The General Economics Thread

Large cash withdrawals and deposits are frequently associated with the illegal drug trade. That's been the case for ages. I'm not sure what other reasons there might be.

edited 18th May '15 7:36:10 AM by Fighteer

What about banks refusing to accept cash for mortgages?

Yeah anything involving large amounts of cash is assumed to be somehow connected to something illegal, be it tax avoidance or the drug trade.

Same thing, they figure it may well be drug money/counterfeit.

edited 18th May '15 7:38:26 AM by Silasw

It is funny but in Brazilian banks large withdraws at ATM usually means kidnapping or pickpocketing and thus makes you go through a few extra security checks.

Also there's legal reporting requirements for transfers of $10,000 or greater at any level. It's part of the PATRIOT Act. Even charity groups have to keep clear records that they are not involved with funding terroristic activity to that end.

Surprise surprise, debt and defaulting are ridiculously worrisome for China.

So much for "holding" so much of the US debt when they are risking defaulting on their own.

Wait what does that mean if they do default ?

I still don't understand the concept of 'selling debt'

It makes little sense. Debt is an amount of money you owe. So wouldn't that be a negative investment ? As in, buying a negative amount of capital?

When you sell debt it's from the perspective of the person owned the money. So Hedge Fund A would buy some Ukrainian debt from Investment company B. The investment company would get a guaranteed bit of money (whatever Hedge Fund A pays for the debt) while Hedge Fund A would now be owed by Ukraine whatever amount that Investment Company A was owned by Ukraine.

edited 18th May '15 3:16:54 PM by Silasw

...what??

Nations sell debt as well. They offer bonds for sale — these bonds have a face value, which is the amount they pay on maturity. That value minus the sale price of the bond is the return to the investor; the gross return divided by the sale value divided by the term in years is the interest rate.

Non-governments sell debt too. When you buy a store gift card, you're obtaining a debt instrument issued by that store, payable in goods and services. Companies sell bonds, with the same principle.

edited 18th May '15 4:52:53 PM by Fighteer

There's also interest paid on that debt. So in the long term more money is made than what was paid out initially.

edited 18th May '15 5:28:15 PM by latenight

I was worried that'd happen once other nations learned our values.

edited 18th May '15 5:32:00 PM by johnnyfog

Your values?

Oh! Gift cards r a form of selling debt? I'm getting closer to understanding! I still don't get how u can sell a debt u owe someone else.

The debtor can't transfer the ownership of debt, but the creditor can. Banks buy and sell loans all the time. You can sell a gift card that you purchased to someone else. The store can't arbitrarily decide that some other store owes the debt.

The initial issuance of debt, however, can be considered a sale: the borrower is selling the promise to repay the principal plus a certain profit to the lender. The lender's trust in that repayment plus the cost of the money to the lender is what determines the interest rate.

(One reason why U.S. federal bonds have such low rates right now is that the price of money in the economy is essentially zero. Lenders are putting their assets into the dollar as a safe haven against economic uncertainty, not to make a profit.)

This somewhat technical post about people using bogus math in an attempt to disprove Piketty makes me wonder if we're going to enter an era when economics students are expressly taught not to use math to solve problems. I envision an elderly Krugman instructing acolytes in a quavering voice, "Your math can deceive you. Don't trust it."

edited 18th May '15 7:16:20 PM by Fighteer

An Austrian school's wet dream, then? I mean, math always seemed a bit vital when it comes to in-depth economics.

The opposite point, actually — an incessant demand for mathematical rigor is what's caused neoclassical economics and its offshoots to veer so far away from reality. If, they say, you can't prove it using microfoundations and rigorous models, it ain't so. However, Keynesian economists are trained to trust empirical reality over math. Their models are ad hoc, reinforced by formulas when necessary but throwing away the calculus when something doesn't match what goes on in real life.

edited 18th May '15 6:19:38 PM by Fighteer

Ah, ok.

But shouldn't there be backup math data, just in case and in order to improve academical research? There's no need to go towards one extreme or towards another.

