Warren Buffet speaks common sense; alarms most Republicans

[C0ckney]

C0ckney: money can't "go in" to stocks or commodities. When I buy a stock the money I spent doesn't just disappear into "the stock market", it goes to some specific person who I bought the stock from (and the same for gold, oil, etc.) That person now has a bunch of dollars, dollars that are worth precisely as much as the asset he sold me. Unless he really likes just holding onto dollar bills, he is going to spend them on something else. Eventually someone is going to spend those dollars on something that isn't an asset, like, say, ice cream.

errr... that would be true if all stock market activity was buying and selling shares but there's an enormous amount of other things going on there too, essentially gambling on the future performance of various shares. so while there's a finite limit for the number of shares that someone can buy, there's no limit for the amount of bets that people can make on the performance of those shares. it's exactly the same with commodities, there's a limited number of barrels of oil but the bets of the price of oil are unlimited. clearly this has an effect on prices. it's fairly well known the spikes in commodity prices last year were related to QE. the prices for base metals, oil, coffee and foodstuffs rose dramatically after QE in the US and UK.

When the Fed prints $100 and uses it to buy $100 worth of assets (say US bonds) off of some bank (measured by market price) it is not (directly) doing that bank any favors; the bank could have gotten the same $100 by selling that asset on the market. In fact, the fact that the bank hadn't already done so implies that the bank actually weakly preferred holding those bonds to holding $100, and so it will probably take the $100 the Fed just gave it and use that to buy $100 worth of bonds from someone else. And so on, and so forth. Each person or firm wants to get rid of the extra money and get something real with it; the whole point of monetary stimulus is that as a group they can't get rid of the new dollars short of lighting them on fire.

this assumes that they the banks were selling the same bonds to the government that the government issued to them. let me give you an example. let's say the government issues a bond priced at 100, which it then sells to the bank at 100. now as part of the process it then buys a bond for 100, but if a bank already owns a bond which it bought some time ago for 95 and sells that it to the government it has just made a profit. QE lowers bond yields and raises price, so it's easy to see how banks could make a lot of money by selling lots of bonds that they bought at a lower price. this is how QE worked in the UK and explains why banks returned to profitability so quickly after the financial crash when the economy was shrinking.

[Kuciwalker]

errr... that would be true if all stock market activity was buying and selling shares but there's an enormous amount of other things going on there too, essentially gambling on the future performance of various shares.

100% of which is actually done by buying and selling financial assets (typically derivatives). I have money. There are only two things I can do with that money: either sit on it, or give it to someone else in return for something that person owns (including a financial asset). That other person then has money and is faced with precisely the same choice.

so while there's a finite limit for the number of shares that someone can buy, there's no limit for the amount of bets that people can make on the performance of those shares. it's exactly the same with commodities, there's a limited number of barrels of oil but the bets of the price of oil are unlimited. clearly this has an effect on prices.

Yes, but collectively they cannot get rid of the dollars short of lighting them on fire.

it's fairly well known the spikes in commodity prices last year were related to QE. the prices for base metals, oil, coffee and foodstuffs rose dramatically after QE in the US and UK.

Of course the price spikes were related to QE (at least, those that occurred on or near rumors/announcements of it). Anything that tends to promote economic recovery is going to cause oil prices to spike. When the economy recovers, of course people will want to use more oil, raising its price; futures markets transmit that information into the present by causing the price to rise now. This efficiently deters people from using oil now, because the futures traders know that there will be more demand for it later and thus some of today's oil supply should be set aside for future consumption.

this assumes that they the banks were selling the same bonds to the government that the government issued to them. let me give you an example. let's say the government issues a bond priced at 100, which it then sells to the bank at 100. now as part of the process it then buys a bond for 100, but if a bank already owns a bond which it bought some time ago for 95 and sells that it to the government it has just made a profit.

The way that you are thinking about this is ridiculous and incoherent. Imagine for a moment that instead of bonds I buy a barrel of oil now for $95. In six months I buy another barrel of oil for $100, and then I pour both barrels into a double-sized container. Then in another six months I sell half of the oil in that container for $100. Which oil did I sell? (Answer: it's a meaningless question!) The profit on those bonds occured when their price rose; it is only realized now when the bank is selling it. But the Federal Reserve is completely unnecessary in this process; the market price of the bonds is $100, so by definition the bank can sell those bonds on the open market for $100. It doesn't need the Fed to come in at all.

QE lowers bond yields and raises price, so it's easy to see how banks could make a lot of money by selling lots of bonds that they bought at a lower price. this is how QE worked in the UK and explains why banks returned to profitability so quickly after the financial crash when the economy was shrinking.

