Henry, . "My point is that the textbook view, in which banks mainly take deposits from households and create credit upon them, is no longer valid." . The author is referring to the "recycled money" model you present. . "I do not argue that these wholesale deposits, or repo transactions, are money proper. However, the key is here to notice that in the contemporary economies there are many money-like assets (and distinct forms of money for different economic agents). I agree that short-term liabilities issued by shadow banks may not be immediately used as means of payment, but they may be converted on demand at par to money proper, hence they are a close substitute (Michell, 2016)." . Shadow banks create credit that circulates at par with state currencies, unregulated by the relevant states. . "The current definition of money supply is too narrow and not sufficient to understand the contemporary economy (Pozsar, 2014). According to Pozsar (2014), the monetary aggregates do not include the instruments that asset managers use as money, particularly repos. As far back as 1935, Hayek (1935, pp. 411–412) doubted whether is it possible to draw a sharp line between what is money and what is not, and noted that all sorts of ‘near-money’ had already existed in his time. Hence, economists should, perhaps, also include in their monetary analysis ‘shadow’ money and re-use of collateral (Singh, 2012, p. 14–16)." . Shadow banks create money. --- Money, as today's reality defines it. Financiers make a Nobel Prize every year in bonus money that is shadow-bank originated. Your definition of money is the idiosyncratic, fantastical, theoretical, unconnected-to-reality one ... --- Inflation does not matter. The Fed can use open market operations to buy and sell inflation swaps, and Treasury Inflation Protected Securities, so as to manipulate inflation expectations (i.e. inflation swap breakeven rates) to whatever they wish. Cost Of Living Adjustments guarantee real income purchasing power stability no matter how high or how fast inflation rises. TIPS protect savings. Inflation is a solved problem and is no constraint on public policy. --- Blissex should look up "externality". GDP is a political figure reflecting political values. Intellectually honest statisticians would include error bars for GDP; they don't, because the margins are so wide as to make them useless for public policy. GDP is over half made up. Donations are imputed; how can you know donations come from wages and not money created out of thin air by private banks in financial markets? My TSLA stock went up 14k%, that's not measured by GDP. GDP should be abandoned as a measurement of anything other than economic la-la-land imputations bearing no relation to out-the-window reality. --- r/wallstreetbets is not like institutional collusion because the collaboration is out in the open for all to see. Individuals are merely exercising free speech. . If there is a resulting liquidity problem, the Fed should supply liquidity as needed. . The point is to disconnect financial markets entirely from the real economy. People seek profits in financial markets and produce real things at lower prices because they want to. (Musk wants to drop the prices on Tesla cars because stock market profits pay salaries.) . Economics and Finance professors are way too quick to call for regulation but we've seen regulation backfire time and time again. The current restrictions on trading are due to unreasonable margin requirements at clearinghouses. The answer is for the Fed to guarantee liquidity supply, not to prohibit private individuals from freely expressing views in financial markets. . In September 2019 repo rates spiked due to Fed tightening and regulatory capital surcharges on big banks. Excessive regulation created a market crisis and the Fed responded by supplying liquidity as needed to bring down repo prices. The repo price spike crisis was completely unforeseen by those calling for the macroprudential regulation that caused it. . We should not reflexively regulate, because regulators have very little idea what is really going on and what unintended consequences their regulations will cause. --- For many of us, financial markets are the last place we can play. Keynesians however want no play. Every human effort must be directed towards increasing the sacred Output. If financial markets become disconnected from the Holy Output, that means people are idling and everyone knows that is the Devil's Workshop. Thank the Great Scarcity Gods we have economists to tell us in no uncertain (!) terms that we must get back to increasing the Hallowed Output, because that is the sole legitimate purpose of existing. . Thou shalt not speculate! . Never mind that the Fed has already proven time and time again that they can fix panics by supplying liquidity, and that the Blessed Output is easily more than demand no matter how many speculators have fun. Recall that FDR's problem was overproduction (see https://www.presidency.ucsb.edu/documents/second-fireside-chat ): . > The Farm Relief Bill seeks by the use of several methods, alone or together, to bring about an increased return to farmers for their major farm products, seeking at the same time to prevent in the days to come disastrous overproduction which so often in the past has kept farm commodity prices far below a reasonable return. . The obvious solution is a basic income funded by money-printing. Pay inflation as interest on Fed basic income accounts, to encourage savings if inflation spikes. But inflation is being exported harmlessly to financial markets, anyway. Rather than recognize and encourage this trend, Keynesians just want to tax away the harmless fun others are having, because they don't understand it ... --- I'm expressing a market view. . Monte Carlo is not as fun. Why should you get to dictate how I choose to have fun? I want to have fun while demonstrating how arbitrary market pricing is. Wall street bets is the best place to express my market view. Who are you to take that away? . Your risk-free approach may keep the arbitrary price you receive