Tachyon Flare
05-12-2003, 03:45 PM
Financial Matrix
I have been sifting through the recent economic publications and frankly, I find it alarming. At times I wonder whether the academia enjoys flooding the market with dangerously misguided economist or whether these individuals relish swallowing the blue pill (Welcome to the Matrix). Whatever the reason, it seems to coming at the expense of productive members of society. The publications that I have collected below are engaging in monetary policies that will have detrimental impact on the physical economy.
This country is facing a number of problems that needs to be addressed before it is too late. America is facing currency devaluation, equity volatility, bank failures, increase in derivatives, acceleration of monetary aggregate, unpayable debt, eviscerated export capability, rising unemployment probably at 12% (How stupid does the BLS think we are?! 6%?!!@#), low savings rate, state budget deficits, outflow of foreign capital, the list goes on and on and on. ... Yet somehow, in the midst of this crisis, the world pretends to go about its business as if its’ severed from the economic reality. Instead of averting disaster, it continues to propagate the flawed economic doctrines run by our wonderful Government/Federal Reserve. Just look at some these publications that I have listed at the bottom, notice the cute titles wrapped around with esoteric flawed Euler-like mathematics (See How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible) to somehow magically correct our decaying economy. If these publications are indication of the world markets, God help us all!
Living with flexible exchange rates: issues and recent experience in inflation targeting emerging market economies
By Corrinne Ho and Robert N McCauley
http://www.bis.org/publ/work130.pdf
This overview paper examines two main issues. The first is why the exchange rate matters, especially for emerging market economies. The second is under what circumstances and how countries have dealt with the challenges posed by the exchange rate in recent years in the context of inflation targeting. We find that emerging market economies, being more exposed to the influence of the exchange rate, are likely to accord the exchange rate a bigger role in policy assessment and decision-making. However, even with the greater emphasis on the exchange rate, the emerging market economies under review have not attended to the exchange rate in a manner that contradicted their announced inflation commitments. Furthermore, recent experience shows that having to keep an eye on the exchange rate is also a fact of life in industrial economies, inflation targeting or not.
Why in damnation would I want to live under the destructive floating exchange rate system (also know as dirty floats)? The floating exchange rate system 1971-200x as we know it is finished! Look at the nominal exchange rate of the dollar versus various other currencies! The increase of volatility is beneficial to currency traders; remember when George Soros short the Pound at the expense of the British citizens? We are currently in a nomenklatura obituary phase; a phase that siphons existing wealth to continue the fraudulent financial sector.
Title: How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible
http://www.imf.org/external/pubs/ft/wp/2003/wp0364.pdf
Summary: I model deflation, at zero nominal interest rate, in a micro founded general equilibrium model. I show that deflation can be analyzed as a credibility problem if the government has only one policy instrument, money supply carried out by means of open market operations in short-term bonds, and cannot commit to future policies. I propose several policies to solve the credibility problem. They involve printing money or nominal debt and either (1) cutting taxes, (2) buying real assets such as stocks, or (3) purchasing foreign exchange. The government credibly "commits to being irresponsible" by using these policy instruments. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal, since it curbs deflation and increases output by lowering the real rate of return.
The second publication admits use of mathematics that base "decisions imply an Euler or IS equation," keeping in mind that Carl Gauss refuted both Leonard Euler and Jean-Louis Lagrange. Nonetheless, aside from that minor detail, does anyone not find it disturbing to find title that "committed to being irresponsible"? On another minor detail, the author Gauti B. Eggertsson thanks his contributors who provided extensive comments, one of them being of course, our beloved Federal Governor Ben Bernanke (aka Mr. Print Press). Nice eh?
Title: Fatal Attraction: A New Measure of Contagion
http://www.imf.org/external/pubs/ft/wp/2003/wp0380.pdf
Summary: This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice it measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of “positive contagion," in which capital flows to emerging markets in a herd-like manner, largely unrelated to fundamentals. Identifying such periods of "fatal attraction" is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.
