Not Even Harry Browne Thought It Was Going To Be This Bad

[Gumby]

Yes, I disagree. My economic analysis indicates that the risk in stocks, bonds and the dollar is too great for me to tolerate, which has nothing to do with my political views. Of course, I could be wrong, but that is true of all analysis on any basis.

Can you explain how a politically agnostic economic analysis comes to the conclusion that stocks, bonds and Dollars are all too risky? It sounds like you are predicting the demise of the US dollar and economy — which is a politically biased conclusion (i.e. "government headed in the wrong direction" or something of that nature).

[WhiteDesert]

• "The rising asset(s) in the PP tend to more than compensate for the falling asset(s). I.e., the rising asset(s) tend to buoy the portfolio."
  (This is usually the case but is not always the case.)

This statement was one that I found compelling when I was doing my initial research, prior to implementing a 4X25PP. It's hard to recall, but it might well have been one of the things that inspired me to research the strategy in the first place. Interestingly, however, even saying that the statement is usually accurate might be overstating things some.

My 4X25PP is fully contained within my Roth, and consists of allocations to VTI, IAU, SHY, and TLT. I started it on 1 July 2011 and have tracked it since. I try to record its performance daily, but I have missed some days due to off-the-grid travel, and I don't track its performance on days that I add money to it (or to my variable, since I track them both as a single portfolio where the PP acts as part of the "anchor"). This leaves me with some 380 observations of performance.

For kicks, I just went in to my tracking spreadsheet and did some quick back-of-the-envelope figuring. The results surprised me, so I thought I'd share them. I assumed that "falling asset(s)" equals at least one of the four components dropping by at least 1%, and I assumed that "buoying the portfolio" means that the overall 4X25PP does not drop more than .25%. I also assumed that "by not more than" means that if the overall portfolio drops exactly .25%, then it counts as a buoyed day (this happened three times). I studied the performance since 1 July 2011 and selected days where at least one asset had dropped by 1% or more from its close on the previous day. This gave me 152 relevant observations. I then scored each of those 152 days as a 0 or a 1. The day earned a zero if the whole portfolio dropped by more than .25%. The day scored a one if the portfolio lost less than .25%.

So, of 152 relevant days, 79 days scored a one and 73 days scored a zero. Using this dataset, and with the assumptions that I had chosen, the portfolio was buoyed by rising assets on just over half of the days that at least one of the funds dropped by 1% or more. The rising assets failed to buoy the portfolio 48% of the time. Additionally, of the days that the portfolio lost more than .25%, it dropped by more than .50% 42 times and more than 1% 10 times. Of the days that the portfolio was buoyed by rising assets, the overall portfolio was positive at the end of the day 40 times and lost value 39 times.

Anyway, this was just some quick figuring and wasn't particularly rigorous. And obviously, changing the initial assumptions will change the results. But I thought folks might find it interesting.

[moda0306]

Yes, I disagree. My economic analysis indicates that the risk in stocks, bonds and the dollar is too great for me to tolerate, which has nothing to do with my political views. Of course, I could be wrong, but that is true of all analysis on any basis.

Can you explain how a politically agnostic economic analysis comes to the conclusion that stocks, bonds and Dollars are all too risky? It sounds like you are predicting the demise of the US dollar and economy — which is a politically biased conclusion (i.e. "government headed in the wrong direction" or something of that nature).

+1

The PP, and investing in a macro-diversified manner in general, carries so much political weight that it's probably pretty pointless to try to completely separate the two. Harry Browne did it about as much as humanly possible.

If you truly think our currency is going to collapse, to say that you've completely removed your political opinions from that is probably impossible... All we can hope for ourselves is that we're making sure that we are seeking to understand economics first, and only later deciding what our political beliefs are, and not letting it go the other way around. 

[Libertarian666]

Yes, I disagree. My economic analysis indicates that the risk in stocks, bonds and the dollar is too great for me to tolerate, which has nothing to do with my political views. Of course, I could be wrong, but that is true of all analysis on any basis.

Can you explain how a politically agnostic economic analysis comes to the conclusion that stocks, bonds and Dollars are all too risky? It sounds like you are predicting the demise of the US dollar and economy — which is a politically biased conclusion (i.e. "government headed in the wrong direction" or something of that nature).

Austrian analysis indicates that there are two and only two possible endings of a gigantic inflation* such as we are seeing today:

1. The central bank stops printing money; or
2. The central bank keeps printing money until they destroy the currency.

Either of these would cause disastrous losses for stock and bond holders; thus my conclusion that those two investments are too risky.

