On Friday 08 February 2008 15:37, Horace Heffner wrote: > Within the context of the mortgage industry debacle precipitated > financial crisis it appears there is something even more sinister > making for the crazy markets: > > http://tinyurl.com/3czmpr > > Actual URL for above: > > http://www.forbes.com/home/opinions/2008/02/06/croesus-chronicles- > darkpools-oped-cz_rl_0207croesus.html > > The quants and their systems may be unintentionally setting up the > world markets and financial systems for a crash. Automated arbitrage > systems appear work fine until an underlying market fundamental > changes, like sudden changes in the the value of real estate or some > set of commodities. > > The problem with modern portfolio theory is its fundamental > assumption, that the market activity is actually based on stochastic > processes. It is assumed that all fundamentals are known by all the > participants and very quickly "priced into the market". All that is > left is due to random fluctuations. I think a large part of the > variance in the random distributions is not random at all, but rather > merely due to variables and functions not understand, but which test > well for being random distributions. An example of this might be the > effects of a feedback loop between publications (reporters) and > politicians, and further, the changes in cycle time, amount, quality, > distribution, and lack of information control brought about by the > internet. > > Of greater concern is the fact market transactions are increasingly > instant computer trades rather than trades by open and manual bidding > systems. This vastly increases the "velocity of money" within the > market place in times of a crises, and the velocity is further > increased when the buyers and sellers are mostly computers too. We > are moving toward the point where the ultimate crash could take > place in seconds. > The velocity of money is the average frequency with which a unit of > money is spent, the dollar turnover rate, the frequency of dollar > spending per unit of time. For a discussion of the velocity of money > see: > > http://en.wikipedia.org/wiki/Quantity_theory_of_money > > and also see: > > http://en.wikipedia.org/wiki/Velocity_of_money > > There you'll see Milton Friedman's famous equation: > > M*V = P*Q > > V = P*Q/M > > where M is the money in circulation, and P*Q is the gross domestic > product, the sum of the values of all transactions in a given period > of time. The value of a transaction is the unit price time quantity > for the transaction. This is expressed in the equation of exchange: > > M*V = Sum[i=1,n] p_i*q_i > > In a computer generated crash, a huge amount of the world's capital > can cycle around between multiple investors instantly, i.e the > velocity V -> inf. Let F represent the values of all non stock > market transactions: > > F = Sum[i=1,x] p_i*q_i > > and G represent the sum of the values of all stock market transactions: > > G = Sum[i=x+1,n] p_i*q_i > > This means > > V = (F+G)/M > > and if G remains fixed, yet the market transaction values for some > period go toward infinity, then we have as: > > as G -> inf, V -> (F+G)/M = (F+inf)/M = inf/M = inf > > This means > > V = P*Q/M -> inf > > the velocity of money goes to infinity. Since the quantity of goods > Q would remain fixed in the seconds of collapse, given it rigorously > must be that, since P*Q/M -> inf, either (or both): > > P -> inf, or M -> 0 > > and neither case is good. If I have this right (and I am definitely > not an economist!) either price goes toward infinity, or money supply > goes toward zero, or both. Since we are in a global economy, this > seems to me to apply to the global money supply. > > It is now of concern that, unlike the way things unfolded in > 1929-1932, a total market collapse, as well as the bankruptcy of many > brokerages, arbitrage houses, and banks, could be almost completely > over before even a hint of it ever hits anyone's screens. The only > effective means of insurance is to be pre-positioned at all times. > > The standard means of providing pre-positioned insurance is to keep a > percentage of assets in personally held gold or other commodities not > held as securities for debt. However, as economic crisis looms as an > obvious possibility, gold, silver, mining stocks, etc, and their > downside risks, become unaffordable. > > I think I have found a reasonable method of achieving some degree of > pre-positioning at this late date, at least for US citizens. That is > to buy I-bonds and/or TIPS. The US treasury has recently limited the > purchase of I-bonds to $5,000 per person per year for actual bonds > (down from $30,000) and another $5,000 per person if held in your > personal TreasuryDirect account. See: > > http://www.treasurydirect.gov/ > > Treasury inflation protected securities (TIPS) can also be purchased > through TreasuryDirect periodically, or purchased in the marketplace > at any time through a brokerage and then transferred to your personal > treasury account. There is a $5M individual limit on TIPS. Many > brokerages are not safe repositories for securities in the event of a > complete meltdown because they have large market exposures, and if > nearly all brokerages fail then brokerage insurance is worthless. If > inflation runs rampant then FDIC insurance is comparatively worthless > as well. If a brokerage is used for holding pre-positioning insurance > securities, like actual TIPS, or TIP, GLD, or GDX ETFs, mining stock, > etc, then it should be a brokerage that does not have any market > exposure itself. (Edward Jones is an example of such a brokerage as > far as I know.) AFAIK, TreasuryDirect can not be used for IRAs, so a > brokerage is necessary if IRA funds are to be placed into TIPS for > protection. If I-bonds or TIPS are held to maturity, unlike typical > bond funds, or even the TIP ETF, no principle can be lost, and they > probably gain a lot of interest. If inflation runs rampant, the > returns can be substantial. Most of all, having some money tucked > away for a rainy day can provide some peace of mind in troubled times. > > I hope this personal opinion, though from a source with highly > dubious qualifications, may be of use to someone. At least hopefully > economics, though known as the dismal science, is at least closer to > on topic here than religion. > > Horace > > Seems a large part of this problem is lack of controls at the exchange market level. Some of this program trading problem was encountered in the eighties and early nineties, and the major exchanges enacted controls to literally shut down the market if such an event occured. Beyond that, we