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Saturday, 19 May

16:00

The Weekend Quiz May 19-20, 2018 answers and discussion Bill Mitchell billy blog

Here are the answers with discussion for this Weekends Quiz. The information provided should help you work out why you missed a question or three! If you havent already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

In a fixed coupon government bond auction, the higher is the demand for the bonds the:

(a) higher the yields will be at that maturity, suggesting that higher fiscal deficits will soon drive short-term interest rates down.

(b) lower the yields will be at that maturity, suggesting that higher fiscal deficits will soon drive short-term interest rates down.

(c) lower the yields will be at that maturity but this tells us nothing about the fiscal effect on short-term interest rates.

The answer is Option (c) lower the yields will be at that maturity but this tells us nothing about the fiscal effect on short-term interest rates.

Option (b) lower the yields will be at that maturity, suggesting that higher fiscal deficits will soon drive short-term interest rates down might have attracted your attention given that it correctly associates higher demand for bonds will lower yields.

You then may have been led by your understanding of the fundamental principles of Modern Monetary Theory (MMT) that include the fact that government spending provides the net financial assets (bank reserves) and fiscal deficits put downward pressure on interest rates (with no accompanying central bank operations), which is contrary to the myths that appear in macroeconomic textbooks about crowding out.

But of-course, the central bank sets the short-term interest rate based on its policy aspirations and conducts the necessary liquidity management operations to ensure the actual short-term market interest rate is consistent with the desired policy rate. That doesnt mean the central bank has a free rein.

It has to either offer a return on reserves equivalent to the policy rate or sell government bonds if it is to maintain a positive target rate. The penalty for not borrowing is that the interest rate will fall to the bottom of the corridor prevailing in the country which may be zero if the central bank does not offer a return on reserves.

This situation arises because the central bank essentially lacks control over the quantity of reserves in the system.

So the correct answer is that movements in public bond yields at the primary issue stage, tell us nothing about the intentions of central bank with respect to monetary policy (interest rate setting).

Given that the correct answer includes lower yields th...

15:00

Devils & Details: Tune in now Pete Wargent Daily Blog

As promised, click the image below to tune in.


Interesting to get Colgo's view on how the Irish housing bubble played out.

14:08

Can Cryptocurrencies Survive? "IndyWatch Feed Crypto"

QUESTION: Do you think Bitcoin can survive? Or has it been a passing fad?

MT

ANSWER: Bitcoin rose because 70% of the miners were in China. It was NOT simply because energy was cheap. Bitcoin became the LEADING means of money laundering and movement of cash out of China, circumventing their rule of law and currency controls. So do not think for one minute that Bitcoin rose because it was really a wonderful idea?

BitCoin was a means to get money out of China when you could not wire money out under currency controls. In Australia, they have adopted the slogan that CASH IS FOR CRIMINALS. They will do the same to cryptocurrencies. All they need to do is declare a law that it is illegal for a business to accept cryptocurrency under the excuse that it is money laundering. You just killed the entire industry.

The government has the army, tanks, and the guns and soon robot soldiers. Until the army is willing to turn against the hand that feeds them, which is why they are developing robot soldiers, you cannot stand with cryptocurrency and claim some magical right to suppress government and central banks. You need the power grid!

Video streaming today is because of the online porn industry (I wont post a picture of that).  They needed to sell their product and they invented video streaming under the mother of all evolution Necessity. Video streaming has since expanded to everything. Blockchain can be used in many other contexts just a video streaming was not restricted to just porn. The technology can be used for documents and other things besides just cryptocurrencies.

I have been skeptical about the claims that cryptocurrencies will replace all money and central banks and end banking creating money out of thin air. That would be recreating the Dark Age. For that to take place there can be no lending. The mortgage market would...

11:00

HSBC Goes All-In on Blockchain Daily Reckoning Australia

Today, I want you to imagine your daily commute as a brisk 10-minute walk.

Just down the road is a fresh food market too.

The air is clean and clear.

Theres just one snag

You have to walk by streets coated with horse manure.

This was the reality of anyone living in the 19th century.

Some 20 million foals trundled up and down the streets of North America and Europe alone.

A gallon of urine and 50 pounds of manure a single stallion could produce that in a days work.

