Fed Going Nuclear - Will the PP get radiation poisoning?

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ahhrunforthehills
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 4:37 pm

Maddy wrote:
Tue Mar 24, 2020 3:49 pm
And if the Treasury Department, at the time of settling up, were to simply say "Not this time. . ." Then what?
I suspect that would just print more Federal Reserve Notes to cover their losses. Then without being tied to the Fed, they could print up all the money they wanted for themselves, friends, families, cocaine, fancy pocket-protectors... whatever they are into I guess?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pmward » Tue Mar 24, 2020 4:46 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 3:30 pm
pmward wrote:
Tue Mar 24, 2020 2:25 pm
A couple things. First, if you invest in a foreign asset, and their currency appreciates, your asset appreciates by the currency spread. There is no "hidden tax" here.
The underlying foreign asset may appreciate in price by the currency spread, but not in your actual value, no?

Let's say that the value of Garbage Pale Kids Cards are stable. The price would go up over time due to targeting inflation.

2025: Value of my Garbage Pale Kids collection = $2500 USD, $2600 CAD
2026: Value of my Garbage Pale Kids collection = $3000 USD, $2700 CAD
2027: Value of my Garbage Pale Kids collection = $3500 USD, $2800 CAD

You can see that the value of the USD and CAD has gotten diluted compared to the value of Garbage Pale Kids Cards. However, CAD was diluted less because their currency appreciated in value again the USD.

If I bought it in 2025 and sold it in 2027 in America, I would pay tax on the $1,000 gain. If I bought it in Canada and sold it in Canada I would only pay on a $200 gain. But because I am an american, I owe additional tax on the currency side of the transaction since the currency fluctuation between 1:1.04 and 1:1.25

In other words, in 2025, I would have converted my USD to CAD to purchase the cards paying $2600 CAD. Then sold them 2 years later for a $200 CAD gain. But I still need to convert those $2800 CAD back to USD. I would pay the tax on the appreciation of the CAD to the USD.

Meanwhile, if I was simply a Canadian, I would have just paid tax on the $200 gain.

Now replace those cards with an ounce of gold.

Am I missing something here?
The value of the tax is the same as well.
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Maddy
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Maddy » Tue Mar 24, 2020 4:49 pm

I'm imagining a situation where the Treasury refuses to take any more of the Fed's garbage and begins issuing its own currency. Essentially shoots the Fed dead, leaving the individual banks holding the bag. FDIC would be used to make depositors whole, but the banks would be left hanging. Is this a credible scenario?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pmward » Tue Mar 24, 2020 4:52 pm

Maddy wrote:
Tue Mar 24, 2020 4:49 pm
I'm imagining a situation where the Treasury refuses to take any more of the Fed's garbage and begins issuing its own currency. Essentially shoots the Fed dead, leaving the individual banks holding the bag. FDIC would be used to make depositors whole, but the banks would be left hanging. Is this a credible scenario?
Why on earth would the right hand shoot the left hand? It makes no sense.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 5:31 pm

pmward wrote:
Tue Mar 24, 2020 4:46 pm
ahhrunforthehills wrote:
Tue Mar 24, 2020 3:30 pm
pmward wrote:
Tue Mar 24, 2020 2:25 pm
A couple things. First, if you invest in a foreign asset, and their currency appreciates, your asset appreciates by the currency spread. There is no "hidden tax" here.
The underlying foreign asset may appreciate in price by the currency spread, but not in your actual value, no?

Let's say that the value of Garbage Pale Kids Cards are stable. The price would go up over time due to targeting inflation.

2025: Value of my Garbage Pale Kids collection = $2500 USD, $2600 CAD
2026: Value of my Garbage Pale Kids collection = $3000 USD, $2700 CAD
2027: Value of my Garbage Pale Kids collection = $3500 USD, $2800 CAD

You can see that the value of the USD and CAD has gotten diluted compared to the value of Garbage Pale Kids Cards. However, CAD was diluted less because their currency appreciated in value again the USD.

