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

General Discussion on the Permanent Portfolio Strategy

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

Post by Gumby » Wed Jul 10, 2013 7:09 am

technovelist wrote:The Fed is indeed buying almost all of the bonds. Yes, they buy them from dealers, but that is irrelevant. The dealers know the Fed is going to buy them, so they don't care what they pay.
What you are missing is that there is a tremendous demand for a Treasury Bond. They are the world's safest paper. If the private credit market is $57 trillion, and there only exists about $16 trillion in interest bearing T-Bonds, then you can bet that savers will want to hold those T-Bonds.

It makes no difference if the Fed buys the bonds or not. The Primary Dealers would rather hold on to interest-bearing T-Bonds than cash. Savers would rather hold on to T-Bonds than cash. Cash stinks unless you need immediate liquidity.

You keep wondering who will buy the bonds if the Fed does not purchase them. We already answered that...

http://pragcap.com/who-will-buy-the-bonds

Anyone who owns a savings account will be a T-Bond buyer whether they know it or not. When the government spends, it swells savings accounts. And those savings accounts are used to buy T-Bonds whether the holders realize it or not. Unlike Euro nations — whose bonds compete against each other — US T-Bonds have no other dollar-denominated competition. They are the only choice for dollar-denominated saving. So, every auction is a slam dunk...every time.

There is never a risk of T-Bond auctions failing so long as people want to hold savings accounts. It makes no difference if the Fed buys the bonds or not. We know this because demand for T-Bonds only increased after the Fed stopped buying T-Bonds when QE2 ended. The fear mongerers were proven wrong.
Last edited by Gumby on Wed Jul 10, 2013 7:52 am, edited 1 time in total.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by tennpaga » Wed Jul 10, 2013 7:17 am

technovelist wrote: Anyway, we are going over the same ground again and again. I'm not going to convince you, and you certainly aren't going to convince me. We will see soon enough who is right; until then, I don't see any reason to continue a fruitless discussion.
How soon?
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Wed Jul 10, 2013 8:12 am

MediumTex wrote:Many of us here started where technovelist is at now and our thinking just sort of evolved as the discussion progressed.

I am completely sympathetic to technovelist's views having once held them myself.
Yes, I agree. At one time I too used to believe that the government could run out of money and that bond auctions could fail. But when I took the time to walk through the operational steps of how our monetary system works, it became painfully obvious that our debt-based fiat monetary system was set up in such a way that it could not fail from an operational standpoint. They made the bond auctions like shooting fish in a barrel. (Austrians miss this entirely because their textbooks are all based on a gold standard, which no longer exists).

The auctions are essentially rigged, for all practical purposes. And the market knows it (while the media is still using pre-fiat logic).

While I totally understand why someone like technovelist mistrusts our government (he raises some good points there), at the same time I'm surprised that he is unwilling to see that the very game that keeps our government in power has already been rigged to keep them in power indefinitely. I mean, I hope he doesn't believe that the government willingly allows itself to risk its own ability to govern every time it has a bond auction. That would be pretty dumb.

No, the government essentially sets up the bond auctions so that they always go off without a hitch — whether the Fed is a participant or not — and the politicians never have to worry about losing their power.

See? You don't have to be a government-trusting liberal to understand how the system works. :)
Last edited by Gumby on Wed Jul 10, 2013 8:24 am, edited 1 time in total.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by moda0306 » Wed Jul 10, 2013 10:22 am

I really think if Austrians didn't have such a deep moral/political fight that they want to fight, they would have a much easier time seeing the light.

They are literally being blinded by their moral plight.  I mean if you've gone your whole life thinking you're essentially a slave to the fed and have been thieveried from as a responsible saver, it can be hard to look at the system as something that has at many points rewarded savers with very lucrative real returns without having to take any nominal risk.

Admitting MR is correct would mean that an Austrian's plight was mostly a myth.  People don't like to concede that kind of "wrongness," especially if we've held these views for a long time. 

I'm not saying there aren't still some huge moral issues with the current system, but it becomes a lot more of a nuanced discussion rather than "95% of my savings have been stolen from government via inflation since 1913" or whatever the common wisdom is.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by tennpaga » Wed Jul 10, 2013 10:43 am

moda0306 wrote: I really think if Austrians didn't have such a deep moral/political fight that they want to fight, they would have a much easier time seeing the light.

They are literally being blinded by their moral plight.
A quibble... I don't necessarily think failure to "see the light" is due to any deeply entrenched moral stance on the part of Austrians, but more simply a culturally-entrenched one.  People believe things that aren't true all the time without that belief having any moral dimensions.

Look at our discussions here about food and nutrition.  I don't think people drink pasteurized milk instead of raw because of their morality.

That said, hanging onto the Austrian view of money could very well be a moral issue for some.
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* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by moda0306 » Wed Jul 10, 2013 10:54 am

Culture and morality intertwine.  The Austrian culture is one that enjoys their co-complaining and scheming of how to avoid their plight of government tyranny.  Their moral superiority creates a culture that is very strong.  Their culture creates a groupthink as well that reinforces their moral plight.

But I think it is a moral position first and foremost.  "Live and let live... No questions asked" is a very appealing and wonderfully simple moral structure and it would be easy to get behind it militantly (verbally, not literally).  Of course, pure freedom is complicated by us having been plopped on a big island with limited natural resources to share.

