Economic myths and fallacies

Great Debates
161

The issue of course is the money needs to come from somewhere, of course you could sell the pebble for $1 to a friend and he can promise to pay you back when he sells it for $2.

Yes this is a ponzi type scheme, you need to keep getting investors along the way, once the value of the asset is lower than the actual purchase price and the chain ends it comes crashing down.

But if that pebble was giving you a return on the $1 invested then you are OK. So for example if this pebble was shaped like Jesus and lots of people are paying 1c to view it, then we can bank that as profits and these can be returned to the shareholder as dividends or invested back into the pebble side show to get more visitors therefore increasing the returns.

162

My 12 year old son made an astute comment a couple of years ago when we were watching TV and they showed the most expensive Rolls Royce in the world valued at $22m. They made the point that RR owns this (and always has) and it has never been offered for sale. He said “well I have the most expensive Vans shoes, they are worth $100m but I’m not going to sell them”.

His point was that you can value anything at any value but unless you test it in the market then it’s only a guess or worse.

163

Yes, to my understanding.

164

LinusK has a point, if his point is limited to the statement that the market, by itself, does not create wealth. He would be equally correct to say that education does not create wealth.

The market doesn’t create wealth, instead, it fuels the machinery that creates wealth (and, the wealth is the fuel, but that’s beside the point). The wealth is the productivity of the companies traded on the market. Most of those companies wouldn’t exist if they couldn’t have been funded by the market, which is why we say that the market creates wealth, whereas it really just finances wealth-building. It’s not the only way of financing wealth-building, of course.

The market can create apparent wealth; it’s what we call a bubble. Admittedly, that’s a rather circular definition. The pebble story is a good example of a bubble, since the pebble has no intrinsic value (it won’t feed or house people, and pretty soon enough people are going to figure out that it’s not worth what the last guy paid for it, and he’s stuck with an expensive pebble.)

Other things on the market do have intrinsic values, to the extent that they are (or they produce things that are) necessary to people or highly desired by lots of people and there’s no cheaper substitute. A bubble can still be created by people paying more than they’re worth, but when reality sets in, there is some nonzero value that the security is worth. For example, for a company that owns its premises, it’s at least worth the value of its buildings. Usually, it’s worth considerably more than that, if it has any intellectual properties or the goodwill of regular customers.

So, if the point is that a market can create apparent wealth that doesn’t represent any underlying value, well, yeah, that’s true, and we all know it. That doesn’t mean that a market is useless (and I don’t believe LinusK said it was, though it did seem to be implied by his tone.)

165

NM

166

I’m not holding myself out as an expert - you are (Mr. MBA). I’m just using evidence and reason to attempt to have an interesting discussion.

If your position is “I’m an MBA and everything I say is right, and I don’t have patience for losers who say things different than I say,” it’s going to be a really uninteresting discussion. One I’m probably not going to be interested in having. (Or anybody else, for that matter.)

For my part, I specifically avoid disclosing credentials, even where they’re relevant, because this is the internet, anybody can claim to be anything. For example, I’m Barack Obama.

The money the Fed uses to buy securities comes from “nothing”. My point is - which I think I said before - it’s a liability on the the Fed (an IOU) and it’s used to purchase assets which balance out the Fed’s financial position. Keep it from going bankrupt, so to speak.

The common misconception is that the Fed is making everyone richer by making money “out of thin air”. Or rather, somehow creating net financial assets. In fact it’s removing from the private sector financial assets that have the exact same value as the money it’s spending into the private sector. The net effect (in terms of financial net worth) is $0.

167

Well, each share always represents the exact same share of equity in the company every year, unless the company changes the number of shares of stocks outstanding. What you meant I think is that the value of each share increases as the value of the company increases. I agree with that. (And I’m pretty sure I said I agreed with that upthread somewhere.)

I agree with that.

I’m not claiming, and have never claimed, that I remember, that either of those statements are myths.

168

  1. I’m happy to hear you admit that since you otherwise were giving the appearance of being a know-it-all. If I speak authoritatively about something it’s only because I’m fairly confident of the accuracy of what I’m saying and I generally back up what I’m saying with citations. If challenged I will provide cites or admit my uncertainty and/or ignorance.

  2. I got my graduate degrees (JD/MBA) decades ago, so those aren’t really relevant today except as to the basics - things which you don’t seem to have a grasp of. That is the only reason the issue even came up. Anyone who has ever taken courses in micro/macro economics or has even a basic understanding of markets wouldn’t have posted some of the indecipherable shit you have here.

  3. This actually more credible than some of your other posts.

  4. This is gibberish. Yes, creating debit and credit entries does balance the feds books when they buy and sell securities and this is how money is created and destroyed by the FOMC. But to say this is how the fed avoids going “bankrupt” is just absurd. If you mean cash is a liability in the technical bookkeeping sense - maybe it is and I’ll be happy to grant you that insignificant and irrelevant point. But it is in fact insignificant and irrelevant just as the idea of the fed ever being bankrupt is absurd.

  5. Maybe this is YOUR misconception. Everyone in the industry understands PRECISELY what the fed is doing, how their doing it and effect it’s having.

And the net effect has been more like 2 TRILLION dollars rather than zero as I’ve already shown if you’d bothered to read my previous posts - which obviously you haven’t.

