Gold Farming

via the excellent ChinaDigitalTimes,

As a prisoner at the Jixi labour camp, Liu Dali would slog through tough days breaking rocks and digging trenches in the open cast coalmines of north-east China. By night, he would slay demons, battle goblins and cast spells.

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Gold Farming

One of these is not like the other

Brad DeLong asks “Where are the stabilizing speculators?

We know why people don’t turn around and become suppliers of liquid cash money when the money stock contracts: they can’t, for nobody else’s liabilities are good as payment for transactions in currently-produced goods and services. But surely Berkshire Hathaway or Microsoft or Northrup-Grumman could have sold lots of bonds at attractive values. Why didn’t they?

My answer: Microsoft is not a financial corporation. They do not borrow in order to lend again, they borrow in order to purchase productive capital. Assuming that Microsoft has purchased all the capital it needs, the question becomes one of leverage, or debt to equity ratios.

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One of these is not like the other

Firm Leverage and Price Stickiness, Part 2

This is a post in response to some of the issues raised by SRW.

I appreciate the feedback.

First, I consolidated leverage by industry (e.g. 5 digit NAICS industry). Next, I looked only at downward deviations in price — e.g. I computed stddev( .5abs(x) – .5x), where x was the the month over month percent change in price for each BLS 5 digit price index.

Therefore now we have mappings between industry leverage, and the downward standard deviation of percent changes in price.

Finally, I weighted everything by equity, so that small industries (often with high leverage) do not contribute so much.

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Firm Leverage and Price Stickiness, Part 2

Stocks, Flows and Loanable Funds

Economics is the science of confusing stocks with flows.

Michal Kalecki

What is the market of loanable funds? It is supposed to be the market that equilibrates the demand for savings with the demand for investment. But if such a market existed, it would be a market for flows, not stocks.

However the bond market is a market of stocks. The capital market is a market for stocks. Both bonds and capital persist across periods and can be re-sold. Everyone who owns a bond (or who owns capital) is a potential supplier of bonds or capital at some rate. Everyone is also a potential demander of bonds or capital at some rate.

As the interest rate changes, some suppliers become demanders, so that at equilibrium, supply (of the stock) is equal to the demand (for the stock).  This is the equilibrating process for stocks that can be re-sold by their current owner in any period.

But lending and investment are the derivatives of these quantities with respect to time — they are flows.

Can the interest rate equilibrate both flows and stocks?
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Stocks, Flows and Loanable Funds