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  1. #171
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    Quote Originally Posted by FDG View Post
    You make it sound as if those formulas are easy. We don't know the interest rate and discount rate (in the future), we don't have reliable models. At best, we can take a guess and say it'll likely never go below zero nominal (but that's not a given, either).
    Scholastics are usually the best approach in this case. At least that is how I tend to deal with these problems.

  2. #172
    nee andante bechimo's Avatar
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    For Americans and other central banking country residences, as long as monetary policy includes offsetting inflation, the risk isn't near as horrendous as it was back in the seventies and prior. But this includes how well your central banks handle monetary policy.

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    pathwise dependent FDG's Avatar
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    Quote Originally Posted by InvisibleJim View Post
    Scholastics are usually the best approach in this case. At least that is how I tend to deal with these problems.
    They're not. You will be exposed to every kind of risk. From my POV it's just astounding how people can easily become extremely confident in their financial opinions without having done their homework.
    ENTj 7-3-8 sx/sp

  4. #174
    lab rat extraordinaire CrystalViolet's Avatar
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    Quote Originally Posted by Lark View Post
    If a million's not a lot there's lots of people have a lot less to manage with.
    Obviously, you haven't seen house prices in Sydney then.
    Dude, you have a bit of a chip on your shoulder. You make it seem like it's an unachievable amount of money, where I've seen people actually achieve it. Surprising people at that. Clever investment, determination, and a whole lot of hard work. These people are good at what they do, but they aren't limited in thier veiws either.
    What I was saying though, is a million isn't a lot when you have to live 30-40 years off it, with dependents and expenses etc, but then I'm just repeating what other people said. If people can gather $1 millon dollars worth of assets on lab tech wages, it can't an unachievable amount. We ain't paid a whole heap. A guy I knew, and lived in the same apartment block as me did it writing articles after he got laid off 5 years ago. Every penny was reinvested, and he had money in loads of things. He lived really frugally though. Those apartments weren't flash.
    Currently submerged under an avalanche of books and paper work. I may come back up for air from time to time.
    Real life awaits and she is a demanding mistress.

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  5. #175
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    Quote Originally Posted by Jenaphor View Post
    For Americans and other central banking country residences, as long as monetary policy includes offsetting inflation, the risk isn't near as horrendous as it was back in the seventies and prior. But this includes how well your central banks handle monetary policy.
    I agree. I know this is off-topic, but in case anyone's interested here's the conventional thinking. (The following picture is oversimplified of course.)

    The Federal Open Market Committee of the Federal Reserve System (usually referred to as "The Fed") moves around interest rates to speed up or slow down the economy. In doing this, it is supposed to achieve a number of contradictory goals. For example, on one hand the Fed is supposed to create conditions for high growth and high employment (IOW, it is supposed to play a stimulative role); on the other hand the Fed is also supposed to ensure price stability and keep inflation low (IOW, it is supposed to keep growth from getting too "frothy").

    In the 70s, the Fed tended to put the emphasis on creating high growth and high employment. But it was difficult to find just the right growth rate over the long-term, and inflation kept creeping into the picture and trashing the economy, especially in combination with the oil shocks of the 1970s.

    Around 1980, with inflation at 13.5%, the Fed switched course and put the emphasis on ensuring price stability and keeping inflation low. Within two years inflation was at 3.5%. And it has stayed at 5% or lower ever since then.

    Inflation-fighting has tended to remain the Fed's primary goal since 1980. The feeling is that economic growth is best served by providing a stable economic environment so that investors, entrepreneurs, and companies can invest money for the long-term without worrying that inflation will make their investment worthless a few years down the road.

    (The goal is that a given investment shouldn't deteriorate significantly even over 30 years. Treasury notes are issued with a duration of 1-10 years; Treasury bonds are issued for 30 years.)

    This same scenario is going to become even more entrenched now that the Baby Boomers are retiring. The Boomers represent a huge chunk of the nation's wealth and property. They are going to load up on Treasury bonds to create a steady stream of retirement income, and the Fed is going to do everything it can to keep those bonds solvent by keeping inflation away from them. The last thing the government wants is for 75 million Boomers to lose confidence in their Treasury bonds, dump trillions of dollars worth of bonds on the open market (reducing their value even further), and then come streaming to Washington to punish the politicians for impoverishing them.

    Nor is it going to end with the Boomers. Even after the Boomers are gone, the wealth will still be in play. The white-haired Boomers will pass it on to their gray-haired children, and the latter will invest it in bonds too when they retire. In other words, the Boomers aren't the only ones who have an interest in keeping that wealth intact. Succeeding generations have their eye on that wealth as well.

    America has prospered by being a low-inflation safe haven for worldwide investors since 1980. Naturally, things can go awry. Who knows what the world will look like in 30 or 50 years. With the world changing quickly, it's easy to get cynical and imagine all kinds of doomsday scenarios. Still, there is every indication that the Fed is going to continue targeting inflation as its primary goal for the foreseeable future. And the Fed is actually quite good at this task, as the last 30 years have shown. It has very powerful tools for moderating economic growth the instant that growth gets too "frothy" and inflation starts creeping in.

