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

[moda0306]

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.

Who's not properly handling tail risks.  Most people here hold 25% of their investment portfolios in an asset that will go absolutely gangbusters, even in real terms, upon the demise of the currency of the most stable legal entity in the world, and the world's reserve currency.

When I say "it's really hard" to change one's opinions when you're emotionally invested, I'm not saying you're emotionally immature, I'm saying you're human.

I could have gone on about similar things among liberals or conservatives.  I've found most MR'ists to have a deep desire to understand the system, not diagnose it before they even understand it.

[MediumTex]

No, it is not a joke, but a reductio ad absurdum. Continuing a conversation that requires one to agree to a proposition that one finds absurd is nonsensical. Why would anyone do that?

Fair enough, but what proposition exactly do you find to be absurd?  If you find all of MR to be absurd, then why does it seem to so clearly and coherently describe the current system?  You may say that the entire current system is absurd (and I would agree with you), but notwithstanding its overall absurdity, it's still important to understand how it works if you want to have an investment strategy that is based upon reality as it is, as opposed to how we would like it to be or wish it to be.

If MR's explanation of the current monetary system is wrong, what would be a correct explanation?

The Austrian explanation.
But of course you knew that already.

But where is the inflation that the Austrians would suggest we should be experiencing?  We are now five years into this crazy Fed intervention, and so far inflation has been very tame.

If we say that the Austrian prediction will eventually come true, that doesn't comfort me if I had already been waiting for it for five years and had sat out stock market gains of almost 100% because I thought the economy had to fully crater before a real recovery was possble.

[moda0306]

After reading all the posts about "monetary realism", I have exactly the same respect for it as I do for the FSM.

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.

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? 

[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.

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.

[Libertarian666]

Fair enough, but what proposition exactly do you find to be absurd?  If you find all of MR to be absurd, then why does it seem to so clearly and coherently describe the current system?  You may say that the entire current system is absurd (and I would agree with you), but notwithstanding its overall absurdity, it's still important to understand how it works if you want to have an investment strategy that is based upon reality as it is, as opposed to how we would like it to be or wish it to be.

If MR's explanation of the current monetary system is wrong, what would be a correct explanation?

The Austrian explanation.
But of course you knew that already.

But where is the inflation that the Austrians would suggest we should be experiencing?  We are now five years into this crazy Fed intervention, and so far inflation has been very tame.

If we say that the Austrian prediction will eventually come true, that doesn't comfort me if I had already been waiting for it for five years and had sat out stock market gains of almost 100% because I thought the economy had to fully crater before a real recovery was possble.

My investment performance has been quite good over the time that I have had this "delusion", so maybe I don't need to be disabused of it.

As for when the inflation will show up, that will happen when either of these events occurs:
1. The banks start lending
2. Foreigners stop taking dollars

and probably some other events I haven't thought of yet.

[systemskeptic]

What would price levels across the whole U.S. economy be doing in your example above?  Would it be rising or falling?  It must be one or the other.

I assume you aren't talking about the United States, which is the largest economy in the world.  If a tectonic shift occurred, the U.S. would still be a top 5 world economy.  I don't see the U.S.'s many structural economic advantages coming unraveled as quickly as many doomsters seem to imagine (though I used to believe that a fast collapse was possible and even likely, but I no longer feel that way).

What does it matter what price levels are doing if real rates on cash durations < 15 year are near zero or negative? (50% of the PP).  Are you suggesting all currencies must have real rates all the time, or even over long periods?

The US can still be a top 5 economy while experiencing stagnant returns as it shifts even from #1 to #2.  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?

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.

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

[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.

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?

[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.