If I bought it in 2025 and sold it in 2027 in America, I would pay tax on the $1,000 gain. If I bought it in Canada and sold it in Canada I would only pay on a $200 gain. But because I am an american, I owe additional tax on the currency side of the transaction since the currency fluctuation between 1:1.04 and 1:1.25

In other words, in 2025, I would have converted my USD to CAD to purchase the cards paying $2600 CAD. Then sold them 2 years later for a $200 CAD gain. But I still need to convert those $2800 CAD back to USD. I would pay the tax on the appreciation of the CAD to the USD.

Meanwhile, if I was simply a Canadian, I would have just paid tax on the $200 gain.

Now replace those cards with an ounce of gold.

Am I missing something here?
The value of the tax is the same as well.
How so?

For simplicity imagine a 100% tax rate paid. An American $2500 USD card became worth only $3500 USD card (again, the value of the card is stable... the price change is due to inflation). Imagine if they ripped a piece of your card off to cover the taxes. An American would have 29% of their card ripped off to taxes. The Canadian only lost 7% of his card. The American cannot transact in a foreign currency without being exposed to additional taxes.

At the end of the day the Canadian operating in Canadian Dollars has 93% of his card. The American using USD has 61% of his card.

If the American used Canadian Dollars, he would pay tax on the currency gain and the Canadian inflation increase. He would still end up with a lot less than the Canadian that had 93% of his card left.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by shekels » Tue Mar 24, 2020 5:36 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 4:37 pm
Maddy wrote:
Tue Mar 24, 2020 3:49 pm
And if the Treasury Department, at the time of settling up, were to simply say "Not this time. . ." Then what?
I suspect that would just print more Federal Reserve Notes to cover their losses. Then without being tied to the Fed, they could print up all the money they wanted for themselves, friends, families, cocaine, fancy pocket-protectors... whatever they are into I guess?
First off Hal I like the dog in your Avatar
Next,The Fed has been adding to it's Balance sheet for a LONG time.
https://fred.stlouisfed.org/series/WALCL
Then they can just Monetize the Debt, when they Can not or Will not run off the excesses from the Fed's Balance Sheet.
https://www.peakprosperity.com/the-fede ... g-us-debt/
Some people may think this is a Good, Some people may think not so good.
With the Dollar being the Reserve Currency the Fed will Print Money out of the air to provide the Liquidity the Dollar starved world needs.
So Yes, They are Printing to Purchase everything possible.
So why not purchase Short and Long Dated Treasury and control the whole Yield Curve aka YCC just like Japan.
Well guess what.

So how did the FED get into this MESS?
¯\_(ツ)_/¯
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pmward » Tue Mar 24, 2020 5:46 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 5:31 pm
pmward wrote:
Tue Mar 24, 2020 4:46 pm
ahhrunforthehills wrote:
Tue Mar 24, 2020 3:30 pm
pmward wrote:
Tue Mar 24, 2020 2:25 pm
A couple things. First, if you invest in a foreign asset, and their currency appreciates, your asset appreciates by the currency spread. There is no "hidden tax" here.
The underlying foreign asset may appreciate in price by the currency spread, but not in your actual value, no?

Let's say that the value of Garbage Pale Kids Cards are stable. The price would go up over time due to targeting inflation.

2025: Value of my Garbage Pale Kids collection = $2500 USD, $2600 CAD
2026: Value of my Garbage Pale Kids collection = $3000 USD, $2700 CAD
2027: Value of my Garbage Pale Kids collection = $3500 USD, $2800 CAD

You can see that the value of the USD and CAD has gotten diluted compared to the value of Garbage Pale Kids Cards. However, CAD was diluted less because their currency appreciated in value again the USD.

If I bought it in 2025 and sold it in 2027 in America, I would pay tax on the $1,000 gain. If I bought it in Canada and sold it in Canada I would only pay on a $200 gain. But because I am an american, I owe additional tax on the currency side of the transaction since the currency fluctuation between 1:1.04 and 1:1.25

In other words, in 2025, I would have converted my USD to CAD to purchase the cards paying $2600 CAD. Then sold them 2 years later for a $200 CAD gain. But I still need to convert those $2800 CAD back to USD. I would pay the tax on the appreciation of the CAD to the USD.

Meanwhile, if I was simply a Canadian, I would have just paid tax on the $200 gain.

Now replace those cards with an ounce of gold.

