Economics is not hard - Part I: Don’t let professional economists tell you otherwise

[Jay]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

We live in (sometimes potentially way excessively) interesting times.


And do consider that there will be a huge amount of netting in that scenario - perhaps as high as 50%.

I would expect so, but who runs the clearinghouse? And I had assumed the netting percentage would be HIGHER!
And what is the total derivatives amount now, has it reached a quad?

[vinoveri]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Someone has to be on the other side of the trade. If TSHTF I think the whole derivatives game breaks down into chaos. Everything will be frozen.

And that $15 Trillion in US retirement accounts will be, in the interest of national security, required to be invested significantly in US treasuries. After that, we can have our inflation , and the middle class can watch their pensions slowly (or not so slowly) confiscated.

[bart]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I would expect so, but who runs the clearinghouse? And I had assumed the netting percentage would be HIGHER!
And what is the total derivatives amount now, has it reached a quad?

DTCC and other exchanges will clear. The "emergency" one will kick in too.

It could of course be higher than 50%, but if so, that's better.


Total derivatives, per the BIS is about $606 trillion - with "shadow banking", I've seen estimates approaching $2 quadrillion.

[MarkL]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

And in any event, variety doesn't equal price, which was my main point. I mean, at a certain point a good is just a good. Does it hurt your standard of living if Home Depot has three brands of hammers, but not the brand of hammer you used to like at the mom and pop hardware store? To paraphrase Freud, sometimes a hammer is just a hammer.

I don't see where or how this leads to a Soviet style economy. If Wal Mart starts to raise prices beyond the equilibrium, people will shop at Target. If there really is some difference in that fourth brand of hammer that is sufficient to create a market for that brand, you can bet someone will start selling it.

Being a regular buyer of hammers (and yesterday a Rake) I can vouch for the fact that these things are not all made the same. Take a metal rake for example. Yesterday I made the choice to buy a rake with 16 tines and a Fiberglass handle instead of the "standard" of 14 tines and a metal handle. It cost me $22 instead of 14, but the quality for me was worth it. In speaking with the gardening department the dept manager mentioned they're not going to carry the rake I wanted anymore because the cost of it had gone up and people have recently switched more to the lower quality rakes.

Both consumer demand pressure for cheaper goods combined with mfgr raw material increase pressures (like metal!) are causing the market to send our products "downstream" in quality. Williams-Sonoma with the ridiculously high quality (and arguably over priced) gardening equipment... is out of business.

Thus, I do think there is something to the quality of goods going down, while prices stay similar effectively hiding *some* inflation. I can't reduce this issue to percentages, but even at the dollar store where I consistently pick up a few things I see 16oz marinated peppers now in 12oz bottles and other things all shrinking by an oz or two. And none of this touches the potential for "hidden" quality drops which can occur with ingredient changes and the laying off of health and testing personnel. I believe that if it's happening at the quantity level, it's certainly happen in places where it's easier to hide.

In addition, as my 24 tine fiberglass rake vanishes from the market, I DO believe it will be easier for Home Depot and it's supplier to raise the price of the 14 tine wood handled rake. There is certainly less competition at the upper end of the market and I'm sorry, I don't go to multiple stores to buy a rake. Lowe's may still carry the 24 tine rake, but I certainly can't and don't afford the time to go to multiple places to buy a rake and I didn't even know there was a 24 tine rank when I went in to make my choice.

And this even extends to "pure" commodities, albeit to a lesser degree. A commodity company that has excellent customer service... or better quality, or better delivery or better return policy, or even better sales can charge a higher price than one that doesn't. There are even whole books written on this subject that espouse how in today's world SERVICE matters MORE than the item in question! And selection is one of these services...

Conclusion RDRees, Choice and selection IS competition and competition DOES drive prices down. If GM had gone out of business Ford would have had more pricing power. They would have been the last American truck manufacturer and for many that's enough for them to make their truck choice, despite "furriner" competition. If Lowe's went out of business, Home Depot would have more pricing power and if the Dollar Store went out of business, Safeway would sell more marinated peppers. And when my 24tine rake is no longer sold, the 14 tine mfgr and Home Depot will have slightly more pricing power.

