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Mobile Loans Ponzi
Rank: Elder Joined: 7/22/2009 Posts: 7,451
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When you borrow for businessIf I borrow for business (and it works out) I will have more money in my pocket but there will be no more money in circulation from the bigger picture point of view. The more money in my pocket will have come from another business person's pocket. Take an example of where I start selling chicken in addition to my groceries. Assuming my groceries customers were buying chicken from another chicken seller 3 shops away, some will now buy from me. The customers will not all over sudden start buying two chickens because we are now two chicken sellers. If my sales go up by x, you better believe they have gone down by x elsewhere. If I was making m and the other seller y earlier, now we will have (m + x) + (y - x) - bank interestwhich is m + y - bank interest This is less total money than earlier! But personally I will not care because I will have more money in my pocket! But the total money in general will be less. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Elder Joined: 7/22/2009 Posts: 7,451
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Long term, low interest rate is a totally different story. That would bring in inflation and/or volatility. We would borrow money that we don't need to pay any time soon and flood the market with a lot money chasing few products and the prices would rise. Of course when it comes time to pay, our expenditure will go down as we channel the money to repaying the loan and hence the volatility. Inflation would be all over the place. Sometimes very high, sometimes very low, sometimes in between. That is why fares are more stable throughout the day in rural areas (route za huko ndani) as opposed to urban areas. In urban areas, demand spikes in the morning and evening lead to much higher fares and decrease in demand during the day lowers them to less than half. Cheap, long tenure loans would have similar effects. You don't want an entire economy to operate like that. That is why CBK buys and sells dollars to stabilise the currency for example. Otherwise the shilling would be very strong during peak tourist seasons, tea, coffee etc. harvest and export and tumble the months we are doing more importing than exporting. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Member Joined: 1/1/2011 Posts: 396
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MaichBlack wrote:When you borrow for business
If I borrow for business (and it works out) I will have more money in my pocket but there will be no more money in circulation from the bigger picture point of view.
The more money in my pocket will have come from another business person's pocket.
Take an example of where I start selling chicken in addition to my groceries. Assuming my groceries customers were buying chicken from another chicken seller 3 shops away, some will now buy from me. The customers will not all over sudden start buying two chickens because we are now two chicken sellers. If my sales go up by x, you better believe they have gone down by x elsewhere.
If I was making m and the other seller y earlier, now we will have
(m + x) + (y - x) - bank interest
which is m + y - bank interest
This is less total money than earlier!
But personally I will not care because I will have more money in my pocket! But the total money in general will be less.  the mere extesion of credit increases money supply immediately as the credit-based transactions exceed the total printed currency in circulation. Regardless of the borrowers' success in their endeavours the increased money in circulation still changes hands. In other words, unless everyone in a given economy was required to settle all obligations in physical fiat currency at the same time ( i.e. probably within the same 24 Hr period), then money supply is ever-expanding.
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Rank: User Joined: 8/15/2013 Posts: 13,236 Location: Vacuum
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jmbada wrote:MaichBlack wrote:When you borrow for business
If I borrow for business (and it works out) I will have more money in my pocket but there will be no more money in circulation from the bigger picture point of view.-Wrong, If you borrow whether for consumption or business, there is more money in circulation since either way you will spend it
The more money in my pocket will have come from another business person's pocket.
Take an example of where I start selling chicken in addition to my groceries. Assuming my groceries customers were buying chicken from another chicken seller 3 shops away, some will now buy from me. The customers will not all over sudden start buying two chickens because we are now two chicken sellers. If my sales go up by x, you better believe they have gone down by x elsewhere.
If I was making m and the other seller y earlier, now we will have
(m + x) + (y - x) - bank interest
which is m + y - bank interest
This is less total money than earlier!
But personally I will not care because I will have more money in my pocket! But the total money in general will be less. the mere extesion of credit increases money supply immediately as the credit-based transactions exceed the total printed currency in circulation. Regardless of the borrowers' success in their endeavours the increased money in circulation still changes hands. In other words, unless everyone in a given economy was required to settle all obligations in physical fiat currency at the same time ( i.e. probably within the same 24 Hr period), then money supply is ever-expanding. Money supply in an economy is primarily affected by the monetary policy. Increase in interest rate=reduced money supply and vice versa. Inflation is caused if there is increase in money supply with no corresponding increase in output. P.s There is no correlation between loan tenor and inflation. MaichBlack wrote:Long term, low interest rate is a totally different story. That would bring in inflation and/or volatility. We would borrow money that we don't need to pay any time soon and flood the market with a lot money chasing few products and the prices would rise.
