a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

I have heard about the high electronic speed of trading via articles by Donald Mackenzie in the LRB. But I usually didn't get to the end of the articles.

literally every single wall street journal article mentioning bonds in any way explains this

I note this, but, not having read the WSJ, I don't understand it, though I think I have also seen it mentioned in the UK press.

*(commodities in paper form akak stocks, bonds etc, rather than actual barrels of apples or whatever)

just that if you turned up unannounced at shrewsbury markethall with a barrel of apples you probably could set up a stall and sell them but if you turned up at the stock exchange with a barrel of apples you would probably be chased away by a policeman: what's for sale at a stock exchange is basically documents -- and stocks, bonds and so on are (or were) objects made of paper, tho in the digital age this may be less the case

(akak is a typo for aka viz "also known as", which didn't help clarity i agree)

amazing explanatory post, mark s!

if i remember right, the 'grain' chapter of William Cronon's Nature's Metropolis tells a pretty engaging tale of the birth of large-scale modern-ish commodity and 'futures' trading, situated in late 19th century Chicago. pretty amazing book overall IIRC (it's been 7-8 years and i definitely binged it).

FWIW, i took dlh's "literally every single wall street journal article..." remark as the beginning of an (imo amusing) meditation on the nature of that explanation appearing so frequently in the publication. in other words, this all highlights how normal and reasonable it is that anyone here wouldn't understand it - people who read the WSJ regularly aren't expected to recall it from the last time it got pointed out.

xp - Frank Norris' "The Octopus" deals with a similar subject and is situated around the same time. Also, around that time was the conceptual beginnings of the Federal Reserve Bank in the U.S. ... I forget the name of the book I read a year or so back that was a really good history of the Federal Reserve and what America was like before central banking.

I started to reflect that rather than attempting something like Blakeley (I gave up) I should try something like, say, an A-level Economics book. But would I understand that? Actually, no. Maybe there is a lower level - Economics for age 12, or something.

IIRC Animal Spirits was approachable and interesting in general and in terms of understanding (1) the 2008 recession and (2) challenges within economics as a discipline.
https://press.princeton.edu/books/paperback/9780691145921/animal-spirits

https://www.investopedia.com/terms/b/bond.asps

xp - in terms of the 2008 recession, that youn mentions, another possibly good recommendation for pinefox is "Diary of a Very Bad Year" (published by n+1) -- basically it's conversations between a hedge fund guy and a literary person interviewing him.

DC is correct re my post yes, sorry if thrust appeared to be “well no shit, don’t you read the wall street journal”

I doubt there is any simple way to interpret finance to pinefox or the rest of us, apart from a few of the most basic ideas. there are far too many different kinds of financial instruments, with new ones being invented constantly, each one with their new bits and bobs of intricacy, designed to squeeze out a bit more profit or shift a bit more risk away from the issuer. to an outsider like me it looks much like chaos.

For those interested, there’s a couple podcasts/YouTube channels that will help suss out the history and convoluted development of capitalism & economics, and also point out the deficiencies in Graeber & Wingrowe’s analysis.

-Derick Varn’s VarnVlog - https://varnvlogvoice.buzzsprout.com/
-What is Politics? - https://podtail.com/podcast/what-is-politics/
-The Regrettable Century - https://regrettablecentury.buzzsprout.com/

Specifically this one: https://www.youtube.com/watch?v=rbz4iAOzc7g
—
Also, this essay by History Prof Chris Wickham:

Chris Wickham, THE OTHER TRANSITION: FROM THE ANCIENT WORLD TO FEUDALISM, Past & Present, Volume 103, Issue 1, May 1984, Pages 3–36

(Those shows all handle things from more of a Marxist, anthropological one, rather than say an anarchist one)

what i don’t understand is how the yields can fluctuate. i thought when you bought the bond it came with a guarantee on its yield. if it’s a 5-year bond the yield will be (x)

OK, I'll bite. The fixed yield that you're referring to, the one that is set when you buy the bond, doesn't fluctuate. It stays fixed for the life of the bond. But that's not what people in the market mean when they talk about yields fluctuating. The fixed payment that you are guaranteed to receive is usually called the "coupon" (since in the very old days it was literally a paper coupon that you clipped off of your bond and exchanged for your interest payment). Perhaps the easiest way to think about yield is that it's the going coupon for new bonds sold today. If yields are going up, that means people now expect a higher coupon on a newly purchased bond than they did yesterday, and bond sellers must offer that higher coupon if they want their bonds to sell.

gotcha

Pretty sure I could still draw the Perfect Competition diagram, and explain the Laffer Curve. I’m just showing off.

