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

[Libertarian666]

But in what ways does monetary realism fail to correctly identify the current monetary arrangement in the U.S.?

I would say that MR differs from FSM in that FSM doesn't provide me with a coherent explanation for the current nature of any aspects of reality, while MR does.

Do you agree with my distinction between MR and FSM?

No. MR provides absolutely no value regarding the financial risks I am concerned with, as the FSM provides absolutely no value for me in the spiritual realm.

You don't see the deflationary risk in an MR model if policymakers choose not to provide liquidity in response to a credit crisis?

This risk would seem to be of great interest to a gold enthusiast.  Why is it of no interest to you?

I don't need MR to know about that risk; it is implicit in the Austrian model as well.

[MediumTex]

At the very least, it will be significantly under-performing if it is losing ground while other economies advance.  It seems rooted in your beliefs that the US can only stay in a top position?

I do not have that belief at all.  I just recognize that the U.S. is currently in the top position and I must respect that as long as it is the case--i.e., I should assume that I can't accurately predict when this will change, though my gold holdings would protect me when and if this transition occurred.

Lastly, it is already established that you do not believe in any scenarios other than the PP maintaining it's past performance, so I do not think there is much to gain by further raising and dismissing specific scenarios.

But you haven't told me of a scenario that would be outside the economy expanding or contracting and the general price level increasing or declining.

I'm listening, though, if you can think of one.  The one you posted above didn't address whether the U.S. price level was rising or falling.  If you could provide that information I can respond to your post.

The idea that past returns will continue as they have is a dangerous belief that IMHO anyone should be able to recognize.

Obviously, and I have always gone to great lengths to emphasize that past performance can help to validate a theory, but past performance on its own should never be used to predict future performance.

[Libertarian666]

MR dives heavily into productivity, past hyperinflations, and the most meaty assertion (that t-bills and cash are not fundamentally all that different) is absolutely fundamental to your analysis... it might serve you well to at least explore the possibility before addressing it as absolutely absurd.

What, truly, is the fundamental difference between a claim on confetti that pays confetti as interest, and the confetti itself?

It is absolutely unimportant to me whether t-bills and cash are the same. They are both devoid of value other than that provided by the "bigger fool" theory, as your equation of them with confetti implicitly admits.

One of the illustrations in the PP book from last year shows a guy checking out in a store, and when he attempts to give the cashier a stock certificate the cashier points to a sign on the wall that says "Cash Only", to which the man replies "But I thought cash was trash."

Regardless of how you feel about fiat money, it still can be exchanged for things of real value.  Do you disagree?

How can a thing be devoid of value if it can be converted into something of value instantly at any time?

It can be converted into something of value... until it can't. See "Zimbabwe dollar", Weimar mark, and hundreds of other examples.

[MediumTex]

No. MR provides absolutely no value regarding the financial risks I am concerned with, as the FSM provides absolutely no value for me in the spiritual realm.

You don't see the deflationary risk in an MR model if policymakers choose not to provide liquidity in response to a credit crisis?

This risk would seem to be of great interest to a gold enthusiast.  Why is it of no interest to you?

I don't need MR to know about that risk; it is implicit in the Austrian model as well.

Do you think that going off of the gold standard in any way affected the validity or applicability of predictions that Austrian economics would make about the economy?

When the U.S. ended gold convertibility, would Austrian economics have predicted that the following 30 years would be the most prosperous in U.S. history, with most of the those years seeing relatively low inflation even though the money supply was increasing more or less continuously?

[MediumTex]

It can be converted into something of value... until it can't. See "Zimbabwe dollar", Weimar mark, and hundreds of other examples.

Zimbabwe's hyperinflation resulted from racially motivated theft of private property that resulted in dramatic capital flight from the country.  This scenario has no applicability to the U.S.

Weimar Germany's hyperinflation was the result of war reparations following its loss in WWI.  This scenario has no applicability to the U.S.

I understand your concern about the U.S. dollar, but it seems to me that there are countless currencies that will collapse long before the U.S. dollar, in part because the U.S. is a vastly more productive economy and has a more stable government than you see in almost any other part of the world.

[moda0306]

Lastly, it is already established that you do not believe in any scenarios other than the PP maintaining it's past performance, so I do not think there is much to gain by further raising and dismissing specific scenarios.

I don't think MT ever said that.

[MediumTex]

Lastly, it is already established that you do not believe in any scenarios other than the PP maintaining it's past performance, so I do not think there is much to gain by further raising and dismissing specific scenarios.

I don't think MT ever said that.

I'm just waiting for someone to tell me about a scenario in which the U.S. economy is neither expanding nor contracting and the price level is neither rising nor falling.

I don't think there are any options outside of the ones above.  I don't care what interest rates in some other country are doing because they are not relevant to the principles on which the PP is based.  Regardless of what is happening anywhere else in the world, the U.S. economy will either be expanding or contracting and the U.S. price level will either be increasing or declining.

[moda0306]

It can be converted into something of value... until it can't. See "Zimbabwe dollar", Weimar mark, and hundreds of other examples.

Zimbabwe's hyperinflation resulted from racially motivated theft of private property that resulted in dramatic capital flight from the country.  This scenario has no applicability to the U.S.

Weimar Germany's hyperinflation was the result of war reparations following its loss in WWI.  This scenario has no applicability to the U.S.

I understand your concern about the U.S. dollar, but it seems to me that there are countless currencies that will collapse long before the U.S. dollar, in part because the U.S. is a vastly more productive economy and has a more stable government than you see in almost any other part of the world.

Yes.  Cullen Roche has responded at great lengths about these hyperinflation events, and we've posted them on here.  Of course the US dollar would collapse in the face of gross corruption or an alien invasion.  If we all of a sudden owed Saudi Arabia 80 trillion dollars worth of gold, and tried to print our way out of it, and Saudi Arabia captured our northeast corridor to help repay them, we'd see hyperinflation. 

It would be one thing if we weren't posting responses to all this. 

Tech, it seems like you don't even want to think outside a certain framework.  Please read what we're posting. 

[MediumTex]

I don't need MR to know about that risk; it is implicit in the Austrian model as well.

But isn't the Austrian model based upon a currency that is convertible into gold?

It seems to me that the current system is outside of the Austrian model, and thus Austrian predictions and prescriptions may not work as well as they would under a gold standard (and they may not work at all).

[Libertarian666]

I don't need MR to know about that risk; it is implicit in the Austrian model as well.

But isn't the Austrian model based upon a currency that is convertible into gold?

It seems to me that the current system is outside of the Austrian model, and thus Austrian predictions and prescriptions may not work as well as they would under a gold standard (and they may not work at all).

No, the Austrian model is NOT based on a currency that is convertible into gold. It includes analysis of pure fiat currencies as well as those convertible into gold.

[MediumTex]

I don't need MR to know about that risk; it is implicit in the Austrian model as well.

But isn't the Austrian model based upon a currency that is convertible into gold?

It seems to me that the current system is outside of the Austrian model, and thus Austrian predictions and prescriptions may not work as well as they would under a gold standard (and they may not work at all).

No, the Austrian model is NOT based on a currency that is convertible into gold. It includes analysis of pure fiat currencies as well as those convertible into gold.

Would it have predicted the 30 years of explosive economic growth with relatively low inflation for most of the 30 year period following the end of gold convertibility in the U.S.?

See the long term real U.S. economic output chart to see what I mean.  It looks like the U.S. economy performed better after the end of gold convertibility on an inflation-adjusted basis than it did while still on a quasi-gold standard.

What is the Austrian economics explanation for this apparently favorable post-gold standard outcome?