169

Compound interest as a concept is barely even a thing. People talk about the wonder or miracle of compound interest as if there’s any other kind. The only place you would ever see “simple interest” is in a 6th grade math class or a whole life insurance policy.

It’s not exactly a miracle that if I start with $1000 and earn 10% for the year, I’m going to start the next year with $1,100.

170

And yet you still claim that the market is just people mindlessly bidding against one another. You seem to be caught in a contradiction.

171

Urban legend.

Salk himself, first of all, had little to say about it; he was working under the auspices of the University of Pittsburgh and the National Foundation for Infantile Paralysis – which would ultimately become the March of Dimes.

And as the excellent book “Patenting the Sun,” explains, those two organizations did in fact explore patenting the vaccine, but concluded that by the patent standards of the time, the vaccine relied on “prior art,” and would thus not be patentable.

It’s true that Salk uttered the famous line that titles the eponymous book, and may have even believed it, but the facts are that the financial interests funding the discovery were in fact amenable to a patent, but believed they couldn’t get one.

172

Right, and Clairobscure is right that it’s not “magic” that will turn a poor investor in to a rich man.

But exponential growth is radically different than linear growth, and that’s something a lot of people don’t understand, and it needs to be inculcated into the consciousness of normal people. For example, they need to understand that investing twice as much is not at all the same thing as investing twice as long. Which is better depends on the effective rate.

Also, Clairobscure’s point about subtracting taxes applies only in certain cases. For example, in a tax-sheltered account, it only applies at one end (going in or coming out) and does not subtract from the effective annual rate any more than any one-time charge. For taxable accounts, it’s significant only if trading is frequent. By-and-holders generally don’t need to be concerned with tax implications, because taxable events are rare. Day traders do, because taxes directly reduce the growth rate. (This is in addition to the fact that the tax rate is higher for short-term gains.)

What were we talking about?

173

Really? On the contrary, most conservatives are quite annoyed that whenever the Fed increases the money supply, that contributes to inflation, which makes everyone poorer. It’s an oversimplification, but it’s the opposite of your claim. Do liberals think the Fed creates wealth? I doubt that: they tend to think that laborers create wealth (and they’re not incorrect in that regard).

Yes, except that thanks to fractional reserve, that increase the money supply N-fold rather than just by the amount of new specie.

But nobody here has claimed that the Fed creates financial assets. On the contrary, it issues a fiat currency. Regardless of the fact that the Fed owns assets, I believe it’s still granted that the US dollar is a fiat currency.

174

This is a little off topic but some may find it interesting. The fed buys and sells securities to manipulate the money supply. Ideally, it does this to match the number of dollars to the demand for dollars or IOW to economic activity. In actual fact however, what it really does is use the money supply to either stimulate or suppress economic growth and employment. Unfortunately, there are limits to what you can do with monetary policy in that regard as we’ve seen with quantitative easing. Banks have nearly $2T in excess reserves which SHOULD have had a tremendous stimulative effect but if you look at things like the money multiplier and velocity, you see that it’s had little to no impact at all.

The feds actions did however save us from financial Armageddon - there’s no doubt about that though. But there may still be a cost in terms of inflation as long as all of that excess liquidity is allowed to remain at large. Mopping it up will mean cleaning up the fed’s balance sheet and offloading a lot of it’s assets and selling those back into the market. That means not only treasuries but hundreds of billions in MBS’s.

Currently the fed is still buying about $85B per month in treasuries but is expected to start to cut back on its purchase program soon - possibly if not probably in Sept. That’s why if you read the finance pages you constantly hear about ‘the taper’ - or the gradual end to this purchase program.

That will have to eventually be followed by the actual SALE of securities and draining of liquidity - reverse QE, so to say.

175

QH? :wink:

176

Hey, cut that out. Dis be srs internet bidness. :slight_smile:

177

Well, the Fed IS monetizing the debt, if by “monetizing” you mean it’s using money to purchase government debt.

Your linked article is right that that’s not creating inflation. The reason is that money is only one part of people’s financial wealth, and swapping out some wealth (bonds) for other wealth (money) doesn’t make people any richer. It doesn’t affect the demand side of the inflation equation.

178

So yes, the Fed does literally make money out of nothing (where else would money come from?) so do all banks.

What I’m saying is that the “money out of nothing” trope is misleading and incomplete.

Say I write out an IOU for $1 and hand it to you. Your net assets have increased by one dollar. My net assets have decreased by $1.

Now say you trade my note to someone else, for some bread. The bread maker trades it for some shoes. The shoemaker trades it for candy. And so on. My IOU is now money. The IOU (or promissory note) was created out of nothing.

But if you treat that IOU as if it were only an asset, and not also a liability, you’re missing half the story and your understanding is incomplete.

179

It could be (and often is) characterized as money flowing “into” stocks, but unless it was paired, explicitly or implicitly, as the exact same amount of money moving out out of stocks, it would be wrong and misleading.

The fact that money is moving “into” stocks - and moving out, simultaneously - doesn’t leave any less money for other investments.

We’re still back to the pebble analogy. The fact the pebble’s increased in value doesn’t leave any less money in the pockets of the people bidding up the price of the pebble. (Admittedly: the trading itself moves money from one pocket to another, but it doesn’t change the total amount.)

180

Perhaps value is what’s created by the work of making of things, and price is what’s extracted by the owners of capital.