Why would either of these cause disastrous losses?

1. Interest rates for the federal government (and all other debtors who borrow in dollars) head for the moon due to lack of actual end demand for their debt, causing the stock and bond markets to collapse.
2. All instruments denominated in fixed numbers of dollars are destroyed in this case. The stock market may survive, but the social chaos makes it difficult for firms to be profitable.

Now it is true that if the central bank chooses ending 1, the dollar could go up a great deal in purchasing power. However, I am of the opinion that they will not do that because of their sensitivity to the stock and bond market crashes that (as we can see from recent events) would start immediately upon their announcement of their new policy. Is this a political opinion? Maybe; the rest is standard Austrian economic analysis.

*By inflation I mean an increase in the money supply, not that general increase in prices that follows from the increase in the money supply.

[buddtholomew]

*By inflation I mean an increase in the money supply, not that general increase in prices that follows from the increase in the money supply.

Is it an increase in the money supply or the circulation of that supply to the masses (velocity)? We haven't witnessed a rise in inflation even with the increase in money supply as banks continue to hold more in their reserves.

[Libertarian666]

*By inflation I mean an increase in the money supply, not that general increase in prices that follows from the increase in the money supply.

Is it an increase in the money supply or the circulation of that supply to the masses (velocity)? We haven't witnessed a rise in inflation even with the increase in money supply as banks continue to hold more in their reserves.

"Velocity" is a meaningless concept in economics. Every unit of money is at all times in someone's cash balance. Even if "the check is in the mail", the money it represents is in one account or another at any given time.

You guys should really read Von Mises' Human Action, which destroys the myths of the so-called "mathematical economists" as well as explaining what economics really is and really can do.

Note that I don't agree with his erroneous assumption that government is necessary to the free market. But other than that he's pretty much spot on.

[Pointedstick]

You guys should really read Von Mises' Human Action, which destroys the myths of the so-called "mathematical economists" as well as explaining what economics really is and really can do.

How do you know we haven't? I have. Austrian economics is attractive because it is logical and internally consistent, but it has been my experience that attempting to apply it to the economies of the last 50 years results in problems because the Austrian explanation for what should come to pass often stubbornly resist manifesting itself in the real world. IMHO it doesn't do a very good job of modeling the world of freely-exchangeable unpegged floating fiat currencies, which has oddly enough avoided collapse thus far and which people mysteriously seem to accept despite the fact that it's all backed by smoke, mirrors, and promises by untrustworthy entities.

Its supporters (myself formerly included) can have difficulty letting go of it because of how darn logical it is and how self-evident are its fundamental axioms. But if it don't work, ya gotta start looking elsewhere.

[Libertarian666]

You guys should really read Von Mises' Human Action, which destroys the myths of the so-called "mathematical economists" as well as explaining what economics really is and really can do.

How do you know we haven't? I have. Austrian economics is attractive because it is logical and internally consistent, but it has been my experience that attempting to apply it to the economies of the last 50 years results in problems because the Austrian explanation for what should come to pass often stubbornly resist manifesting itself in the real world. IMHO it doesn't do a very good job of modeling the world of freely-exchangeable unpegged floating fiat currencies, which has oddly enough avoided collapse thus far and which people mysteriously seem to accept despite the fact that it's all backed by smoke, mirrors, and promises by untrustworthy entities.

Its supporters (myself formerly included) can have difficulty letting go of it because of how darn logical it is and how self-evident are its fundamental axioms. But if it don't work, ya gotta start looking elsewhere.

Yes, the collapse has not arrived yet, but that doesn't mean it isn't coming. I don't recall any claim by Von Mises that the timing of the end was predictable. In fact I would be very surprised at any such claim, considering the basic fact that economics is not a mathematical science.

And as I still have not seen any explanation of how there can be another ending besides the two I outlined, I will maintain my position that one of those two will happen eventually.

[Xan]

I will maintain my position that one of those two will happen eventually.

I won't quote Keynes's old saw, but "eventually" can be a VERY long time indeed.  Why not stick 25% of your savings into stocks, 25% into bonds, set some rebalance bands, and capture the gains while they last?

Eventually, the stock market will no longer exist.  Eventually the sun will go nova.  Eventually I will die.  But in the meantime, I'd like to buy stocks and bonds low and sell them high.  :-)

[Libertarian666]

I will maintain my position that one of those two will happen eventually.

I won't quote Keynes's old saw, but "eventually" can be a VERY long time indeed.  Why not stick 25% of your savings into stocks, 25% into bonds, set some rebalance bands, and capture the gains while they last?

