Why is the Herald so nasty to Clarkson and Albanese?

[Jerry_Atrick]

I'll spare you all the economics dissertation, suffice to say that demand v supply dictate the underlying (real) rate of inflation or deflation; while the money supply merely dictates the amplitude. Yes, the money supply can have an inflationary affect itself, if, say it ends up in increased income and there is no changes to drive that (ceteris paribus)... then there is a natural devaluation of money; but generally the money supply's impact is quite small compared to excess real demand over supply - the housing market is a perfect illustration (yes, there are other things, such as negative gearing, first home owner grants, exceedingly easy borrowing resulting in the credit multiplier effect, etc).  In short, generally the level of excess real demand over supply determines underlying/natural inflation and the change in the money supply over a longer time determines the rate.

 

11 hours ago, old man emu said:

I meant to give out in some form with the expectation of having the principle and added value returned to the giver. Buying shares, as the managed funds do, is really an "interest only" loan, as long as the borrower remains in a position to repay the principle on demand.

I see where you're going, but it is not quite correct. I get what you are saying is that a fund manager buys a pot of shares in a company, they expect a return on that company. That is true. But the mechanics are very different, and buying shares is definitely not a loan. To borrow @facthunter's expression, they are effectively taking a bet, and there are a couple of things that differ between lending and equity investment. Lending is the issue of a debt for a contractual repayment of that debt + interest. It will often come with seniority and often come with collateral that can legally be sized by the lender in the event of default. Debt also (generally) has a defined period of time, after which once it is paid back, the borrower has no further obligation to the lender.

 

Equity (shares) is a very different proposition - it is the investment into the ownership of a company (or structure) with the rights to the proportion of future profits. At this stage everyone will be saying that is the interest payment on the loan. However, it is not a loan. There is no legal requirement for a company to pay the profits as dividends to the shareholders, for example. In fact most public companies only pay a very small portion of their profit as dividend, retaining the rest for investments into improving the business or paying down debt.

Running a business is about getting the best possible return for the shareholder. This is another way where it differs from debt. Generally speaking, the interest rate on a loan is fixed, and the cash flows in the future are predictable. However, in equities, the return is potentially limitless. If the company makes 100% profits, the shareholders own it; Conversely, though, if the company loses money, the shareholders own those losses (but are not liable for them).

 

Yes, the pressure is on the CEO to maximise his return to the shareholders, and the CEO will set prices accordingly. But this will be a feature of demand and supply (at its very simplest form, with investments in marketing, product development, innovation, etc., designed to increase the demand of the product). So, while even a major shareholder who has representation on the board can try and exert influence on the management of the company, the performance of the company, and the return to the shareholder, is driven more by market forces than by interest rates.

Yes, the fund manager expects a return, but equity investments are not the burden on a company that debt is – debt has to be serviced in accordance with the contract; there is no such requisite for equity investments.  In addition, should a company go bankrupt, all creditors have seniority over shareholders in distribution of funds.

 

In terms of adding to the money supply, one has to keep in mind there are primary and secondary markets in financial instruments. The latter dwarfs the former by at least 10 – 1 (although spot FX and commodities are not quite the same). A primary market is a new issuance – lets keep it to equity (shares) and bonds (debt). This is where a company is raising finance to do something; typically invest in new capital or restructure debt.

 

The primary market raises new funds for a business, and if it is not used to retire or restructure debt, then, yes it increases the money supply. The secondary market is the trading of those financial instruments. This buying and selling existing shares and bonds. With the exception of buy-backs, not one cent goes to the companies that issued the shares or bonds. It is a transfer of money between the selling investor and buying investor at a price that values the shareholding or debt holding. This does not result in an increase in the money supply (assuming such exchanges are not leveraged).

 

Like the rest of the investing community, fund managers want good quality primary market issuances, but they are relatively rare, so they contend with trading largely in the secondary markets. That is they are buying and selling shares and bonds that have already been issued and have no bearing on the financial performance or capital structures of the business, with one exception. Therefore, they are not directly impacting the money supply. What they are doing, however, is creating demand for instruments that provide a return, as it is generally accepted that holding cash loses money, even in low-inflation periods. The old saying it is better to buy part of the bank than lend your money to it.

 

So, there is an increase in demand of financial instruments on the secondary markets, but no increase in supply.. The price of those instruments then goes up. There is upper limits based on valuations and future expected returns, otherwise you are entering the return of cash in a deposit account for a lot more risk. So, the investors move to higher risk higher return instruments, but as the demand for that increases, so does the price of those instruments and, by definition, the return reduces.

