, demand for loans will decrease , and rates will decline commensurately, until they are low enough to once again provide positive expected returns on capital. the point remains that the owners of capital must be compensated for giving up their claim on it and transferring it to someone else. they give up their ability to use it in the present, and the only way they will be enticed to do so is if they can expect a return for doing so. furthermore, those who borrow the capital for a given interest rate don't do so because someone has put a gun to their head. they do so because they expect this borrowed capital to provide even greater future returns than the interest rate charged on it. you keep ignoring this crucial fact - the employment of capital creates more wealth. the lending mechanism meanwhile allows capital to be transferred to those who can make the best use of it, while still compensating those that provide it. mozel@time value of money -- trotsky, 13:07:30 09/25/06 Mon you wrote: "Real money has no positive time value. Clay and paper money have a negative time value. Time destroys them. Gold and silver money has no time value. That is, it neither increases nor decreases in any way over time. Hence, there is no natural rate of interest for real money. Real money does not grow on trees or in chests, bank vaults, pockets, or under mattresses. I have been chided that this is simplistic, implying over simplifying. But is it simplistic because it simply expresses what is or because it over-simplifies it ?" that's exactly right, it's oversimplified. you keep forgetting that money is only a medium of exchange. it only REPRESENTS real capital. it is said real capital that has a time value. humans have time preferences - present goods are valued more highly than future goods. if one gives up one's claim to goods in the present (i.e., one saves and lends), one needs to be compensated for that, otherwise there is no reason whatsoever to engage in lending. otoh, the borrower expects to be able to produce more future goods than he will have to pay for the use of the capital he borrows. if you disable this basic economic mechanism by e.g. making interest illegal, economic activity would grind to a halt. also, it is important that a free market interest rate exist, so that entrepreneurs have an objective gauge of current time preferences. lower time preferences (a propensity to save which lowers interest rates, making more capital available for loans) not only change the expected returns on capital investment, they also shift investment along the structure of production toward earlier stages of production. this is important in order to avert intertemporal distortions in the production structure that tend to lead to busts (this is inter alia why interest rate manipulation by a central bank is so damaging). i agree of course that fiat paper money is a wholly different animal - as you say, it loses value over time, and as we can see, interest rates on paper money tend to exceed gold interest rates (nowadays 'lease rates') by a huge margin to compensate for the uncertainties of fiat money to some extent. a centrally managed fiat money does not benefit society as a whole, it only benefits certain groups. it leads to a misdirection of resources (a.k.a. malinvestment) by creating FALSE signals about time preferences.