pmward wrote: ↑Mon Mar 09, 2020 4:16 pm
The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
Care to elaborate? Couldn't the government run a surplus by just spending less while collecting the same amount of revenue in taxes and bonds? If that were to happen, why would households and corporations be miserable?
Hypothetically, let's say the government reduced spending mainly by cutting way back on "defense" (i.e., offense). A lot of people employed in the defense industry and related industries would probably have to find employment elsewhere, which implies a certain amount of suffering for them, but what about everybody else?
pmward wrote: ↑Mon Mar 09, 2020 4:16 pm
The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
Care to elaborate? Couldn't the government run a surplus by just spending less while collecting the same amount of revenue in taxes and bonds? If that were to happen, why would households and corporations be miserable?
Hypothetically, let's say the government reduced spending mainly by cutting way back on "defense" (i.e., offense). A lot of people employed in the defense industry and related industries would probably have to find employment elsewhere, which implies a certain amount of suffering for them, but what about everybody else?
It's how a balance sheet works. The entire country is like one giant balance sheet. The governments (and corporations) deficit expansion post financial crisis is what allowed the households to delever so efficiently. Household debt in the U.S. is now the best it's been in decades! You cannot change one side of the equation without an equal opposite change effecting the other side.
pmward wrote: ↑Mon Mar 09, 2020 5:43 pm
The entire country is like one giant balance sheet. The governments (and corporations) deficit expansion post financial crisis is what allowed the households to delever so efficiently. Household debt in the U.S. is now the best it's been in decades! You cannot change one side of the equation without an equal opposite change effecting the other side.
Okay, so if one entity reduces the size of its deficit, another entity (or entities) must increase the size of its deficit by an equal amount? So the size of the total deficit remains fixed over time?
So the total size of the current deficit has always been as large as it currently is, and always will be?
pmward wrote: ↑Mon Mar 09, 2020 5:43 pm
The entire country is like one giant balance sheet. The governments (and corporations) deficit expansion post financial crisis is what allowed the households to delever so efficiently. Household debt in the U.S. is now the best it's been in decades! You cannot change one side of the equation without an equal opposite change effecting the other side.
Okay, so if one entity reduces the size of its deficit, another entity (or entities) must increase the size of its deficit by an equal amount? So the size of the total deficit remains fixed over time?
So the total size of the current deficit has always been as large as it currently is, and always will be?
Money is debt in the U.S. Debt can go up and increase money supply, or debt can go down and decrease money supply. That debt can come from the government, the corporations, and the households. If the government pays it's debt down, it removes money from the supply... which tightens liquidity... which forces someone somewhere to have to take out more debt. Total debt overtime tends to go up (as does money supply). But it is better for the government to run a deficit so the households and corporations can run a surplus. The government has no default risk after all, they can just print it away if they need to (which is still a way of creating more debt on the Fed's balance sheet).
EDIT: I do want to add that this is a generalization, and there is definitely a thing as too much government debt. I'm mainly saying it is a balancing act, but in general terms, the government running a responsible deficit is a good thing.
Last edited by pmward on Mon Mar 09, 2020 6:02 pm, edited 1 time in total.
pmward wrote: ↑Mon Mar 09, 2020 5:53 pm
If the government pays it's debt down, it removes money from the supply... which tightens liquidity... which forces someone somewhere to have to take out more debt.
Not if they choose to spend less instead of take on more debt, right?
To take an extreme example, consider someone who goes completely "off the grid" by living in a shack somewhere in the wilderness, growing their own vegetables and hunting their own meat. Their debt and spending are both rather low, aren't they?
pmward wrote: ↑Mon Mar 09, 2020 5:53 pm
If the government pays it's debt down, it removes money from the supply... which tightens liquidity... which forces someone somewhere to have to take out more debt.
Not if they choose to spend less instead of take on more debt, right?
To take an extreme example, consider someone who goes completely "off the grid" by living in a shack somewhere in the wilderness, growing their own vegetables and hunting their own meat. Their debt and spending are both rather low, aren't they?
Sure in that utopia it would work. But, how many people in the U.S. are willing to volunteer to take one for the team and decrease their standard of living so the rest can stay the same? Generally speaking, a large scale decrease in standard of living, like what happened in the wake of the 2008 financial crisis or the Great Depression, is a very painful and scarring event for the public. Matter of fact, in 2008 it was the governments deficit (I'm lumping the Fed in with the government by the way) that saved the day and allowed a quick rebound, and in turn allowed Main Street to bounce back in much shorter accord than in the Great Depression when the government compounded the issue by trying to fight it with austerity. If the tea party in the early 2010's would have gotten their way and we would have went the austerity route once again, the last 10 years would not have been as pleasant. It is better for the government to run a deficit to prevent these things.
By the way, Ray Dalio's book "Navigating Big Debt Crisis" does a really in depth study on both the 2008 financial crisis and the Great Depression. It goes really deep into these things. Ray describes them much better and more in depth than I am capable. Highly recommend that book for anyone interested in this idea.
We had a bunch of T-Bills mature at Fidelity today. I replaced those will more T-Bills with maturities between six and 12 months out. The interest on these was ever so slightly positive. Has anyone else been buying individual treasuries as opposed to a fund like SHY?
barrett wrote: ↑Tue Mar 31, 2020 11:24 am
We had a bunch of T-Bills mature at Fidelity today. I replaced those will more T-Bills with maturities between six and 12 months out. The interest on these was ever so slightly positive. Has anyone else been buying individual treasuries as opposed to a fund like SHY?