for your labor safe. But from my perspective, far more damage is done by austerity and liquidity tightening than by loosening. Economists' perfect world arbitrarily values my labor at $0. I value their work at $0 (they should get a basic income). Prove that economists are right ... --- Henry and Skippy: . The laws are written by the big players. Right now, demand for GME stock is being artificially suppressed due to regulations that Dodd and Frank thought would protect little guys, but the effect is to save the short-sellers. That is why regulation is the wrong approach: it has unforeseen consequences that more often hurt little me than not. But Dodd and Frank never hear my pain because I am so insignificant. They only listen to their donors. I can be safely scrubbed from the data and no one (but me!) will notice. . The best way to bail out the system is a universal basic income. The Fed should also ensure the payments system works even if JPM fails; then you no longer have to bail out big institutions. . Talk of moral hazard is hi-falutin' but silly in a world where JPM does what it wants, writes its own regulations (using unwitting, well-meaning but bumbling fools like Dodd and Frank), and knows the Fed will bail it out because otherwise ATMs will stop working. . The Fed should make sure it can keep ATMs on with or without JPM, pay everyone a basic income, insure everyone against inflation, then let JPM fail next time there is trouble. The bankers, traders, and investors will have basic income to fall back on. --- How can you know with such emotional certainty that the the world is necessarily uncertain? And how can you be so certain that taxes on Wall Street transactions will have the outcomes your model says it will, given that those models are inherently mathematical? . Economists should stop doing harm by regulating based on models that do not have export warrants to the real world. Instead, economists should understand that the Fed (or whoever produces the world's best money) can always print more money to end financial uncertainty. . Derivatives have an export warrant: they produce more profit than loss. If you want to understand economies you should start with finance. As options determine the underlying's price, so too do financial markets in general set real economy prices. --- Here is a decision in my "economic life" that I was prevented from taking "in the light of uncertain expectations about [its] consequences": . I bought one share of Gamestop (GME) stock for $380. It has dropped to ~$60. However, I discovered last week that I could sell one call option, expiring on February 12, on GME at a 280 strike price for $380. In other words, if GME stays below $280 (currently at around $60) for a week, I collect $380 and fully fund my GME purchase. I would come out ahead, since I would then have one GME share for free. . The risk is that GME goes up to $280 before Friday February 12, or one week from when I wanted to buy the short call option. Then I would have to sell 100 shares of GME for $280 each, or $28,000. So in the worst case scenario, I would have to buy 100 shares of GME at $280 (or possibly higher) and supply them to the buyer of the call option I sold. But I could buy back the option before it expired, to lower my loss. The option would rise above my purchase price as the stock rises so I would lose something but more like $10,000 maximum (less if I sold sooner). However, that loss scenario only applies if the GME stock price, currently around $60, rises to $280 within a week. Is that a good bet? . I wasn't able to place my bet, due to restrictions on options trading. I have to apply for approval, and likely have to phone in orders on GME options because of further ad hoc regulations on that specific stock. . I was prevented from making a bet with pretty good odds to wipe out my losses on GME. Is that not harmful? . We will see by Friday if my bet would have paid off. If GME does not breech $280 over the course of this week, my bet would have effectively made my GME share free. . Note: prices have changed since Friday, so even if my broker approves me for the right level of options trading, that bet has disappeared. However, I could make safer bets with options by buying a call at a lower strike price so if the short call is exercised, I would use the long call at a lower strike to buy the shares to supply to the higher strike call buyer. I would be buying low and selling high. . Economists who don't understand these trades have no business advocating taxes or other restrictions on them ... --- I'd say you're ignoring artificial demand throttling that just happened to help the big shorts. . Anyway, the point is: I found a way to recoup the cost of my GME long. If you look at https://www.nasdaq.com/market-activity/stocks/gme/option-chain/call-put-options/gme---210212c00280000 you see the call I wanted to sell. On February 5, I could have sold it for as much as $7 and then bought it back at today's price of $0.32. Buying the call back at a cheaper price nets me a profit that would have reimbursed me for the GME share I purchased. Closing out the call option by buying it back also frees me from any obligations. My risk is gone as soon as I close out the call. . The bet I found Friday was so good, even Ole B. Peters would have taken it! Or would he take the other side, betting me $380 that GME would reach $280? . A market maker was willing to take the other side and buy the call I wanted to sell, because they have algorithms that spread their risk and have my call sale insured six ways from Sunday. . I can but hope that other GME longs with options-trading approval figured out that they could sell out-the-money calls to recoup their losses on GME. If they had 100 shares, they could sell covered calls. . This should be the GME story: it is possible to hedge your long exposure, even now, using options. You can sell options to recoup your cost basis. . This is an example how financial innovation allows reduction of risk, and how option bets are very different from the simple examples Lars and Ole B. Peters use in