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Expectation, Inflation and Deflation

November 9th, 2009 No comments

Econtalk.org had another good podcast today. One of the parts I liked best was a short statement about why the rate of inflation or deflation is not what matters, but rather unexpected changes in inflation/deflation. If only this more widely understood. In fact, I would argue that high rates of inflation are correlated with bad economies and not the cause of bad economies. It is more likely that the high inflation is caused by the government printing too much money.
“If everybody knew that prices were going to grow at 2% a year, everybody would factor that into interest rates. Value of the money changing hands a year from now goes up. Inflation would be irrelevant; deflation would also be irrelevant. People have this bizarre fear of deflation; unusual in our lifetime. If everybody understood that prices fell 2 or 3% a year, they would factor that into wage expectations, their borrowing and interest rates. Where you get real effects is when outcomes don’t mirror very closely your expectations. If I lend you $1000 and expect to get $1100 back, and prices are stable; if suddenly prices went up in a way that wasn’t anticipated at the time of the loan, those swings in reality versus expectations discourage economic activity.”

Categories: Economics Tags:

Credit Default Swaps, there is still a market.

October 16th, 2008 No comments
The chart below is the current rate for Credit Default Swaps (Credit Derivative). It is interesting to me that these are still being traded more accurately there is still bond insurance being sold and there are some buyers. Keep in mind there is still no exchange or clearing house for these. Here is how to read this, For the B-rated bond you must pay 11% above the fed T to get insurance on the bond for a year. Of course if your bond pays 15% this is good and the Fed rate is almost 0 now. The problem is that there is maybe more risk that the company selling the insurance doesn’t pay than it is that the bond defaults.

Credit Derivative Indexes

Thursday, October 16, 2008
Credit derivatives are designed to allow sellers to take on, or buyers to reduce, the default risk on a bond.
MID BID-ASK
SINCE LAST ROLL
CDX Index Spread
(basis pts)
Upfront Coupon
(%)
Roll date High Low Average
Investment grade, N. America 197.75 $97.89 1.50 Sept. 25 215.43 128.50 173.74
  High volatility 502.50 95.43 3.85 Sept. 25 506.67 453.08 474.69
High yield, N. America 120.06 78.85 5.00 Oct. 2 85.45 78.85 82.17
  B-rated 1136.41 80.35 5.00 Oct. 2 88.46 80.35 84.90
  BB-rated 708.04 92.48 5.00 Oct. 2 98.08 92.48 95.49
Emerging-markets 683.95 88.15 3.35 Sept. 25 97.37 88.15 92.63
Emerging markets diversified* 527.09 89.05 2.80 Sept. 25 96.60 87.75 91.84
Market
participants together with Markit Group Limited select companies for
each index. For additional information and a list of participants and
components, please see www.markit.com
This chart can be found at: LINK

Categories: Economics Tags:

Political Pessimism

September 29th, 2008 No comments

The house failed to pass the bill, Maybe this is ok and maybe not, I think not. The source of my pessimism is that the republicans and the democrats contradicted each other on the facts of what happened and why it didn?t pass. This gives me little confidence. Worse I don?t expect the press will call out those that are deceiving there constituents.
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Categories: Economics Tags:

Planet Money

September 20th, 2008 No comments

NPR has a new blog and podcast about economics, LINK It is the best coverage of the current economy that I have seen. It started with a special on the Sub-Prime lending collapse that aired as a This American Life episode. Episode Link. This is really worth listening to. Well they got a lot of good responses from this and it has turned into a blog/podcast for NPR that explaind the economy. It is a daily podcast I think there are now 5 episodes. All worth listening to. If you use iTunes you can subscribe here LINK

Categories: Economics Tags: