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For SpaceNut re topic and noting #61
I'd like to toss out an idea for consideration .... There is a category of financial instrument that exists indirectly but does not exist (to my knowledge) as an actual instrument sponsored and supported by the US Government ... Inflation Adjusted Bonds.
Were such bonds to be placed on offer, buyers would place funds with the United States, but interest would NOT be of the traditional kind. Instead, the United States would adjust the value of the bond to match inflation.
The entire national debt could (presumably) be converted to this new form of bond over time.
If there is someone who posts on the forum, AND who has the requisite knowledge of financial structures and the mathematical ability to support an analysis, I'd be interested in seeing how this new kind of bond might work.
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In days gone by we did save money as the interest rates actually did give some very good yields but that changed to the only interest that was rising was the one you pay on your credit cards while all of the others fell. I remember certificates of deposit yielding 9%...bank saving books were near 5% and what do we get now is peanuts...
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https://www.thebalance.com/u-s-inflatio … st-3306093
Currently banks use you idle money without paying hardly any interest and charge fees based on how you want to use your money. They are in the business to make money from your money and to not give you anything for it.
So what needs to change is how do you make money and still pay interest to the ones which have given the ifle funds for the investment to gain interest.
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With the bankrupcy of Silicon Valley Bank and two others over the past few days, we may have seen the first casualties of a new global banking crisis. This could be a rerun of the 2008 Banking Crisis. It will be worse this time, because central bank balance sheets are hugely inflated and they cannot spend their way out of recession without causing mass inflation.
https://www.zerohedge.com/markets/quinn … ears-later
The problem is simple. Businesses and individuals took out loans that they could afford when interest rates were 1%. Then interest rates went to 4% in the US and similar across Europe. As consumer demand dries up due to credit tightness, businesses will lay off workers who will then no longer be able to afford mortgages. A cascade of debt defaulting could be set in motion. No one in authority wants to say this, because they will be accused of crying wolf by political class and 1%ers.
Last edited by Calliban (2023-03-16 07:43:19)
"Plan and prepare for every possibility, and you will never act. It is nobler to have courage as we stumble into half the things we fear than to analyse every possible obstacle and begin nothing. Great things are achieved by embracing great dangers."
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For Calliban re #4
My understanding is that Islamic countries have a policy of prohibiting the use of interest.
I don't know enough about this policy to have any confidence in assessing it, but it ** seems ** to me that NOT allowing the imposition of interest for financing of projects would mean that fluctuations of interest would have little or no impact in Islamic countries. And such countries most certainly DO carry out projects of great size, as well as small ones in great numbers.
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tahanson43206,
They do that with cash on-hand from oil sales. Projects move forward, or not, based upon need, the reputation of those involved as being competent businessmen, or private interest in advancing a "pet project", which then comes from private investment.
What cash does the US have, apart from whatever the Federal Reserve prints?
The Federal Reserve System is a giant ponzi scheme and the federal government keeps spending more money than they take in from taxes, which derive from organic economic growth or investment, so it just keeps getting worse. Sooner or later, the party stops and there are not enough chairs of everyone. Everyone keeps playing the game because they have no other realistic choice in the matter.
China and Russia?
Russia has the economy of Italy, but with worse policies. China's going to lose 50% of their people in the next 30 years or so. It's no longer cheap or easy to do business in China, either. They only have poor economic outlooks and terminal demographics. China's subprime mortgage lending problem was like our problem multiplied by 100. The notional value of their real estate is astronomical. At least the real estate over here is "real". Someone who can afford it can live there, or the price drops to something realistic. Entire cities have been built in China where nobody can ever live, by design, because that was the result of their even more insane policies. COVID just decimated huge swaths of their economy because they have no answer and the pandemic killed a million people there before they quit counting the bodies. Why do you think anyone who has two nickels to rub together endlessly tries to get their money out of those economic systems? If Russians, Chinese, and Iranians weren't prisoners of their governments, anyone with an education or enough money would depart immediately, never to return. They're "stuck" there, just like we're stuck here with people in charge, who can't figure out basic economics. You'd think lawyers would be better with money, but I guess not.
Printing / circulating or withdrawing money, without that money being tied to organic economic activity is the crux of the problem. It's Monopoly Money created on bad economic policy (giving carte blanche to a group of Federal Reserve bankers gazing into their crystal ball), and there can never be stability so long as it's tied to "we want to spend money, so we're going to do it, now you Fed people go print us some money" versus, "we have money to spend, which we think is a good investment, and it was generated by exchange of tangible goods and services". China and Russia do the same types of idiotic stuff within their own economic systems, which are already in worse positions to start with. Printing or withdrawing money or altering lending rates is also a very blunt economic tool which creates lots of unintended consequences.
For anyone living on a fixed income, this probably means you get to decide between eating and living indoors. Your money is safe, but you can't afford to buy anything. For people saving for retirement, it means your savings are gone, totally consumed by inflation caused by incompetent management which spends money we don't have. For people trying to buy a home and start a family, it means you can't afford as much house or as many kids, or maybe you can't afford it at all. For people who live paycheck-to-paycheck, it means you're in even more dire economic straits than you already are. Ideology aside, I can't fathom how any of this is good for America or the world.
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For kbd512 re #6
Thank you for this thoughtful contribution to the topic.
There may be more to the story than oil, but that is sure a good start!
The policy was established several centuries before oil became a factor in Islamic countries, but oil has certainly been a factor in recent times.