Eventually, the stock market will no longer exist.  Eventually the sun will go nova.  Eventually I will die.  But in the meantime, I'd like to buy stocks and bonds low and sell them high.  :-)

Because I don't like the risk/reward ratio.

[moda0306]

What if "printing money" is really just exchanging slow money for fast money?  A bond that is a promise to pay a fiat dollar from the entity that issues those dollars is fundamentally not all that much different from the dollar itself.

Please explain how printing dollars and exchanging them for t-bills changes the nominal purchasing power of the economy.

Pleeeeeease.

And the natural rate of interest to receive for loaning your currency to the issuer of said currency is 0%. We're in a deleveraging crisis with lots of unused productive capacity. Why in gods name should there be a high interest rate floor?

The referee of a hockey game doesn't wear ice skates so he can score a goal. He wears them so be can do his job of holding the players accountable more easily.  The players know this, and don't treat him like they treat other players.  The issuance of bonds by the federal government isn't much different.  There's no natural need for a currency issuer to issue bonds, just like refs don't need equipment to help them score goals.  However, giving them those tools doesn't all of a sudden make them like everyone else.  We just now know that the government is in the business of setting an interest rate floor and the ref wants to see things better.

Ill give one more example...

Imagine if instead of "printing money" and exchanging it for tbills, the government gave every US citizen treasury bonds of varying duration worth a total of $100,000.

The money supply, according to common measurements, has not increased. However, we have a nominally risk-free financial asset to the tune of $100k on our balance sheets that wasn't there before.  THIS would be inflationary. This would repair all our balance sheets and then some.

This would cause a lot of inflation. However, in an under-capacity, low investment environment, lowering an interest rate floor to 0-3.6% is NOT a crazy market manipulation, and that's essentially what "printing money" is.

[Libertarian666]

What if "printing money" is really just exchanging slow money for fast money?  A bond that is a promise to pay a fiat dollar from the entity that issues those dollars is fundamentally not all that much different from the dollar itself.

"Well, if birds flew underwater, If a dollar bill was a dime
Boy wouldn't things be crazy
But maybe then you'd come around some time
If steamships flew the skyways, and honey wasn't made by the bee
If black was blue, if I was you, I'd come back to me"

Lyrics from <a href="http://www.elyrics.net">eLyrics.net</a>

[moda0306]

What made "printing money" such a disaster under the gold standard is that there was a fundamental difference between a claim on an ounce of gold today, and one for 5-10 years from now.

Print too many "today" claims and you have an obvious potential disaster.  Also, debt could be a huge problem because there could be not enough gold to meet those future "today claims."

When a currency is built on fiat value, rather than the government borrowing gold from people or taxing it from them, they need to create a demand mechanism.  With no link to gold, the tax becomes a huge piece of that system. They don't really tax to get the money, they tax to stimulate demand for the currency.

Similarly, issuing bonds (usually the other way a government procures funds) are equally pointless to the government in the traditional sense.  Allowing people to buy bonds in a currency you issue essentially allows you to set an interest rate floor, which helps you put the brakes on inflation.  But essentially these bonds may as well be dollars from a balance sheet point of view.  A promise to pay something of fiat value at a future point is something very different than a promise to deliver a real good or service. 

Having a government issue a currency at all may be blasphemy to some, but let's at least look at this machine for what it is.  If a country IS going to issue currency, it's then up to Austrians to help explain why a country should even issue bonds at all, and if they do use bonds as an interest rate management tool, why they are anything fundamentally all that different from cash itself.

Also, The nice thing about currency, is that it's not war or a police state, or even being forced into a public school you don't like.  It's just an asset you have to hold enough of in your bank account to pay some bills. You can negotiate every long-term contract as inflation adjusted if you want to, and as soon as you make your money you can convert it to a number of investment choices, foreign currencies, industrial commodities, or even gold itself.

And that's all assuming you're actually being victimized by holding the dollar. For decades we were subsidized to hold it... Hence gold's 20-year super-bear market.

[moda0306]

What if "printing money" is really just exchanging slow money for fast money?  A bond that is a promise to pay a fiat dollar from the entity that issues those dollars is fundamentally not all that much different from the dollar itself.

"Well, if birds flew underwater, If a dollar bill was a dime
Boy wouldn't things be crazy
But maybe then you'd come around some time
If steamships flew the skyways, and honey wasn't made by the bee
If black was blue, if I was you, I'd come back to me"

Lyrics from <a href="http://www.elyrics.net">eLyrics.net</a>

So you're telling me a piece of fiat confetti promising to deliver a piece of fiat confetti in the future is something fundamentally different than the fiat confetti to be delivered?

