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

[moda0306]

Well if most of society doesn't see them as forced kidnappings, you're not going to have mass exodus from the society or fear to be in it.

That would be the equivalent of a hyperinflation.

I agree that there won't be a mass exodus as long as most people remain brainwashed.
But I don't understand the last part of your first sentence. Who won't fear to be in it?

I worded that funny.

Unless a particular threshold is crossed, members of society won't fear to be part of it.

Issuing bonds is a currency user's game.  We may not like the government issuing currency, but once they do, we view their bonds differently (if they even issue the for some reason.  There's no need to).

It would be like if we had a lot of police officers in the streets, and the government decided to pull some of them off and replace them with cops that have more ammo in their guns... This has an effect only if cops are getting in a lot of fire fights.

Now if an individual citizen would build and trade deadlier guns to gangsters for their six shooters, and then took those 6-shooters and went out and sold them to other gangsters, then there's more ammo (pardon the pun) for crime to happen.

The fed doesn't buy houses or cars... They buy and sell treasury bonds.  It's simply not a helicopter drop any more.

[Pointedstick]

Unless a particular threshold is crossed, members of society won't fear to be part of it.

The problem is that nobody knows where that threshold is. Inching closer by storming residential poker games with SWAT teams and strip-searching people driving with expired tags is playing with fire.

[moda0306]

Unless a particular threshold is crossed, members of society won't fear to be part of it.

The problem is that nobody knows where that threshold is. Inching closer by storming residential poker games with SWAT teams and strip-searching people driving with expired tags is playing with fire.

I agree PS.

But swapping government issued fiat assets printed from nothing with different government issued fiat assets printed from nothing isn't significant.

If the fed were to openly admit it would keep rates low even as inflation hit 3, 4, 5, 8 percent, or if Ben Bernanke were to use the government bonds that the fed owns to go buy himself all sorts of goodies, we'd be in a very, very different monetary situation much more akin to police brutality.

Just having tougher looking police in the streets alone won't do it. 

[Pointedstick]

Unless a particular threshold is crossed, members of society won't fear to be part of it.

The problem is that nobody knows where that threshold is. Inching closer by storming residential poker games with SWAT teams and strip-searching people driving with expired tags is playing with fire.

I agree PS.

But swapping government issued fiat assets printed from nothing with different government issued fiat assets printed from nothing isn't significant.

If the fed were to openly admit it would keep rates low even as inflation hit 3, 4, 5, 8 percent, or if Ben Bernanke were to use the government bonds that the fed owns to go buy himself all sorts of goodies, we'd be in a very, very different monetary situation much more akin to police brutality.

Just having tougher looking police in the streets alone won't do it.

Yeah, I pretty much agree with all that.

If the Bernank forced yields to remain low while inflation hit 8%, I think gold would be hitting General Bonkers territory pretty fast.

[Libertarian666]

Well if most of society doesn't see them as forced kidnappings, you're not going to have mass exodus from the society or fear to be in it.

That would be the equivalent of a hyperinflation.

I agree that there won't be a mass exodus as long as most people remain brainwashed.
But I don't understand the last part of your first sentence. Who won't fear to be in it?

I worded that funny.

Unless a particular threshold is crossed, members of society won't fear to be part of it.

True, but unfortunately once that threshold is passed, it will be too late to leave. That takes a lot of advance planning even in relatively good times; in a catastrophe, it will be effectively impossible for almost anyone.

Issuing bonds is a currency user's game.  We may not like the government issuing currency, but once they do, we view their bonds differently (if they even issue the for some reason.  There's no need to).

They don't issue currency; the Fed does.
But I'm not sure what you mean about our viewing their bonds differently. I certainly view them differently, namely as being worthless, but somehow I don't think that's what you mean.

It would be like if we had a lot of police officers in the streets, and the government decided to pull some of them off and replace them with cops that have more ammo in their guns... This has an effect only if cops are getting in a lot of fire fights.

Now if an individual citizen would build and trade deadlier guns to gangsters for their six shooters, and then took those 6-shooters and went out and sold them to other gangsters, then there's more ammo (pardon the pun) for crime to happen.

The fed doesn't buy houses or cars... They buy and sell treasury bonds.  It's simply not a helicopter drop any more.

No comment.