[systemskeptic]

MediumTex,

I do not think you addressed the point about price level vs. real rates inside the US.  Right now we have zero/negative real rates and a "rebounding" economy.  So it's not much of a stretch to imagine a situation where the real rates stay low and the economy stops showing significant returns.  It's not the price level that matters it's the real return on a bond barbell...

Also, why do you think Gold will necessarily protect you in the event that another region has a period of economy prosperity relative to the US?

[MediumTex]

MediumTex,

I do not think you addressed the point about price level vs. real rates inside the US.  Right now we have zero/negative real rates and a "rebounding" economy.  So it's not much of a stretch to imagine a situation where the real rates stay low and the economy stops showing significant returns.  It's not the price level that matters it's the real return on a bond barbell...

I didn't address price level vs. real rates because real rates are not one of the variables on which the PP is based.  All I need to know is whether the economy is expanding or contracting and whether prices are rising or falling.

Do you understand why these are the only variables that the PP cares about?

Also, why do you think Gold will necessarily protect you in the event that another region has a period of economy prosperity relative to the US?

Did I say that gold would protect you in that situation?  If I did, I didn't mean to.  What I should have said was that outperformance of another region would be irrelevant to the PP's performance in the U.S.  All we would need to know would be whether the U.S. economy was expanding or contracting and whether U.S. prices were rising or falling.

I wish it wasn't so simple because we tend to like complicated explanations to complicated problems, but those two variables are really all that matter, especially for a U.S. investor who is investing in the largest bond market in the world and investing in the stock market tracking the largest economy in the world.

[systemskeptic]

I didn't address price level vs. real rates because real rates are not one of the variables on which the PP is based.  All I need to know is whether the economy is expanding or contracting and whether prices are rising or falling.

Do you understand why these are the only variables that the PP cares about?

I guess I don't understand because you aren't invested in price levels nor are you invested in the "economy" you are invested in bonds and holding a stock fund. 

What does the price level of steak (CPI) have to do with real returns on TLT/SHY?  What does the US economy have to do with the world economy?  How does the economy of Europe affect the flow of money into and out of VTI?  Are these items synonymous? 

[MediumTex]

I didn't address price level vs. real rates because real rates are not one of the variables on which the PP is based.  All I need to know is whether the economy is expanding or contracting and whether prices are rising or falling.

Do you understand why these are the only variables that the PP cares about?

I guess I don't understand because you aren't invested in price levels nor are you invested in the "economy" you are invested in bonds and holding a stock fund. 

What does the price level of steak (CPI) have to do with real returns on TLT/SHY?  What does the US economy have to do with the world economy?  How does the economy of Europe affect the flow of money into and out of VTI?  Are these items synonymous?

The PP owns proxies for each combination of economic conditions I described.

If the economy is expanding with low inflation, stocks will do well.

If the price level is rising with little economic expansion, gold will do well.

If the price level is falling and the economy is contracting, bonds will do well.

...and so on. 

There is a PP asset or combination of assets for every economic condition based upon the expansion or contraction of the economy and the rise or fall in price levels.

Craig and I cover this concept in a lot more detail in the PP book.

[Libertarian666]

It can be converted into something of value... until it can't. See "Zimbabwe dollar", Weimar mark, and hundreds of other examples.

Zimbabwe's hyperinflation resulted from racially motivated theft of private property that resulted in dramatic capital flight from the country.  This scenario has no applicability to the U.S.

Weimar Germany's hyperinflation was the result of war reparations following its loss in WWI.  This scenario has no applicability to the U.S.

I understand your concern about the U.S. dollar, but it seems to me that there are countless currencies that will collapse long before the U.S. dollar, in part because the U.S. is a vastly more productive economy and has a more stable government than you see in almost any other part of the world.

Yes.  Cullen Roche has responded at great lengths about these hyperinflation events, and we've posted them on here.  Of course the US dollar would collapse in the face of gross corruption or an alien invasion.  If we all of a sudden owed Saudi Arabia 80 trillion dollars worth of gold, and tried to print our way out of it, and Saudi Arabia captured our northeast corridor to help repay them, we'd see hyperinflation. 