Economics/finance is a massive blind spot for me too. I've been trying to understand central banks, and if I've got this straight, they can just print as much money as they like, when they like - ie, for quantitative easing they are basically buying government debt and paying for it by magicking up money out of thin air. Obviously this puts more money into circulation, which leads to inflation. But why is inflation such a bogeyman, why isn't it just a zero sum game? Let's say for example that instead of taxing people, governments simply printed the money they needed. Yes, this would lead to massive inflation, which would diminish the value of people's money. But at the same time, people wouldn't be paying tax and the extra money they had would compensate for the reduction in the value of the currency. Wouldn't it? I guess not, or all governments would be doing this!

i think you are in a prime position to read about modern monetary theory! https://en.wikipedia.org/wiki/Modern_Monetary_Theory

Thanks for that, interesting! I find the whole idea of fiat money fascinating - it's like a collective illusion or something, it only exists because people will it into existence...

no different than the gold standard - an arbitrary rock that people collectively will into believing has value

But why is inflation such a bogeyman, why isn't it just a zero sum game? Let's say for example that instead of taxing people, governments simply printed the money they needed.

it's a great question. some level of inflation actually is desirable

one reason why is that deflation is very undesirable as it leads to a "deflationary spiral": if consumers anticipate that prices will be lower tomorrow, they will delay purchasing, this then lowers demand, causing prices today to fall further, with causes firms to layoff workers and incomes to fall, which makes demand falls further, and so on. a positive inflation rate provides a "buffer" against deflation. this is especially important over the business cycle since prices tend to fall at the onset of a recession. during the early period of the great depression prices fell by something like 7% every year. central banks nowadays try really hard to avoid this

another reason is that monetary policy becomes ineffective at the "zero lower bound". nominal interest rates can't go (far) below zero (since at some point it becomes profitable to store cash under your mattress rather than buying bonds), which blunts the ability of central banks to stimulate the economy through rate cuts. a higher inflation rate pushes the economy further from this point

there has been a discussion over the last 10+ years about the fed increasing its inflation target for exactly these reasons. there's lots of speculation today that rather than aim to get inflation back to its previous target of 2%, the fed may "settle" at a new permanent higher rate of 3% or 4%

what's usually undesirable isn't inflation itself, but accelerating inflation, or more generally unstable inflation. in theory any given level of inflation should be "neutral" in the way you describe as long as it is stable

accelerating or unstable inflation can be a problem because it increases uncertainty in the economy, which is usually a bad thing. one way this manifests is that at the margin a higher baseline level of uncertainty will make people invest in safer (usually lower return) assets rather than riskier (higher return) ones

unstable inflation can also create lots of arbitrary and unequally distributed costs. many contracts are either written in nominal terms (i.e., no inflation-adjustment, or the inflation adjustment is only updated irregularly) and so people who signed a contract with an ex post low inflation indexation will get large wage cuts if inflation surges

How did I miss this thread for the last week??? Need to catch up.

Thanks flopson, that all makes sense - I can see that accelerating and unstable inflation is destructive, and maybe inflation in inherently unstable. But if it's possible to take that out of the equation - and maybe it isn't - then it seems to me that inflation is still the zero sum game, where value is transferred from people holding money to governments, or to people holding debt or other assets - but the value itself is not destroyed.

As for the gold standard being the same as fiat currency in terms of people willing it to believe it has value - I don't think that's quite right. Gold has an inherent scarcity value that fiat money doesn't. Governments can simply print more money, but you can't just print gold - you have to buy it or dig it up from the earth. Also gold has a use value (or did more obviously so when it first became a currency) because it has an aesthetic value as decoration.

Gold has an inherent scarcity value that fiat money doesn't.

okay yeah, but what you're saying is that humans value scarcity, not gold. for example, at various points in history people have valued cowrie shells, or wampum, on a similar basis to gold, believing these items to be similarly scarce. and governments can artificially create scarcity too - by just not issuing too much money. or, to put it a different way, to only make one entity (the government) capable of issuing money, and carefully regulating that process.

Also gold has a use value (or did more obviously so when it first became a currency) because it has an aesthetic value as decoration.

aesthetic value not limited to gold! why gold and not other items that had aesthetic value at the time? perhaps you mean some other property of gold? and what of non-western societies that were never on the gold standard?

flopson, I don't have an interesting econ question, but I am vulgarly interested in whatever juicy academic econ beefs various schools or luminaries have with each other, but the only thing that I've subconsciously absorbed from popular media is that the chicago school is some kind of abstract jerk generator, and that the behavioral economists think the non-behavioral economists are peddling scientology bracelets (or is it vice versa?), but as for professional talking-to-the-media economists, they all seem pretty polite and deferential to each other.