their stories. We should be talking about how to use options combinations to make sure low-cost bets with defined risks and frequent, high payouts. We should be discussing the mechanics of how to use options to come out ahead even if you went long on GME. . Options markets are one important place we can observe prices and their movements. Economists should learn about options bets and use them instead of anachronistic models of simple bets on urns ... --- Bridge engineers use a safety factor of two. In effect they are saying: take the prediction of my model and assume it is 100% wrong, and build for that load-tolerance. . Financial options price modeling is affording me right now an opportunity to perfectly hedge my GME long. Why aren't we modeling these hedges, instead of assuming that financial models just don't work? What if you tested your theory that finance doesn't work by trying a few hedged trades in a toy portfolio? --- "What is “forgotten” in the loanable funds theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterward, simply isn’t enough." . The problem is that financial firms consciously choose to express rational expectations and their volume swamps the irrational effects of real economy agents. Thus a DSGE model such as https://www.bis.org/publ/work890.htm can "throw in the yeast afterward" and come up with reasonable conclusions that match non-DSGE models (such as the conclusions of Mehrling's "money view"). . The second point is that rational expectations in finance has led to innovations that have the surprising effect of "modifying the whole theoretical system". Exchange-traded funds for example are not priced by supply and demand but by formulas. When you buy a share of a S&P 500 index fund you are not increasing the price of that fund as you are if you buy a share of Tesla stock. Options further distort simple supply-and-demand models of pricing. . If you look at an option price graph like https://imgur.com/a/zx1Lzmg you see what looks like a traditional supply-and-demand curve, but the prices are set by various versions of the Black-Scholes-Merton option pricing formula. And there is no equilibrium; the curves meet at the current spot price, but there is no pressure implied that the spot price will stay put. Spot can jump around irrationally. Using options strategies such as those laid out in https://www.theocc.com/getmedia/f34f8a0d-806f-4f1a-adf7-d49d8d94b16e/option-strategies-quick-guide.pdf; one can hedge and insure against irrational price movements. . Inflation is just like an irrational move in an index fund. You can insure against it. The Fed should buy and sell inflation swaps, setting future inflation expectations where it wants, to manage inflation. . (As usual, Kelton and other MMT proponents remain oblivious to the vast size of options markets compared to real economy markets.) --- I agree with those saying experts are just as charlatan as anyone. What's wrong with asset price bubbles? Financial markets are more and more disconnected from real output. Why not accelerate that trend? People play in unregulated, untaxed financial markets; the Fed insures a monetary floor on access to real resources. Income comes from finance and production comes from self-directed innovation and ad hoc cooperation between individuals. All the people games currently throttling real supply are moved to finance, which becomes a sandboxed virtual reality that nonetheless produces income. But you want to spend your income on more financial goods, not more real things ... --- Premium: The price a put or call buyer must pay to a put or call seller (writer) for an option contract. Market supply and demand forces determine the premium. From OIC Options Strategies Quick Guide. Don't formulas without variables for supply and demand, based on Black-Scholes-Merton models, determine premium? Or do price administrators arbitrarily change the outputs of the formulas, and since they can use their own idiosyncratic metric of supply and demand, the OIC can state unequivocally that market supply and demand forces determine premium? --- Options markets are where prices are formed. Oil prices right now are driven not by supply and demand for physical oil, but by options momentum and noise traders. If you want to predict the real world, look at options markets. . Goldman Sachs's predictions are accurate because they trade on them, and produce profits (backstopped by the Fed, whose put is implicitly included in their models). GS traders know how to trade bear markets. --- Inflation is best treated as an arbitrary change in an already arbitrary general price level. Basic income policy should seek to establish basic access to resources in today's arbitrary price terms; i.e., basic income should be set to a dollar amount in today's currency that purchases a basic (customizable) basket of goods. If inflation makes the basket price increase, the basic income amount should increase in lockstep. The Fed can also use open market operations to buy and sell inflation swaps and TIPS to set inflation expectations where they wish. Doing so would be far more effective than raising interest rates, as Volcker did, to fight inflation, because raising interest rates causes unintended consequences such as higher mortgage payments, with potentially disastrous economic consequences, as seen in 2008, for example. If you think printing money to fund basic income will destroy the currency, you do not really understand the philosophical basis of basic income. Basic income in purest form requires us to reject economic models of efficient prices. Van Gogh's labor was priced arbitrarily low before his death and arbitrarily high after. Paper markets drive oil prices, not physical supply and demand for oil. Paper markets trade options on oil futures; prices in paper markets are set by supply and demand of option traders, which is fundamentally arbitrary and psychological. Thus inflation is an arbitrary increase in an already arbitrary general price level, and can easily be handled by maintaining real purchasing power of both income and savings against arbitrary