Competition is all about minor differences in quality/feature/choice and is an essential part of capitalism, competition, and pricing power.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I don't go to multiple stores to buy a rake

I do most of my shopping online. If it is something that would cost more to ship than it's worth (like your rake), then once I learn what the range of choices are, I look to see via the websites what is in my local stores (Lowe's, Home Depot, etc) and then go buy the best I can get for my needs locally. Usually I have no hope of finding just what I want locally and am happy to spend the $5 to $10 to ship it.

The shipping cost is often less cost than local sales tax plus driving, and I get something I could not have gotten locally in any case. The local UPS driver knows right where I live. It takes him less time to drop off a package for me than it takes most clerks to ring up a sale, and it takes him less gas to add a stop at my place to his route that day than it takes me to drive to a store.

It's actually cheaper in real labor and energy to ship one item than to go to the store for it. Inventory on the other end is more efficient as well. One regional warehouse can run a broader inventory with tighter controls than a hundred retail stores. Some of the advantages that made Sears, Roebuck and Co successful selling various items to farmers a century ago still apply. Only now with the web, a thousand stores can run specialty businesses, many focusing considerable expertise on a narrow product line, all automatically handled in real-time 24 by 7 except for the picking and boxing.

[raja]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

it's true, tptb and the elite who own all the bonds will never allow inflation. in fact, that's why there wasn't any inflation in the 1970's.

Was it because TPTB couldn't control inflation, and it ended up hurting them . . . or they did want inflation so made it happen (if so, how did inflation help them) . . . or they didn't care because inflation couldn't hurt them (if so, why were they immune?)

[raja]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Very simple answer - its a hedgeable risk and has been hedged.

The huge majority of the $600+ trillion of world derivatives are in the interest rate areas.

So . . . you are saying the banks are not afraid of inflation, so will let it happen . . . because they are protected by derivatives.

Do the banks have no fear of a derivative meltdown?
Do you think they honestly believe that they will be covered by the incestuous derivative edifice if high inflation destroys their mortgages?
Or is it that they believe they will be bailed out again by their buddies in government?

[bart]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

So . . . you are saying the banks are not afraid of inflation, so will let it happen . . . because they are protected by derivatives.

Pretty much - yes.

Do the banks have no fear of a derivative meltdown?

It's a very small fear - they can be incredibly arrogant, and they think they can hedge any risk - or invent an instrument that will hedge a given risk or risks.

Do you think they honestly believe that they will be covered by the incestuous derivative edifice if high inflation destroys their mortgages?

Pretty much yes - just recall Blankfein's comment about doing the work of God.

Or is it that they believe they will be bailed out again by their buddies in government?

That too - they don't see any way they can lose (which of course is one of their Achilles heels)

This Keynes quote applies too.

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."
-- John Maynard Keynes, "Consequences to the Banks of a Collapse in Money Values", 1931

[LargoWinch]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

it's true, tptb and the elite who own all the bonds will never allow inflation. in fact, that's why there wasn't any inflation in the 1970's.

...and the elite owns no hard assets of course (Muskoka summer house, Hamptons real estate, fine art, rare spirits, jewellery etc.)