What's the inside scoop? Are there secret vicious twitter beefs between Ha-Joon Chang and Tyler Cowen we don't know about? Bitter school rivalries that only reveal themselves at seedy invite-only parties after conferences?

re: intrinsic properties of gold, just want to chime in to say that (like other precious metals) gold is extremely resistant to oxidation

Yeah I accept that there's an arbitrary quality to the gold standard - why gold and not cowrie shells - but ultimately it still constrains money as something that the issuer promises to exchange for an actual thing. With fiat money, there's no 'thing' at the bottom that the system is based on. It's just a lot of people agreeing to accept that a complete abstraction has value, so it seems to me to be on a different conceptual level.

it's tempting to think that the physical (and weighty!) nature of gold represents a less abstract 'value' than fiat money, but when you examine it carefully the value of gold used as money is no different than paper bills or digits written on an account sheet, for the simple reason that money itself is entirely abstract and that must always be its inherent nature no matter what "thing" represents it.

flopson, I don't have an interesting econ question, but I am vulgarly interested in whatever juicy academic econ beefs various schools or luminaries have with each other, but the only thing that I've subconsciously absorbed from popular media is that the chicago school is some kind of abstract jerk generator, and that the behavioral economists think the non-behavioral economists are peddling scientology bracelets (or is it vice versa?), but as for professional talking-to-the-media economists, they all seem pretty polite and deferential to each other.

What's the inside scoop? Are there secret vicious twitter beefs between Ha-Joon Chang and Tyler Cowen we don't know about? Bitter school rivalries that only reveal themselves at seedy invite-only parties after conferences?

― Philip Nunez, Tuesday, November 1, 2022 10:54 PM (eighteen minutes ago) bookmarkflaglink

this is probably going to be very disappointingly boring

the old freshwater/saltwater divide in macro has both weakened and geographically dispersed. the schools keeping the freshwater spirit alive today are minnesota, nyu and ucla. chicago's free-market identity has softened, too, although it's still known for having rude seminar culture and treating its grad students like shit

i would say the main beef right now is over the role of economic theory in empirical research in economics. specifically, there is a lot less economic theory in empirical research today, and some people are mad about it. berkeley, harvard and mit are on the atheoretical side (we call it "reduced-form") side while yale and chicago are more on the theoretical side ("structural"). princeton is somewhere in between. departments aren't really the main split and you see it more in sub-fields. fields like public finance, labor and development tend to be in the reduced-form camp, while macro, industrial organization and trade are more structural. josh angrist at MIT is probably the most outspoken advocate of the reduced-form approach, and the hugely influential graduate textbook he wrote over a decade ago ("Mostly Harmless Econometrics") takes a very confrontational approach, openly criticizing previous work for being opaque and "harmful"

purely theoretical economics, which used to be both what the majority of economists did and the most highly respected, is small today and many economists see theorists as weird nerds solving dinky math problems. most theorists are lucky if they can convince 1-2 graduate students a year to specialize in the field

i don't think things like behavioural economics are very controversial anymore. some economists have an aversion to behavioural explanations, in the sense that they'd rather an explanation that doesn't rely on people acting irrationally, and see the proliferation of behavioural "heuristics" as ptolemaic fudges whereby behavioralists explain every new phenomenon by positing a new bias. however there's now a lot of really good behavioural work and some of the biases are now very well-documented so you don't hear much complaining about it

If yields are going up, that means people now expect a higher coupon on a newly purchased bond than they did yesterday, and bond sellers must offer that higher coupon if they want their bonds to sell.

― o. nate, Tuesday, November 1, 2022 2:43 AM (yesterday) bookmarkflaglink

this has been covered elsewhere in the thread, but when the news is talking about yields going up its because bond prices have gone down on the secondary market - not because the coupon rate has increased.