    There's an old investment saying that goes: "Never bet against the Fed." The conventional wisdom is that as long as the Fed continues targeting inflation as its long-term primary goal, then inflation isn't going to be a major problem.

  6. #176
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    Quote Originally Posted by FDG View Post
    They're not. You will be exposed to every kind of risk. From my POV it's just astounding how people can easily become extremely confident in their financial opinions without having done their homework.
    They are when someone has the appropriate quality of information. Your opinion belies that you do not have the appropriate quality of information; why assume that others don't? Building proper risk analysis models for investments is a minor and occasionally paid hobby of mine.

    Quote Originally Posted by FineLine View Post
    Nor is it going to end with the Boomers. Even after the Boomers are gone, the wealth will still be in play. The white-haired Boomers will pass it on to their gray-haired children, and the latter will invest it in bonds too when they retire. In other words, the Boomers aren't the only ones who have an interest in keeping that wealth intact. Succeeding generations have their eye on that wealth as well.
    There are major socio-economic consequences regarding the behaviour of OEDC central banks.

    1) Inflation was targeted high during the Baby Boomers prime economic surplus time. This was a political decision to keep this massive swell of young working people more productive than necessary and to attempt to aim for full employment and maximum 'net satisfaction' in the economy. Earning money is most important at the beginning of your working life.
    2) Inflation is now targeted low as the Baby Boomers enter their golden years. This is a political decision to keep this massive swell of golden oldies spending their money on 'nice' things rather than reinvesting their wealth in proper job creation as can be seen from the decline in many industries.
    3) Due to low inflation targeting the children of the Baby Boomers are now much more dependant upon them due to this low inflation targetting, there are less incentives for them to be productive.
    4) Secondary concern, in many parts of second world countries there is less incentive for productivity and investment at a time where they have their own massive swells of young working people (see Egypt). These countries should be driving economic growth upwards as an equivalent to South Korea. Instead we have dilapidated growth figures which further castigates the children of the Baby Boomers who are attempting to 'start' saving money and cannot find favourable investments. I often worry how many of the bodies in the streets of MENA are a consequence of OECD banking policy.

    The difficulty with this Political Banking policy is that the system is actually very unfair and plays 'generational favourites'. In effect one body of people have been given every incentive to succeed and be productive. By contrast another have been disincentivised and thus set up to fail. Therefore they are bound to be dependant and reliant on the first group for some time to come if not through family ties then by government wealth redistribution which more often further robs from the equivalent 'earning' age bracket and thus further disincentivises investment, earning and productivity.

    This is a major macroeconomic elephant in the room that is rarely brought up and discussed.

  7. #177
    pathwise dependent FDG's Avatar
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    Quote Originally Posted by InvisibleJim View Post
    They are when someone has the appropriate quality of information. Your opinion belies that you do not have the appropriate quality of information; why assume that others don't? Building proper risk analysis models for investments is a minor and occasionally paid hobby of mine.
    Nobody has the appropriate quality of information about the future. There's a load of books on interest rate modeling, and if risk analysis models are an hobby of yours, you should know very well that your certainty is misplaced...
    ENTj 7-3-8 sx/sp

  8. #178
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    Default I don't know so you don't know so stop telling others that they know what you do

    Quote Originally Posted by FDG View Post
    Nobody has the appropriate quality of information about the future. There's a load of books on interest rate modeling, and if risk analysis models are an hobby of yours, you should know very well that your certainty is misplaced...
    Forgive me for not choosing to ignore that risked(a) + risked(b) = prob(c), check p65. The whole function of stochastics is to resolve information quality issues by definition. I would say that because information is uncertain does not make it ignorable, I can understand that those who do not have that understanding will have high level issues with that.

    You are complaining that 'information is not high quality' = ignore. When infact 'information is not high quality' = put into risk analysis and take an appropriate risk position.

    I use it in engineering work continually because with any gauge the effect of measurement uncertainty can be marked; the only way to resolve this is to work back from the uncertainty to the most likely truth. Otherwise you throw your hands up and do nothing because there is nothing else worth doing and then you have failed to solve a marked problem.

    See the 'how many sweets in the jar' stochastic problem. As I said; just because some may not have the appropriate level of information quality does not mean that most do not.

    This analysis today will tell you to change from a low variable interest rate mortgage to a fixed term mortgage for 5 years. You can also see this by how banks have started throwing fees at that problem to try to 'get more money' out of people who don't just charge into the abyss without using the information and opinions that are available to them.

    One of the most important aspects is understanding how other people are using their risk analysis to benefit themselves when they have most of the information, thus using it to your own benefit. As I've shown above, it's pretty trivial to look at changes in bank lending policies to gain a high quality understanding of microeconomic household positions. The level of information required is trivial and openly available to anyone.