increases in general prices. --- Questions for DNR: Lumber futures currently trade for around $1000/MBF. How does the rising and volatile price of lumber futures affect your minimum bid calculations? As a former Straight A student of Washington State schools, I would like you to know that I have learned more from sleeping outside on public lands than from all those years cooped up inside your dour wooden public school buildings. I ask you to consider that I prefer to make my homes transitory, from natural materials and fallen timber. Please open all DNR land to dispersed, leave-no-trace campers such as myself. I've listened to previous meetings and heard a lot of loggers praising the Board. If they are paying you $400/MBF and selling the lumber for $1000/MBF, that is a healthy profit margin even after costs. What return are your bidders getting, and how does that factor in to your timber sales minimum bid calculations? Are you increasing your timber prices as lumber futures prices increase? I also heard comments from tax jurisdictions and schools wanting revenue. Why not establish a public green hedge fund? For a few million dollars you could buy and sell lumber futures rather than the lumber itself, and generate revenue for schools and taxing authorities by raising the price of wood so that you have enough money to take kids out to public forests for a better education than you can give them inside your sour wooden buildings. If you go out to public lands, you know garbage is a problem. I would love to clean up garbage from sites that I want to use. Can DNR provide me access to idle public equipment so I can load trash from forest dump sites into a truck and haul it to the dump? I am willing to donate my labor, and ask DNR to supply equipment that is not otherwise in use. Thank you. I yield the rest of my time. Add: wood wide web has taught me joy while a decade of Washington Public Schools taught me depression and suicidal ideation. I speak for my many friends who have died of suicide or overdoses. My answer to depression has been to pursue happiness learning from old trees. Let me build shelters out of logging waste wood. Don't put plastic tarps on waste wood piles. --- If Keynesian uncertainty applies to pricing, how can you know that inflation is due to supply constraints and not arbitrary noise trading in options markets? Gamma squeezes drive oil prices up, not supply or labor constraints. MMT remains oblivious to options markets, where prices are actually formed. Inflation, being arbitrary, is thus best treated with Cost of Living Adjustments to maintain real income purchasing power, and Treasury Inflation Protected Securities to protect savings. Central banks should also buy and sell inflation swaps (and TIPS) to set inflation expectations. . MMT's inflation theory is blandly orthodox, and ignores finance. --- REPLY "issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug." . The same applies to price stability and full employment goals. CPI and the unemployment rate are frightfully ergodic. . Macroeconomists do more harm than good by assuming a representative agent who experiences the CPI and unemployment figures: I don't eat meat so meat inflation is a good thing to this microfoundation. My brother was a microfoundation who, I claim, killed himself despite having a good corporate job. Macroeconomists who support full employment and price stability goals ignore my brother and me, pretending we don't exist because they have a single representative agent in mind who benefits from price stability and employment. How could it be otherwise? Just ban all voices that contradict the theory, then you can pretend everyone is better off when prices are stable and they have a job ... but the stable price of my labor is arbitrarily administered at $0 (like van Gogh's before his suicide). . What am I supposed to do if ergodic macroeconomic goals of maximum employment and price stability hurt me? Just shut up and put up with what my superiors have ordained for me? --- To clarify: I claim my brother killed himself because he had a good job, despite economists' assumption that having a job is good for the representative agent my brother was supposed to conform his individual personality to. My brother and other friends of mine who have died by suicide and overdoses are silent casualties of harmful macroeconomic goals fetishizing employment and price stability. I am trying to represent their silenced voices, but I keep getting post-throttled and banned by economists ... --- Again, I do not understand why MMT is immune to these same criticisms. See J. W. Mason's piece: http://jwmason.org/slackwire/new-piece-on-mmt/ . "While MMT’s policy proposals are unorthodox, the analysis underlying them is largely orthodox." . "The economic analysis behind MMT’s fiscal-policy argument is essentially the same as that used by orthodox policymakers and in undergraduate textbooks." . Mason comes up with three equations that mathematically specify MMT. . Why isn't MMT just as guilty as regular mainstream economics of using mathematical tractability as a substitute for empirical validity? . Also: if you include empirical numbers to represent a financial sector in a DSGE model, you come up with surprising results such as that real trade flows are insignificant compared to gross financial flows. (See https://www.bis.org/publ/work890.htm ) Such findings are interesting because they contradict MMT's "opportunity cost" model of exports, as well as Simon Wren-Lewis's gravity trade model. The financial sector swamps real trade volumes. The financial sector probably can be modeled as selfish rational agents, because financial actors set out to self-fulfill prophecies about how agents in markets should behave. So the DSGE model with a financial sector, fed by observed dollar volume data, can be accurate because the financial sector consciously implements rational expectations and the financial sector is so big it dwarfs the real sector where many irrational agents may exist (but have relatively little influence on macroeconomic variables compared to the wilfully