[Libertarian666]

The problem is that nobody knows where that threshold is. Inching closer by storming residential poker games with SWAT teams and strip-searching people driving with expired tags is playing with fire.

I agree PS.

But swapping government issued fiat assets printed from nothing with different government issued fiat assets printed from nothing isn't significant.

If the fed were to openly admit it would keep rates low even as inflation hit 3, 4, 5, 8 percent, or if Ben Bernanke were to use the government bonds that the fed owns to go buy himself all sorts of goodies, we'd be in a very, very different monetary situation much more akin to police brutality.

Just having tougher looking police in the streets alone won't do it.

Yeah, I pretty much agree with all that.

If the Bernank forced yields to remain low while inflation hit 8%, I think gold would be hitting General Bonkers territory pretty fast.

The Fed can never stop buying Treasurys, regardless of inflation. So we will be hitting that territory one of these days.

[MediumTex]

I agree PS.

But swapping government issued fiat assets printed from nothing with different government issued fiat assets printed from nothing isn't significant.

If the fed were to openly admit it would keep rates low even as inflation hit 3, 4, 5, 8 percent, or if Ben Bernanke were to use the government bonds that the fed owns to go buy himself all sorts of goodies, we'd be in a very, very different monetary situation much more akin to police brutality.

Just having tougher looking police in the streets alone won't do it.

Yeah, I pretty much agree with all that.

If the Bernank forced yields to remain low while inflation hit 8%, I think gold would be hitting General Bonkers territory pretty fast.

The Fed can never stop buying Treasurys, regardless of inflation. So we will be hitting that territory one of these days.

We might, but I can't get out of my head the casual certainty in Ron Paul writings in the early 1980s expressing a similar sentiment that turned out to be almost 100% wrong in the subsequent two decades and even now really isn't coming true in the form of the wild inflation that has always been predicted.

[moda0306]

Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?

[Gumby]

The Fed can never stop buying Treasurys, regardless of inflation. So we will be hitting that territory one of these days.

Are you suggesting that the Fed is a necessary buyer (as in somehow funding the government) or that the Fed is just buying purely to implement monetary policy? There's a difference.

The Primary Dealers are contractually required to buy Treasury bonds at auction regardless of whether the Fed buys them or not (not to mention the PD's want to buy T-Bonds at auction in order to drain their excess reserves that were created from previous government spending). So, to say that the Fed is a necessary buyer and somehow funding the government is false since Primary Dealers are more than willing and capable of buying and holding all of the Treasury Bonds sold at auction. But, if you're saying that the Fed will always be buying in order to conduct monetary policy (i.e. targeting the Federal Funds Rate or setting the IOER) then that may or may not be true as it is simply its job as mandated by Congress.

Not to mention that there is a situation where the Fed would want to sell its bonds through POMO (Permanent Open Market Operations). POMO isn't a one-way street.

[Gumby]

Issuing bonds is a currency user's game.  We may not like the government issuing currency, but once they do, we view their bonds differently (if they even issue the for some reason.  There's no need to).

They don't issue currency; the Fed does.

Let's be more precise. By "issuing" the currency, the Fed is really distributing the currency to purchasing banks, but Treasury Department is the entity that actually creates the currency. Commercial banks purchase that currency with their own funds.

Federal Reserve notes are legal tender currency notes. The twelve Federal Reserve Banks issue them into circulation pursuant to the Federal Reserve Act of 1913. A commercial bank belonging to the Federal Reserve System can obtain Federal Reserve notes from the Federal Reserve Bank in its district whenever it wishes. It must pay for them in full, dollar for dollar, by drawing down its account with its district Federal Reserve Bank.

Federal Reserve Banks obtain the notes from our Bureau of Engraving and Printing (BEP). It pays the BEP for the cost of producing the notes, which then become liabilities of the Federal Reserve Banks, and obligations of the United States Government.

Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy.

Source: http://www.treasury.gov/resource-center ... ender.aspx

As you can see, the physical currency is really is all just confetti created by the Treasury Department.

And when the Fed creates its electronic money "out of thin air" it is just swapping its electronic money for assets — such as T-Bonds that were created by the Treasury Department. If the T-Bonds did not exist in the first place, the Fed would have no T-bonds to swap.