 

Now, this does affect the capital structure of the company, as it increases its equity (value) against its liabilities (debts) and assets.. which means it is in a stronger position to issue more shares (increasing the supply of shares, which against a constant demand will move them to an equilibrium price) or issue more debt. But there is no direct injection of money to a company as the result of activity on the secondary markets.

This is an over-simplification, and it would take an entire dissertation to go through all of the variables – suffice to say that equity investments is not a loan of any sort and does not directly affect inflation. And trading debt on the secondary market is, however, taking debt on in the secondary market does.

 

A good example is QANTAS. They have been enjoying excess demand over supply (capacity) and just had a bumper quarter. Yet, investors sold it off on that announcement and its shares dipped 6%. This is because the share price is forward looking; I am guessing the investors are saying something like they are making hay while the sun is shining, but the sun won’t shine for long for them.. International capacity is expected to bounce back over some period of time in the not too distant future, and the excess demand will not last long. Therefore, they can’t expect the company returns to be as good, so they look elsewhere. But a loan (debt) has a constant return while the lender can afford to service it.

 

Debt holders will only get nervous if they think that QANTAS will not be able to repay its debts (or the chances it won’t increase). Again, on the secondary markets, the existing debt will trade at what it thinks the chances are of non-repayment, but on the primary markets, the interest rate will increase.

 

So what was the point of all of the above? Super itself doesn't materially contribute to a rise in inflation or the money supply; in fact it could be argued without it, that extra money would go to purchases which would contribute to inflation and the money supply.

 

It is also a most effective way to ensure people havbe income as free as possible from bburdening the state in their retirement. It's not perfect, and can be improved. But what are better practical alternatives?

Edited February 25, 2023 by Jerry_Atrick

[old man emu]

Nay, an I tell you that, I'll ne'er look you i' the face again: but those that understood him smiled at one another and shook their heads; but, for mine own part, it was Greek to me. 

[Bruce Tuncks]

I was referring to Clarkson the Vic football coach who was treated badly by the woke lot and now ( inexplicably ) by the right=wing media.

But I sure like the thread drift and have followed the stories about land grants etc with great interest.

[Jerry_Atrick]

10 hours ago, old man emu said:

it was Greek to me

Just read the second last para...

 

BTW, finance is Greek to all of us: https://www.investopedia.com/terms/g/greeks.asp

[Bruce Tuncks]

Jerry, does that mean that a government can print more money than it takes in taxes without causing inflation if they do it right?

[facthunter]

Printing more money really is devaluing it. Things that appear to be too good to be true usually are.. Money not backed by a gold or similar standard is a promissory note. An IOU.    Nev

[onetrack]

The Americans in particular, indulged in printing money wholesale in recent years (that cutely-named "Quantitative Easing") to try and save their economy from a major recession or Depression after the GFC, and after the Pandemic.

QE has also been tried by the British, the Europeans and the Japanese. It works for a short time, but eventually, it causes inflation and inequality. QE is largely the reason why America now has a nearly 10% inflation rate.

 

https://www.forbes.com/advisor/investing/quantitative-easing-qe/

[Marty_d]

Money is simply an agreement between all users that it has a specified value.  I don't believe any country has their currency fully backed by gold any more.  Having said that I agree, if you just print more money (as Pauline wanted to do) then you devalue the currency and you need more of it to buy the same product.

 

[Old Koreelah]

2 hours ago, Marty_d said:

Money is simply an agreement between all users that it has a specified value.  I don't believe any country has their currency fully backed by gold any more.

There isn’t enough of it. All the gold in world would fit into a suburban supermarket. A return to a gold-backed currency would cause a massive rise in the price of the yellow metal.

 

China, Russia, Turkey and other nations have in recent years reacted to America’s trade sanctions (abuse of the dollar’s position as world currency) by quietly building up their gold reserves. There was much talk of them launching a new gold-backed crypto currency to compete against the US$. 
 

The world is overdue for a currency reset like the Breton-Woods Agreement in 1944, but the big nations would first have to be actually talking to each other.
 

[Jerry_Atrick]

8 hours ago, onetrack said:

The Americans in particular, indulged in printing money wholesale in recent years (that cutely-named "Quantitative Easing") to try and save their economy from a major recession or Depression after the GFC, and after the Pandemic.

QE has also been tried by the British, the Europeans and the Japanese. It works for a short time, but eventually, it causes inflation and inequality. QE is largely the reason why America now has a nearly 10% inflation rate.

