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Pricing Money: A beginner's guide to money, bonds, futures and swaps

jdawiseman.com

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Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#151

Post by FabHK »

jdaw1 wrote: post #85
tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

> The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them.

That is just one of the purposes; others are:

- time-shifting of consumption: borrow when you study or build a house, then invest and save during work years, then live of retirement portfolio

- maturity transformation enabling investment: extra cash goes in the bank (and can be redeemed on demand), is bundled and lent (long-term) to fund construction or businesses [1]

- allocative function: send capital to its most productive use. For that, you need accurate prices, supported by equity research and markets.

So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes.

In crypto, it's just a pure cargo cult copy of financial markets without any underlying productive purpose.

[1] that whole banking business is somewhat precarious, but reasonably well understood (since Bagehot) and regulated/insured, though in recent times obviously hasn't worked great. Alternative models (narrow banks + private credit) are conceivable.

[2] and to be clear: the amount finance skims of the economy is way too large. Similarly, building a somewhat straighter fibre (and then microwave towers) from Chicago to NY has no societal benefit I can discern. (But the solution to that is fintech and regulation, not crypto.)

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#152

Post by thelamest »

plandis wrote: post #146
tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

The thing that I’ve always found wild is that the money people make on markets seems to be so much higher than the money people who actually make goods/services. Why has the global economy put such a high benefit from investment bankers compared to, for example, family doctors?

For one, finance is a macro force multiplier; it can make or break entire other industries. There’s also a bit of selection (global top) and survivorship (plenty of less visible non-success stories) in the wild money stories you can see out there.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#153

Post by FabHK »

RyEgswuCsn wrote: post #122
jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.

Sure, but without insurance, everyone would have to have enough cash available to build a second home in case the first burns down (ie, provision for the worst case loss). With insurance, just need to have extra cash corresponding to the expected loss (ie, worst case loss times probability it happens) plus some cost for administering the insurance.

So, effectively [1], with insurance everyone can build a house nearly twice as big as without. That strikes me as productive.

[1] if the probability of a fire is sufficiently small

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#154

Post by FabHK »

User23 wrote: post #93
jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

It is an interesting reframe to think of insurance as a, roughly, ATM put. Having some experience with both trading derivatives and gambling though, I’m fairly confident saying that it’s a distinction without a difference. In both cases a little guy with an understanding of risk and bankroll management and some aptitude for the game, which for trading is a Keynesian beauty pageant, can scrape up a few bucks. But most…

Some derivatives can be fairly consistently good bets, because you can take real-world probabilities, while your counterparty (the bank) deals with "risk-neutral" probabilities implied by their hedging, which can differ quite substantially and persistently from the real-world probabilities.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#159

Post by lbotos »

dataflow wrote: post #94
lbotos wrote: post #90

Earlier quoted context omitted.

Your viewpoint here is kinda weird? The more something trades, the more likely we will have the right price . When things don't trade as much, we don't actually know what that thing is worth. This concept is a benefit to society as many things are interconnected and correlated, so the more accurate we can quickly find the current price (and expected future price) the more we can evaluate value . (Also, they aren't "s…

Just because you've improved the accuracy of a price for something, that doesn't mean whatever you're doing to achieve this is a net benefit to society, right? Surely the idea that this logic doesn't follow isn't weird? Is the idea that society gets a net benefit from price distortions like minimum wage, subsidies, taxes, etc. also "weird"? These also make it hard to discover the "right price" for goods, therefore it…

My point about being "weird" was related to this bit:

> but then a bunch of unrelated parties come in and siphoning money from the existing parties.

I think you are trying to argue that markets mean that the value of a purchased contract changes, and that's only if you want to sell the contract again. If you buy the contract you'll get delivery of what you bought at that price? the market moving only affects you if you want to sell again. If I buy a 2009 used dodge charger with 100k miles for 10k, and then the next day someone sells another 2009 dodge charger with 100k miles for 9k, are those unrelated parties siphoning money away from me?

You could go straight to your local wheat farmer and cut a deal directly with them, but they are gonna say "what's the going rate for wheat" and call some friends and look at market data to determine if they want to accept your deal or not.

----

If you believe that futures markets are harming society, then what is your proposed solution as to how a buyer and seller should agree on a fair price for wheat?

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#160

Post by [deleted] »

jdaw1 wrote: post #85
tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

[deleted]
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