Herd-like manner eh? Expect rapid outflows of capital as the dollar tanks. Enough said.
Title: Unanticipated Shocks and Systemic Influences:
The Impact of Contagion in Global Equity Markets in 1998
http://www.imf.org/external/pubs/ft/wp/2003/wp0384.pdf
Summary: August to September 1998 has been characterized as one of the worst episodes of global financial distress in decades. This paper investigates the transmission of the Russian and the LTCM crises through global equity markets using a panel of 14 developing and industrial countries. The results show that contagion was systemic during the period, with industrial countries providing the dominant cross-country transmission linkages . Both crises reinforced each other, highlighting the importance of studying them jointly. An implication of the empirical results is that models of contagion that exclude industrial countries are potentially misspecified and may yield misleading outcomes.
I highly suggest reading "When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein." I also suggest reading Armando Falcon's 112 page study titled "SYSTEMIC RISK: Fannie Mae, Freddie Mac and the Role of OFHEO."
Title: Does Insider Trading Raise Market Volatility?
http://www.imf.org/external/pubs/ft/wp/2003/wp0351.pdf
Summary: This paper studies the role of insider trading in explaining cross-country differences in stock market volatility. The central finding is that countries with more prevalent insider trading have more volatile stock markets, even after one controls for liquidity/maturity of the market and the volatility of the underlying fundamentals (volatility of real output and of monetary and fiscal policies). Moreover, the effect of insider trading is quantitively significant when compared with the effect of economic fundamentals.
The dismantling of the Glass-Steagall Act around November of 1999 blurred the distinction of brokerage firms and commercial banks. There is no doubt that the destruction of this act ultimately increased market volatility. (See Frontline Bigger Than Enron: http://www.pbs.org/wgbh/pages/frontline/shows/regulation/) As this market volatility increases, more financial speculators will take advantage of derivatives. According to the BIS:
"Global over-the-counter (OTC) derivatives market point to unusually robust growth in euro-denominated interest rate swap contracts in the second half of 2002. As a result, the total estimated notional amount of outstanding OTC contracts stood at $141.7 trillion at the end of December 2002, an 11% increase from end-June 2002. This compares with a 15% increase in the previous half-year period. At the same time, gross market values grew sharply, rising by 43% to $6.4 trillion, compared with a 18% increase in the first half of 2002. The following trends are notable:
Substantial rise in gross market values
Strong double-digit growth in notional amounts outstanding
Euro-denominated swap instruments dominate
Subdued market for currency derivatives
OTC business accelerates relative to that on exchanges"
Check out page 38, there is a fascinating chart for "Market Volatility and Insider Trading Index By Country." Not sure whether I agree with the methodology but it would be interesting to see quarterly updates.
Title: Inflation Targeting Lite
http://www.imf.org/external/pubs/ft/wp/2003/wp0312.pdf
Summary: Inflation targeting lite (ITL) countries float their exchange rate and announce an inflation target, but are not able to maintain the inflation target as the foremost policy objective. This paper identifies 19 emerging market countries as practitioners of ITL. They seem to focus mainly on bringing inflation into the single digits and maintaining financial stability. ITL can be viewed as a transitional regime aimed at buying time for the implementation of the structural reforms needed for a single credible nominal anchor. The important policy challenges for an ITL central bank include whether or not to precommit to a single anchor.
Check out those committed inflation rates! Recent Inflation objective from the European Central Bank:
The ECB's Inflation Objective
http://www.imf.org/external/pubs/ft/wp/2003/wp0391.pdf
Summary: The ECB's objective of medium-term inflation below 2 percent has been portrayed by critics as ambiguous, asymmetric, and excessively stringent. This paper attempts a comprehensive evaluation of the trade-offs.
In summary, these publications offer only short-term solutions that will only exacerbate the situation. This country needs radical monetary reform and government controlled bankruptcy organization implemented before it causes any financial shock waves. Either we accept the reality of our current predicament thereby preventing a depression or we can continue to relish on our daily blue pills on this so called coming “recovery.” The choice is yours.