 

https://www.forbes.com/advisor/investing/quantitative-easing-qe/

Bith the US and Europe havee used QEE extensively since the GFC in 2008. However, inflation has remained very low during most of this period. Further QE efforts were announced during the early days of the pandemic in late 2019, but despite shipping rates spiking during the pandemic (I can't eeasily find them in google seearches, but they went up by multiple 100%s as I recall), costs remained relatively light, and this is because, at the end of the day, demand relative to supply didn't change much.

 

I don't think inflation has been the result of QE in this case, although I am of the view the taps were turned on too much for too long, so it contrbutes to the size. Inflation started its consistent rise around mid-late 2021, when the world was meerging from the pandemic: https://www.rateinflation.com/inflation-rate/uk-historical-inflation-rate/ (this is the UK table, but it approximates the global case - more or less). This is probably due to the global economy emerging from the pandemic, where two things happened; demand for non-ecommerce and staples was increasing, and business were recoupingt the losses from the pandemic lockdowns. Also, the underlying cost pressures of shipping and other areas where demand was sky-high, but supply was rock-bottom due to the pandemic were stasrting to come home to roost. The, along comes the war in Feb, 2022, and in the aftermatch of santions, a commodities markets led set of inflation as there was (going to be) less oil and other stuff against increasing demand, and it is more than just QE at play.

 

What QE did was help the size of the swing... definitely.. and of course, adding to the momey supply itself does stimulate inflation, but QE doesn't just flush the financial system with funds; it is directed at boosting economic investments rather than consumer driven spending.. .which is thought to make injecting money supply  more sustainable, or at least dampen the volatility that simply giving away cash would do.  Notice, with the exception of the Truss reign, currencies have remained relatively consistent against each other..

[Bruce Tuncks]

While people like Nev seem to speak plain common sense, I am not convinced that you cannot print more money than you take in tax. I don't mean " just printing lots" but in recent years, we have seen low inflation and more money printed than has been collected in taxes. And, some "earned" money is not counted as govt expenditure, when it plainly is. Medical specialist incomes is one example of this.

So I ask again, are there circumstances where printing more money than you collect as taxes does not lead to inflation?

[facthunter]

Giving a one for five shares is the same . A share buy back is the opposite effect. The share increases in value. The purpose there is to reduce the amount of dividend to the shareholders but if the share value rises the price /earnings quotient looks worse and people value P/E as a determinant of share value.  When shares go ex dividend the share price drops for a while.  Nev

[Bruce Tuncks]

While the rest of the world was in depression, Nazi Germany jumped out....  my understanding is that Hitler had zero understanding of what were the accepted ideas of economics, and everybody around him was too scared to stop him building roads and armies and stuff.

Yes, I know it was a bit more complicated than that, but I still reckon that was the essence of it. And don't forget that the Weimar republic was the world's worst example of bad inflation in the 1920's.

The difference might be that if your printing of money has the effect of getting people off their bums and working, it is a worthwhile thing to do.

[facthunter]

Excessive reparations caused Germany's currency problems to a great extent. Nev.

[Jerry_Atrick]

@Bruce Tuncks - I am not so sure I understand the correlation between increasing the money supply > tax receipts and inflation. Tax receipts are used for two purposes: 1) Government spending, and 2) Repaying debt. They could be used for savings, but for most western governments that run deficits (and yes, some, including Aus, have sovereign wealth funds), there is little savings retained out of government operations for a year. 

 

According to this search (https://www.google.com/search?q=australian+national+debt+as+a+percentage+of+GDP&rlz=1C1YTUH_en-GBGB1008GB1008&oq=australian+national+debt+as+a+percentage+of+GDP&aqs=chrome..69i57j0i22i30i625j0i22i30j0i390l2.10762j0j7&sourceid=chrome&ie=UTF-8), Australia is in debt to the tune of 58.63% of its GDP. This is not bad, when you consider many European countries, for example. But, this is, IMHO, cripplingly high, as it is funded from tax, which is a small portion of GDP. Be that as it may, we can say that interest payments on debt is relatively constant. 

 

What isn't constant is the amount that is spent by the government. Not only do they rely on taxes, but they also rely on issuing debt (government bonds, or govvies, abbreviated). The government issues debt for two reasons: a) to increase the spending capacity over tax receipts - interest payable on current debt; and b) to repay existing debt (governments will usually only do this when a) the new debt is cheaper than the old debt or b) when the government needs to repay the principal and don't want to fork out for it). 

 

This is the normal course of government business, and this is what QE is used for. Without QE, the government will issue new bonds to the wholesale market where there is virtually no liquidity. This would mean,. without demand, the government would have to make it very appealing to investors to take on the debt. The only way this could happen would be for the government to issue the debt at extraordinary high interest rates. So, the central banks piled in using QE to purchase such debt at more normal interest rates, and accept a higher risk of default. It ius a bit like the central bank intervening to prop up (or down) their country's currency in the FX markets. 

