I read both Pekelo's and your interesting posts. I wonder, does the reality that governments no longer have to borrow to spend in deficit affect your thinking? Although sovereign bonds still serve some of the same purposes they did before 1971, e.g. an interest bearing store of money temporarily not needed, a tool of the central bank, etc., they nevertheless do not serve all the same purposes. We will make a mistake if we think, as economists used to, that a market, like a stock market, should behave rationally, and therefore something is wrong when it is obviously behaving irrationally. Markets, such as the stock market, are inherently irrational, so they are only unusual when for brief periods they appear to be rational. Of course the government through fiscal policy, and through it's central bank, could intentionally apply the brakes to "irrational exuberance." Especially in an election year, however, a government faced with an "irrationally exuberant" stock market may be inclined to let market forces take their natural course. Human nature is the driving force; not any kind of sound financial model.
Trump Cutting Taxes For Stock Traders? Still some suckers out there. Not done till that money's in here. Go get em boys. Pump the FOMO. https://elitetrader.com/et/threads/trump-cutting-taxes-for-stock-traders.340504/
9. When people increase the mortgage on their house to invest in the stock market. 10. When people say they will loan as much as possible and go all in on stocks on the next 10 % dip. Yes. I know a few people personally who did just that recently
No doubt, Deutsche Bank is the baddest, coolest, and hippest when it comes to "I'm retarded, so how does yours stack up?" Truly second to none.
I am not sure I can in a way that is correct, understandable, and sufficiently concise for ET. If you want to really understand money in modern fiat economies you would have to make a serious study of Treasury and Central Bank operations, among other things. I'll do my best to keep this as simple as possible without being simpler. Let me began by pointing out that when it comes to central bank operations the misinformation and misunderstandings greatly exceed correct knowledge. There are, for example, folks right here on ET that insist that the Central Bank is a privately owned, for private profit operation. Although there may be a shred of truth in this if one goes back in time before the banking acts of the 1930s, nothing could be further from the truth today. The Fed is in effect, as far as its management of interest rates and money goes, a part of the overall Treasury operation. This can be seen by consideration of the consolidated Treasury and Federal Reserve Balance Sheets. The Congress has wisely, by statute, tried to isolate the Federal Reserve part of the Treasury operation from political influence. In the course of doing that they have given the Fed the appearance of being wholly independent from the Treasury. It, of course, could not function as it does if it were actually totally independent. The government spends money into the economy and taxes it back out. The difference between the former and the latter equals, to the penny, the deficit or the surplus. These differences are arbitrarily tallied as of each previous October, and the sum of all the differences equals the aggregate deficit or surplus. Economies with increasing GDP must run an aggregate deficit or they will starve their economies of the money needed for commerce and will eventually fall into deflation. Assuming GDP is growing, not only can deficits be too large, they can also be too small. Because the the U.S. now uses fiat, rather than commodity backed money, whenever it needs money it does not yet have, it has the option of simply creating new money with a computer key stroke – The Fed credits the Treasury's reserve account – or borrowing the money. The U.S. does not have a statute, as some countries do, requiring that when it spends in deficit it must borrow the money rather than simply create it. (Such a statute makes no sense , as I will prove with my argument below.) It can be seen by examination of consolidated Treasury and Fed Balance sheets that in fact the Treasury regularly spends before it borrows. This creates a lag between spending, which puts money into the economy, and borrowing, which takes money out of the economy. It is also proof that the Treasury does not have to borrow to spend in deficit. (Whether this is a transaction within the US. economy or involves foreign economies is immaterial in this context.) It doesn't matter whether the Treasury spends before it borrows or after it borrows. What concerns us here is not whether the Treasury spends before or after it borrows, but rather whether the Treasury borrows the money it spends beyond it receipts, or whether it creates the money without borrowing. The Treasury, with the Fed's assistance, can do either. In either case the Fed will simply credit money to the Treasury's Reserve account whenever it is needed. If the Treasury's deficit is paired to bonds, dollar for dollar, then a little reflection will convince us that the net, aggregate deficit is equal to issued minus redeemed bonds.* We also call the net, aggregate deficit “the national debt.” When the Treasury sells a bond, money moves from the Private sector to the Government sector. If the government has spent before it borrowed, the money it spent will come back to it and a new bond will be created. If the government borrows first, money will come out of the economy and then be put back in when the government spends it. Either way the net is the creation of a bond and the government having acquired goods and/or services, and no net change in the amount of money in the economy. This is a rather surprising result. The government can not increase the amount of money in the economy by spending borrowed money into it, nor can it by redeeming bonds using borrowed money. Not only that, but it can't be done by redeeming bonds using a surplus created by spending less than receipts. This simply puts back into the economy the money taken out when the surplus was created! The only way to put more money into the economy is to create it out of thin air and then spend it into the economy without pairing it with debt. This in fact is what's done. And we hope it is only done to the extent justified by increases in GDP, or an urgent need for increased private sector savings, i.e., private sector investment, or government investment in non-wasting assets such as education and infrastructure. Optionally we can borrow the money for these urgent needs, and then, to the extent that increased GDP results, pay ourselves back by matching the GDP increase with newly created money that can be used to pay down the corresponding debt and in the process creating a net addition to the money in the economy. _____________________ *In the real world, where countries don't pair all of their deficit with bonds, we would have an additional term on the right side of the equation for the deficit in terms of bonds. That would be the amount of new money created. This is entirely consistent with our original definition of deficit as the difference between receipts and expenditures. N.B. to avoid extraneous and unnecessary complication, I have left out any mention of the credit cycle. Bank credit is the largest factor in determining day to day money supply.