If Obiero did it, Who Am I?
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Rank: Member Joined: 2/20/2007 Posts: 767
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@swenani, @Maich, I think you guys are quoting theories learnt in highschool. What I know is that 1. Inflation is the progressive increase in prices of goods and services over time. 2. In Kenya today, when interest rates go up, the next thing to go up will be cost of fuel and before long everything else will go up. That is the reality. They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: Member Joined: 2/20/2007 Posts: 767
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MaichBlack wrote:tom_boy wrote:@Maich, kindly fafanua how mobile loans do not increase money supply. I am really interested in learning this point. As a river road economist, I think they increase money supply. Okay. Here we go. First off, remember we are talking about short tenure, high interest loans. Practical Example:Assume I have 30,000/= to spend every month. In January I have 30,000/= and I take 30,000/= loan. I will get 27,000/= (or less) because they deduct the interest/service charge upfront. Now I have 57,000/= to spend in January. In February I will spend 0/= because the 30,000/= will go to repaying the loan. Total spending money for the 2 months = 57,000/=. If I had not taken the loan, total spending money would have been 60,000/=!!! What if I keep taking a new loan every month for the whole year??? It would be worse! If I want to end the year loan free (how I started in January) I would borrow up to November. December money pays for November. So my total spending money for the year would be: 57,000/= + 27,000/= × 10 = 327,000/= If I hadn't borrowed my spending money would have been 30,000/= × 12 = 360,000/= I can keep extending the loan/re-borrowing as long as I want but that only makes things worse because every month I will have 3k less to spend till the day I stop borrowing (and skip a month of spending for the final repayment). Problem with this analogy is that you assume the individual will stop borrowing.
Most likely scenario is the individual will borrow every month until they are not able to pay.
Imagine a worst case scenario where 100% of bank loans are on mobile. What happens when these people progressively stop paying back one month after another. That is when you borrow to spendNext.... They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: User Joined: 8/15/2013 Posts: 13,236 Location: Vacuum
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tom_boy wrote:@swenani, @Maich, I think you guys are quoting theories learnt in highschool.
What I know is that
1. Inflation is the progressive increase in prices of goods and services over time.-Who disputed this? What causes the progressive increase?
2. In Kenya today, when interest rates go up, the next thing to go up will be cost of fuel and before long everything else will go up. e.g when?
That is the reality. If Obiero did it, Who Am I?
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Rank: Elder Joined: 7/22/2009 Posts: 7,451
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tom_boy wrote:MaichBlack wrote:tom_boy wrote:@Maich, kindly fafanua how mobile loans do not increase money supply. I am really interested in learning this point. As a river road economist, I think they increase money supply. Okay. Here we go. First off, remember we are talking about short tenure, high interest loans. Practical Example:Assume I have 30,000/= to spend every month. In January I have 30,000/= and I take 30,000/= loan. I will get 27,000/= (or less) because they deduct the interest/service charge upfront. Now I have 57,000/= to spend in January. In February I will spend 0/= because the 30,000/= will go to repaying the loan. Total spending money for the 2 months = 57,000/=. If I had not taken the loan, total spending money would have been 60,000/=!!! What if I keep taking a new loan every month for the whole year??? It would be worse! If I want to end the year loan free (how I started in January) I would borrow up to November. December money pays for November. So my total spending money for the year would be: 57,000/= + 27,000/= × 10 = 327,000/= If I hadn't borrowed my spending money would have been 30,000/= × 12 = 360,000/= I can keep extending the loan/re-borrowing as long as I want but that only makes things worse because every month I will have 3k less to spend till the day I stop borrowing (and skip a month of spending for the final repayment). Problem with this analogy is that you assume the individual will stop borrowing.
Most likely scenario is the individual will borrow every month until they are not able to pay.
Imagine a worst case scenario where 100% of bank loans are on mobile. What happens when these people progressively stop paying back one month after another. That is when you borrow to spendNext.... Can you read @tom_boy??? Read the entire last paragraph starting with first line. Slowly!!! Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Elder Joined: 7/22/2009 Posts: 7,451
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tom_boy wrote:@swenani, @Maich, I think you guys are quoting theories learnt in highschool.