Oh yes. Not since the market & yield crash, but fairly recently. Some are due next month.
I am letting the balance of my T-bills mature and not renewing them at negative nominal yields. Proceeds are currently split between my treasury money market fund (FDLXX) and my annual I bond purchase. I think that it helps to remember that while the real yield on Cash is slightly negative, the yield of my barbell -- consisting of short term Treasurys + T-bonds is certainly positive.
I am trying to avoid buying into a negative real yield on Cash (as I would do with any asset), but I am also reminded that the HBPP requires the investor to hold all four assets simultaneously.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Tortoise wrote: ↑Tue Mar 31, 2020 3:45 pm
Given that inflation (as measured by CPI) is currently 2.3%, that means a zero-yielding Treasury has a real yield of -2.3%.
Yet, for a lot of investors, a nominal negative yield of, say, -0.2% (a slightly lower real yield of -2.5%) is just a bridge too far.
Investor psychology is an interesting thing.
CPI is backward looking, yields are forward looking.
pmward wrote: ↑Tue Mar 31, 2020 4:20 pm
CPI is backward looking, yields are forward looking.
Right. I was referring mainly to short-term Treasuries (i.e., "cash"). Let's say a six-month T-bill.
Will CPI change drastically in six months? And even if it does, wouldn't this pandemic be more likely to decrease it than increase it, thus further strengthening the point I was making?
In 1927 the CPI dropped 1.7% and didn't turn positive until 1934 when it was 3.1%, a 7-year run without any inflation. (In 1929 it was 0.0%.) It went negative again for two years in 1938 & 1939. (But of course there's nothing like a world war to turn it positive.)
So we've had extended periods of US history with negative CPI. There are many other examples of a year or two, but certainly the Great Depression is the most well-known period of falling prices over the past century.
Between negative interest rates and negative CPI growth, my brain starts turning to mush. Makes me starts thinking about the Pablo Escobar School of Investing.
StdDeviant wrote: ↑Wed Apr 01, 2020 3:41 pm
In 1927 the CPI dropped 1.7% and didn't turn positive until 1934 when it was 3.1%, a 7-year run without any inflation. (In 1929 it was 0.0%.) It went negative again for two years in 1938 & 1939. (But of course there's nothing like a world war to turn it positive.)
So we've had extended periods of US history with negative CPI. There are many other examples of a year or two, but certainly the Great Depression is the most well-known period of falling prices over the past century.
Between negative interest rates and negative CPI growth, my brain starts turning to mush. Makes me starts thinking about the Pablo Escobar School of Investing.
According to hulbert the Great Depression recovered in inflation adjusted terms in 4-1/2 years as the CPI fell a total of 18%
Clarification/update per your PM:
I will not renew them, barrett, but will leave the proceeds from matured bills to buy stocks and, if I can find them, some more gold coins.
barrett wrote: ↑Tue Mar 31, 2020 11:24 am
We had a bunch of T-Bills mature at Fidelity today. I replaced those will more T-Bills with maturities between six and 12 months out. The interest on these was ever so slightly positive. Has anyone else been buying individual treasuries as opposed to a fund like SHY?
Oh yes. Not since the market & yield crash, but fairly recently. Some are due next month.
dualstow wrote: ↑Thu Apr 02, 2020 2:38 pm
I will not renew them, barrett, but will leave the proceeds from matured bills to buy stocks and, if I can find them, some more gold coins.
Thanks for posting that, dualstow. Can you clarify if it is the paltry rate of interest that is pushing you away from T-Bills? Would you just be buying something else because there is virtually no nominal return on T-Bills? Or is it because you need to buy stocks or gold to stay within a predetermined target assets allocation? Thanks in advance.
The number one reason is that I pay attention to what people like jhogue are doing. I’m not smart enough to know what to do exactly, so I copy those with more experience even if they aren’t looking for followers.
I have never really worried about yield from the cash portion and I don’t think a mildly negative yield is anything terrible.
I wish i had more 30-year bonds to balance things out. That’s on me.
I do have a lot of dividend stocks in my VP. That’s fortunate.
I don’t have a pressing need to buy equities or other assets, but I’m anxious to buy some stocks in the VP. (PP stocks are still above 25% for me). My gold is at exactly 25% so buying more would mean making the PP a larger portion of my total. No rush at these prices, this scarcity and these spreads.
If my money market funds shrink a bit while I wait, that’s ok.
I am just using this thread to get myself used to this low-yield world. The six-month treasuries that I bought the other day will each pay less than 17 cents on a face value of $1,000 if held to maturity. The one-year treasuries bought at the same time will each pay 46 cents.
dualstow wrote: ↑Thu Apr 02, 2020 2:38 pm
Clarification/update per your PM:
I will not renew them, barrett, but will leave the proceeds from matured bills to buy stocks and, if I can find them, some more gold coins.
barrett wrote: ↑Tue Mar 31, 2020 11:24 am
We had a bunch of T-Bills mature at Fidelity today. I replaced those will more T-Bills with maturities between six and 12 months out. The interest on these was ever so slightly positive. Has anyone else been buying individual treasuries as opposed to a fund like SHY?
Oh yes. Not since the market & yield crash, but fairly recently. Some are due next month.
shy is actually kind of long at 1-3 years ..shorter term instruments are like shv and bil.
be careful though when comparing rates on treasury money markets and etf's ... money markets are based on the last 7 days ... etf's are the yield the last 30 days ending with the last month ..etf's are way behind in other words in what they show as the yield