"bond prices have gone down on the secondary market"

okay but i don't know what this means :/

secondary markets = people buying and selling bonds that have already been issued

suppose interest rates decrease. it then becomes worth it for someone to buy a bond which was purchased at an earlier date with a higher coupon rate. this pushes up the price of the earlier bond in the secondary market and decreases yield (since coupon is held fixed and yield = coupon/price)

this is why bonds are thought to convey expectations about changes in interest rates through the yield curve, a graph with yield on vertical axis and maturity on horizontal axis. the yield curve is typically upward sloping: higher maturity bonds (e.g. 10y) have higher yields than short (2y). this is due to the liquity premium (among other things). all else equal it's better to have a 2y than a 10y bond. even if you want a 10y bond, if they cost the same price, you could recreate a 10y bond by buying five 2y bonds, and then you'd have the option of re-evaluating each year whether you want to buy again. 10y bonds therefore have to sell at a lower price (higher yield) to make them attractive

if the yield on 10y bonds decreases relative to 2y, this suggests that people expect interest rates to decrease and stay low for a long time (which usually happens during a recession). this can cause the yield curve to flatten or invert

even if you want a 10y bond, if they cost the same price, you could recreate a 10y bond by buying five 2y bonds, and then you'd have the option of re-evaluating each year whether you want to buy again

this is a bit unclear. you could "re-create" a 10y bond by buying a 2y bond, waiting 2 years, then buying another 2y bond, etc. you have the option to re-evaluate (maybe a better investment opportunity comes along) every 2 years

A friend of mine has a very rare 70s folk album that he offers to sell me for £400. I say no thanks, but instead ask to borrow it for a month, paying him £80 for the pleasure. He agrees, hands over the vinyl, and I immediately sell it to someone else for £500. A week later the record is reissued on CD and the value of original pressings falls: I'm able to buy it back for £300, return it to my friend and keep the £120 profit.

I haven't been able to follow the thread, but that last statement doesn't make sense, as if you have only borrowed an item, you cannot sell it to someone else.

while i feel if you pay him to "borrow" it for a short period you're in fact renting it

There's nothing in our agreement to stop me selling it; as long as he gets it back at the end of the month he's happy, and he's made £80 from something that was otherwise sitting on his shelf doing nothing.

The risk is mine: if it hadn't been resissed and the artist had died, the value could've increased and I'd've lost money.

i think pinefox and i are disagreeing w/you abt terminology here

I think one can only sell something that one owns.

If Mark S lends me a copy of A HIDDEN LANDSCAPE ONCE A WEEK, I cannot sell it.

It is not mine to sell.

in the world of market-trading discussed in this thread (of stocks, bonds etc), something *like* fetter's manoeuvre is not just common, it is normal

• viz items passed across from trader A to trader B for a specified period
• trader B sells them to a third party C and repurchases them (ideally for a little less, so that trader B makes a small profit)
• the item is then returned per specified period

— what's different is that
(a) this is not the kind of unique item fetter is talking about, set about the benjaminian-auratic irreplaceability, but (very often) one document among many in the market at large so similar as to be identical (meaning that replaceability is not often an issue)
(b) the market culture is expecting and indeed encouraging such activity, so that if the word "borrow" or "elnd" or "rent" is used, it doesn't vitiate the possibility of such behaviour (quite the opposite)
(c) ownership is more a contractual matter (with specified penalties if the project goes awry) than the kind of moral-personal matter entailed by borrowing between pals

• the item is then returned per specified period

this shd say: the item is then returned to trader A per specified period

given the nanosecond nature of sales in the digital context, trader B may well undertake such a project many many many time before returning it to trader A

Mark S: what you say indicates that the market world you mention is different from the normal world. So analogies between the two point up the distinction or incommensurability between them, rather than showing a continuum in which the finance world is really just like ours.

yes! i think we are moving back and forth between different worlds like an example from wittgenstein

except when i was out getting a coffee i thought of a COUNTEREXAMPLE (which some would call an EDGE CASE)

suppose:
• i am walking past __________ where you work and you come out and see me, and i say "pinefox! just the chap! can you lend me a tenner till tuesday?"
• and you (luckily for the story) say "of course my fine fellow!" and hand over the relevant crisp plastic note
• and then on tuesday i seek you out and hand you the correct crisp plastic note

i feel we would both find it unexpected behaviour if you then said "well mark, i happen to know that you took my ten pound note to a CAKE SHOP and immediately bought several items that you then ate on THAT VERY BENCH OVER THERE -- so in conclusion this is NOT the note i let you borrow but merely another exactly like it… and we can no longer be friends"

in conclusion: money itself passes between these worlds more comfortably (this is kind of the point of it: that it was never not your ten pounds but i am allowed to do as i please with it as long as you get it back in good time and in kind)

(of course this is somewhat why some argue that friends shd never lend to or borrow from friends: it blurs the worlds)

Interesting. I am quite convinced by this post.