Therefore, the Fed's electronic currency would not exist without the Treasury's debt being created in the first place. Again, it all comes back to the Treasury to create the underlying (debt-based) currency. And that's how it's supposed to work since government fiscal spending comes from Congress — via the Treasury — and not the Fed (which only conducts monetary policy).

The Fed just conducts swaps that are largely inconsequential beyond swapping assets/reserves and targeting interest rates — which are all implementations of monetary policy.

[Mdraf]

Re: " The government's liability is the private sector's asset."

LOL. You guys. Your logic reminds me of Zeno's Half Distance paradox.

How is the government's liability not the private sector's asset?  To me, this is simply an accounting identity.

Because an asset is by definition something of value. The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued. The government could print $16000 trillion in bonds and the private sector would not be better off because that "asset" would be worthless.  That's what I meant by the Half Distance paradox. The accounting may be right but it is meaningless.  Do you think Detroit could go back to health by issuing bonds in its own currency to its inhabitants?

[Gumby]

The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued.

You are correct that the asset could be devalued by issuing too many without enough productive capacity — nobody disputes that.

But, I don't understand why you still think that the bonds are at risk of not being "paid back". There is never a risk of the bonds not being "paid back" regardless of productivity. For instance, see the statement above about how the debt from WWII has never been "paid off" — and certainly not from any tax collection from the private sector. It was "paid back" by issuing new debt. The debt from WWII simply became our private sector assets. The WWII debt is not an economic burden. These debt deposits in the private sector represent real goods and services in the economy (that's what they were given to us for!). But, that has nothing to do with "paying" the debt. The debt is a creation of the government that will always be "paid back" regardless of any productivity or not.

Furthermore, nobody is advocating any amount of spending here. We are just stating mechanics and accounting identities (i.e. the government's liability is the private sector's asset). The government can provide those assets to the private sector in exchange for real goods and services if the elected politicians vote to do so. That's pretty straightforward.

[Libertarian666]

Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?

Who has been buying all of the new issuance of Japanese bonds: the Japanese central bank, foreign buyers, or domestic private purchasers?

[Gumby]

Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?

Who has been buying all of the new issuance of Japanese bonds: the Japanese central bank, foreign buyers, or domestic private purchasers?

Circa 2008:

[align=center][/align]

Of course, all this shows is that the Yen is mostly just a domestically held currency — and not much of a globally held currency. A global reserve currency would obviously have far more foreign holders.

Usually people try to argue that the US can spend by being the world's global reserve currency, but explaining Japan's massive spending and low inflation requires ignoring the "global reserve currency" argument

[moda0306]

Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?

Who has been buying all of the new issuance of Japanese bonds: the Japanese central bank, foreign buyers, or domestic private purchasers?

Circa 2008:

[align=center][/align]

Gumby,

You've probably added months if-not years to my life by helping me in MR discussions.  I hate posting links and quotes.

But to your point on Japan, not only that, but inflation has been all-but nonexistent for decades now in Japan.  One of the key indicators of "artificially low interest rates" is high inflation, because if you can borrow at less than the rate of inflation with ease you'd be an idiot not to, which induces more inflation, which leaves rates even more attractive in comparison, etc, etc.

[Gumby]

As we can see from the pie chart, a lot of Japanese debt is simply purchased by the "Post Bank" which is the largest bank in Japan (it is literally in every Post Office). So, Japanese Savings accounts are responsible for a lot of their government bond purchases. That just illustrates the Japanese citizens' desire to save their money. The net financial assets to fund these savings accounts mostly comes from government spending that lands in people's pockets. Yen is spent into existence, and stays in the Japanese banking system. It's not like everyone in Japan needs to think about buying bonds. All Japanese citizens have to do is put their money into savings accounts and the banks (mostly Japan's "Post Bank") take care of the risk-free bond purchases for them behind the scenes.

This isn't any different from Primary Dealers and private banks purchasing bonds for us when we deposit dollars in our own savings accounts. The only difference between us and Japan is that more foreign investors are willing to hold our government debt — which, by definition, is what makes a global reserve currency.

So, Japan's currency is mostly domestic and ours is more globally held. No massive inflation is currently happening either way.

[Mdraf]

The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued.

You are correct that the asset could be devalued by issuing too many without enough productive capacity — nobody disputes that.