It would be one thing if we weren't posting responses to all this. 

Tech, it seems like you don't even want to think outside a certain framework.  Please read what we're posting.

You're right; I don't want to think outside a certain framework.
So what are your thoughts on phrenology?

[systemskeptic]

The PP owns proxies for each combination of economic conditions I described.

If the economy is expanding with low inflation, stocks will do well.

If the price level is rising with little economic expansion, gold will do well.

If the price level is falling and the economy is contracting, bonds will do well.

...and so on. 

There is a PP asset or combination of assets for every economic condition based upon the expansion or contraction of the economy and the rise or fall in price levels.

Craig and I cover this concept in a lot more detail in the PP book.

I understand the concept, my question is: are those assertions really true or are you being mislead because you are looking only the performance of those items in a region with a strong / strengthening presence.

Put another way, I agree with the economic cycles you are describing.  The question is not about those cycles, but about the state of the region... those same cycles occur in both strong and weak regions.  Probably the difference is in the magnitude of returns (positive, zero, or negative). 

You seem pretty confident that the sum of those cycles always occurs "above water" , as it were.

[MediumTex]

You're right; I don't want to think outside a certain framework.

Why not?

So what are your thoughts on phrenology?

It's interesting that you bring that up because "figurative phrenology" might be an interest thing to study--i.e., the way thinking within different frameworks alters the shape of the mind and by extension the figurative shape of the skull.

[MediumTex]

The PP owns proxies for each combination of economic conditions I described.

If the economy is expanding with low inflation, stocks will do well.

If the price level is rising with little economic expansion, gold will do well.

If the price level is falling and the economy is contracting, bonds will do well.

...and so on. 

There is a PP asset or combination of assets for every economic condition based upon the expansion or contraction of the economy and the rise or fall in price levels.

Craig and I cover this concept in a lot more detail in the PP book.

I understand the concept, my question is: are those assertions really true or are you being mislead because you are looking only the performance of those items in a region with a strong / strengthening presence.

If you are saying that a Zimbabwe, Lebanon or Cuba PP might not work as well as a U.S. PP, I completely agree with you, but for a U.S. investor why would this matter?

If you are saying that the U.S. is going to be the next Zimbabwe, Lebanon or Cuba, are you also saying that this will occur overnight, because if it doesn't happen overnight it seems like there would be plenty of time to re-evaluate your investment strategy in light of deteriorating conditions.

When people have backtested the PP in situation involving a small economy experiencing catastrophic economic conditions such as Iceland in 2008, the PP would have still provided pretty good protection, and far better protection than almost any other diversified investment strategy.

I would also like to add that in a lot of these discussions where the PP is held to a higher and higher standard of perfection, remember that we all must invest in something, so it's reasonable to point out that if the PP is doing poorly most other strategies are probably going to be doing very poorly.

Are you suggesting that the PP doesn't hold enough gold or is there something else about it that you think it lacks?  I would really like to hear your thoughts on this topic.

[glennds]

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.

MT,

Is it really such a simple  binary proposition - we're either expanding or we're contracting? Could it be that the effect on the portfolio also depends on the type of expansion or the nature of contraction? Not to beat the "this time it's different" drum but I really do wonder if the four states of economy concept is simplified to the point of being potentially deceptive. Could it be that under two different scenarios where economic expansion has occurred but in each in a different manner,  the portfolio might behave differently because the correlations between the asset classes might behave differently?  Thanks for your thoughts on this nuanced question.

[MediumTex]

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.

MT,

Is it really such a simple  binary proposition - we're either expanding or we're contracting? Could it be that the effect on the portfolio also depends on the type of expansion or the nature of contraction? Not to beat the "this time it's different" drum but I really do wonder if the four states of economy concept is simplified to the point of being potentially deceptive. Could it be that under two different scenarios where economic expansion has occurred but in each in a different manner,  the portfolio might behave differently because the correlations between the asset classes might behave differently?  Thanks for your thoughts on this nuanced question.