Once again, I thank you for the charming narrative and personal quality of your fictional examples.

i haven't read the book you abandoned but i wonder if passing between worlds through the barrier of seeming incommensurability isn't roughly what grace blakeley means by "financialisation": viz the turning of something not ordinarily seen as money into money (with all its curious attendant customs and assumptions)

"A commodity appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties. … The form of wood, for instance, is altered, by making a table out of it. Yet, for all that, the table continues to be that common, every­day thing, wood. But, so soon as it steps forth as a commodity, it is changed into something transcendent. It not only stands with its feet on the ground, but, in relation to all other commodities, it stands on its head, and evolves out of its wooden brain grotesque ideas, far more wonderful than 'table­ turning' ever was."

this is why bonds are thought to convey expectations about changes in interest rates through the yield curve, a graph with yield on vertical axis and maturity on horizontal axis. the yield curve is typically upward sloping: higher maturity bonds (e.g. 10y) have higher yields than short (2y). this is due to the liquity premium (among other things). all else equal it's better to have a 2y than a 10y bond. even if you want a 10y bond, if they cost the same price, you could recreate a 10y bond by buying five 2y bonds, and then you'd have the option of re-evaluating each year whether you want to buy again. 10y bonds therefore have to sell at a lower price (higher yield) to make them attractive

if the yield on 10y bonds decreases relative to 2y, this suggests that people expect interest rates to decrease and stay low for a long time (which usually happens during a recession). this can cause the yield curve to flatten or invert

― flopson, Wednesday, November 2, 2022 4:47 AM (five hours ago)

a simpler way to explain why the yield on a 10y bond is higher than the yield on a 2y bond (usually expressed as a higher interest rate on the 10y bond than the 2y bond, if both bonds are issued at the same time) is that the 10y bond is a riskier investment, so the higher interest rate is supposed to compensate you for that increased risk. it is riskier for a number of reasons - risk of default by the issuer (if issued by a company and not the government - not so much if issued by the government, because governments are viewed as close to risk-free as you can get via ability to print more money), but also riskier to you in that central monetary authority in your country to move interest rates against you, making your bond worth less than it was before for the various reasons we've discussed itt

(a) this is not the kind of unique item fetter is talking about, set about the benjaminian-auratic irreplaceability, but (very often) one document among many in the market at large so similar as to be identical (meaning that replaceability is not often an issue)

the word you're looking for here is fungibility, which is key to selling short. shares of common stock are the most common example in financial markets, because a share of common stock is completely fungible with another share of common stock. but you can extend this to other fungible items too, like bushels of corn, or megawatt hours of electricity, etc.

ok but my explanation is better than just saying "fungibility" (a word i admit i had forgotten) (also a word i like, bcz it looks like it means "can turn into a mushroom")

I think one can only sell something that one owns.

If Mark S lends me a copy of A HIDDEN LANDSCAPE ONCE A WEEK, I cannot sell it.

It is not mine to sell.

― the pinefox, Wednesday, November 2, 2022 6:29 AM (three hours ago)

putting aside one's principles here, the key to mark's example is that a buyer is indifferent as to whether the seller actually owns or doesn't own the item he is selling, so long as there are no consequences to the buyer if the buyer accidentally buys stolen goods. the law generally works this way too - any recourse by a wronged party here (i.e. if the copy of A HIDDEN LANDSCAPE ONCE A WEEK were in fact stolen from someone else) is against the seller, not against the buyer (assuming the buyer didn't know it was stolen). intuitively, that makes sense - when you buy a book online, do you first ask the seller "hey I just want to make sure this copy of A HIDDEN LANDSCAPE ONCE A WEEK wasn't stolen?"

that said, the government has an interest in making sure that items of high value like cars and houses can't be stolen and flipped so easily, so there is a titling system run by the government that then shifts some of the responsibilities back onto the buyer, such that if you're buying a used car or house, you do have some responsibility to do due diligence and make sure that you're getting a clean title of ownership etc. - ignorance no longer works in your favor here!

Yeah I accept that there's an arbitrary quality to the gold standard - why gold and not cowrie shells - but ultimately it still constrains money as something that the issuer promises to exchange for an actual thing. With fiat money, there's no 'thing' at the bottom that the system is based on. It's just a lot of people agreeing to accept that a complete abstraction has value, so it seems to me to be on a different conceptual level.

― Zelda Zonk, Tuesday, November 1, 2022 11:26 PM (yesterday)

this may be a bit unfair / putting words in your mouth, but it feels to me what is appealing about the gold standard to you is that gold is something that is out of the government's control to make more of without great effort on its part - that perhaps you distrust the government to make the right decision about its ability to print more money in a fiat money economy. in which case, may i introduce you to something called bitcoin!