I have been sifting through the recent economic publications and frankly, I find it alarming. At times I wonder whether the academia enjoys flooding the market with dangerously misguided economist or whether these individuals relish swallowing the blue pill (Welcome to the Matrix). Whatever the reason, it seems to coming at the expense of productive members of society. The publications that I have collected below are engaging in monetary policies that will have detrimental impact on the physical economy.
This country is facing a number of problems that needs to be addressed before it is too late. America is facing currency devaluation, equity volatility, bank failures, increase in derivatives, acceleration of monetary aggregate, unpayable debt, eviscerated export capability, rising unemployment probably at 12% (How stupid does the BLS think we are?! 6%?!!@#), low savings rate, state budget deficits, outflow of foreign capital, the list goes on and on and on. ... Yet somehow, in the midst of this crisis, the world pretends to go about its business as if its’ severed from the economic reality. Instead of averting disaster, it continues to propagate the flawed economic doctrines run by our wonderful Government/Federal Reserve. Just look at some these publications that I have listed at the bottom, notice the cute titles wrapped around with esoteric flawed Euler-like mathematics (See How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible) to somehow magically correct our decaying economy. If these publications are indication of the world markets, God help us all!
Living with flexible exchange rates: issues and recent experience in inflation targeting emerging market economies
By Corrinne Ho and Robert N McCauley
http://www.bis.org/publ/work130.pdf
This overview paper examines two main issues. The first is why the exchange rate matters, especially for emerging market economies. The second is under what circumstances and how countries have dealt with the challenges posed by the exchange rate in recent years in the context of inflation targeting. We find that emerging market economies, being more exposed to the influence of the exchange rate, are likely to accord the exchange rate a bigger role in policy assessment and decision-making. However, even with the greater emphasis on the exchange rate, the emerging market economies under review have not attended to the exchange rate in a manner that contradicted their announced inflation commitments. Furthermore, recent experience shows that having to keep an eye on the exchange rate is also a fact of life in industrial economies, inflation targeting or not.
Why in damnation would I want to live under the destructive floating exchange rate system (also know as dirty floats)? The floating exchange rate system 1971-200x as we know it is finished! Look at the nominal exchange rate of the dollar versus various other currencies! The increase of volatility is beneficial to currency traders; remember when George Soros short the Pound at the expense of the British citizens? We are currently in a nomenklatura obituary phase; a phase that siphons existing wealth to continue the fraudulent financial sector.
Title: How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible
http://www.imf.org/external/pubs/ft/wp/2003/wp0364.pdf
Summary: I model deflation, at zero nominal interest rate, in a micro founded general equilibrium model. I show that deflation can be analyzed as a credibility problem if the government has only one policy instrument, money supply carried out by means of open market operations in short-term bonds, and cannot commit to future policies. I propose several policies to solve the credibility problem. They involve printing money or nominal debt and either (1) cutting taxes, (2) buying real assets such as stocks, or (3) purchasing foreign exchange. The government credibly "commits to being irresponsible" by using these policy instruments. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal, since it curbs deflation and increases output by lowering the real rate of return.
The second publication admits use of mathematics that base "decisions imply an Euler or IS equation," keeping in mind that Carl Gauss refuted both Leonard Euler and Jean-Louis Lagrange. Nonetheless, aside from that minor detail, does anyone not find it disturbing to find title that "committed to being irresponsible"? On another minor detail, the author Gauti B. Eggertsson thanks his contributors who provided extensive comments, one of them being of course, our beloved Federal Governor Ben Bernanke (aka Mr. Print Press). Nice eh?
Title: Fatal Attraction: A New Measure of Contagion
http://www.imf.org/external/pubs/ft/wp/2003/wp0380.pdf
Summary: This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice it measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of “positive contagion," in which capital flows to emerging markets in a herd-like manner, largely unrelated to fundamentals. Identifying such periods of "fatal attraction" is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.
Herd-like manner eh? Expect rapid outflows of capital as the dollar tanks. Enough said.