Come on man. This isn't that preposterous. In fact, I'm pretty sure it's the only logical conclusion one can come to.

It's just an interest rate floor setting tool. Banks had fiat confetti on their balance sheets before QE, and they had it after.

Lastly, what would you assert to me is the natural rate of interest a government should pay to someone to borrow the fiat currency they issue?

If anything other than 0%, please explain your reasoning.

[Xtal]

They don't really tax to get the money, they tax to stimulate demand for the currency.

This made me stop in my tracks.  What a thought-provoking sentence!  Somebody could write a whole book about this one concept.

[moda0306]

They don't really tax to get the money, they tax to stimulate demand for the currency.

This made me stop in my tracks.  What a thought-provoking sentence!  Somebody could write a whole book about this one concept.

Xtal,

Is that sarcasm? 

If not, the first time I heard that, my mind was blown.  Of course, there's more to a currency holding its value than holding a gun to someone's head and requesting a piece if paper.  However, I always wondered what it was, fundamentally, that made us value holding a US dollar when it has no intrinsic value.

This is the model of "chartalism," which isn't our system, but it's not too far off in some important ways. Any fiat currency has to develop its value. Part of that is stimulating demand for the currency.  Other things are important in maintaining it.  But we kind of tripped into a quasi-chartalist system after ending the gold standard without really realizing it.


I don't have a link, but the British used this in Africa to get the people to start to demand currency. The Africans didn't value it, so the British taxed it and something clicked with all the people to demand it, and it became money for that society where it would have previously been confetti.

[Gumby]

Because I don't like the risk/reward ratio.

It sounds like you are overestimating inflation expectations.

I'll just point out that Inflationists have been consistently wrong about inflation — since 1980, mind you — simply because they do not understand how our fiat monetary system works. For instance, most inflationists, such as yourself, believed that QE was inflationary. Those who understood our fiat monetary system knew better.

Misunderstanding the Monetary System is Hazardous to your Portfolio
04/15/2013 AT 12:56 PM

I was just perusing the FT and came across this article about gold’s collapse.  This line really jumped out at me:

“Some, at least, are keeping the faith. John Paulson, one of the most prominent gold investors, continues to believe that the expansion of central bank balance sheets through “quantitative easing”? and other policies in the US, Japan, Switzerland and the UK will trigger higher inflation and boost gold prices, according to people familiar with his thinking.”?

Anyone who understands MR and really understands how the monetary system works would never assume that QE is inflationary.  I’ve been on record for years explaining how QE is essentially just an asset swap that changes the composition of private sector financial assets, but doesn’t actually increase the net financial assets of the private sector.  This is the crucial understanding with regards to QE.

All the other stuff might have some impact.  Yes, QE probably has some impact on interest rates.  It definitely has a psychological impact because it’s so widely misunderstood.  But the one thing it definitely doesn’t seem to do is cause inflation.  And that makes complete sense.  If you own a T-Bond you have something very similar to a savings account.  If the government comes along and takes your savings account from you and replaces it with a bank deposit (a checking account) are you suddenly more inclined to spend?  Of course not.  That’s QE in a nut shell.

Anyone who understands MR knows that QE (as is being implemented) is overrated when it comes to real fundamental economic impacts.  All the hyperbole in recent years about hyperinflation, high inflation, the increasing money supply all leading to the “overweight hard assets”? thesis has been based on a fundamentally flawed understanding of the monetary system.  And now those investors are paying the price.

Source: http://pragcap.com/misunderstanding-the ... -portfolio

That's what happens when you let your political beliefs guide your investment decisions — you misunderstand how fiat money works and what causes inflation. The Austrian school has a political agenda, and it warps their understanding of our fiat monetary system and its inflationary pressures.

The fact of the matter is that no one knows what the future holds, so you'd be better off in a well-balanced portfolio that protected you from all economic conditions. Far better than listening to people who have been incorrectly predicting high inflation for over 30 years.

[Xtal]

They don't really tax to get the money, they tax to stimulate demand for the currency.

This made me stop in my tracks.  What a thought-provoking sentence!  Somebody could write a whole book about this one concept.

Xtal,

Is that sarcasm? 

If not, the first time I heard that, my mind was blown.  Of course, there's more to a currency holding its value than holding a gun to someone's head and requesting a piece if paper.  However, I always wondered what it was, fundamentally, that made us value holding a US dollar when it has no intrinsic value.