What I know is that
1. Inflation is the progressive increase in prices of goods and services over time.
2. In Kenya today, when interest rates go up, the next thing to go up will be cost of fuel and before long everything else will go up.
That is the reality. I give up on you. Officially!!! Let's allow others to continue with this discussion. We have both said what we wanted to say. We might bore people to death. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: New-farer Joined: 12/14/2015 Posts: 29
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How the Economic Machine Works- Ray DalioThe hot stock is the one that everyone thinks that everyone else thinks....is the hot stock (Dixit & Nalebuff, 2008).
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Rank: Elder Joined: 12/7/2012 Posts: 11,901
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I hope this settles the panganga that has been going on here.  In the business world, everyone is paid in two coins - cash and experience. Take the experience first; the cash will come later - H Geneen
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Rank: Member Joined: 1/1/2011 Posts: 396
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Angelica _ann wrote:I hope this settles the panganga that has been going on here. Great basic video.
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Rank: Member Joined: 2/20/2007 Posts: 767
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The problem with fellas who feel they are knowledgable because they probably sat in an economics class and learnt about FED rates and such things is they forget hapa ni Kenya, sio ulaya. Example 1. Assume no fuel price control in Kenya. All OMCs hold alot of working stock on loan. Do you want to tell us that if interest rates go up then price of fuel will go down ( again, assume no price control in place) Example 2. We are currently in a situation where interest rates are controlled. This has caused rates to be relatively low. Has this led to increase in money supply? Example 3..... Loading They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: Member Joined: 2/20/2007 Posts: 767
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Example 3 In the Kenya CPI, housing is one of the components. When interest rates go up, the price ( interest) on existing mortgages go up. The landlord whose property is on mortgage will increase the rent. Is this equal to reduced inflation related to increasing interest rates? One may argue that rate of new mortgage uptake will go down thus less buildings come up and thus reduced demand on building materials. However, in KE, existing mortgages are more at any one time than any new mortgages that will be purchased by virtue of say a 3% drop in interest. So effect of rate change is greatest on existing mortgages( on a weight basis) rather than on future potential mortgages. They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: Member Joined: 1/1/2011 Posts: 396
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tom_boy wrote:The problem with fellas who feel they are knowledgable because they probably sat in an economics class and learnt about FED rates and such things is they forget hapa ni Kenya, sio ulaya.
Example 1. Assume no fuel price control in Kenya.
All OMCs hold alot of working stock on loan. Do you want to tell us that if interest rates go up then price of fuel will go down ( again, assume no price control in place)
Example 2.
We are currently in a situation where interest rates are controlled. This has caused rates to be relatively low. Has this led to increase in money supply?
Example 3..... Loading Example 1: prices will rise on any good that is deemed essential and scarce to an economy. We are an oil (refined) importing country. Oil is both essential and scarce in Kenya so prices would indeed rise without price controls. The ERC uses a combination of forced competition via the open tendering system (on the importation leg) and price controls at the pump. So variation in Central Bank rates would not have the free market impact we would expect on this unique and critical commodity. On example 2: again this is an artificial analysis. The central argument against controlling interest rates is that it DENIES the Central Bank one of its most vital tools in responding to and tampering the effect of over and under supply of money within the economy. Without the cap in place, the Central Bank would be better enabled to tame rising prices and even manage exchange rate fluctuations. Right now, the Central Bank's ability to do so are extremely limited and results in implementation of very draconian control measures such as calling trading desks on an intraday basis whenever there is any fluctuation in rates.
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Rank: Member Joined: 1/1/2011 Posts: 396
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tom_boy wrote:Example 3
In the Kenya CPI, housing is one of the components. When interest rates go up, the price ( interest) on existing mortgages go up. The landlord whose property is on mortgage will increase the rent. Is this equal to reduced inflation related to increasing interest rates?
One may argue that rate of new mortgage uptake will go down thus less buildings come up and thus reduced demand on building materials. However, in KE, existing mortgages are more at any one time than any new mortgages that will be purchased by virtue of say a 3% drop in interest. So effect of rate change is greatest on existing mortgages( on a weight basis) rather than on future potential mortgages. Housing costs are part of the CPI basket of goods and services comprising about 19% approx. of the total CPI basket. This 19% segment of the overall CPI basket includes water and electricity. So the inflation rate would not be overly affected by rate rises and subsequent, assumed, rental cost rises. In your quoted example, you assume that most landlords are leveraged and that they can hike rates without notice, which is not the typical case. In addition, they often focus on retaining consistent tenants. So pricing changes are much less sensitive to intra-year interest rate changes. However, the food and non alcoholic basket has significant sensitivity to price changes. If rates rise, the INFLATION rate will slow. Overall prices may not necessarily drop, but the pricing growth RATE , i.e. inflation, will slow down. One of the CBK's mandates is maintaining price stability and helping the country avoiding booms and busts, not necessarily reducing overall costs of goods and services.