Title: Unanticipated Shocks and Systemic Influences:
The Impact of Contagion in Global Equity Markets in 1998
http://www.imf.org/external/pubs/ft/wp/2003/wp0384.pdf
Summary: August to September 1998 has been characterized as one of the worst episodes of global financial distress in decades. This paper investigates the transmission of the Russian and the LTCM crises through global equity markets using a panel of 14 developing and industrial countries. The results show that contagion was systemic during the period, with industrial countries providing the dominant cross-country transmission linkages . Both crises reinforced each other, highlighting the importance of studying them jointly. An implication of the empirical results is that models of contagion that exclude industrial countries are potentially misspecified and may yield misleading outcomes.
I highly suggest reading "When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein." I also suggest reading Armando Falcon's 112 page study titled "SYSTEMIC RISK: Fannie Mae, Freddie Mac and the Role of OFHEO."
Title: Does Insider Trading Raise Market Volatility?
http://www.imf.org/external/pubs/ft/wp/2003/wp0351.pdf
Summary: This paper studies the role of insider trading in explaining cross-country differences in stock market volatility. The central finding is that countries with more prevalent insider trading have more volatile stock markets, even after one controls for liquidity/maturity of the market and the volatility of the underlying fundamentals (volatility of real output and of monetary and fiscal policies). Moreover, the effect of insider trading is quantitively significant when compared with the effect of economic fundamentals.
The dismantling of the Glass-Steagall Act around November of 1999 blurred the distinction of brokerage firms and commercial banks. There is no doubt that the destruction of this act ultimately increased market volatility. (See Frontline Bigger Than Enron: http://www.pbs.org/wgbh/pages/frontline/shows/regulation/) As this market volatility increases, more financial speculators will take advantage of derivatives. According to the BIS:
"Global over-the-counter (OTC) derivatives market point to unusually robust growth in euro-denominated interest rate swap contracts in the second half of 2002. As a result, the total estimated notional amount of outstanding OTC contracts stood at $141.7 trillion at the end of December 2002, an 11% increase from end-June 2002. This compares with a 15% increase in the previous half-year period. At the same time, gross market values grew sharply, rising by 43% to $6.4 trillion, compared with a 18% increase in the first half of 2002. The following trends are notable:
Substantial rise in gross market values
Strong double-digit growth in notional amounts outstanding
Euro-denominated swap instruments dominate
Subdued market for currency derivatives
OTC business accelerates relative to that on exchanges"
Check out page 38, there is a fascinating chart for "Market Volatility and Insider Trading Index By Country." Not sure whether I agree with the methodology but it would be interesting to see quarterly updates.
Title: Inflation Targeting Lite
http://www.imf.org/external/pubs/ft/wp/2003/wp0312.pdf
Summary: Inflation targeting lite (ITL) countries float their exchange rate and announce an inflation target, but are not able to maintain the inflation target as the foremost policy objective. This paper identifies 19 emerging market countries as practitioners of ITL. They seem to focus mainly on bringing inflation into the single digits and maintaining financial stability. ITL can be viewed as a transitional regime aimed at buying time for the implementation of the structural reforms needed for a single credible nominal anchor. The important policy challenges for an ITL central bank include whether or not to precommit to a single anchor.
Check out those committed inflation rates! Recent Inflation objective from the European Central Bank:
The ECB's Inflation Objective
http://www.imf.org/external/pubs/ft/wp/2003/wp0391.pdf
Summary: The ECB's objective of medium-term inflation below 2 percent has been portrayed by critics as ambiguous, asymmetric, and excessively stringent. This paper attempts a comprehensive evaluation of the trade-offs.
In summary, these publications offer only short-term solutions that will only exacerbate the situation. This country needs radical monetary reform and government controlled bankruptcy organization implemented before it causes any financial shock waves. Either we accept the reality of our current predicament thereby preventing a depression or we can continue to relish on our daily blue pills on this so called coming “recovery.” The choice is yours.