Still, yeah, I agree with the bit about throwing away the calculus when it doesn't match reality.

edited 18th May '15 6:44:02 PM by Quag15

Obviously it's necessary; I'm postulating an extreme reaction to neoclassical thought in economics schools that would make things no better than they are now, only different.

edited 18th May '15 7:12:27 PM by Fighteer

I dont know if Xopher got an answer to his/her question that made any sense. No one sells the "debt", they are selling the future payments, with interest. If I owe a mortgage on my house which will eventually net the bank that issued it $300,000 over 20 years (lets say), then the bank can sell my mortgage to another bank, for say $100,000 (because they need the money now, not 20 years from now).

edited 18th May '15 7:25:49 PM by DeMarquis

UK inflation (as measured by Consumer Price Index) has just been reported to have fallen to -0.1% for April, down from 0% in March.

So we've hit deflation right?

As for the debt talk. Let men try again. Xopher say I loan you $10, you now owe me $10 plus whatever interest. Now the interest will make me a fair bit of money over the long term, but I need money now, so I go to Fighter and offer to sell him your debt (you get no say in this) for $20. Fighter accepts because he knows that over the long term he'll make more than the $10 extra he's paying, due to you paying interest. Now you don't owe me anything, instead you owe Fighter $10 plus interest.

That's the basic of it, you don't sell your own debt, you sell what someone else owns you. The rest of what I'm about to say is extra, the basics are all covered in the previous paragraph.

As for the whys of this. Sometimes it's the need for fast cash, sometimes it's because the original owner doesn't expect it to be paid back. So I might sell your debt (the $10 plus interest you owe me) to Fighter because I don't trust you to pay and want to make sure I get something out if this.

This can backfire though. Whereas I'm a reasonable person who if you came to me and said you couldn't pay it all back might accept you just paying me $8 (hey at least I get something), Fighter is an evil hedge fund who wants all the money, so he insists on the full $10 even though you can't afford it. This is what happens a lot with countries debt, they borrow from reasonable groups who'd make a deal, but the debt then gets sold to hedge funds who refuse to make any kind of deal.

edited 19th May '15 1:49:08 AM by Silasw

Relevant: to get a handle on debt (and how trading debt can go wrong instead of right), try Extra History's look at the South Sea Bubble.

Euo, your Youtube link didnt work for me. It led me to a page of recommendations, none of which appeared to concern the South Sea Bubble (and I was looking forward to seeing that!).

Allow me to fix that. And alt link in case the playlist link fails.

Really, Extra Credits does a wonderful job with their Extra History series. Their sub-series on the South Sea Bubble condenses things fairly well.

The other risk is that, while the original buyer of the debt may have a good idea of the risks involved, other people down the chain may not. When debts get bought and sold as commodities, it's possible and indeed likely for the people dealing in them to lose track of the risk of default, especially when ratings agencies (whose job it is to evaluate said risks) have a conflict of interest. What makes it even crazier is when people start using those debts as collateral for additional loans, essentially doubling down on the risk, yet this is how big finance works.

Let's say you come to me for $20. I say, "Sure, Joe [your name is Joe], I'll lend you $20 now if you pay me $25 next week." We sign an agreement to that effect. That agreement has a face value: $25.

I don't want to be bothered to collect a piddly $25 from you, so I sell the agreement to Charlie, who makes it his job to handle all these debts. He pays me $22, so I've already made a $2 profit on the deal. I walk away happy and can even lend that $22 to some other fellow.

Meanwhile, Charlie holds the debt, but what I didn't tell Charlie is that Joe is a deadbeat who's probably going to skip out on it. If Charlie can't collect, then he's out the $22 he paid, never mind its $25 face value.

Now, let's say that Charlie took out a loan to finance his own operations, using that $25 debt as collateral. In other words, he's going to repay his loan with the proceeds from Joe's repayment. If he can't collect from Joe, he's screwed.

Joe's failure to repay has now caused Charlie to lose money (the $22 he paid) and default on a debt, while I (the original broker of the transaction) made a $2 profit.

Take this scenario and multiply it by approximately 20 billion and you get the mortgage lending collapse that led to the financial crisis of 2008. (It's more complex than this but hopefully you get the gist).

edited 19th May '15 7:15:44 AM by Fighteer