[bart]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

USDA Normalized Price Estimates, National Level1
http://www.ers.usda.gov/Data/normali...natlprices.xlx
Commodity	2004	2005	2006	2007	2008	2009	2006-2009 change	2007-2009 change
Wheat, all types (bushels)	$2.84	$2.99	$3.16	$3.31	$3.61	$4.19	32.6%	26.6%
Rye (bushels)	2.71	2.80	2.99	3.13	3.22	3.56	19.1%	13.7%
Rice (cwt)	5.88	5.71	5.98	6.36	7.50	9.16	53.2%	44.0%
Corn for grain (bushels)	2.00	2.09	2.12	2.15	2.37	2.74	29.2%	27.4%
Oats (bushels)	1.33	1.41	1.48	1.60	1.65	1.82	23.0%	13.8%
Barley (bushels)	2.22	2.39	2.48	2.56	2.68	2.94	18.5%	14.8%
Sorghum grain (cwt)	3.34	3.59	3.64	3.68	4.16	4.79	31.6%	30.2%
Hay, all types, baled (tons)	86.70	86.88	90.20	92.92	95.62	102.74	13.9%	10.6%
Dry beans (cwt)	18.22	18.10	19.76	20.36	20.36	22.70	14.9%	11.5%
Sugarbeets (tons)	37.12	38.12	38.06	40.24	41.12	41.58	9.2%	3.3%
Sugarcane for sugar (tons)	27.32	27.76	28.30	28.72	29.00	29.24	3.3%	1.8%
Cotton, lint, upland (pounds)	0.47	0.47	0.47	0.45	0.48	0.51	8.5%	13.3%
Tobacco (pounds)	1.87	1.90	1.93	1.90	1.84	1.79	-7.3%	-5.8%
Cottonseed (tons)	103.00	100.60	104.30	102.30	106.20	118.40	13.5%	15.7%
Soybeans for beans (bushels)	4.87	5.35	5.55	5.73	6.14	7.05	27.0%	23.0%
Peanuts, for nuts (pounds)	0.24	0.22	0.21	0.19	0.18	0.19	-9.5%	0.0%
Flaxseed (bushels)	4.46	4.63	5.46	5.99	6.29	7.74	41.8%	29.2%
Apples, all commercial (pounds)	0.18	0.19	0.18	0.17	0.18	0.20	11.1%	17.6%
Oranges, all types (boxes)	6.20	5.79	5.81	6.12	6.63	7.79	34.1%	27.3%
Grapefruit, all types (boxes)	5.19	5.22	5.14	7.09	8.54	8.85	72.2%	24.8%
Potatoes (cwt)	6.01	6.07	6.04	6.45	6.52	6.69	10.8%	3.7%
Sweet potatoes (cwt)	16.06	16.84	16.82	17.36	17.94	18.24	8.4%	5.1%
Steers and Heifers (cwt)	69.44	72.82	76.60	82.78	86.22	91.28	19.2%	10.3%
Cows for slaughter (cwt)	59.90	87.70	67.20	44.62	45.76	47.88	-28.8%	7.3%
Calves (cwt)	94.58	99.22	105.50	111.68	117.08	121.60	15.3%	8.9%
Sheep (cwt)	31.74	32.60	34.10	36.32	36.44	37.10	8.8%	2.1%
Lambs (cwt)	73.44	77.86	83.16	89.28	95.00	99.98	20.2%	12.0%
Hogs (cwt)	36.94	37.50	41.30	42.90	43.20	45.86	11.0%	6.9%
Milk (cwt)	13.90	13.31	13.66	14.22	13.80	15.79	15.6%	11.0%
Broilers, commercial (pounds)	0.36	0.35	0.37	0.39	0.38	0.41	10.8%	5.1%
Turkeys (pounds)	0.39	0.39	0.39	0.40	0.40	0.48	23.1%	20.0%
Eggs (dozens)	0.63	0.64	0.66	0.64	0.63	0.69	4.5%	7.8%
Wool (pounds)	0.44	0.47	0.55	0.63	0.69	0.63	14.5%	0.0%
1/ Prices for crops and milk are for marketing years; for livestock and wool, calendar years.

[LargoWinch]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Wow. Think of the impact of the following, where rice is the main source of nutrients for a lot of humans:

Rice (cwt) 2007-2009: +44.0%

[bart]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Here's a more current picture, the correction to date has brought rice back to 2007 prices - and its still still up ~43% since 2005.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Here's a more current picture, the correction to date has brought rice back to 2007 prices - and its still still up ~43% since 2005.

iTulip's premier chart slut strikes again - thanks!

Does anyone here know why the price of rice spiked in early 2008?

[MarkL]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I buy things online too but more books and things I already know.

I agree with all of your efficiency and cost arguments.

But I like to touch stuff... especially tools. You can get a real feel for whether something is going to brake by twisting on it and checking the welds and plastic parts and such, especially with tools like drills and saws. The 24 tine rake head was also made of a much stronger thickness of metal than the cheaper rake... something that would've been hard to ferret out online.

More than once I've bought something online that had a great picture that.. disappointed upon arrival.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

But I like to touch stuff... especially tools.

Good point.