The Truth about Money Printing. Do you want to understand?

Discussion in 'Markets & Economies' started by President Trump, Jul 4, 2020.

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After reading the above what do you believe:

  1. Interest rates will go up.

    7 vote(s)
    22.6%
  2. The Fed can just keep buying treasuries to infinity

    17 vote(s)
    54.8%
  3. Modern Monetary Theory will fix the problem

    2 vote(s)
    6.5%
  4. The US will default.

    10 vote(s)
    32.3%
Multiple votes are allowed.
  1. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    I was trying to explain the role of central banks in all of this. The government could do away with them and it won't make any difference to their capacity to print money.

    We may do I don't really know. I'm of the Austrian school of economics. I'm also an anarcho-capitalist, so basically I'm an advocate for the free-market and the abolition of the State.

    Forgive me if this sounds rude, but I really don't think you get it. What I believe to be the truth about the current situation ie MMT is not what I want ie a free-market economy and the abolition of the State. Shit, even @leo25 doesn't advocate for that.

    Edit to add: and I haven't even voted in your poll by the way.
     
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  2. leo25

    leo25 Well-Known Member Silver Stacker

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    Last edited: Aug 2, 2020
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  3. President Trump

    President Trump Active Member Silver Stacker

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    Yeah but to be fair that's how I feel about you saying there is no government debt system when the government is issuing and paying back billions in debt.

    Or saying that the US can't default when there is an active sovereign default market on US government debt.

    I believe what I see. Its not unusual to believe what I do. Its just different to what you believe.
     
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  4. leo25

    leo25 Well-Known Member Silver Stacker

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    The mistake you're making is thinking this is just my opinion and therefore it's my opinion vs your opinion.

    I think Alan Greenspan was one of the first people to publicly talk about how the US government can't default (since by proxy the FED can always issue more credit/currency). Most of the other major central banks have more or less said the same thing in relation to their currency.
     
    Last edited: Jul 17, 2020
  5. President Trump

    President Trump Active Member Silver Stacker

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    Ha ha I will continue this conversation but please don't track me down and strangle me in my sleep.

    1. I don't think you are normally the type of guy that listens to what central bankers say.
    2. Here is an actual quote from Alan Greenspan:“I know you think you understand what you thought I said , but I'm not sure you realized that what you heard isn't what I meant” I think this applies here.
    3. I have listed many countries that have defaulted in previous posts. Including the USSR which defaulted while it was a superpower.
    4. There is an active market buying protection on a default of the USA. Just as institutions bought protection on the decline of the US housing market (which the Fed also thought couldn't happen). So they might be wasting their money but they clearly believe a default is a least possible. I feel safe that I also am not alone in my thinking.

    So I'm not saying you are wrong. There are two views on the table. Mine has some evidence behind it and it's not ridiculous. In the end it doesn't matter a because governments should behave as though they can default and act prudently for all our sakes.
     
  6. President Trump

    President Trump Active Member Silver Stacker

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    It wouldn't be the first time. But I am trying to get it. What would you vote?
     
  7. leo25

    leo25 Well-Known Member Silver Stacker

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    Help me interpret this :p Also i don't trust what they say, I trust what i see.



     
    Last edited: Jul 17, 2020
  8. President Trump

    President Trump Active Member Silver Stacker

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    Well let me try. That is Alan Greenspan saying that there is zero probability of a US default.

    Actually it reminds me very much of when my wife told me that I can put the house in her name, because there is zero probability she would leave me.

    I'd say that too if I was him. Our printed dollars will always be desirable. Famous last words. And next thing you know you have to borrow in a foreign currency because you need to conduct international trade and your trading partners wont accept dollars. Surprise surprise. A country doesn't default on its own currency just like he says. they are forced to borrow in other currencies and then they default on that. Or they try 3 or 4 other well trodden tricks that are also now defined as sovereign events of defaults under the derivative documents used to sell the protection.

