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Berkshire Hathaway Inc. Message Board

  • goofybot_7 goofybot_7 Dec 23, 2003 3:04 PM Flag

    Keynes is Dead

    +++++
    How funny is this:
    1) even modern Keynesian framework assumes that higher taxes do not decrease aggregate demand overall, because the corresponding increase in government spending produces a greater increase in aggregate demand. Hence the higher the taxes and government spending, the greater is econoomic growth!
    2) Inflation results from reduced production capacity and low unemployment and has nothing to do with monetary policy.
    3) The Great Depression had nothing to do with contraction in money supply, it was caused by the small size of the US government.
    LMAO, you are an amazingly bright thinker John Maynard! Too bad you did not get a Nobel prize for your works
    ++++

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    • the idea is not new has been floating for many years in academic and Fed circles. The thing is, in an era of fiat money, real deflation is virtually impossible for political reasons (politicians are always tempted to inflate surreptitiously).


      http://www.ledr.com/neg_rates/neg_rates_home.htm

      Negative rates in Japan:

      http://www.jei.org/Archive/JEIR98/9843w2.html

      or you can just type "negative interest rates" in Google

    • Banks can borrow $1000 and pay back $900

      Please tell us if the above "idea" is something that you thought of yourself. If not can you cite the article or book that it was in and who the author was.

    • The fed does not "print" money. It can create bank reserves (kept at the Fed) using its computer. Bank reserves become bank deposits (=cash). Coins and paper money are created by the Treasury Dept, which owes the Fed close to 700 billion.

      The money that the Fed creates is written off as national debt (an item called "federal debt held by the Fed"). Curiously, the Fed is required to deposit interest it earns on treasury securities immediately back into the Treasury Dept.

      There are legislative limits on national debt. Which can be expanded if the President gets an approval in Congress.

      Regarding hoarding of loans, exchange rates, etc see my message #199709

      Why is creation of money by the Fed more efficient than taxation and government spending?

      Because you spend your money on things that are important for you; YOU have a choice.

      Keynes does not give you a choice. Beaurocrats will take away your money by force (or else go to prison), and spend it the way they see fit.

      I don't like the last senario at all; however you are entitled to your opinion too

    • *****
      <<Banks can borrow $1000 and pay back $900>>

      How does this fight deflation? Banks would simply borrow the max and stuff the cash in their vault. Why risk lending loss when you get a guaranteed 10% return from hoarding?
      ******

      1) Because discount loans are not for pleasure. They are offered only to dying banks as loans of last resort. If you stop the number of functioning banks from dropping, you do fight deflation. As you probably know banks expand money supply through relending the same money multiple times (monetary multiplier effect).

      The -10% discount loans are likely to be offered by the Fed if deflation is let's say 10% (the Great Depression scenario). Deflation kills banks (and most other highly leveraged businesses) by the thousands.
      Will a 0% apr loan save a bank? Unlikely, because the real interest rate is 10% in this case. Will a minus 10% loan save a bankrupt bank? Quite likely, because the real interest rate is 0%.

      2) Viable banks compete for customers and think about future business. Most will realize that -10% discount rate (and probably -5% fed funds rate) means the end of deflation, get ready for inflation. If your long-term customer comes in and asks for a loan, will a sane banker say "No, I would rather keep my cash in the vault" ?
      What if an excellent new client walks in the door? The bank will still make mountains of money if it lends out at minus 2% and borrows at minus 5%. Why lose current and future business to other banks? When deflation is over (if the central bank cuts rates below zero, you can be sure of that) where are you going to find good banking business?


      3) Low discount rate is only one of the tools in the Feds playbook. THE most flexible and efficient tool is open market operations which I described later in that message. When a central bank starts buying up all bonds, their prices go up and the yields go down.

      How does that fight deflation?

      First of all market interest rates go down and businesses will find it very easy to borrow money or issue debt (and stay afloat). Market yield on bonds can easily reach negative values, because bonds are traded for capital gains as well, not only coupons. Say if the bond market expects the Fed to pour more cash into the economy (deflation is still a threat) you can buy a bond that yields minus 3%, and later sell it for a nice profit when the yield reaches minus 5% after the Fed buys up more bonds. Now imagine a corporation that wants to issue debt. Because of the extreme demand for bonds, the price it gets for its bonds exceeds par, and there you go, you borrow greater nominal amount than what you have to repay.

      Second, everybody now has tons of cash on their hands instead of bad loans and bonds. Money supply expands and now more dollars chase the same amount of goods, thus causing prices to rise. Rising prices mean the end of deflation

      Third, the value of the dollar starts dropping (exchange rate) due to the market glut, and people will rush to get rid of their dollars through spending or investing.
      No fun hoarding a dollar that is falling like a rock against the Euro ;-)

    • <<Have you lowered your standards?>>

      Not really on the buy side, but definitely when it comes to selling. My REITs are well above my target prices, yet I still hold about half of them. The BRKA I bought at 61k in Feb was supposed to have been sold in the upper 70s. And so on. It's especially hard to sell these big cap gainers so close to yearend. I'm holding for all the wrong reasons, but it keeps working so I tend to keep doing it. Dangerous behavior pattern.

    • < Where is the Fed going to get the money to lend the banks the trillions upon trillions of dollars that the Banks are dying to borrow under those terms? Let's say that the Fed prints up its trillions and trillions and somehow lends it all to the banks.