 

So, it depends on what the government money was being used for. In 2008, it was literally to keep the lights on.. I would say trillions were pumped into the global economy, yet, because the money was used to keep the lights on and foster business and government investment, inflation remained relatively low., But, in the pandemic, the money spent by the government was used to put money directly in consumer's pockets (and some businesses). Furlough here, and I cannot recall the name of the scheme in Australia, meant that there was excess money in consumer's hands. After the customary lag, inflation went up.

 

It is splitting hairs, but QE is investing in government and qualifying commercial activity. The government elected to spend the money on a splash, which led to an increase in the demand for goods precisely when everyone thought the economy would implode, and that in turn led to inflation. 

Edited February 26, 2023 by Jerry_Atrick

[facthunter]

People on the low end of the socio economic scale have little discretional money. Often all will be taken up with basics. In this pandemic, pretty much all over the world the wealth of the top 2% rose significantly and THEY are the ones who support the governments that made that happen, because it's absolutely in their interests to perpetuate it.  Trickle down is just a con. .Nev.

[Jerry_Atrick]

Too right, Nev. But with the exception of the USA, in advanced economies, the low end of the socio-economic scale (relative poor) were in the minority. Trickle down is far worse than a con...

 

[Bruce Tuncks]

Right again Nev. At least the US learned that lesson well and the excessive reparations were replaced by the marshall plan.

Gosh, this inflation stuff is hard huh... I reckon its just too easy to fall into the trap of common-sense thinking, when its much harder than that.

Imagine a farmer said to his kids that they could grow veggies and he would pay them with handwritten notes ( ie print money ) which they could use only for farm produce grown by the other kids.

To my mind, this would not cause any bad effects and the kids would all be better off.

 

[facthunter]

A LOT of economic THEORY is just a con for Monopolistic marketing and CONTROL by BIG entities. The FREE market will FIX everything IF we just leave it alone. Why would THAT be. Its aim is to make profit NOT worry about charity. A  pile of desperate  workers is required since slavery was abolished and is superior since you don't have to buy them feed and clothe them or bury them either.   Nev

[old man emu]

I don't get this "print more bank notes" idea. Isn't it just like making confetti out of coloured paper? Does a banknote represent anything tangible? I've just been looking at buying some Hi-Viz vests. I could give today's banknotes to the seller, but I could also used plastic. The Government can print enough banknotes to have a ticker-tape parade, but does that alter the worth of the vest? If I use plastic, then all I am doing is altering the seller's and my numbers in bank accounts. 

 

How does printing more banknotes affect inflation?

[facthunter]

Like air in a tire. The harder it gets for everyone. Nev

[spacesailor]

Superannuation! 

 The Singaporeans have a Great super investment scene ,

When they need their home deposit . It comes from that ' superannuation ' they have paid .

It helps two fold : first it gives incentive 😂  then they have a paid-off mortgage,  as they receive their pension .

spacesailor

 

[spacesailor]

O m e

Your ' cashless ' transaction will raise the price on commodities, as the poor recipient of your bancard Cannot dodge any taxes owing .

Draw out Cadh then ask fof a discount ,so the commodity can be " half a tax " cheaper .

spacesailor

[octave]

42 minutes ago, spacesailor said:

Your ' cashless ' transaction will raise the price on commodities, as the poor recipient of your bancard Cannot dodge any taxes owing .

Draw out Cadh then ask fof a discount ,so the commodity can be " half a tax " cheaper .

f everyone one avoids tax then how do we pay for the age pension and run our hospitals?

[old man emu]

Getting a lower price for cash only works when you are paying for a service. Give you a "for instance"

 

I'm doing a reno, but need an electrician to supply and fit a water heater. The Sparky buys the heater from his wholesaler. GST has been gradually added from the time the raw materials were dug from the ground. At the next-to-last step, the Sparky has paid the wholesaler the total of that accumulated GST. Then he adds his administration costs involved in getting the heater. That adds a bit more GST. I purchase the heater from him and as the end recipient, I pay all the accumulated GST. But the Sparky has to submit his Business Activity Statement to get a refund of the GST he paid to the wholesaler. The Tax Man is on top of that. 

 

If I want to get a lower price on the whole job, I can offer to pay him the labour portion of the job in cash. He doesn't have to declare it as income, so can reduce the cost to me by his business's rate of tax. We treat the purchase of the heater as a retail transaction.