Over the last 40 years it has been that simple.

Are you suggesting that the stock market might respond to one type of economic expansion differently than it would another?  Why would it?  If corporate profits are increasing, do we care why?  We may care a lot, I just thought I would ask the question.

In my mind, if the economy is expanding in real terms I don't feel the need to look beneath the numbers.  I simply take the expansion at face value.

Will it be that simple going forward?  I don't know.

[Libertarian666]

You're right; I don't want to think outside a certain framework.

Why not?

So what are your thoughts on phrenology?

It's interesting that you bring that up because "figurative phrenology" might be an interest thing to study--i.e., the way thinking within different frameworks alters the shape of the mind and by extension the figurative shape of the skull.

Why don't I want to study the Klingon language?
Why does the patent office require a working model of a perpetual motion machine submitted for patent protection?
Why doesn't a chemist want to study alchemy? Why doesn't an astronomer want to study astrology?

The answer to all of those is very similar to the answer for your question: we know enough about the supposed object of study to be able to dismiss it as valueless to us, so why should we waste any additional energy on it?

[MediumTex]

You're right; I don't want to think outside a certain framework.

Why not?

So what are your thoughts on phrenology?

It's interesting that you bring that up because "figurative phrenology" might be an interest thing to study--i.e., the way thinking within different frameworks alters the shape of the mind and by extension the figurative shape of the skull.

Why don't I want to study the Klingon language?
Why does the patent office require a working model of a perpetual motion machine submitted for patent protection?
Why doesn't a chemist want to study alchemy? Why doesn't an astronomer want to study astrology?

The answer to all of those is very similar to the answer for your question: we know enough about the supposed object of study to be able to dismiss it as valueless to us, so why should we waste any additional energy on it?

So you don't think that MR accurately describes the way our current monetary system works and helps to explain why no significant inflation has occurred over the last five years?

Do you think that all people who find MR to be a helpful explanation of how the current system works are simply mistaken, in the same way that an alchemist is mistaken about the nature of the elements?

[Libertarian666]

Why not?
It's interesting that you bring that up because "figurative phrenology" might be an interest thing to study--i.e., the way thinking within different frameworks alters the shape of the mind and by extension the figurative shape of the skull.

Why don't I want to study the Klingon language?
Why does the patent office require a working model of a perpetual motion machine submitted for patent protection?
Why doesn't a chemist want to study alchemy? Why doesn't an astronomer want to study astrology?

The answer to all of those is very similar to the answer for your question: we know enough about the supposed object of study to be able to dismiss it as valueless to us, so why should we waste any additional energy on it?

So you don't think that MR accurately describes the way our current monetary system works and helps to explain why no significant inflation has occurred over the last five years?

Do you think that all people who find MR to be a helpful explanation of how the current system works are simply mistaken, in the same way that an alchemist is mistaken about the nature of the elements?

Correct.

[MediumTex]

So you don't think that MR accurately describes the way our current monetary system works and helps to explain why no significant inflation has occurred over the last five years?

Correct.

Which part of MR do you think fails to explain the current monetary system?  If you read any of the pieces that moda and Gumby linked to, what was the largest error(s) you felt that the authors made in their analyses?

Although I think that our post-gold standard monetary system is kind of goofy, I have found MR to be a useful tool in understanding the mechanics of how it actually works, including the role of deficit spending, the effects of interest rates on debt that is being rolled over, what the Fed's QE policies actually do, and how bond auctions work.

I hate to hear that my understanding of all of these things as scene through an MR lens may be wrong, but I suppose it's possible.

I assume that you are also saying that there is no data, analysis or new information that could change your conclusions about MR as a tool to help understand how the monetary system works.  You do now (and will always) view MR in the same way that you view astrology and FSM.  Is that correct?