This is the model of "chartalism," which isn't our system, but it's not too far off in some important ways. Any fiat currency has to develop its value. Part of that is stimulating demand for the currency.  Other things are important in maintaining it.  But we kind of tripped into a quasi-chartalist system after ending the gold standard without really realizing it.


I don't have a link, but the British used this in Africa to get the people to start to demand currency. The Africans didn't value it, so the British taxed it and something clicked with all the people to demand it, and it became money for that society where it would have previously been confetti.

Definitely not sarcasm!  I've also come across this idea before, in David Graeber's book Debt: The First 5000 Years (which is an excellent read, btw), but not in a pithy one-sentence form like this.  It's just really thought-provoking.

It really annoys me how governments claim an effective monopoly on currency.  Currency, taxation, and power all go hand in hand.

[smurff]

The Austrian school has a political agenda, and it warps their understanding of our fiat monetary system and its inflationary pressures.

Gumby, just curious:  What do you believe the Austrian School's political agenda to be?

[Pointedstick]

The Austrian school has a political agenda, and it warps their understanding of our fiat monetary system and its inflationary pressures.

Gumby Pointedstick [HIJACKED!], just curious:  What do you believe the Austrian School's political agenda to be?

Personally my sense is they they push an agenda that at the minimum is in favor of an extremely small government and at is most outright anarchistic as reflected in arguments made by some of their scholars (such as Hans-Hermann Hoppe) for a "private-law society". That's in fact what attracted me to them. But I think a lot of their arguments are undercut by misunderstanding about the nature of modern money and over-reliance on logical axioms.

[Gumby]

The Austrian school has a political agenda, and it warps their understanding of our fiat monetary system and its inflationary pressures.

Gumby, just curious:  What do you believe the Austrian School's political agenda to be?

It's pretty well spelled out here...

The Ludwig von Mises Institute (LvMI), or simply "Mises Institute", located in Auburn, Alabama, is an American organization named for Austrian School economist Ludwig von Mises (1881-1973). Its website states that it is "the world center of the Austrian School of economics and libertarian political and social theory," and that it is dedicated to advancing "the Misesian tradition of thought through the defense of the market economy, private property, sound money, and peaceful international relations, while opposing government intervention." [1]

Source: https://en.wikipedia.org/wiki/Ludwig_vo ... _Institute

And for what it's worth, Wikipedia classifies Austrian School Economics in the following categories:

Austrian School, Conservatism in the United States, Economic theories, Heterodox economics, Libertarian theory

Source: https://en.wikipedia.org/wiki/Austrian_School

[Reub]

"The Ludwig von Mises Institute (LvMI), or simply "Mises Institute", located in Auburn, Alabama, is an American organization named for Austrian School economist Ludwig von Mises (1881-1973). Its website states that it is "the world center of the Austrian School of economics and libertarian political and social theory," and that it is dedicated to advancing "the Misesian tradition of thought through the defense of the market economy, private property, sound money, and peaceful international relations, while opposing government intervention." [1]

Source: https://en.wikipedia.org/wiki/Ludwig_vo ... _Institute

So what's wrong with that?

[Libertarian666]

"The Ludwig von Mises Institute (LvMI), or simply "Mises Institute", located in Auburn, Alabama, is an American organization named for Austrian School economist Ludwig von Mises (1881-1973). Its website states that it is "the world center of the Austrian School of economics and libertarian political and social theory," and that it is dedicated to advancing "the Misesian tradition of thought through the defense of the market economy, private property, sound money, and peaceful international relations, while opposing government intervention." [1]

Source: https://en.wikipedia.org/wiki/Ludwig_vo ... _Institute

So what's wrong with that?

Good question.

And by the way, none of this demonstrates that Austrian economics is based on a political agenda. Rather, those who understand Austrian economic know that government's interference in the economy is always destructive. So the causality runs the other way, from Austrian economics to libertarianism.

[moda0306]

I think most theories and political agendas are a chicken/egg thing.  And this applies to all sides.

Austrians think government interference in the economy is distasteful, but some knowingly or subconsciously over exaggerate their predictions of disaster.

Same with liberals (Krugman) who exaggerate the effect of welfare reform or lowered Medicaid spending.

I tend to think Austrians are especially bad at this, but they also have very compelling aspects of their arguments that are built on what can feel like natural fundamentals where other economic arguments can feel like a central planning echo chamber.

[MediumTex]

Austrian economics is immensely intellectually appealing. 

The problem is that Austrian economics doesn't provide a complete or satisfactory explanation for the way things work in the real world (though I wish it did).