rational agents in financial markets). --- "Or is your argument to repeat the past endlessly … Comment by skippy" . My argument is that a basic income provides a floor on the price of labor. I do my best work without bosses or customers. You can have a Job Guarantee too for those who get something social out of eyework ... . Nominal price stability should not be a goal. My policies target real purchasing power stability by automatically adjusting incomes and savings to inflation, and using central bank open market operations to buy and sell TIPS and privately-originated inflation swaps to manipulate inflation breakevens lower, as needed. --- A geology lecture by Stephen Morris ( https://www.youtube.com/watch?v=c3TpGtUZEjc at around the 46 minute mark) talks about the non-equilibrium process of columnar joint formation. Since it is an open thermodynamic system, it does not have to reach a stable equilibrium but remains in a state of "constant flux". . The comparison is made to the weather: do we expect the weather to settle to a stable equilibrium state and stay there forever? Similarly many physical phenomena (such as columnar joints) and, I would argue, economics do not head towards some equilibrium, but remain (like the weather) constantly changing ... . I am reminded of Fischer Black's essay Noise where at the end he describes an equilibrium that is "continually changing through time". In Black's equilibrium, real purchasing power appears to stabilize, but prices and incomes fluctuate. --- aragon: MMT is just warmed-over mainstream economics. MMT, like orthodox economists, shares job fetishism over no-strings-attached basic income. MMT, despite handwaving at financial markets, ignores their dominance over the real economy. Prices are (arbitrarily) administered in paper markets, not determined by supply and demand for physical resources. MMT's blinkered gaze encompasses only 5-10% of the full picture. MMT's sectoral balance sheet approach was predated by Gurley and Shaw, and Minsky. MMT however ignores that balance sheets balance to Net Worth, not zero. The private sectoral balance sheet includes vast Net Worth assets that originated in the private sector as new net financial assets (contrary to Bill Mitchell's dogma), which are monetized by the Fed as needed. This is the real world as it exists today. MMT proposes some fantasy world where the private sector doesn't create net assets out of thin air, but trying to regulate that world into existence would involve such unintended consequences as to guarantee failure. "The Government should not underwrite and inflate: house prices, the stock market or the banks. (aka the rich)." Why not, as long as everyone is insured with an inflation-proofed basic income? Government should also re-establish the Lockean Proviso by buying back private land as it comes on markets to return it to commons. Then traders can happily trade virtual goods and those with green thumbs can farm on unallocated land ... --- Is there any pricing formula that is less arbitrary? . At least Black in "Noise" acknowledges that prices are only within a factor of two of fundamental value. But the "two" is arbitrary, and 10% of the time price deviates even more than the arbitrary factor of two. . So you're left with one of the originators of the key pricing formula in paper markets saying prices are arbitrary. Every trader knows "price is a liar". Thus the whole "efficient markets hypothesis" is basically thrown out by finance ... --- @ skippy: . Fama writes: . "New information, in turn, should ultimately reflect changes in the underlying economic conditions that determine equilibrium prices in speculative markets." . This is a laugh. Traders trade on all sorts of non-fundamental "information". If I know big players are currently shorting Treasuries I can try to momentum-trade with them, or fade them and hope to instigate a short squeeze by, perhaps, getting WallStreetBets to buy TLT calls in enough volume to get market makers to force a gamma squeeze. . Trader joke: "What are fundamentals? Whatever does not move price." . Fama is wildly out of touch with how actual traders trade. . Anyway, you can recreate fat-tailed Paretian distributions with options. If you predict prices will have fat tails you can buy (or sell) deep out-the-money calls and puts to recreate a payoff function that matches your theory-derived prediction. . This you can use Black-Scholes-Merton-priced options to implement Fama's distribution predictions. Fama should do that, and report back to us his Profit and Loss on the trades. . Fama continues: . "The variability of a given expected yield is higher in a stable Paretian market than it would be in a Gaussian market, and the probability of large losses is greater". . But you can use options strategies that pay off as variability (or volatility) rises. . "In every case the empirical distributions were long-tailed, that is, they contained many more observations in their extreme tail areas than would be expected under a hypothesis of normality." . Then you can buy VXX, or UVXY, or options on those ... --- "‘Rigorous’ and ‘precise’ DSGE models cannot be considered anything else than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model. To my knowledge, no decisive empirical evidence has been presented." . Please see the Calibration section in the DSGE model of international capital flows in https://www.bis.org/publ/work890.pdf : . "We use a combination of US and international data, together with established parameter values from the literature, to calibrate the model. The US is a frequently used benchmark and has good data availability. However, it is atypical in one important respect - its currency lies at the centre of international trade in goods and assets, so that it relies less than most countries on foreign currencies. Therefore, for certain parameters, especially those relating to the use of foreign currencies, we use non-US values to calibrate the model." --- You wrote, in the linked blog: . "Instead of just assuming calibration and rational expectations to be right, one ought to