Am I missing something here?
The value of the tax is the same as well.
How so?

For simplicity imagine a 100% tax rate paid. An American $2500 USD card became worth only $3500 USD card (again, the value of the card is stable... the price change is due to inflation). Imagine if they ripped a piece of your card off to cover the taxes. An American would have 29% of their card ripped off to taxes. The Canadian only lost 7% of his card. The American cannot transact in a foreign currency without being exposed to additional taxes.

At the end of the day the Canadian operating in Canadian Dollars has 93% of his card. The American using USD has 61% of his card.

If the American used Canadian Dollars, he would pay tax on the currency gain and the Canadian inflation increase. He would still end up with a lot less than the Canadian that had 93% of his card left.
You're looking at the wrong thing. Your same argument could be made about someone in the U.S. holding TIPS. Why would someone hold TIPS and pay this "hidden tax"? Because it's better than not. Would you rather take the currency appreciation and pay tax on it, or take the currency loss straight up? Why even bother with investing in assets that appreciate if you don't want to pay tax on the price increase? In an inflationary period in the U.S. (1970s, and in smaller doses the early 2000s) foreign always out performed U.S. stocks for a U.S. investor. Most of the difference between the two was the currency spread. If you don't want to pay capitol gains tax, don't invest. Keep your cash under your mattress. You'll see real quick which tax is bigger, inflation or capitol gains.
ahhrunforthehills
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 7:18 pm

pmward wrote:
Tue Mar 24, 2020 5:46 pm
ahhrunforthehills wrote:
Tue Mar 24, 2020 5:31 pm
pmward wrote:
Tue Mar 24, 2020 4:46 pm
ahhrunforthehills wrote:
Tue Mar 24, 2020 3:30 pm
pmward wrote:
Tue Mar 24, 2020 2:25 pm
A couple things. First, if you invest in a foreign asset, and their currency appreciates, your asset appreciates by the currency spread. There is no "hidden tax" here.
The underlying foreign asset may appreciate in price by the currency spread, but not in your actual value, no?

Let's say that the value of Garbage Pale Kids Cards are stable. The price would go up over time due to targeting inflation.

2025: Value of my Garbage Pale Kids collection = $2500 USD, $2600 CAD
2026: Value of my Garbage Pale Kids collection = $3000 USD, $2700 CAD
2027: Value of my Garbage Pale Kids collection = $3500 USD, $2800 CAD

You can see that the value of the USD and CAD has gotten diluted compared to the value of Garbage Pale Kids Cards. However, CAD was diluted less because their currency appreciated in value again the USD.

If I bought it in 2025 and sold it in 2027 in America, I would pay tax on the $1,000 gain. If I bought it in Canada and sold it in Canada I would only pay on a $200 gain. But because I am an american, I owe additional tax on the currency side of the transaction since the currency fluctuation between 1:1.04 and 1:1.25

In other words, in 2025, I would have converted my USD to CAD to purchase the cards paying $2600 CAD. Then sold them 2 years later for a $200 CAD gain. But I still need to convert those $2800 CAD back to USD. I would pay the tax on the appreciation of the CAD to the USD.

Meanwhile, if I was simply a Canadian, I would have just paid tax on the $200 gain.

Now replace those cards with an ounce of gold.

Am I missing something here?
The value of the tax is the same as well.
How so?

For simplicity imagine a 100% tax rate paid. An American $2500 USD card became worth only $3500 USD card (again, the value of the card is stable... the price change is due to inflation). Imagine if they ripped a piece of your card off to cover the taxes. An American would have 29% of their card ripped off to taxes. The Canadian only lost 7% of his card. The American cannot transact in a foreign currency without being exposed to additional taxes.

At the end of the day the Canadian operating in Canadian Dollars has 93% of his card. The American using USD has 61% of his card.

