A Small Detour: Savings Account and Interest Compounding
A typical way to think about interest rates is to study how a savings account works. Suppose Mr. X puts $1000 in a savings account that provides a one percent annual interest rate. In that case, X will get at the end of:
Year 1: $1010 = $1000(1 + 0.01)
Year 2: $1020.1 = $1010(1 + 0.01) = $1000(1.01)2
Year 5: $1051.01 = $1000(1.01)5
Several things are worth noticing:
The rate of return is fixed by the issuer of the account (1%)
Principal rises over time: The longer X keeps the funds in his saving account, the greater, the total amount of principal due by a bank when X chooses to withdraw all its funds.
Income rises over time: Interest income earned is automatically added to the outstanding amount of funds ($1000, $1010, etc.) so income earned changes every year as more funds are accumulated: $10 the first year, $10.1 the second year, $10.2 the third year…
By William K. Black
August 27, 2017 Kansas City, MO
Like you, I learned recently that Glenn Simpson had given ten hours of testimony before a closed session of the Senate Judiciary Committee and produced tens of thousands of pages of documents to the committee. Simpson founded a company (Fusion GPS) that hired a former British intelligence officer, Christopher Steele to conduct an investigation of Donald Trump’s ties with Russia. Newsweek reports:
Following Simpson’s testimony behind closed doors, his attorney, Josh Levy, told reporters that his firm is “proud of the work” that Steele produced and Simpson oversaw, and that he “stands by it.”
Fusion GPS bills itself as a place to buy “opposition research.” In plain English, that means if you pay it lots of money it will produce a hit piece demonizing anyone you hate or fear. We do not know who hired Simpson to arrange the hit piece on Donald Trump. The credibility of Simpson’s hit pieces is one of the most important issues for Americans. The best way to judge that credibility is to evaluate Simpson’s prior hit pieces against national leaders.
NEP’s Bill Black appears on the Real News Network and says Trump promised to “drain the swamp” but instead filled his administration with Washington insiders and elite billionaires like Carl Icahn. You can view with a transcript here.
NEP’s Bill Black is interviewed by German news firm ZDF for a documentary regarding a Trump real estate project. Bill appears around the 40 minute mark discussing potential violations of law including conspiracy. You can view here (site is in German).
NEP’s Bill Black appears on The Real News and says the Democrats’ demands are the result of bad economics and bad politics, while Trump’s vision is “the type of thing that comes from ingesting too much peyote”. You can view with a transcript here.
Erratum on Post 18: Figure 18.10 has reversed proportions: about 30 percent are issued by nonfinancial corporations.
Note: As I was afraid it would happen, someone emailed me to take issue with the way I use the term promissory note. “Promissory note” has a specific meaning in the law—it is a specific type of financial instruments—but Post 18 uses the term conceptually to mean any formal promise made by someone—a synonymous to financial instrument—, which may create some confusion. I am trying to find an alternative terms that contains the word “promise” (maybe promissory paper?, promissory contract? Contractual promise?) any suggestion welcome. For the moment, I will use the terms financial instrument, or promise…maybe that is good enough…
Regulated Portfolio Management Companies: Mutual Funds and Others
Portfolio management companies provide a wide variety of placement opportunities to economic units with spare funds who do not want to, or cannot, directly buy securities or other assets. There are three broad types of portfolio management companies: mutual funds, closed-end funds, and unit investment trusts (UITs). One of the main differences between them is the characteristics of the shares they issue in terms of marketability and redeemability. Mutual fund shares are nonmarketable and redeemable on demand, closed-end fund shares are marketable and irredeemable, and UIT shares are marketable and redeemable on demand. Closed-end funds and UITs do not continuously offer their shares for sale. Rather, they sell a fixed number of shares in an initial public offering, after which the shares typically trade on a secondary market such as the New York Stock Exchange or through the sponsor (for UIT). The price of closed-end funds is determined by the market and may differ greatly from the net asset value per share (see below). Another main different is the type of asset they are allowed to acquire, with closed-end funds allowed to buy more illiquid assets than mutual funds.
Farmer Mac, Fannie Mae, Freddie Mac, and Sallie Mae
This section closes the presentation of government-sponsored enterprise with a quick look at other GSEs. They work in a similar fashion to the FCS, by issuing securities and using the proceeds to buy or to back illiquid financial instruments held by financial institutions. The goal is once again to lower the level and volatility of interest rates on specific financial instruments and to encourage credit for specific economic activities.