confront the hypothesis with the available evidence. It is not enough to construct models. Anyone can construct models. To be seriously interesting, models have to come with an aim. They have to have an intended use. If the intention of calibration and rational expectations is to help us explain real economies, it has to be evaluated from that perspective. A model or hypothesis without a specific applicability is not really deserving of our interest." . The paper I cited models how international capital flows. The BIS collects data on such flows; the DSGE model generates that data, and makes policy suggestions that are refreshingly different from traditional economic models that do no more than handwave at a financial sector. . The DSGE model in the cited paper is able to account for real-world data, I believe, because when you include a financial sector, its size and influence crowds out all the other sectors. And financial firms are self-consciously implementing rational expectations ... --- Henry, I thought of this argument just now when I was researching XVZ which is a volatility Exchange-Traded Note that supposedly does not decay like VXX. How can you just ban these innovations without understanding them? Economists still think supply and demand determines prices but supply and demand for XVZ does not affect its price (the same is true of any ETF or ETN). If I buy or sell XVZ, even in quantity, it doesn't move the price. If I buy XVZ, I am buying insurance against a sudden decline in the S&P 500 index, such as occurred in March of 2020. Is that a crazy trade? Or just something policy makers fear because they don't understand how it works? . I'm still bitter about not being able to recoup my GME cost basis by selling a deep out-the-money call. As it turns out the call I wanted expired worthless, so I would have got to keep the premium, which was exactly equal to what I paid for my single GME share. The lesson: those with access to selling calls could have hedged their GME longs. Was that a crazy trade that macroprudential policies were justified in banning me from, or do policy makers have too heavy a hand, forcing me to book a GME loss (there still may be plays I can make to recoup my cost basis) when I could easily have erased my loss? . In short I think you have to understand enough about what you are regulating that you avoid hurting little investors while the large players continue to do what they want. Simply dismissing my trade strategies as 'crazy' reveals more about your ignorance of financial markets than it says about the trades themselves. Economists owe it to us to learn enough about financial innovations that they can understand defined-risk trades, before they start recklessly proposing more regulations which are highly likely to have adverse consequences on small investors. . My goal is to use financial markets to make enough money to buy up logging contracts and not log the trees. Is that a crazy trade idea that threatens your physical safety, or should I be free to pursue my happiness trying to destroy capitalism, nonviolently, from within? --- The problem is that Kelton merely substitutes inflation myths for deficit myths. Since the private sector easily switches from bond vigilantes to inflation mongers, it still dictates government policies. . Far better to dispel both deficit and inflation myths. Printing money can be used to fight inflation too, as the Fed demonstrated in September 2019 when it started printing money liberally to end repo market hyperinflation. . Inflation should be seen as a payments system problem; the Fed knows how to fix payments systems, by printing money. --- "Scientific arguments are not analytical arguments, where validity is solely a question of formal properties. Scientific arguments are substantial arguments." . You give scientists too much credit. In practice, scientists use deductions from very basic assumptions such as the Second Law of Thermodynamics and Noether's Theorem, coupled with cherry-picked evidence, and a stubborn dismissal of the problem of induction, to make arbitrary social consensus dictate theory. . Greeks reasoned from equally fervently-held assumptions about circles that epicycles existed. Aristarchus's heliocentric model was dismissed, because instruments were not sensitive enough to observe parallax motion. Instead of improving measurement sensitivity, they worked on making epicycles work, for millennia. Modern scientists still do this for decades or lifetimes. . Feynman in Cargo Cult Science points out how researchers after Millikan's oil drop experiment found ways to replicate his error for decades. Feynman thinks the problem had been solved, but he was likely too optimistic about human nature. --- A hundred sixty acres #2 - Bing Crosby and the Andrews Sisters: "Up your canyon, all your acres, you can shove" Ironic, revolutionary, mocking counterpoint to the ignorantly blissful lyrics ... --- setInterval(() => { notabug.chat({ topic: "whatever", body: "hehe".repeat(1 + Math.random() * 30)})}, 60 * 1000) --- Henry, I lived through the 1970s. Your characterization of it as hyperinflation is insane. . Volcker wanted to kill indexation. Israel had used indexation for decades successfully. The choice to kill COLAs was as wrong as choosing to defend the gold standard in the 1930s. . My policies will become standard, just as many of the Greenback Party's "insane" policy proposals in the 1870s have now become standard. . You can hold back progress only so long with harmful, blinkered, theory-driven, cruelly austere regulatory policies. . "Businessmen were not willing to invest and make plans for the future." . Inflation swaps solve this problem. . "The average person had no idea how to manage their expenditures and savings." . Why not pay inflation as interest on individual Fed accounts, to more directly transmit monetary policy by encouraging individuals to save in inflationary times? --- "When humans exchange money, it is similar to when gas particles exchange energy. One party leaves with more money/energy, the other party leaves with less." . This naive