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Friday, March 31, 2017
Warren Mosler — Credit check
Private credit collapsing. FRED charts.
The Center of the Universe Credit checkWarren Mosler
Morris told Congress that redistributing wealth upward was essential so that the wealthy could acquire “those Funds which are necessary to the full Exercise of their Skill and Industry,” and thereby promote progress.
So theft via government privilege is supposedly necessary for progress.
When the risk free rate is increased, the PV of any existing financial asset decreases.
The risk free (discount) rate has been increased from 0.5% to 1.0% in the last 90 days....
H.8 report documents PV of bank loan assets based on current risk free (discount) rate not the total outstanding loan balances or something....
Formula here:
PV = FV / (1+r)n
Discount rate is in the denominator...
Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.
Read more: Present Value - PV Definition | Investopedia http://www.investopedia.com/terms/p/presentvalue.asp#ixzz4czhTTeEp Follow us: Investopedia on Facebook
Suggest run thru a few examples with pencil and paper and a scientific calculator 3 times a week for 1 hour for 15 weeks and see what happens..
Morris told Congress that redistributing wealth upward was essential so that the wealthy could acquire “those Funds which are necessary to the full Exercise of their Skill and Industry,” and thereby promote progress.
Capitalism is the economic system that favors capital as ownership of real and financial assets over other factors on the assumption that capital accumulation promotes national growth, hence, power, and "a rising tike lifts all boats."
Matt is saying the banks have reported the value of their stock of loans in their "inventory" fell because of interest rate change adversely affected their value using that mathy formula. Maybe someone could ask Warren. If anyone know bank loan values, it's him, he owned his own bank and had to deal with annoying regulators and accountants
And FRED wouldn't know? Historically did the value of the stock of loans in their "inventory" increase when the interest rate fell to 25 basis points a few years ago?
When the risk free rate is increased, the PV of any existing financial asset decreases. Franko
Conversely, when future welfare proportional to account balance (positive yielding sovereign debt) is eliminated , the value of existing welfare proportional to account balance shall increase.
So it seems existing sovereign debt owners should not oppose new deficit spending if the new yields are, as they should be, no more than 0% (for the longest maturity sovereign debt).
Matt raised an interesting point, with some help from Ryan's plain English translation.
I turned to FRED to see if, in the past, a rising discount rate correlated to falling credit creation. To the contrary, credit creation and the discount rate usually have risen and fallen together. FRED graph at link
The chart also tells us that not all downturns in credit creation led to a recession -- sometimes there were bumps in the road during expansions. But all recessions were accompanied by a downturn in credit creation. Usually the credit creation downturn preceded the recession, other times it coincided with the recession.
Matt, I still have a business calculator from the time i took a pretty good corporate finance course and I wanna brush up w/ that exercise. I almost was going to study finance, so what you said made sense to me, but your funny plain english version cracked me up.
This explains the problem with credit. Defaults and delinquencies rising amid a deep dive into low credit scoring consumers by finance and auto companies reaching for sales targets. Early in a recovery, they can bet on lower credit scores improving but late in the cycle, it's reckless. This is the first credit cycle we are going to enter with the new 6-10yr longer-duration auto-loans and larger portions of the workforce in disposable 1099 and part-time positions. The reason collateral values are falling is because Auto-companies are heavily discounting to keep volumes up which is late-cycle behavior before layoffs become the only alternative to keep profits from eroding.
The other thing is that if you look at what Treasury has been doing with reserves, they have been fluctuating the reserves via the TGA and remember those reserves are assets to the depository institutions just like loans...
The reserves have been wildly fluctuating by +\- 500B over the last months...
If those institutions seek to maintain a constant capital to assets ratio, if Treasury runs the TGA down by 400B in a few months like they just did, then reserve assets increase at the institutions so the institutions may increase the rate of securitization of loan assets (sell the loans) to get them off the balance sheet which would show up on the H.8 as a decrease in loan assets... this would be in order to maintain a constant target capital:asset ratio at the institutions which they always seek to do
.i.e. If govt forces 100s of $billions more reserve assets onto the depository institutions balance sheets in a short period of time the institutions have to get rid of other assets to maintain a constant capital:asset ratio... so they sell the loans...
The frequency response of bank capital is waaaaay lower than the frequency reponse of bank assets... and banks (depository institutions) seek to maintain a constant ratio of capital:assets and take action to do so...
Very interesting article on Alexander Hamilton and other founding crooks
ReplyDeleteThis is telling:
Morris told Congress that redistributing wealth upward was essential so that the wealthy could acquire “those Funds which are necessary to the full Exercise of their Skill and Industry,” and thereby promote progress.
So theft via government privilege is supposedly necessary for progress.
When the risk free rate is increased, the PV of any existing financial asset decreases.
ReplyDeleteThe risk free (discount) rate has been increased from 0.5% to 1.0% in the last 90 days....
H.8 report documents PV of bank loan assets based on current risk free (discount) rate not the total outstanding loan balances or something....
Formula here:
PV = FV / (1+r)n
Discount rate is in the denominator...
Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.
Read more: Present Value - PV Definition | Investopedia http://www.investopedia.com/terms/p/presentvalue.asp#ixzz4czhTTeEp
Follow us: Investopedia on Facebook
Suggest run thru a few examples with pencil and paper and a scientific calculator 3 times a week for 1 hour for 15 weeks and see what happens..
Under Mark-to-Market accounting debt held-to-maturity get reported at amortized cost minus required impairment. FAS115
ReplyDeleteIn English please Matt.
ReplyDeleteOk in English:
ReplyDeleteWell Keynes blah blah blah Samuelson blah blah blah Hayek blah blah blah Marx blah blah blah Kaldor blah blah blah Mankiw blah blah blah Milton Friedman blah blah blah Galbraith blah blah blah Taylor blah blah blah Picketty blah blah blah Krugman blah blah blah ....
Help?
Morris told Congress that redistributing wealth upward was essential so that the wealthy could acquire “those Funds which are necessary to the full Exercise of their Skill and Industry,” and thereby promote progress.
ReplyDeleteCapitalism is the economic system that favors capital as ownership of real and financial assets over other factors on the assumption that capital accumulation promotes national growth, hence, power, and "a rising tike lifts all boats."
Matt, is your discussion of Present Value meant to explain the downturn in the charts Mosler showed?
ReplyDeleteMatt is saying the banks have reported the value of their stock of loans in their "inventory" fell because of interest rate change adversely affected their value using that mathy formula.
ReplyDeleteMaybe someone could ask Warren. If anyone know bank loan values, it's him, he owned his own bank and had to deal with annoying regulators and accountants
And FRED wouldn't know? Historically did the value of the stock of loans in their "inventory" increase when the interest rate fell to 25 basis points a few years ago?
ReplyDeleteDoesn't make sense BC growth slowed, amount didn't fall.
ReplyDeleteWell Keynes blah blah blah Samuelson blah blah blah Hayek blah blah
ReplyDeleteFinally! Matt explains it all in a way that makes sense.
This for me, Ryan? "Doesn't make sense BC growth slowed, amount didn't fall."
ReplyDeleteWas Thinking out loud about Matt's idea more, MRW.
ReplyDeleteWhen the risk free rate is increased, the PV of any existing financial asset decreases. Franko
ReplyDeleteConversely, when future welfare proportional to account balance (positive yielding sovereign debt) is eliminated , the value of existing welfare proportional to account balance shall increase.
So it seems existing sovereign debt owners should not oppose new deficit spending if the new yields are, as they should be, no more than 0% (for the longest maturity sovereign debt).
Matt raised an interesting point, with some help from Ryan's plain English translation.
ReplyDeleteI turned to FRED to see if, in the past, a rising discount rate correlated to falling credit creation. To the contrary, credit creation and the discount rate usually have risen and fallen together. FRED graph at link
The chart also tells us that not all downturns in credit creation led to a recession -- sometimes there were bumps in the road during expansions. But all recessions were accompanied by a downturn in credit creation. Usually the credit creation downturn preceded the recession, other times it coincided with the recession.
Matt, I still have a business calculator from the time i took a pretty good corporate finance course and I wanna brush up w/ that exercise. I almost was going to study finance, so what you said made sense to me, but your funny plain english version cracked me up.
ReplyDelete
ReplyDeleteThis explains the problem with credit. Defaults and delinquencies rising amid a deep dive into low credit scoring consumers by finance and auto companies reaching for sales targets.
Early in a recovery, they can bet on lower credit scores improving but late in the cycle, it's reckless. This is the first credit cycle we are going to enter with the new 6-10yr longer-duration auto-loans and larger portions of the workforce in disposable 1099 and part-time positions. The reason collateral values are falling is because Auto-companies are heavily discounting to keep volumes up which is late-cycle behavior before layoffs become the only alternative to keep profits from eroding.
I think Ryan is describing what Minsky described ... capital (financial capital in this case) taking on increasing risk for decreasing returns.
ReplyDeleteThe other thing is that if you look at what Treasury has been doing with reserves, they have been fluctuating the reserves via the TGA and remember those reserves are assets to the depository institutions just like loans...
ReplyDeleteThe reserves have been wildly fluctuating by +\- 500B over the last months...
If those institutions seek to maintain a constant capital to assets ratio, if Treasury runs the TGA down by 400B in a few months like they just did, then reserve assets increase at the institutions so the institutions may increase the rate of securitization of loan assets (sell the loans) to get them off the balance sheet which would show up on the H.8 as a decrease in loan assets... this would be in order to maintain a constant target capital:asset ratio at the institutions which they always seek to do
.i.e. If govt forces 100s of $billions more reserve assets onto the depository institutions balance sheets in a short period of time the institutions have to get rid of other assets to maintain a constant capital:asset ratio... so they sell the loans...
The frequency response of bank capital is waaaaay lower than the frequency reponse of bank assets... and banks (depository institutions) seek to maintain a constant ratio of capital:assets and take action to do so...
ReplyDelete