If the American used Canadian Dollars, he would pay tax on the currency gain and the Canadian inflation increase. He would still end up with a lot less than the Canadian that had 93% of his card left.
You're looking at the wrong thing. Your same argument could be made about someone in the U.S. holding TIPS. Why would someone hold TIPS and pay this "hidden tax"? Because it's better than not. Would you rather take the currency appreciation and pay tax on it, or take the currency loss straight up? Why even bother with investing in assets that appreciate if you don't want to pay tax on the price increase? In an inflationary period in the U.S. (1970s, and in smaller doses the early 2000s) foreign always out performed U.S. stocks for a U.S. investor. Most of the difference between the two was the currency spread. If you don't want to pay capitol gains tax, don't invest. Keep your cash under your mattress. You'll see real quick which tax is bigger, inflation or capitol gains.
I think you may have missed my original point. I am not arguing that being invested in an appreciating asset is better than not. Of course it is.

The original point was that moving to another country (i.e. renouncing your Uncle Sam) seemed to be the only way someone could avoid the bullet. Whatever toxic assets are on the feds sheet may likely be the liability now of every taxpayer.

As long as you are a citizen, you (and your children) are going to take a hit.

Unless....

WE INVADE CANADA!
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pmward » Tue Mar 24, 2020 7:42 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 7:18 pm

I think you may have missed my original point. I am not arguing that being invested in an appreciating asset is better than not. Of course it is.

The original point was that moving to another country (i.e. renouncing your Uncle Sam) seemed to be the only way someone could avoid the bullet. Whatever toxic assets are on the feds sheet may likely be the liability now of every taxpayer.

As long as you are a citizen, you (and your children) are going to take a hit.

Unless....

WE INVADE CANADA!
Haha. Well, the Fed is not acting in isolation. The whole world is doing the same thing. The last 12 years we have been stuck in a deflationary spiral. All the liquidity they've supplied was not even enough to average 2% inflation. Eventually the inflation will come back. But when that happens, will there be anywhere to hide? Or will it be a global inflationary spiral? Obviously, there will be some countries better than others. Either way, the PP will do just fine. Matter of fact, the PP should do better in inflation than in deflation, especially if it is inflation with growth (i.e. not stagflation) as then you would have 2 assets returning above inflation, and 1 keeping pace.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pugchief » Tue Mar 24, 2020 7:44 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 7:18 pm

Unless....

WE INVADE CANADA!
Canada is safe. The average idiot in the US wouldn't be able to deal with the metric system.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by stpeter » Tue Mar 24, 2020 8:48 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 1:46 pm
It makes me wonder if the PP could hold up to a situation where the US is steadily diluted out of being the world reserve currency while the long-term debt cycle comes to an end.
What's your prediction on which currency will replace the U.S. dollar?

Euro? The euro area economy is even weaker than that in the U.S.

Yuan? The Chinese government hasn't even been able to guarantee convertibility between the external yuan and the internal renminbi, and as I understand it very little international commerce is denominated in yuan.

Any other candidates?

I don't disagree with some of your concerns, but an awful lot would need to happen for the dollar to lose its reserve currency status.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 10:58 pm


Haha. Well, the Fed is not acting in isolation. The whole world is doing the same thing. The last 12 years we have been stuck in a deflationary spiral. All the liquidity they've supplied was not even enough to average 2% inflation. Eventually the inflation will come back. But when that happens, will there be anywhere to hide? Or will it be a global inflationary spiral? Obviously, there will be some countries better than others. Either way, the PP will do just fine. Matter of fact, the PP should do better in inflation than in deflation, especially if it is inflation with growth (i.e. not stagflation) as then you would have 2 assets returning above inflation, and 1 keeping pace.
You seem to accept the official inflation numbers at face value, I simply do not. Hedonics and geometric weighting grossly alter the real figures and are the equivalent of outright fraud. I think the PP just barely gets above REAL INFLATION. This is my concern. I doubt in the future it will keep up. But if you believe in the 2% inflation rate, I can see why you do not think it would be a problem. You still see meat on the bone, I fear the bone has already been sucked clean.
What's your prediction on which currency will replace the U.S. dollar?
I don't think I am really qualified to answer that. But I doubt the world would be dumb enough to just nominate a single country again after the US abused it so badly.

I would assume the world would get together and decide on something that looks like the IMF's SDR valuation.

An example:

Currency / Weight

Chinese yuan 10.92%
Euro 30.93%
Japanese yen 8.33%
UK Pound 8.09%
US Dollar 41.73%
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