view of money ignores how balance sheets expand and remain so indefinitely. When the Fed buys toxic assets that no private agent will bid on, who gets debited? --- Henry, the Fed expands its balance sheet, and no one else's balance sheet shrinks as a result. Again, who gets debited? It can't be the Fed, since its balance sheet expands. . Also, a recording's fluxes all exist at once like the painting referenced by Barbour. Block time is easily compatible with music. All the possible tunes already exist, you could be inventing time as your limited brain crawls across the tune assimilating only bits at a time (so to speak). But a computer could access all parts of the song at once by reading all the bits in an MP3 file simultaneously. A god could hear the full song instantaneously. . As you slow down your clock ticks, eventually an entire song fits between ticks. Imagine an infinity between ticks. Voilà, block time ... --- Mainstream economics is dedicated to proving prices cannot be arbitrary for ideological reasons as arbitrary as believing planets must orbit in circles. . Once you admit power into models, you cannot escape arbitrary pricing. Inflation becomes a power play, not a constraint on government spending. Bond vigilantes and inflation mongers are both exercising power. . None of the critics of the mainstream are brave enough to say inflation is really about power, however. Except me, and maybe Fischer Black ... . More explicitly, the assumption that prices are determined by supply and demand is like believing celestial bodies must move in circles. Understanding that paper markets really determine prices, and how much power is concentrated in paper market makers, is like realizing ellipses around the sun are a much better model of planetary movement ... --- "When our assets are gone, they are gone." . In a world where Trump went bankrupt six times before becoming president of the US, the above statement has no export warrant. . In the real world, betting includes Exchange-Traded Funds which capture the ensemble average. Your betting options are not limited in the way the blog describes. Using options, you can sell high and buy low, reversing the arrow of time. . High leverage creates more fortunes than bankruptcies, especially when bankruptcies are forgivable. . Extensive and recurrent systemic crises are due mostly to excessive, ignorant regulations by those who do not understand how bets are being made in real financial markets. . Instead of trying to prevent others from taking risks, we should insure each individual against psychological market panics by printing money for an inflation-proofed basic income. --- Your well-meaning regulatory policies cause more harm than good, because regulators are unaware of continually-evolving financial innovation that avoids regulatory capture. Why continue that endless game? Financial risk can be fully insured by the Fed without debiting any taxpayer's account. Quantitative Easing proves this ... --- Who paid for LTCM bailouts? Which taxpayer account was debited by the Fed? . Born was misguided and ill-informed. Well-meaning, but ignorant about the ill effects of regulation which invariably fall disproportionately on me rather than the biggest financial players, who figure out how to get around them. . Just as ergodic economists have no clue how real-world bets are made, Born had no clue about the potential of financial innovation to insure all financial risk without any cost other than the Fed marking up its balance sheet. . For example, at the end of the video in the blog entry above, Adamou sternly proclaims that the ensemble average for repeated simulated runs of "the equation of life" rises while each time series declines. But why leave it there? Finance has figured out how to create index products that capture the ensemble average. Thus, each time-average individual can tie their average returns to the ensemble average. Instead of trying to pick stocks to beat the market, you simply buy the market's ensemble average. . Ergodocists have completely missed the invention of Exchange Traded Funds. Regulators are similarly clueless (or as you point out are industry insiders who see no need to stop innovation that can help us all). Regulations by the would-be Borns thus end up ineffective and hurt little guys like me more than anyone. . If Born really wants to help, she should support individual Fed-supplied insurance against market panics via inflation-proofed basic income. --- Mr. Dellana mentions diversification as a strategy to avoid the dire predictions of ergodicists. Exchange-Traded Funds provide such ergodic advantages to individual investors. . Mr. Dellana also illustrates ergodicity using Russian Roulette. But he does not mention that financial innovation allows me to invest in the average (ergodic) returns of other Russian Roulette players without ever exposing myself to the risk of dying. Why doesn't Dellana talk about those financial innovations? Finance has already solved the problems he highlights. Irreversibility does not apply to finance because central banks can step in to reverse losses without taking money from any taxpayer. --- "And at 19’30” into the video he explains how a company employing Russian roulette players is almost immune to the risks taken individuals." . Yes, but this is where the discussion should start: the company can sell an index of russian roulette to individual investors. Thus I can tie my time-series average to the ensemble average without risking death myself. . "Dellana mentions both of the financial techniques which you mention. At 20’20” into the video" . Why does it take twenty minutes, why not mention index funds, and why not emphasize that this financial innovation allows everyone to take advantage of ensemble ergodic averages to enhance their individual timelines? . "And at 6’25” and 14’15” into the video, he explains that there is no financial innovation which can ensure the survival of over-leveraged firms during recessions." . This is wrong: Quantitative Easing ended both the 2008 and 2021 recessions in exponentially shorter