13 October 2011

US manipulating the gold price up

Very funny to read this from Reuters where Iran claims that its enemies were deliberately causing the price of gold and foreign exchange to rise in a bid to undermine the Islamic Republic's economy. "The enemies and ill-wishers want to make a fuss and present wrong information to provoke and deviate the market," Ahmadinejad told a crowd in a town in the western province of Hamadan, where he was on one of his frequent provincial visits. "In order to disturb the market they buy a lot of gold coins with their huge amount of money ...

Seriously, this should be read in context of Vietnam's issues with its citizens buying gold as an inflation hedge/savings, which I've blogged about in the past. We are seeing how politicians respond to high inflation. In Vietnam's case, try to ban/restrict gold or in Iran's case, blame outsiders. In neither case take responsibility. Don't expect it to be any different in Western countries.

I also note DGC Magazine's pick up of expansion of reporting (in USA) of export/import of physical money to prepaid access/stored value card products. Of course all about preventing the "transfer of money obtained through illicit activity". I wonder how long before the movement of money between states within a country has to be reported. They may as well get it over and done with and tell us fuck your privacy and just ban all forms of physical money/value and tell us we have to have one government issued credit/debit card we have to use for any transaction.

Finally, I recommend reading Unqualified Reservations blog post on maturity transformation, on which he has written about before. His argument is that borrowing short and lending long is at the heart of our banking problems and cause of the business cycle. Quote:

The genius of Professor Krugman is that he goes so near the truth that he makes it obvious even to his commenters - who typically are both idiots and fools, but several of whom spontaneously exhibit the same insight themselves: Why can't we regulate or even ban the maturity mismatch? Savers would have to make the maturity choice themselves and it would be transparent. Currently, the savers don't understand the huge run risks that the banks have by funding with demand deposits and lending long. It's hiding the risk.

4 comments:

Justin said...

"His argument is that borrowing short and lending long is at the heart of our banking problems and cause of the business cycle."

I think it has to do with persistently falling interest rates. Here's an article by Keith Weiner at GSI that I thought was rather good;

http://www.goldstandardinstitute.net/2011/08/falling-interest-rates-and-duration-mismatch/

Bob said...

The asset-liability duration mismatch is also the result of the normal shape of the yield curve, i.e., ST rates are usually lower than LT rates. If banks financed their LT assets (the 30-yr mortgage on your house) with LT liabilities (30-year bonds), the rate they would charge you would be much higher, assuming they could get funding on the long end of the curve. This would mean much less loans made and much less home ownership - a goal of many governments. Since your cost of servicing would be higher you would spend less on Big Macs and GDP growth would suffer.

Additionally, the banks would face serious prepayment risk, i.e. if interest rates fell and everyone refinanced into lower-rate mortgages, the bank would face a negative interest margin if it could not refinance its liabilities. This could wipe out the bank.

Derivatives may have heightened the risk but banks have been taking on interest rate risk in exchange for a positive NIM for centuries.

It may be true that the government
supports this because it is beholden to the bankers, but it is also true that it is conducive to more lending at lower cost, and thus higher economic activity.

As for the Iranians, maybe they want a guest post on The Blog That Shall Not Be Named (tm)?

Gordon said...

Bob said: "This would mean much less loans made and much less home ownership." Actually, eventually it would kill the housing price bubble resulting in houses that people could afford without being in hock to the banks for most of their lives.

intuitivereason said...

Or you deal with the issue the way we do in Australia, and issue variable rate mortgages.