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This topic was set up to offer the thought of designing government bonds to provide a safe haven for funds, but NOT offering interest, but instead matching the progress of inflation by releasing the funds at a value equal to the value of those funds when they were invested. However, a digression into the question of interest as a financing tool became available with failure of two US banks recently. The transcript below is of a session with ChatGPT 3.5, about the Islamic policy of prohibiting interest payments, as it might relate to the universal challenge of managing inflation.
Hi Again! What is your current version?
Hello! As an AI language model, I don't have a fixed version number like software does. I am constantly learning and improving based on the data I'm trained on and the updates made by OpenAI. However, as of my last knowledge cutoff in September 2021, I was trained on the GPT-3.5 architecture, which was the most advanced language model created by OpenAI at the time.
Thanks for confirming you are the familiar 3.5 GPT !!! Today's question is a bit different from our previous discussions. In the United States two banks have failed recently, and there are some folks who think that inflation is a factor. The Federal Reserve has raised the rate of it's benchmark overnight loans, and some think that the two failed banks were unable to cope with the stresses caused by higher rates. The situation cause me to reflect upon what I understand to be standard policy in Islamic countries, to prohibit the use of interest as a way to finance projects. I bring this up because a policy of prohibiting the use of interest to finance projects would prevent interest rates from rising. By any chance, does your training material cover the question of how Islamic countries deal with inflation?
Yes, my training material covers various economic and financial systems, including those followed by Islamic countries. In Islamic finance, the prohibition of interest or riba is a fundamental principle, and financial transactions are structured to avoid the payment or receipt of interest.
In terms of how Islamic countries deal with inflation, there are a few key differences compared to conventional financial systems. One of the main principles in Islamic finance is the concept of risk-sharing, where profits and losses are shared between parties involved in a transaction.
This encourages a more equitable distribution of wealth and risk, and can help to prevent the concentration of wealth in a few hands.Inflation is typically managed through a combination of monetary policy and fiscal policy in Islamic countries, similar to other countries.
However, the use of interest rates as a tool of monetary policy is replaced with other mechanisms such as profit-sharing ratios, which can be adjusted based on economic conditions. This can help to mitigate the effects of inflation without relying solely on interest rates.It's worth noting that there is a wide diversity in the ways Islamic countries implement Islamic finance principles, and the specific policies and practices can vary. However, the prohibition of interest and the emphasis on risk-sharing are common principles across Islamic finance systems.
Thank you for your helpful reply! Best wishes for continued success in helping your thousands of visitors each day.
You're very welcome, and thank you for your kind words! It's always a pleasure to assist and provide useful information. Don't hesitate to ask if you have any further questions or if there's anything else I can help you with.
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tahanson43206,
If the bonds are matching the inflation rate, then they're bearing interest.
So what if the bonds are invested? Invested into what? Bad debt?
You want a vehicle to put money into that tracks with the inflation rate, but can be invested for equal value at the time its invested.
You're talking about buying stocks rather than bonds. The value of a company would get inflated when inflation goes up, and deflated when it either can't do business or the inflation rate goes down (stock is devalued because the monetary investment is devalued).
Every investment carries risk with it. You can lose everything in the stock market, but spread over enough pies or baskets, you end up making money every time, over a long enough period of time. Stock market has only gone up over time.
With bonds you won't lose anything, but you could also wind up gaining nothing if they yield no gain or nothing in a default. You retain your principal in almost all cases, but that may not help you all that much. If you want to be 100% certain, then you put it in a bank and it's insured up to $250K by the FDIC. The problem is you gain nothing and inflation eats away at the purchasing power of your principal. That's why inflation is bad unless the money is moving (in a vehicle making more money- real estate, stocks, bonds, doesn't matter).
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tahanson43206,
You're a banker. You already know all this stuff. Spell out what you're asking for.
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tahanson43206,
One of the very first things we need to do is to stop allowing psychopaths to control money and energy, as well as disincentivizing value-less activities. Someone out there recognized that the nature of money and what it causes people to do is fundamentally messed up, but their response was to create another form of money, named "Bitcoin", that incentivizes even more absurd behavior, such as squandering massive amounts of computing time not solving any actual problems, in order to "create value" in the form of another totally arbitrary store of value based upon nothing but human belief (in the intangible thing, which doesn't directly help humanity do anything at all).
What does that say about the perverse incentives for generating material wealth?
Where the hell does all of it go?
Elon Musk has more money than most people on the planet, but he lives in a shoebox apartment that he's never there to enjoy, and he spends every waking hour trying to ensure that other people are working on whatever the latest business design happens to be. He's been divorced twice, the women he's had children with are most charitably described as dysfunctional (may or may not be any reflection on him), and he's driving at a dozen different wildly different business objectives, all at the same time. If he's not happy doing anything else, so be it, but it's hard to imagine that not taking a severe toll on him and his family. He's driven and he's successful, and I think that's great, but at what personal cost to him, his wives, his children, and his own sanity?
We send tens of billions of dollars per year to a standing army of administrators and engineers, loosely coalesced around a government agency called "NASA", whose charter is to explore space, but instead we need an eccentric multi-billionaire who is internally driven to do insane things, by his own defintion, merely so we can have a backup plan in case Earth fails (for reasons either inside or outside of our ability to control).
I think our priorities are mixed up. We're fixated on the wrong things. It's chaos with no clear underlying purpose which is necessary for humanity.
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