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Rank: Member Joined: 2/20/2007 Posts: 767
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jmbada wrote:tom_boy wrote:The problem with fellas who feel they are knowledgable because they probably sat in an economics class and learnt about FED rates and such things is they forget hapa ni Kenya, sio ulaya.
Example 1. Assume no fuel price control in Kenya.
All OMCs hold alot of working stock on loan. Do you want to tell us that if interest rates go up then price of fuel will go down ( again, assume no price control in place)
Example 2.
We are currently in a situation where interest rates are controlled. This has caused rates to be relatively low. Has this led to increase in money supply?
Example 3..... Loading Example 1: prices will rise on any good that is deemed essential and scarce to an economy. We are an oil (refined) importing country. Oil is both essential and scarce in Kenya so prices would indeed rise without price controls. The ERC uses a combination of forced competition via the open tendering system (on the importation leg) and price controls at the pump. So variation in Central Bank rates would not have the free market impact we would expect on this unique and critical commodity. Now I see where the problem is.
Economists are trained to think in terms of free markets. Problem s that free markets do not exist. At least not in KE. What we have is the REAL MARKET, where fuel price can go up with increase in interest rates (if no controls). I dont get your last part by the way, the part in red. Are you saying that on this critical commodity (fuel), the price would obey free market economics and go down with rise in rates IF there were no controls.On example 2: again this is an artificial analysis. The central argument against controlling interest rates is that it DENIES the Central Bank one of its most vital tools in responding to and tampering the effect of over and under supply of money within the economy. Without the cap in place, the Central Bank would be better enabled to tame rising prices and even manage exchange rate fluctuations. Right now, the Central Bank's ability to do so are extremely limited and results in implementation of very draconian control measures such as calling trading desks on an intraday basis whenever there is any fluctuation in rates. [color=green] . They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: Member Joined: 2/20/2007 Posts: 767
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jmbada wrote:tom_boy wrote:The problem with fellas who feel they are knowledgable because they probably sat in an economics class and learnt about FED rates and such things is they forget hapa ni Kenya, sio ulaya.
Example 1. Assume no fuel price control in Kenya.
All OMCs hold alot of working stock on loan. Do you want to tell us that if interest rates go up then price of fuel will go down ( again, assume no price control in place)
Example 2.
We are currently in a situation where interest rates are controlled. This has caused rates to be relatively low. Has this led to increase in money supply?
Example 3..... Loading Example 1: prices will rise on any good that is deemed essential and scarce to an economy. We are an oil (refined) importing country. Oil is both essential and scarce in Kenya so prices would indeed rise without price controls. The ERC uses a combination of forced competition via the open tendering system (on the importation leg) and price controls at the pump. So variation in Central Bank rates would not have the free market impact we would expect on this unique and critical commodity. Now I see where the problem is.
Economists are trained to think in terms of free markets. Problem s that free markets do not exist. At least not in KE. What we have is the REAL MARKET, where fuel price can go up with increase in interest rates (if no controls). I dont get your last part by the way, the part in red. Are you saying that on this critical commodity (fuel), the price would obey free market economics and go down with rise in rates IF there were no controls.On example 2: again this is an artificial analysis. The central argument against controlling interest rates is that it DENIES the Central Bank one of its most vital tools in responding to and tampering the effect of over and under supply of money within the economy. Without the cap in place, the Central Bank would be better enabled to tame rising prices and even manage exchange rate fluctuations. Right now, the Central Bank's ability to do so are extremely limited and results in implementation of very draconian control measures such as calling trading desks on an intraday basis whenever there is any fluctuation in rates. Here, I disagree.
