The Rant: SUNNY SIDE OF THE STREET: ANALYSIS OF THE FINANCIAL SYSTEM & THE ECONOMY (part 4)

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Tuesday, July 4, 2017

SUNNY SIDE OF THE STREET: ANALYSIS OF THE FINANCIAL SYSTEM & THE ECONOMY (part 4)

Interest Rates: Which Theory Is Correct?

Reconciling Stocks and Flows

Charles Lamson

Liquidity preference is the name given to the theory based on the demand for and supply of money. It was developed by John Maynard Keynes in the 1930s. The supply of money is the stock of money, and the demand for money, or "preference for liquidity," is how much money spending units wish to hold. The supply of and demand for money is partially determined by the central bank, through its control over the stock of reserves and reserve requirements. Also, the demand for money is based on the spending plans of spending units. Demand is related to the interest rate, ceteris paribus (all other things being equal). The interest rate adjusts to equate the quantity supplied (stock) of money with the quantity demanded.

The loanable funds theory is based on flows as opposed to stocks. Flows are measured throughout time, whereas stocks are measured at a point in time. Thus, if I offered you a job for $10,000, you will want to know whether this is per week, per month, or per year. Not so for stocks. If I give you a $10,000 savings account, there is no relevant time dimension. The loanable funds theory develops the argument that the interest rate is determined by the supply of and demand for loanable funds. The demand for loanable funds reflects borrowing plans by DSUs, while the supply of loanable funds reflects lending plans by SSUs. Ceteris paribus, the quantity demanded of loanable funds is inversely related to the interest rate, while the quantity supplied of loanable funds is directly related to the interest rate. The interest rate adjusts to equate the quantity demanded of loanable funds with the quantity supplied.

To help you see that the theories compliment each other, consider what happens when the Fed increases bank reserves. When reserves increase, banks create money by incurring deposit liabilities as they acquire loans. In doing so, banks have simultaneously augmented the supply of loanable funds. According to liquidity preference, an increase in the supply of money, ceteris paribus, causes the interest rate to fall, while according to the loanable funds theory, an increase in the supply of loanable funds have the same effect. Likewise, if the Fed decreases the supply of reserves, you should be able to verify that both the stock of money and the supply of loanable funds decrease, leading to a higher interest rate. Again, both theories predict that interest rate changes in the same direction.

Next consider what happens when the demand for loanable funds increases, reflecting an increased desire of people to borrow more at every interest rate. Since banks acquire loan assets when they create checkable deposits, which are also money, an increase in the demand for loanable funds corresponds to an increase in the demand for money. According to both theories, an increase in the interest rate results. Likewise, a decrease in the demand for loanable funds translate to a decrease in the demand for money and a lower interest rate.

From an intuitive standpoint, we can reconcile the two theories by recognizing that when there is a change in a stock measured at different times, a flow has occurred, that is, a flow over time results in a change in a stock. For example, if I have a gallon of milk in the morning, go to the refrigerator for a glass of milk repeatedly throughout the day, and have a gallon left at the end of the day, then I can safely say that I consumed a half gallon of milk during the day. Consumption of milk over the course of the day represents a flow, while the amount of milk in the refrigerator at a point in time is a stock. The change in the stock of milk as measured at two different points in time depicts the flow. If I save $100 per year, at the end of the year, my stock of wealth will have increased by $100 (ignoring interest payments for the time being). Correspondingly, changes in the supply (flow) of loanable funds entail changes in the stock of money measured at two different points in time. Likewise, changes in the demand (flow) of loanable funds entail changes in the demand for money. A theory stated in flows can always be reformulated in terms of stocks and vice versa.

*SOURCE: THE FINANCIAL SYSTEM & THE ECONOMY, 3RD EDITION, 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 72-73*

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The kingdom of God is among you

Luke 17:20-25 Asked by the Pharisees when the kingdom of God was to come, Jesus gave them this answer, ‘The coming of the kingdom of God does not admit of observation and there will be no one to say, “Look here! Look there!” For, you must know, the kingdom of God is among you.’ He said to the disciples, ‘A time will come when you will long to see one of the days of the Son of Man and will not see it. They will say to you, “Look there!” or, “Look here!” Make no move; do not set off in pursuit; for as the lightning flashing from one part of heaven lights up the other, so will be the Son of Man when his day comes. But first he must suffer grievously and be rejected by this generation.’

Live Adoration from Tyburn Convent

Adoration, also known as Eucharistic Adoration, is a Catholic prayer in front of the Blessed Sacrament. It is a sign of devotion and worship to Jesus Christ, who is believed to be present in the consecrated host. During adoration, Catholics pray to Jesus Christ before the Eucharist at their local parish. The Eucharist is typically kept in a tabernacle at the parish church, and may be presented in front of a closed tabernacle or in front of the exposed host in a monstrance. A monstrance is a vessel used in Roman Catholic, Anglican, High Church Lutheran, and Old Catholic churches. It is a stand made of precious metal that holds the Blessed Sacrament during adoration. The word "monstrance" comes from Latin and means "to show".

