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02-05-2014, 03:07 PM (This post was last modified: 02-05-2014 03:18 PM by earmuffs.)
RE: Ask an Economist
(02-05-2014 12:22 PM)Adriana Wrote:  Hello,

can you explain to me what does "Financial bubble" means? I have read about it over the Internet but I am not sure what does the word itself means? It is usually related to assets/real esteates and its prices, fall of the intrerest rates which leads to rise in the investments etc.?

If you can, explain to me why is this happening? Why do ineterst rates change? Is it because of the change in monetary politics (there is more money in the sistem so the interest rates go up, and reverse)?

Thank you,

Adriana

A bubble is something that is profitable now, like really profitable, but unsustainable and will eventually, like a bubble, pop.
The classic example is the tulip bulb example. Back in the whatever hundreds in Netherlands or whereever the price of bulbs of tulips skyrocketed, like we're talking you could an estate mansion with a couple of these things.
This was because of supply and demand and people perceiving them to be worth a fuck ton more than they actually were worth. There's a story of a bunch of orphans selling their dead dads bulbs and becoming millionaires (by the days standards).
Obviously this was stupid and after a while people woke the fuck up and the price of the bulbs plummeted, literally overnight. Pop.
It's all about people believing the price will go up. If people believe the price of something will continue to rise than they will hang onto their stock. The problem with this though is that the more people that hang onto their stock the less stock there is and so the price is artificially inflated. Eventually it will get to a price where people will just say fuck it and not buy that stock for the asking price. You than lose buyers and so the stock becomes worthless because nobody wants to buy them. Suddenly something that was worth say $20 a share is now worth $0.10. That sudden drop in price is the pop and the artificial price hike is the bubble.
It's all to do with perception and reality. Perception keeps it artificially inflated, reality brings it crashing back to earth.


As for changing interest rates, there's two reasons.
The first is that interest rates is price you pay for borrowing money (or the bank pays you to borrow your money) and so falls under the same supply and demand "laws" as any other commodity.
The second is that the government, via the reserve bank, influences interest rates to combat inflation. So they set a high interest rate (usually only a couple percent) to slow money flowing into the country because less people want to borrow because interest rates are high. This keeps inflation low. Or they set low interest rates to stimulate the economy and get people borrowing money.

For example. A mortgage interest rate might be 6%. 2% of that could be what the reserve bank set for government bonds and shit like that. That means the base is 2% because the bank could just buy government bonds which are a shit load less risky. The extra 4% than comes from a combination of supply and demand (goes up or down depending on supply and demand, competition, things like that) and your perceived risk (riskier you are the more interest you pay. Though in the case of a mortgage from a bank you'll likely just be refused if you're too risky).

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20-05-2014, 12:26 AM
Value of USA transactions in a year
How do I find the value of all financial transactions in the USA in a given year?
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20-05-2014, 07:33 AM
RE: Ask an Economist
How can the RBA lower inflation and also depreciate the domestic currency? Can the RBA use sterilization with imperfect assets to decrease the dollar? How does this work? Is it possible to lower both the dollar and inflation or would the RBA have to use 2 separate policies?

Thanks
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20-05-2014, 06:59 PM
RE: Ask an Economist
(20-05-2014 12:26 AM)jasonhewitt Wrote:  How do I find the value of all financial transactions in the USA in a given year?

http://www.google.com

Quote:How can the RBA lower inflation and also depreciate the domestic currency? Can the RBA use sterilization with imperfect assets to decrease the dollar? How does this work? Is it possible to lower both the dollar and inflation or would the RBA have to use 2 separate policies?

Thanks

purchase of assests = increase money supply
increase in money supply = lower interest rates

increase foreign assets = increase home money supply

steralized foriegn purchase = home asset decrease, foriegn asset increase

buy foriegn asset to decrease money appreciateion

expectation of money devaluation increases interest rates

Sterilization is used to balance a countries exchange rate.
As other countries buy and sell another countries bonds and currency and shit, it effects that countries currency value.
What this means is that it will cost more to buy goods from America and so American exports will be hindered. It however increases the amount of imports a country can buy because their dollar is worth more.
Depending on what you want to stimulate (imports or exports) determines if you want a low or high value dollar.
Governments use sterilization to counteract foreign buying and selling of their currency and shit to keep their currency as stable as possible (generally stable is better because it allows for better future planning which is good for business).
They do this by buying and selling foreign currency and shit and than immediately do an opposite transaction to counter the effects of that money.

ie: If a country sells some of its foreign bonds it is left with a large amount of money (from the sale) so it will than immediately buy domestic bonds and treasuries and shit, off setting all this money it just got.

Basically what this does is transfer foreign assets into domestic ones. It can work the same way of selling domestic assets and buying foreign ones.
Doing this a country can counteract the effects of foreign countries doing this to them.
"Sterilization" is the effect of immediately buying domestic (or foreign) assets with the money from selling foreign (or domestic) assets.

The reasons why countries do this at all falls back on import and export prices and countries wanting to stimulate whichever particular area.


Because sterilization is about off-setting the effects of how much money is in circulation it doesn't effect interest rates and inflation directly.
A country can however say "I'm gonna do X in the future", this creates speculation which does effect interest rates (and thus inflation).

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21-05-2014, 02:41 AM
RE: Ask an Economist
Great, thank you.
I have to figure out how to lower the domestic currency because it is hurting exports, but inflation is getting too high, so it needs to be lowered.

With the expectation of devalued money you mentioned, how does this raise the interest rate? I thought lower $ = lower interest rates?

Also when you say buy foreign assets to decrease money appreciation- is that taking into account the imperfect asset substitutability?

It just seems that either way I approach this scenario, I will create an expectation that will offset my goals Sad just struggling with this question a lot!
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16-07-2014, 01:09 AM
RE: Ask an Economist
(26-05-2013 04:25 PM)Thomas Wrote:  I teach and hold an advanced degree in Economics.
If you have any questions on economics I'll attempt to answer them.
Always willing to help if I can.
But please, I can't do your take home exam for you.

Hi I am unsure of the breakdown on the value of tax exemptions in the USA for faith enterprises and individuals

So on a local level city rates and stuff like that
churches do not pay rates ? and the pastor ? his home
as there is some type exemption I heard about

In my city in Australia I had an issue with my Mayor and asked for all rates not collected to be in the budget summary we get as rate payers
It caused quite a situation as she had no good reason for that not to be clear in the budget

This came up as my friend Mark was in a debate with a christian pastor on blog talk radio and it might be useful if he knew the details of what the situation is in the USA
regards HUGH
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