But, I don't understand why you still think that the bonds are at risk of not being "paid back". There is never a risk of the bonds not being "paid back" regardless of productivity. For instance, see the statement above about how the debt from WWII has never been "paid off" — and certainly not from any tax collection from the private sector. It was "paid back" by issuing new debt. The debt from WWII simply became our private sector assets. The WWII debt is not an economic burden. These debt deposits in the private sector represent real goods and services in the economy (that's what they were given to us for!). But, that has nothing to do with "paying" the debt. The debt is a creation of the government that will always be "paid back" regardless of any productivity or not.

Furthermore, nobody is advocating any amount of spending here. We are just stating mechanics and accounting identities (i.e. the government's liability is the private sector's asset). The government can provide those assets to the private sector in exchange for real goods and services if the elected politicians vote to do so. That's pretty straightforward.

I maintain that WWII debt was paid back and absorbed by inflation. In other words IF those WWII bonds hadn't been issued in the first place (hypothetical since I believe we had no other choice) the private sector would have been better off. Impossible to measure though.

Accounting is a language, not a science. We use it to describe and make sense of a situation. It is by no means definite and final in so much as other countries have different accounting rules. Even ours keep changing over time.  By our accounting rules all those Credit Default Swaps were assets on the banks' balance sheets. But were they really?

Yes, the government can provide those assets to the private sector in exchange for real goods and services but only if the private sector values them to be worth those goods and services.  Currently here in the US they do. But it is not an absolute rule.

[Gumby]

I maintain that WWII debt was paid back and absorbed by inflation. In other words IF those WWII bonds hadn't been issued in the first place (hypothetical since I believe we had no other choice) the private sector would have been better off. Impossible to measure though.

Well, the debt hasn't diminished so the debt from WWII was literally "paid for" with more debt.

But how exactly has the American saver been hurt from WWII inflation? Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards. You might feel warm and fuzzy inside if it took only $5 to by a bicycle, or an ice cream cost a nickel, but your wages and your savings would likely be 1% of what they are now. Meanwhile our standard of living has increased dramatically since then. And even Harry Browne has pointed out that if you put all your cash into Short Term Treasuries decades ago your savings would have done just fine. The whole "our dollar is now worthless" argument is mostly meaningless political misdirection used to rile up constituents.

By our accounting rules all those Credit Default Swaps were assets on the banks' balance sheets. But were they really?

In our world, yes, because all of our money comes from debt in the first place. That's what money is in our society. It's an IOU. So, CDS is just a form of private credit (i.e. money).

Yes, the government can provide those assets to the private sector in exchange for real goods and services but only if the private sector values them to be worth those goods and services.  Currently here in the US they do. But it is not an absolute rule.

Agreed. But the necessity to pay taxes — and thus stay out of jail — with only that currency does give it some value.

[Mdraf]

Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.

I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.

In our world, yes, because all of our money comes from debt in the first place. That's what money is in our society. It's an IOU.

A worthless IOU is commonly written off according to our accounting standards

Agreed. But the necessity to pay taxes — and thus stay out of jail — with only that currency does give it some value.

If there is nothing to tax there is no tax. If productivity is too low there is not enough tax to make good on the bond

[Pointedstick]

If there is nothing to tax there is no tax. If productivity is too low there is not enough tax to make good on the bond

Exactly. But we're not Zimbabwe. We're probably the opposite of Zimbabwe, really. It seems like you're now grasping that this whole house of cards works best in a healthy, prosperous, and productive society--and that's exactly right! If the government decided to utterly destroy the productive capacity of the economy without slashing the money supply (which of course it would never do), the result would be hyperinflation and currency collapse.

[Gumby]

Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.

I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.

But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.

[Mdraf]

Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.

I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.

But the point is that we never "worked off" the debt! We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt.

Well yes, of course. But it is always predicated by the theoretical possibility of payback.  -> Future taxation-> future productivity.
You can refinance your mortgage again and again, but always within your credit rating.

[Gumby]

I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.

But the point is that we never "worked off" the debt! We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt.

Well yes, of course. But it is always predicated by the theoretical possibility of payback.  -> Future taxation-> future productivity.
You can refinance your mortgage again and again, but always within your credit rating.

Except for a country that creates it own currency by issuing more debt.

[Mdraf]

Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.

I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.

But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.

Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )

[Gumby]

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.

Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )

YES!!!