Friday, 30 October 2009

Great news about the US coming out of recession...?

I've watched pretty much every single Peter Schiff video on you tube. They're all good, but I thought that yesterdays offering was so important that I would post it here.

Friday, 23 October 2009

The value of money. A computer simulation.

Back in March I wrote a blog entry on the value of money in which I suggested a mechanism whereby it may be possible to write a computer simulation of an economy in which the value of money could be discovered. Well I finally have some results...

But first of all I should be clear about exactly what problem I am trying to solve, so I shall present the following conundrum. Imagine a very simple society in which there is only one commodity: sandwiches. Everyone in the land grows the ingredients for their sandwiches in their gardens. Often they will exchange sandwiches with their neighbors just for variety. There is no money in this society only barter. But then one day the king of the land says "I've just invented something I'm going to call money. It consists of metal coins called shekels. I will give everyone in the land 1000 shekels and from now on bartering is banned. All exchanges must be via the medium of exchanging shekels. What's more, nobody is allowed to eat their own sandwiches." The question now is: how many shekels will a sandwich cost? It may well be that on day one, people will not have a clue and all sorts of silly prices may get paid... but presumably over time the price will gravitate towards a certain value. What will that value be? I suspect that no economist (to date) has ever answered this question.

I actually thought of this problem around ten years ago but only recently did I work out that it was soluble via a computer simulation and now I've finally written it and tweaked the many parameters such that I get a stable price.

What I'd like to do now is publish this work, but I am not in a position to do this on my own. My academic credentials (in the field of economics) are simply not good enough, and I am not currently working in an academic institution. So I am seeking a partner.

I shall publish more information about my simulations at a later date. I may even make the source code public domain. By the way, there is no reason the simulation could not be expanded to incorporate multiple commodities, lending, banking and many other features to make it more accurately reflect the real world.

Wednesday, 21 October 2009

Would you buy US government bonds?

This chart, the "dollar index", shows the value of the dollar verses a basket of other currencies. Presumably at some point people/institutions/foreign governments are going to refuse to buy US government bonds unless the interest offered on them is high enough to compensate for the depreciating dollar. And when that happens, the US is in one hell of a lot of trouble.

Saturday, 17 October 2009

Dow hits 10,000 - is that good?

The recent rise is the Dow may look to some like signs that this crisis is coming to an end and that "green shoots" are growing everywhere. But first of all it should be pointed out that the rise in the Dow over the past year has been matched by an almost equal drop in the value of the dollar (as measured against a basket of other currencies - the "dollar index").

Dow 1 year ago: 8852
Dow today: 9995
Change: 12.9% (lets open the champagne!)

Dollar index 1 year ago: 82.4
Dollar index today: 75.5
Change: -8.4% (oops!)

Dow as priced in foreign currencies 1 year ago: 729,400
Dow as priced in foreign currencies today: 754,600
Change: 3.4% (better put that champagne away...)

Personally I suspect that even this modest 3.4% real rise in the Dow, owes more to irrational/rational exuberance than anything else.

Monday, 5 October 2009

Money as Debt II

The following movie fixes some important errors in the original.

          Money as Debt II.

We won't see major fast deflation in the UK or US

The inflation deflation issue is really starting to drive me crazy. My favorite economic commentators seem divided on the issue. Steve Keen, Karl Denninger, and Max Keiser are all saying that there will be deflation while Peter Schiff and Mark Faber are still insisting on hyperinflation. Ultimately it will be down to politics because the politicians are in charge of the printing presses and there is no limit to how much can be printed. Certainly of the government did nothing then there would be massive sharp deflation. So one could argue that on the spectrum from massive deflation to massive inflation, almost anything is possible. But I'm going to stick my neck out here and rule out a section of the spectrum: Substantial fast deflation is very unlikely. The reason I have come to this conclusion is twofold: Firstly if significant deflation were to be allowed then too many people would be unable to make their mortgage repayments. This would lead to an outcry so large that politicians would immediately be forced to create more money. Secondly, the government's debt repayments would effectively be giving too much away. The numerical ammount that must be paid to existing holders of government bonds is fixed, this means that if we had deflation then each dollar that the US government paid out would become dramatically more valuable in terms of US goods and services.

Please note that at the moment I am not ruling out any other part of the spectrum, there could indeed be deflation, but if that happened then it would be a very long slow drawn out process like in Japan.