Love

1 Corinthians 13:4-7: Love is always patient and kind; it is never jealous; love is never boastful or conceited; it is never rude or selfish; it does not take offence, and is not resentful. Love takes no pleasure in other people’s sins but delights in the truth; it is always ready to excuse, to trust, to hope, and to endure whatever comes. 1 Corinthians 13:8-9,13: Love does not come to an end. But if there are gifts of prophecy, the time will come when they must fail; or the gift of languages, it will not continue for ever; and knowledge – for this, too, the time will come when it must fail. For our knowledge is imperfect and our prophesying is imperfect. In short, there are three things that last: faith, hope and love; and the greatest of these is love. Colossians 3:14-15: Over all these clothes, to keep them together and complete them, put on love. And may the peace of Christ reign in your hearts, because it is for this that you were called together as parts of one body. Always be thankful.

It is not peace I have come to bring, but a sword

Jesus instructed the Twelve as follows: ‘Do not suppose that I have come to bring peace to the earth: it is not peace I have come to bring, but a sword. For I have come to set a man against his father, a daughter against her mother, a daughter-in-law against her mother-in-law. A man’s enemies will be those of his own household. ‘Anyone who prefers father or mother to me is not worthy of me. Anyone who prefers son or daughter to me is not worthy of me. Anyone who does not take his cross and follow in my footsteps is not worthy of me. Anyone who finds his life will lose it; anyone who loses his life for my sake will find it. ‘Anyone who welcomes you welcomes me; and those who welcome me welcome the one who sent me. ‘Anyone who welcomes a prophet will have a prophet’s reward; and anyone who welcomes a holy man will have a holy man’s reward. ‘If anyone gives so much as a cup of cold water to one of these little ones because he is a disciple, then I tell you solemnly, he will most certainly not lose his reward.’ When Jesus had finished instructing his twelve disciples he moved on from there to teach and preach in their towns.

The beheading of John the Baptist

Matthew 14:1-12 Herod the tetrarch heard about the reputation of Jesus, and said to his court, ‘This is John the Baptist himself; he has risen from the dead, and that is why miraculous powers are at work in him.’ Now it was Herod who had arrested John, chained him up and put him in prison because of Herodias, his brother Philip’s wife. For John had told him, ‘It is against the Law for you to have her.’ He had wanted to kill him but was afraid of the people, who regarded John as a prophet. Then, during the celebrations for Herod’s birthday, the daughter of Herodias danced before the company, and so delighted Herod that he promised on oath to give her anything she asked. Prompted by her mother she said, ‘Give me John the Baptist’s head, here, on a dish.’ The king was distressed but, thinking of the oaths he had sworn and of his guests, he ordered it to be given her, and sent and had John beheaded in the prison. The head was brought in on a dish and given to the girl, who took it to her mother. John’s disciples came and took the body and buried it; then they went off to tell Jesus.

Psalms 9:16

The LORD is known by the judgment which he executeth: the wicked is snared in the work of his own hands. Higgaion. Selah - Question: What does Higgaion and Selah mean? Answer: Both Higgaion and Selah are used numerous times in the Old Testament. They occur together in Psalm 9:16. The meanings of these words are uncertain. We observe Higgaion in such passages as Psalm 9:16; 19:14; 42:3; Lamentations 3:63. In Arabic, the root gives a deep vibrating sound, like the murmering sound of a harp (Psa. 92:3). The International Standard Bible Encyclopedia states that it may be derived from the Greek versions of Psalm 9:16 and takes it to mean an instrumental interlude. It may also mean a soliloquy or meditation such as concerning the judgment of God (Psa. 9:16), the words and work of God (Psa. 19:14), and the loving kindness and faithfulness of God (Psa. 92:2-3). In the Septuagint, Selah is translated as daplasma (meaning a division). It occurs in Habakkuk 3:3, 9, 13 and 71 times in the Psalms. It is used in 39 of our 150 psalms. Of those 39 psalms, 31 they are ones handed over to "the chief Musician." So, pause and meditation may be the predominate idea. In addition, it may mean to lift up (Hebrew, salal) or, in some definitions, a repetition, end of a strophe, or a recurring symphony. In his sermon named "HIGGAION!" about Psalm 9:16, Archibald G. Brown, on August 17, 1873, at the East London Tabernacle said this: "When the psalmist wrote this verse, and reached the words 'The wicked shall be snared in the work of his own hands', he seemed to be overpowered at the terror of the thought, and so put a full stop and wrote in the word 'Higgaion!' As much as to say, 'O my soul, meditate on the tremendous truth my hand has penned, and let all who read the same meditate.' And then after 'Higgaion' he puts 'Selah'. He would have there to be a solemn pause. Oh, I would that there could be just one moment's solemn pause in our meeting tonight. Would that there could be a Selah, a Higgaion! Friends, shall there be? I put it to you. 'The Lord is known by the judgment which he executes; and the wicked shall be snared in the work of his own hands!" Now let us just for a moment meditate on that. Let there be a solemn Higgaion, and let every heart ask itself the question, 'How do I stand in reference to this tremendous truth?' *Answer by Dr. Joseph R. Nally, Jr. (https://thirdmill.org/answers/answer.asp/file/47892)*

The Rant

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Tuesday, July 4, 2017

SUNNY SIDE OF THE STREET: ANALYSIS OF THE FINANCIAL SYSTEM & THE ECONOMY (part 4)

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