QE does not lower bond yields; its effect on them is ambiguous. If the Fed announced that it would do QE over and over until NGDP returned to trend, bond yields would rise.

[Uncle Sparky]

By that you mean he feels his philanthopy is better suited to reflect his personal preferences and/or believes that he is more efficient with his philanthropy than allowing the government access to his wealth.

Unbelievable!!

Sarcasm noted. However, until a just economic society can be created from the ashes of capitalism, I would rather have a philanthropic billionaire than the usual lot of bleed 'em dry millionaires.

[Aeson]

You have everything backwards. A housing bust and financial crisis in 2008 does not cause 9% unemployment in 2011. Excessively tight monetary policy in response to that crisis, followed by a continued policy of tight money, does cause 9% unemployment in 2011.

Moving goalposts. First it's the primary cause of the recession. Now it's just unemployment in 2011.

(It's fallacious for you to disregard the crash and financial crisis as factors as to why we have 9% unemployment today as well.)

Yes, we would have to reallocate some production out of the housing sector and into other industries. Big ****ing deal; we were already doing that starting around 2006. Retraining construction workers to do something else doesn't require 3 years at 9% unemployment.

Inventory was still increasing. The gap between house prices and incomes was still increasing. Stupid loans were still available. Financials were still leveraged to historically unsustainable levels.

But obviously the market fixed all these problems in time, and they didn't disrupt anything, so nothing about the recession could be because of the above!

But the Federal Reserve is completely unnecessary in this process; the market price of the bonds is $100, so by definition the bank can sell those bonds on the open market for $100. It doesn't need the Fed to come in at all.

Is this an argument against quantitative easing?

[Kuciwalker]

Moving goalposts. First it's the primary cause of the recession. Now it's just unemployment in 2011.

What? How are those distinct things?

(It's fallacious for you to disregard the crash and financial crisis as factors as to why we have 9% unemployment today as well.)

It would not be "fallacious" even if it were wrong (it is, of course, neither). Don't use words you don't understand.

Inventory was still increasing. The gap between house prices and incomes was still increasing. Stupid loans were still available. Financials were still leveraged to historically unsustainable levels.

But obviously the market fixed all these problems in time, and they didn't disrupt anything, so nothing about the recession could be because of the above!

You are a deeply confused person.

The Fed enacted a contractionary monetary policy in reaction to the housing bust. The housing bust was a causal factor leading up to the recession but the recession was not a necessary consequence of the bust. The recession was a necessary consequence of the Fed's policy. Had the Fed enacted a different policy the recession would have been mild or nonexistent.

Is this an argument against quantitative easing?

No, but this is apparently an argument against your own literacy.

[Kuciwalker]

Aeson, do you have any kind of model at all explaining how events proceeded from the housing bust through the present day? Or do you just write it off as a mystery that cannot be understood?

[BlackCat]

Can someone please confirm that Kuci will forever be a low life employee that never gain power ?

[Asher]

It depends what kind of power.

His blind faith means he may very well be a very successful yes-man.

[BlackCat]

A yes-man is acceptable - it' more the insane ideas I'm worried about.

[Kuciwalker]

This from the one whose beliefs aren't based on any actual data...

(xpost)

[Kuciwalker]

Asher, you don't even know any macro. At all. None. Why does it strike you as implausible that there is more to the recession than "zomg the house prices fell so all the construction workers lost their jobs"? Don't you wonder in the least bit why this recession has been so much worse than e.g. the one following the Internet bubble?

[BlackCat]

Asher, you don't even know any macro. At all. None. Why does it strike you as implausible that there is more to the recession than "zomg the house prices fell so all the construction workers lost their jobs"? Don't you wonder in the least bit why this recession has been so much worse than e.g. the one following the Internet bubble?

Uhm, that could probably be because it hits way more people than the IB.

[KrazyHorse]

Glad to see kuci and jag keeping you numbskulls in line.

[KrazyHorse]

this issue is off course when the gov prints too much money... as has been happening, skewing the investments made... too much easy money makes you invest poorly... what is the "correct" amount of extra "printing" is open to interpretation, but it is pretty clear that the US gov is on "too high" side of it, at the moment, and has been for at least past 10 years... with that printing it was supporting lots of frivolous investment, which did not result in net job gains for the US economy, and relevant growth... so we are where we are, but that has nothing to do with transfer of tax receipts from the poor/middle to the upper classes...

I'm not sure if paleo-Keynsians or paleo-Austrians are more amusing...

[Kuciwalker]

OFITG has managed to be both in this thread, actually.