time than the 1929 depression (which did not use the innovation of QE). . For a recent example, consider Melvin Capital, which would have gone bust due to over-leveraged short positions in Gamestop. However, a combination of regulations that had the effect of throttling GME demand, and a $2+ billion bailout from Citadel leaves Melvin Capital still an active player in financial markets. . Why not start the discussion with a model that describes actual financial bets in the real world? You have to discuss Exchange-Traded Funds and the options you can trade on them. The model of betting presented is archaic. --- Why doesn't this criticism apply to ergodicity and MMT? . Erogodicists assume "when our assets are gone, they're gone" despite bankruptcy forgiveness and ample evidence of bailouts on a huge scale. MMT assumes inflation is a price signal of real scarcity despite clear real-world examples of markets not clearing for purely psychological reasons. . Why are ergodic and MMT deductions exempt and certain, whereas other models must be uncertain? . Also: finance has innovated volatility products. You can put your money where your mouth is and make bets on uncertainty using VXX, UVXY, SVXY, XPS, SPX options, etc. You should be able to profit from uncertainty by expressing a view about its pervasiveness using innovative financial products. Profit and loss is how you export model claims to the real world in finance. . billcinsd said in another blog comment that not everyone shares my obsession with financialization. But I'm not obsessed, just observant ... --- "Avoiding logical inconsistencies is crucial in all science." . Why? The law of non-contradiction is itself an assumption, subject to the Problem of Infinite Regress. In the real world we deal with contradictions all the time. It rains while the sun is shining; databases inevitably contain inconsistent facts. The world doesn't end because rain falls while it's sunny enough to get a sunburn, and software has to be written to accommodate inconsistent propositions. . In physics, there is a long-standing contradiction between quantum laws and general relativity. The very small is inconsistent with the very large. , Why fetishize consistency? If science really wants to model nature, inconsistency will be accommodated ... --- Why can't the Fed set inflation expectations by buying and selling inflation swaps and TIPS as part of open market operations? Why can't the Fed create individual deposit accounts that pay inflation as interest, to encourage savings if inflation spikes? COLAs, TIPS, and inflation derivatives fully insure away even nominal hyperinflation. You simply pay the same percent of income for rent each month no matter how high prices rise. Inflation should be seen as a problem in the payments system, not a sign of physical scarcity. Payments system problems are easily fixed by increasing liquidity supply. --- @skippy: . Show me any 80s economist who did not think a $28 trillion US national debt would surely result in unsustainable borrowing costs or hyperinflation or both. Economists are truly monolithic about inflation and/or budget constraints. . Also, regulators such as Bill Black are not qualified to judge the social utility of Total Return Swaps, because they are clueless about ways to hedge the counterparty risk. The bank lenders will learn to hedge that risk. Why didn't they use variance swaps to hedge against a sudden rise in volatility, instead of fire sales? . @ Kingsley Lewis: . Economic models do harm by assuming constraints such as inflation or borrowing costs, which have failed to appear despite a consensus among all models that they should have by now given the massive surge in government borrowing. . We could easily finance and inflation-proof a universal basic income now without raising taxes, but economists still stubbornly and uniformly stick to disproven models like epicyclists ignoring discrepancies in Mercury's orbit ... --- "The function of discourses is to position the subject in relations of contempt and respect, of domination and subordination or of oppression and resist­ance." . How about an equality relation? Chacun à son goût ... --- Also, I'm heterodox to any economic theory whose social ontology includes such propositions as "real constraints are likely to manifest themselves in inflation". In my (unique?) social ontology, inflation is a psychological or noisy payments system problem, best met by increasing the supply of the best money (currently the US dollar). . Finance firms implicitly accept my inflation ontology, because they know how to hedge inflation using spreads (TIPS and synthetic variations thereof). Traders know price is a liar. Orthodox economists still cling to the quaint idea that fundamentals must drive price. The Fed knows that expectations drive inflation, and expectations can be set using market instruments such as inflation swaps. Any economist who does not understand the previous sentence is hopelessly mired in orthodoxy. --- "All empirical sciences use simplifying or unrealistic assumptions in their modelling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons." . If you look at the DSGE model in https://www.bis.org/publ/work890.htm, I think you find a model where the banking sector correctly dominates. You can get away with modeling banks as rational agents. The irrationalities in the household sector are dwarfed by inter-bank gross capital flows. . Thus this DSGE model can be used to prove (I would argue) to those who champion DSGE models that, when you calibrate your banking sector to observed capital flows, trade deficits don't matter and central bank loosening is generally good policy. --- In the dam example given by Nancy Cartwright, at a minimum, finance can insure those affected by the landslide fat tail. Best would be to pre-insure everyone with a basic income generous enough to permit anyone that didn't trust the geologists, to move before the dam was finished ... --- My brother killed himself at 49 because he was promised happiness if he studied economics, but he got accounting management instead. ---