      What would stop a bank from borrowing a trillion dollars and putting it all in a vault for a year and suspending operations for that year. When the year is up, pay the $900 billion principal payment and pocket the $100 billion as a risk free profit? >

      Good point. If monetary base is to shrink, causing deflation, it destroys the incentive to lend. Why not take a zero interest rate for doing nothing rather than a negative rate for lending?

      But if inflation is a negative ten percent, and banks won't lend unless they get some positive interest, effective real rates are higher than 10%. Which would be a huge hurdle for borrowers to justify, hence less borrowing and economic activity. Can you say "great depression"?

      <It is totally inefficient, especially when the goverment can just hand out $100 billion in tax brakes to those who will spend that money ( i.e. the working class). That money is sure to go directely into the economic system. >

      Uh, no, that's money that's shifted from one pocket to the other, i.e. increased government borrowing crowds out corporate in direct proportion to the tax breaks. If you can get some consumers to spend more, the ones getting laid off will probably spend less.

      <2- the Fed buys ups all existing bonds known to man. The Fed drives bond yields to 0% as it sucks up each and every bond. First, where is the Fed going to get the money to buy all those trillions worth of bonds? >

      That's called running the printing press, and blowing up the money supply and leads to hyperinflation before yields ever get near zero %.

      < if you are big institution, why not just sell all your current US based bonds to the sucker known as the Fed at an incredible deal and promptly take all your profits from the US bond sales and buy foreign bonds yielding anywhere from 3-10%. >
      That's exactly what you'd do, cause hyperinflation means the dollar is going to plunge in value, and your foriegn bonds are going to maintain their value while your U.S. bonds become worthless.

      <And it is not Keynes fault that our politicians are addicted to pork. Keynes never really advocated so of the crazy $%^T we are seeing coming of Congress today. >

      Very true, though Keynes is the fig leaf for big government spending. And all because of the myth of a "multiplier effect"...

    • "It seems I can only put cash to work by lowering my standards."

      Amen, brother doggy:-) So have you done it? Have you lowered your standards?

    • Sometimes it takes more time to write a short message than a long one, at least according to Mark Twain.

      I can't find much of anything out there that compares to the opportunities available over the last few years. It seems I can only put cash to work by lowering my standards.

    • that was my point and I spent 30 precious minutes editing my long reply while you spent what?? 3 seconds?

      Hey doggy, I ain't finding much. How about you??? I bought a few AEC at $6.30 praying for a manufacuturing rebound and I recently bought WXH at $9.90 assuming that they will have to reinstate a dividend of a buck sometime in the future if their long dividend record is any guide. Below $10, that is a 10% divy when (if) it gets reinstated. But other than those two, I am completely out of ideas.

    • tell me how any of your suggestions are any more efficient than Keynes' suggestions for fiscal stimulus:

      1. Fed lends $1000 and gets paid back $900. Where is the Fed going to get the money to lend the banks the trillions upon trillions of dollars that the Banks are dying to borrow under those terms? Let's say that the Fed prints up its trillions and trillions and somehow lends it all to the banks. What would stop a bank from borrowing a trillion dollars and putting it all in a vault for a year and suspending operations for that year. When the year is up, pay the $900 billion principal payment and pocket the $100 billion as a risk free profit? That is an incredible risk free porfit. Why risk any of that money when you can just keep it in the vault risk free? Especially when the economic environment is so bad that the Fed is willing to lend $1000 for $900. So either banks will lend at relatively high REAL rates to compensate them for giving up a risk free return of $100 billion, or they won't lend any of that money at all and all that monetary stimulus is for naught. They may vault the $900 billion princpal payment they will have to make so to prevent their own bankruptcy if things go badly, and they may be willing to lend the remaining $100 billion. But they would want to be compensated for that risk. 5% if $100 billion is only 5 million. Small potatoes, so why bother? (or maybe my work ethic needs some tweaking:-)

      It is totally inefficient, especially when the goverment can just hand out $100 billion in tax brakes to those who will spend that money ( i.e. the working class). That money is sure to go directely into the economic system.

      2- the Fed buys ups all existing bonds known to man. The Fed drives bond yields to 0% as it sucks up each and every bond. First, where is the Fed going to get the money to buy all those trillions worth of bonds? I know there is something called a printing press, but I would think that there are limits to how much the Fed can print without driving the system completely out of whack. Second of all, if the Fed drives the yields to zero, are you, the private investor going to lend to ABC corporation at 0%? Why would you lend to ABC at 0% when you can invest in a bond fund that invests in government bonds overseas. Of if you are big institution, why not just sell all your current US based bonds to the sucker known as the Fed at an incredible deal and promptly take all your profits from the US bond sales and buy foreign bonds yielding anywhere from 3-10%. You can earn 4.61% in Canadian foreign government debt and Canada is a pretty stable investment. Private capital is not restricted to US securities. You don't have to put up with 0% US rates if you don't want to. So the FED buying all goverment bonds above their par value is deeply inefficient. It will pay absurd amounts to buy up all the bonds in the US and has no guarantees that any of that money will stay in the US. It could all easily drift overseas, much as many of the Japanese keep investing abroad. It is completely inefficient for the Fed to do as you recommend and much more so than any of the Evil Keynes fiscal policy suggestions.

      So again, you hate what Keynes stands for soooo much that you would rather put up with inefficient monetary actions than any reasonable fiscal policy recommendations. And it is not Keynes fault that our politicians are addicted to pork. Keynes never really advocated so of the crazy $%^T we are seeing coming of Congress today.

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BRK-A
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