have been set up for this ever since the dollar was made a fiat currency with no intrinsic value. Literally speaking, the Dollar and many other currencies around the world are ALL fiat currencies. They could literally all go flat at once, taking with them all the various cash that holders may or may not have in banks. Incidentally, with bank savings interest lower than one percent per year, and inflation in the United States as determined by the government at seven percent, anyone who holds his funds in a bank is a fool who is literally paying his banker to take his money. With the demise of the Glass-Steagal act in recent years, banks can again 'take a flyer on the stock market' at depositors expense just like they did with margin trading in 1929. Now it is called 'derivative' trading. You might as well bet on where pigeons will land on a sidewalk. If you are a farmer and are worried about this, you might as well buy coal and store it on your property. Energy is always tradable at real value no matter what the world's governments say their money is worth. Real values cannot be lied about like when governments insist on artificial exchange rates to mask various dishonesties often from its own citizens, giving rise to parallel black market exchange systems that prove impossible to suppress. Solution: 1. Go back to commodity based currencies..hard money 2. Make all stock exchange transactions legal only with actual paper instruments, no computer trading allowed 3. Re-enact the Glass-Steagal Act and take banks out of the market 4. Re-enact the old Jacksonian National Bankruptcy Act of 1936 5. Re-enact the old laws forbidding banks to cross state lines 6. Absolutely forbid the participation of foreign banks in the United States except in certain set 'financial port districts' 7. Allow no corporation to own another corporation. This includes corporations owning stock. Only individuals own stock 8. Make illegal all electronic funds transfers 9. Re-enact the usury laws and make violations serious felonies 10. Repeal all so called 'free trade' laws and go back to tariffs 11 Discourage importation of consumer goods 12 Slam the borders tight 13 Make illegal the taking of money out of the country
The above would seriousely slow down not only the velocity of money, but would also keep the country from being literally looted in seconds by a hostile power. It would also provide for the legal ability to recover from insolvency, especially by poor ordinary citizens who now are being set up for the new 'debtors prisons'. This would stop the wasteful excercise in futility of soulless greedy foreigners futily attempting the collection of the uncollectable from powerless souls whose only recourse in adversity is to run or become bandits like in ancient China. It would stop dishonest corporations from hiding their true ownership from investors, the government, and others who might not want to invest their own money, for instance, in a foreign sultan or an international outlaw individual or firm like the old BCCI. Requiring hard copy would also put the control of transactions into accountable forms. Stopping free trade and unlimited immigration would stop the erosion of wages of Americans. Stopping the export of money would keep the money in the nation where it could recirculate and produce goods and services for Americans and not be lost to foreigners. Only guest workers and bandit corporations need to send money out ot the country so that it can circulate and benefit THEIR country and not ours. The only advantage foreign factories have over us is the use of slave or prisoner or child labor. American workers should no longer have their own wages subject to sinking to these levels unless the creators of this 'free trade' envision amending the United States Constitution to again allow slavery. Might not even need this. The current administration openly advocates torture in violation of the fourth amendment and dares the Congress to do anything about it.....and gets away with it....openly. These new reforms were undertaken at various time in United States history. They are not some new or 'quack' idea., and they were enacted during times of national distress. The Jacksonian Bankrupcy Act was done in response to the great depression of 1836. The Glass-Steagal Act came in the depths of the great depression of 1929-1941. Tariffs came about due to foreign dumping all through our history, especially with the British exploiting of Hindu textile weavers to dump these products on us in the 1700's and 1800's. The British used military force to impose the opium trade on a helpless China in the 1800's. Usurers have taken advantage of Americans throughout our history, and bankers' abuses of our economy is well documented in the same period, which is why they were regulated in the first place. Banks used to issue money, and still can today if they want to pay certain taxes on it. The middle 1800's history is replete with their shenanigans. Even the early Mormons got in on that racket, setting up a crooked bank in Ohio that swindled some of my own ancestors and disaffected many Mormons right out of their church. Remember Ross Perot, the old big eared geezer from Texas? I do! Remember the giant 'sucking sound' that he predicted? We all have been hearing that for some years now. It went one better that even Ross did not predict. He prodicted that jobs would leave the country. He never dreamed publicly that greedy unscrupulous businesses in this country and foreign corporations would import illegal immigrants by the millions and use them as slaves within our country and in our faces take the jobs of American workers and give them to these slaves in peonage. The government admits up to twelve million illegals. Thirty percent of the residents of my litte town are these invaders. We have a population of about ten thousand here. There are five or so towns like ours in our county. If one took the assumption of three thousand per town and 5 towns per county and 2200 counties in the United States and neglected the increased concentration of illegals in large cities where welfare checks and sanctuaries are easier to get, that would mathematically give a population of illegals in this country of at least 33 million people and as much as fifty or sixty million. And the end is nowhere in sight. What is in sight is apathy and intellectual torpor brought about by television. That is set to change in 2009 with the digital switchover when all television becomes de facto pay tv and tens of millions of peoples televisions will go dark, throwing them out onto their porches, awakened for the first time in decades. Standing Bear