The stench must have been unbearable. To say nothing of diseases spread by flies bred in horse dung.

Thankfully, its not something you have to deal with today.

Heres why

The family car revolutionised our daily commute and grocery run. And its made cities much larger than one with a transport system built on horses ever could.

But not every outcome has been positive.

Cars eliminated methane emissions in cities, but they introduced ozone-ripping carbon monoxide. And car accidents replaced injuries from bucking and kicking horses.

But it does show that disruption rarely unfolds without complication.

No matter where it happens, or on what scale, change always produces winners and losers.

Often times, it is both necessary and welcome.

But its rarely inevitable.

In hindsight, its easy to assume the transition from horses to cars took place overnight and that it was met with broad approval. But that couldnt be further from the truth.

In fact, this process played out over the course of half a century, introducing as many problems at it solved.

After all, nothing takes place in a vacuum. Its impossible to upend industries without destroying the livelihood of both people and businesses.

Road sweepers, carriage drivers and breeders suddenly found themselves out of work as the horse was displaced.

But it also paved the way for the biggest explosion of urban development in human history.

Now, some 120 years following the four-wheeled takeover, we find ourselves at another inflection point.

This fight promises to be fiercer than any before it. But, unlike the automobile, its unlikely this challenger will need 50 years to displace its competitor.

In fact, just this week, it landed the first blow

Blockchain goes mainstream

A landmark event took place this week that could overhaul the financial industry as we know it.

Banking giant HSBC completed the worlds first commercially viable trade-finance transaction using blockchain.

Its proving that blockchain technology is ready for wider adoption in the $9 trillion trade-finance industry.

More than anything, it could be the first step in making banks obsolete, resulting in faster and more efficient trading transactions.

As it stands now, these are cumbersome. They require stacks...

11:00

The Coming Massive Commodity Rally Daily Reckoning Australia

Earlier this year Goldman Sachs had sent a report out to its high-net-worth clients indicating that it was the best time to own commodities in at least 15 years, if not decades.

This view from Goldman was based on three forces coming together at the same time:

  1. Economies around the world are growing in unison (good for commodity demand);
  2. The world is borrowing more money, which means more to spend (again, good for commodity demand); and
  3. Inflation is on the rise (again, good for commodity demand).

You may not love Goldman Sachs, but their research is definitely worth paying attention to.

Then, just a short time later, the notoriously secretive hedge fund legend Paul Tudor Jones had suddenly become rather chatty. His main message detailed a very bullish view on commodity prices.

Jones view is based on a belief that the recent big tax cut is a mistake. His issue with the tax cut is timing it coming nine years into an economic expansion. Jones believes the tax cut is going to be the spark that finally sets off the inflation fire.

I see his point there are a lot of inflationary forces at work here. This tax cut, on top of a decade of ultra-low interest rates, on top of years quantitative easing, on top of a spending bill.

The bottom line for Jones is that nothing performs better in an inflationary environment than commodities.

And in April, another very smart investor reported that they think commodities are going to perform exceptionally well. At some point we may need to conclude that these proven investors are onto something.

This time around the investor is DoubleLine Capitals Jeffrey Gundlach.

Gundlach doesnt just think commodities are going to do pretty well from here; he thinks commodity prices are on the verge of exploding higher. Gundlach isnt looking for a 30% rise; he expects commodities as a group to go up 100%, 200% or even 400%!

That is a bold call.

As to why (always the important part) Gundlach is so bullish on commodities, the investing heavyweight hits on a few factors that are similar to what we heard previously from Goldman and Jones.

Those factors include:

  • Continuing growth in global economic activity;
  • The Trump tax cut, which will boost economic growth;
  • The incredibly easy money policies from the European Central Bank; and
  • A continued weakening of the US dollar.

In addition to putting together the fundamental case behind rising commodity prices, Gundlach points to something else. That something else is history.

He captures his point in the chart below. As of today the S&P GSCI commodity index is sitting at its lowest point relative to the S&P 500 since the dotcom bubble:

...

Friday, 18 May

20:44

Thousands of companies to take action under Australia's anti-slavery law "IndyWatch Feed Economics"

The Australian government said it would introduce its Modern Slavery Act to parliament by mid-2018.

IndyWatch Australian Economic News Feed Archiver

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