The food stuff is different, except where it's not.  I think vegans have, in part, a very tight moral plight with their hatred of factory farming.  However, they allow this to color their views on whether meat is healthy for humans. They're allowing their moral stance, reinforced by culture, to affect their interpretation of the science of nutrition.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by technovelist » Wed Jul 10, 2013 11:57 am

So it is okay on this forum to imply that Austrians are mentally unbalanced or emotionally immature? I guess that tells me all I need to know about the "civility" that we are supposed to engage in here.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Wed Jul 10, 2013 12:17 pm

technovelist wrote: So it is okay on this forum to imply that Austrians are mentally unbalanced or emotionally immature? I guess that tells me all I need to know about the "civility" that we are supposed to engage in here.
Uh no. Nobody ever said or implied those things.

Surely you can have a high-level conversation about these concepts without taking everything so personally? (Your name isn't 'Ludwig von Mises' is it?) So, I assume you have the ability to objectively examine your own beliefs — as we all have done before. We didn't all used to believe these concepts. We examined them and our thinking evolved.

The fact of the matter is that the Austrians look at our currency as if it has a reserve constraint — as if it were still tied to a gold standard. They didn't update their dusty old textbooks once the currency lost its ties to gold, despite the fact that the currency became free-floating and operated differently after 1972. To add to the confusion. many of the legacy gold-standard laws were never updated by Congress (such as bond auctions). So, this only confused the Austrians even more as the Fed and Treasury unpegged the currency and stuck to the letter of the legacy laws.

This isn't a criticism of the Austrians so much as its a criticism of their outdated textbooks.

So, no, Austrians are not "mentally unbalanced" or "emotionally immature". Nobody here would ever say that. And you really shouldn't claim that we implied it. We didn't. Nobody did.
Last edited by Gumby on Wed Jul 10, 2013 12:54 pm, edited 1 time in total.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by systemskeptic » Wed Jul 10, 2013 12:18 pm

MediumTex wrote: Can you elaborate on why you think they are dangerous?

Is there an economic condition that the PP doesn't cover?
I doubt there are any examples that I can provide that would be new to you, so it's not really a question of new information but rather existing.  As an example, your response to D1984.

You seem to be holding the view, if I may summarize: "I have covered all the bases, so nothing can possibly go wrong"  again, fundamentally I think this is very dangerous.

Like you, I have an asset allocation that matches my view of the world and where it is going, and I feel is greatly diversified.  One difference I see in our perspectives is I accept that there are still many scenarios that could unfold that would result in poor performance, even devastating performance, over 5, 10, 20, 30 year periods.

To address your second point: in the view of many on this board, a US PP performs in "all economic conditions" yet to my view it only performs in two:  US prosperity and geopolitical/currency crisis.  The short of it is the world (and all it's invest-able assets) is far too big of a place for any investment to be as risk-free as you seem to believe. 

Again, just an opinion and an observation.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by technovelist » Wed Jul 10, 2013 1:09 pm

Ok, so then this would be an acceptable post? If you say so.

-------------------
I really think if "monetary realists" didn't have such a deep reluctance to admit the tail risks they are ignoring, they would have a much easier time seeing the light.

They are literally being blinded by their inability to admit that their portfolio could be demolished by a freeze-up of the US financial system.  I mean if you've gone your whole life thinking you're essentially safe in believing that the US empire is different from every other one in history, it can be hard to look at the system as one that could collapse without warning and leave your "safe portfolio" in ruins.

Admitting Austrian economics is correct would mean that a "monetary realist's" belief in the stability of the financial system was mostly a myth.  People don't like to concede that kind of "wrongness," especially if we've held these views for a long time. 

I'm not saying there isn't some life left in the current system, but it becomes a lot more of a nuanced discussion rather than "tail risks in the current system can be safely ignored" or whatever the common wisdom is.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by MediumTex » Wed Jul 10, 2013 1:12 pm

technovelist wrote: So it is okay on this forum to imply that Austrians are mentally unbalanced or emotionally immature? I guess that tells me all I need to know about the "civility" that we are supposed to engage in here.
Just to clarify, I think that Ludwig von Mises was one of the deepest and most insightful thinkers in the entire field of economics.

He was as close to a true economic philosopher as you are ever likely to find.

I just think that there has been a paradigm shift in monetary arrangements that has rendered some of von Mises' conclusions obsolete, but it takes nothing away from the fact that he was an outstanding thinker.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by MediumTex » Wed Jul 10, 2013 1:18 pm

systemskeptic wrote: To address your second point: in the view of many on this board, a US PP performs in "all economic conditions" yet to my view it only performs in two:  US prosperity and geopolitical/currency crisis.  The short of it is the world (and all it's invest-able assets) is far too big of a place for any investment to be as risk-free as you seem to believe. 
The PP is premised upon the following assumptions:

1. At a given point in time, the economy can only be on an expansion trajectory or a contraction trajectory.  It's possible for the economy to be neither expanding nor contracting, but such a condition rarely lasts for very long.

2. At a given point in time, price levels across the whole economy are either increasing or declining.  It's possible for the price level to be neither increasing nor declining, but such a condition rarely lasts for very long.

What combination of economic conditions can you visualize that wouldn't fit into one of the four combinations of conditions based upon the assumptions above?
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