    But I don't think a default is going to happen to the USA. Nevertheless, I know it can.
     
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  9. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Interest rates will probably eventually go up so I'd vote for 1 I guess, and the Fed can just keep buying securities so I'd probably also vote 2.

    MMT won't fix anything because it's not a solution, it's just an explanation and the US won't default unless it voluntarily does so.
     
  10. leo25

    leo25 Well-Known Member Silver Stacker

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    Yes you are correct, a country could default (as Russia did in 1998). What i should have said is a country that controls it's currency can't default by force. Russia defaulted by choice in 1998 and is a very interesting topic as to why. (maybe they wanted to mess with LTCM :p)

    So there are two options that can make a country default by force.
    1) it doesn't control the currency it uses.
    2) It's debts are denominated in a foreign currency. You normally only see this in smaller developing countries where the government borrows in say USD, then they deplete their foreign reserves and are unable to pay back in USD. This only becomes an issue if that country stupidly tries to peg its currency to the USD. (so in a way still a choice)
     
    Last edited: Jul 18, 2020
  11. President Trump

    President Trump Active Member Silver Stacker

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    So we agree on almost all of this. Lets explore the difference.

    This thread is called "The truth about money printing" The inference is that money printing is bad and will cause problems of some type. So I list 3 possible problems and what I believe some people may regard as a solution, MMT;

    I believe MMT is an economic theory. Am I at least correct on this?

    If it is a theory, theories can be put into practice and there is a lot of talk about putting MMT into practice. Part of that theory seems to me to be that governments can print money without creating the problems that I listed. At least 2 of these you have just said could be a problem.

    So is it just semantics?

    Should I have said "The adoption of a monetary system (or changes to our existing monetary system) based on the theory contained in modern monetary theory will mean that the above problems do not arise with respect to money printing."
     
  12. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    @leo25 and I have taken issue with your assumptions and therefore your conclusions ie that your theory of currency is based upon an outdated view of what constitutes government issued currency and that you claim that as there is a market for sovereign defaults, it is possible therefore for countries like Australia and the US to be forced to default.

    We argue that your conclusions whilst logical, are wrong. And we've laid out our reasons.

    No.

    It's more of an explanation how the modern monetary system works and therefore make it understandable. If we were discussing science we'd probably call it a "law":

    https://thehappyscientist.com/science-experiment/gravity-theory-or-law

    The associated problems are more likely to arise due to human nature as well the continued presence of central banks and the use of monetary policy to manage the economy. I'm pretty sure core MMTers argue that the central bank has no function to play. That last sentence of yours is more accurate.
     
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  13. President Trump

    President Trump Active Member Silver Stacker

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    MMT is a law? I guess there is more that we don't agree on then.

    I don't assume that there is a market for sovereign defaults. Its a fact. I worked in the sovereign default market for the last 12 years of my career before I retired.
     
  14. Stoic Phoenix

    Stoic Phoenix Well-Known Member Silver Stacker

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    Don't confuse a scientific law with common law, scientific law merely generalize a body of observations.
     
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  15. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    You've misunderstood me. I didn't say you've assumed that a sovereign default market exists. I said that you've made the assumption that the fact that there is a market for sovereign defaults means that the US or Australia will default or can be forced to default.
     
    Last edited: Jul 18, 2020
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  16. leo25

    leo25 Well-Known Member Silver Stacker

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    Out of interest how are these markets priced? Also how long ago was it that you worked in this field?
     
