Since late 2016 we have entered the age of disclosures! Fasten your mental safety belt and enjoy the ride! Heretic

Sunday, April 17, 2016

Rediscovery of Discount Rate

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[OFF TOPIC]

This post deals with economy and bond market pricing rather than medical heresies. I am posting it because the article is somewhat heretical and is pointing out some (probably intentionally) forgotten aspects of the bond investing that may soon become very important.


Rediscovery of Discount Rate.


Conclusions:

Some implications of bond discounting under negative interest rate policy (NIRP) are as follows:

* Banks will not be able to avoid discounting of their own held government-issued bonds (otherwise they would be risking their own insolvency)

* Collateral assets held by the banking system will be loosing value (since the discounting would have to be accounted for).

* Total market capital value of the entire bond market will probably keep growing faster in relation to monetary mass in circulation, due to discounting mechanism applied during the roll-over refinancing at maturity. (At roll-over a borrower must re-pay the principal amount by issuing a higher nominal amount of bonds to offset the discounting). .

* Bond market will have to be made working under the truly open market rules controlled by supply and demand rather than by market administrators. Under NIRP the market will probably not be able to tolerate mispricing or distorsions in the discounting mechanism, because it requires accounting for cash losses or gains upfront leaving very little scope for market losses deferrals and creative accounting. Any attempts at manipulating the discount rate back towards 0, would result in buyers (even government buyers) walking away otherwise they would have to book losses immediately.

3 comments :

Sam said...

I'm not so sure this is correct because of the way banks get the bonds. All currency is debt based and created from thin air. So if the FED lends money to banks to buy bonds then pays interest on the bonds then they have no skin in the game at all.

I ran across this guy whose running for President and he has the most astounding, interesting financial ideas I've ever seen.

Get rid of all income, corporate and excise taxes and only tax financial settlements. Example you buy something the seller taxes it at .1%, you put your paycheck in the bank, etc., .1% tax. His idea is the base of financial settlements is huge in the thousand trillions.

Ex. "...Personal income totals $15 trillion annually,
while the federal budget is $3.9 trillion per year..."

"...Settlements made
through banks and non-banks (such as credit unions)
plus securities cleared totaled $4,456 trillion dollars in the year 2013.6 That is nearly 300 times the amount of
our income. Clearly, we are taxing the wrong thing!
Dividing the government’s 2015 budget of $3.9
trillion by $4,456 trillion yields 0.0875%—the
percentage that must be evaporated from each financial
settlement in order to balance the budget. We will round
that number up to 0.1% for the purposes of this chapter..."

He would also get rid of debt based money. The tax money would just be evaporated when collected. No need to send in actual money. The gov. would then just print the collected amount.

He would get rid of interest on loans. Banks would only get a service fee. I'm not so sure about this one as the recent banking crisis shows that the banks will lie on the value of the loans to create more. Myself I would have some small interest with most of the interest profit going to the US treasury as we're responsible for the money supply anyways.

End the debt in five years. As he is going to a non debt based money supply it would be better to pay off all the bonds over five years than have them keep collecting interest. He points out that bonds today are monetized as assets anyways so monetizing them wouldn't change much and would save us the continually compounding interest.

He has some super ideas. What we have now with all money being debt based means we can never pay off the debt, we wouldn't have any money if we did, and it compounds so that whoever controls the money supply by definition eventually owns everything. (I believe this to be a planned part of the present system).

No financial tax incentives for debt would mean companies would only borrow money for expansion and not for financialization. There wouldn't be as much profit in it. The small tax would lower speculation, stock churning and currency trading. None of which really add to economic growth.

I'm not so sure all of it would work but it's an astoundingly simple and compelling idea.

http://www.scottsmith2016.com/

Sam said...

I need to add one of the most innovative parts of the financial settlements tax. The gov. spends money and the FST removes it from the economy. If the economy slows down then less FST money is removed from the economy while the gov. still spends. If the economy gets better the FST removes more money from the economy while keeping gov. spending the same. A self regulating system.

Stan Bleszynski said...

Hi Sam,
I like this idea. Another big advantage from my point of view is that it would greatly simplify the tax system and would automatically level off the tax inequality the private people suffer against the corporate entities: corporations can write off expenses against the tax while private people cannot. In addition, private income tax is much higher than the corporate income tax. We are living in a new feudal system where the corporate entities are the new landlords, while the employees the new peasants working for them.

FST would not address another imbalance that is the corporations are legally granted infinite lifespan (allowing them to spread out like cancer) where as people are limited by natural laws. This could be quite simple to rectify.

Regards,
Stan