    Of course, the level of understanding required to apply stochastics and indeed the intelligence required to decipher what it tells us and more importantly what other people with more information tell us would appear to be two entirely different issues from whether stochastics has value as a decision making method.

  9. #179
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    Quote Originally Posted by InvisibleJim View Post
    The difficulty with this Political Banking policy is that the system is actually very unfair and plays 'generational favourites'. In effect one body of people have been given every incentive to succeed and be productive. By contrast another have been disincentivised and thus set up to fail. Therefore they are bound to be dependant and reliant on the first group for some time to come if not through family ties then by government wealth redistribution which more often further robs from the equivalent 'earning' age bracket and thus further disincentivises investment, earning and productivity.

    This is a major macroeconomic elephant in the room that is rarely brought up and discussed.
    Actually, I hear that complaint a lot: That the Boomers are a demographic 600-pound gorilla, and that they have sucked up all the wealth or oil or land or whatever and there's nothing left for succeeding generations. I always hate representing the Boomers in a generational argument, because I know this particular argument will surface pretty quickly.

    (Disclaimer: Technically I'm a Boomer, but I'm just on the cusp. I'm going to use the third person when talking about Boomers just for ease of argument--I don't want to personalize the issues and make them about me.)

    While it's true that the Boomers are a demographic 600-pound gorilla, I think the rest of your argument misses the mark. For starters, the Boomers made their money in the go-go 80s, i.e., in the same low-interest environment that we're enjoying now. They couldn't have made it any earlier: They were still in college in the 60s, and the 70s were such an economic disaster that no one made money then. Just for one example: In the 70s, the prosperous "Factory Belt" running from Albany, NY to Detroit, MI and westward turned into the "Rust Belt." Whole cities died. That wasn't a money-making environment.

    They called it "stagflation" in the 1970s: inflation plus stagnation. Price controls, businesses collapsing, shortages of goods. Again, it's not a money-making environment.

    Your assertion that the central banks targeted inflation high so that the Boomers could make money is ridiculous. No one makes money in periods of high inflation. It was the lowering of interest rates and the creation of a stable economic environment in the 80s that finally unleashed the Boomers and allowed them to build computer companies and entertainment empires. That's why they called it "the go-go 80s"--interest rates were suddenly low for the first time in a decade and entrepreneurs and businesses could finally come out of hibernation, take loans, expand, and explode with activity. Watch the movie "Wall Street." It's about greed and easy money in 1985. It's not about inflation and stagnation in 1979.

    As for why things are slow now:

    A lot of the problem is that low interest rates make for easy money, and that leads to asset bubbles. The latest one was the housing bubble. And in the US that was more about making mortgages affordable to those who couldn't afford them (the young and the dispossessed) than about doing anything for the Boomers. The bubble popped, and now the banks are sitting on a bunch of bad mortgages and being tight with their money. It'll work itself out sooner or later.

    When you have low interest rates, you have to watch out for asset bubbles. And once a bubble appears, you have a choice: live with it and risk inflation, or choke it off and risk recession. The Fed tends to go with the second choice these days, because it doesn't want to risk the first.

    Also, one more point. Even without the Boomers, the Fed would have to keep interest rates low. There are even bigger consumers of Treasury bonds than the Boomers: Foreign governments seeking safe haven for their money (China, Japan, Saudi Arabia, etc.). Those foreign governments would be even more pissed than the Boomers if inflation crept into the system. Matter of fact China chastised the Fed just recently when China thought the Fed was getting a little slack on monetary policy.

    Furthermore, you have a whole corporate bond market that operates alongside the Treasury market. If you screw with interest rates, the whole corporate market will go belly-up as well.

    So there is a lot more to it than just the Boomers. I brought up the example of the Boomers just because they are right in front of us and people tend to see them as a force the government won't mess with. (And the Boomers themselves like to encourage that illusion. ) But I only brought the Boomers up for purposes of illustration, to show how real people are affected by the issues. The truth is that Boomers are only a minor player in this drama. The issue of interest rates and the bond market (both Treasuries and corporates) is much bigger than just the Boomers.

    Oh well, end of rant. Besides, now we're really getting off-topic. I think it's time for me to drop out. I don't want to get into a Boomer vs. youth polemic.

  10. #180
    pathwise dependent FDG's Avatar
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    Quote Originally Posted by InvisibleJim View Post
    Forgive me for not choosing to ignore that risked(a) + risked(b) = prob(c), check p65. The whole function of stochastics is to resolve information quality issues by definition. I would say that because information is uncertain does not make it ignorable, I can understand that those who do not have that understanding will have high level issues with that.
    Err, sorry but you said scholastics, not stochastics. I wouldn't have risen so many objections otherwise, the meaning changes completely.
    ENTj 7-3-8 sx/sp

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