  17. President Trump

    President Trump Active Member Silver Stacker

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    I was a structurer of bond products and credit derivatives up to 2012. Traders set prices, I put the various pieces of the deal together, but I worked closely enough with traders for what I am saying about prices to be accurate. On common sovereign names anyone (who is willing to pay the subscription) can get prices from a company called Markit that was owned by the big investment banks. Traders at these investment banks (still I'm sure) feed their prices for credit protection into Markit. Markit then amalgamates those prices. For individual banks, changes in these prices reflect the risk adjustments to the sovereign risk positions on the books of the investment banks. The price movements are typically pretty small but they are going on all the time. It is most important that this mechanism exist when trouble brews as it allows risk transfer to occur. You can imagine when things were going pear shaped with Greece, some investment banks were holding more Greek risk than they wanted. Other banks, for a price were prepared to take more on.

    As well as this CDS market, sovereign risk is traded in the OTC structured product market. The way it basically worked was that an investor (who would typically buy a vanilla bond) wants to increase the yield they receive. Obviously theres no way to do this without accepting more risk. So we would write sovereign risk into the bond that they bought.
    A basic bond contains issuer risk of repayment. The yield an investor receives is composed of a) the risk free rate of return on funds b) an additional rate which is the default risk of your issuer. As you move out the risk curve of issuer names the default risk increases and the bonds pays a higher return.

    If these two components of the interest rate do not combine to provide the desired yield, then an investor can talk to an investment bank about adding in risks. What you can add is virtually unlimited. The investor receives the higher return, but the bond documents will say that the investor will receive the principal at maturity or upon an Event of Default of X(insert whatever sovereigns name you want). If the Event of Default occurs the investor will receive the principal ie 100% less the percentage drop in value of the specified sovereign assets.

    We produced bonds that paid a higher yield because US default risk was included. This is despite the fact that US treasuries are generally regarded as the ultimate risk free asset... but they were not at the time. What constitutes an Event of Default on these swaps and structured products goes way beyond the "hard" default of simply not paying at maturity. As you guys keep saying the sovereign would have choose not to pay if it only borrows in its own currency. But as a country starts to fuck up its monetary system all sorts of things go wrong with its currency value and with funds flowing out of the country. There are certain steps that countries always take to try to fix these problems these steps are well know and are all "Soft" events of defaults. They make the value of the sovereign debt fall in a dramatic fashion but they are not what the lay person regards as a Default. If you think about it from the protection buyer perspective, he doesn't care. They receive the loss on the bond (meaning the reference asset that defaulted), that payment makes them happy and whole.

    The problem for the sovereign is that not only has a Default been very publicly called but the sovereign credit rating will be downgraded. There are a bunch of other effects too. This is why these defaults play out so fast. I don't believe even a superpower can stop the ball rolling if they let it start. My view is that the USA and Australia for example can default but almost certainly never will. But it is good that people don't believe it can happen because fiat money is a confidence game.
     
    Last edited: Jul 19, 2020
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  18. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    What's the yield on an Australian or US default? I think the probability of it happening for Australia is something like 0.3% according to some table I was looking at. Seems like the sovereign CDS market is just a casino where investors roll the dice on Pakistan or Zambia defaulting. :p
     
  19. President Trump

    President Trump Active Member Silver Stacker

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    No idea what the yield is now days. I see everything except PM as a gamble right now, personally. Central Bank liquidity makes it all to distorted and difficult to analyse.
    I can imagine though that there are businesses that must operate or invest in certain jurisdictions. They are grateful that they can hedge their country risk. The protection is provided by the gamblers. Unfortunately those gamblers include our super fund and pension fund. I also regard what the central banks are doing as a gamble. It’ll just take longer to play out.
     
  20. Silver260

    Silver260 Well-Known Member Silver Stacker

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    Sorry, I'm only halfway through this thread. But...

    But no, Argentina didn't chose to default. It had no real option ( at least in 2001).

    Remember, at the turn of the century, Argentina was an economic "developing nation" powerhouse.

    And this is the key to this discussion....

    Having been "persuaded" to issue most of its debt in USD, then peg its dollar to the US dollar......( Throw in a Socialist Government, and an economic downturn ) .... it was basically screwed from the start.

    Luckily our Socialist Governments can print their own money... ;)
     
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