Our CBK has never been able to control interest that bank charges by changing CBR. This is until controlls came in. I may be wrong on this but I believe our rates in Kenya have historically been set by the tbill rate. Banks have historically looked at tbill rate and added a premium. They pretend they are looking at CBR but in effect its the tbill rate that mattered. Problem is that this self same tbill rate was a product of auction at the market in which banks participate. The CBK was traditionally always faced with the hard question of accept the high rates offered by banks or have no money to fund govt operations. Thus high bank interest rates always persisted thanks to high govt borrowing. So the story we are constantly fed about CBK regulating interest rates via CBR blah blah blah and now they are handcuffed yada yada is a big fat lie. Ask yourself, why is it that currently long tenor bonds are getting low subscriptions currently. Could it be that with up coming loans repayments, banks suspect that CBK will be forced to pay more on bills and bonds in the near future. When the time comes, banks will bid high and CBK will be squeezed to accept. Thats the waiting game right now. Meanwhile the banks are still making money on mobile ponzi as they wait. They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: Member Joined: 2/20/2007 Posts: 767
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I think this discussion has really digressed. But it has been interesting for me. I guess a major question to be answered is " Do mobile loans lead to an increase in money supply? " Money may not be available to the middle class conventional / traditional bank borrower, but has money become more available to the 70% of low income earners that constitute this economy? Does the typical mobile loan borrower think about interest rates? Would it be a moot point trying to use normal free market logic to say with high borrowing rates, inflation rate will slow down? Of course the premise of this free market theory is that borrowers are rational and will avoid borrowing when rates go up and vice versa. Does this apply to mobile loan applicants? They must find it difficult....... those who have taken authority as the truth, rather than truth as the authority. -G. Massey.
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Rank: Member Joined: 1/1/2011 Posts: 396
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tom_boy wrote:jmbada wrote:tom_boy wrote:The problem with fellas who feel they are knowledgable because they probably sat in an economics class and learnt about FED rates and such things is they forget hapa ni Kenya, sio ulaya.
Example 1. Assume no fuel price control in Kenya.
All OMCs hold alot of working stock on loan. Do you want to tell us that if interest rates go up then price of fuel will go down ( again, assume no price control in place)
Example 2.
We are currently in a situation where interest rates are controlled. This has caused rates to be relatively low. Has this led to increase in money supply?
Example 3..... Loading Example 1: prices will rise on any good that is deemed essential and scarce to an economy. We are an oil (refined) importing country. Oil is both essential and scarce in Kenya so prices would indeed rise without price controls. The ERC uses a combination of forced competition via the open tendering system (on the importation leg) and price controls at the pump. So variation in Central Bank rates would not have the free market impact we would expect on this unique and critical commodity. Now I see where the problem is.
Economists are trained to think in terms of free markets. Problem s that free markets do not exist. At least not in KE. What we have is the REAL MARKET, where fuel price can go up with increase in interest rates (if no controls). I dont get your last part by the way, the part in red. Are you saying that on this critical commodity (fuel), the price would obey free market economics and go down with rise in rates IF there were no controls.On example 2: again this is an artificial analysis. The central argument against controlling interest rates is that it DENIES the Central Bank one of its most vital tools in responding to and tampering the effect of over and under supply of money within the economy. Without the cap in place, the Central Bank would be better enabled to tame rising prices and even manage exchange rate fluctuations. Right now, the Central Bank's ability to do so are extremely limited and results in implementation of very draconian control measures such as calling trading desks on an intraday basis whenever there is any fluctuation in rates. Here, I disagree.
Our CBK has never been able to control interest that bank charges by changing CBR. This is until controlls came in. I may be wrong on this but I believe our rates in Kenya have historically been set by the tbill rate. Banks have historically looked at tbill rate and added a premium. They pretend they are looking at CBR but in effect its the tbill rate that mattered. Problem is that this self same tbill rate was a product of auction at the market in which banks participate. The CBK was traditionally always faced with the hard question of accept the high rates offered by banks or have no money to fund govt operations. Thus high bank interest rates always persisted thanks to high govt borrowing. So the story we are constantly fed about CBK regulating interest rates via CBR blah blah blah and now they are handcuffed yada yada is a big fat lie. Ask yourself, why is it that currently long tenor bonds are getting low subscriptions currently. Could it be that with up coming loans repayments, banks suspect that CBK will be forced to pay more on bills and bonds in the near future. When the time comes, banks will bid high and CBK will be squeezed to accept. Thats the waiting game right now. Meanwhile the banks are still making money on mobile ponzi as they wait. It is the Treasury that borrows money, whether for short or long term. The CBK is the Government's Banker and also a regulator. They help mitigate outsized market fluctuations. And any bank charging above KBRR which CBR +4% per annum is patently illegal.
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