Gyroscopic Investing

Just for fun let's see what the non-posting members think about this controversy.

What part of MR is a "theory"....it seems to me to simply describe how the present monetary system is set up to work.

When people talk about MR they aren't saying one system is better or worse than the other, they are just trying to describe reality as it exists.

doodle wrote:What part of MR is a "theory"....it seems to me to simply describe how the present monetary system is set up to work.

When people talk about MR they aren't saying one system is better or worse than the other, they are just trying to describe reality as it exists.

While it's true that MR is simply descriptive of the debt-based credit-based monetary system, Monetarists think that the description is false because these Monetarists believe in a form of Metalism and they don't really understand what "Credit Money" is.

See: http://en.wikipedia.org/wiki/Metallism

Wikipedia.org wrote:Metallism is the economic principle that money derives its value from the purchasing power of the commodity upon which it is based. The currency in a metallist monetary system may be made from the commodity itself (commodity money) or use tokens such as national banknotes redeemable in that commodity. The term was coined by Georg Friedrich Knapp to describe monetary systems using coin minted in silver, gold or other metals.

In metallist economic theory, the value of the currency derives from the market value of the commodity upon which it is based independent of its monetary role.

Source: http://en.wikipedia.org/wiki/Metallism

..versus the Credit Theory of Money...

Wikipedia.org wrote:Credit theories of money (also called debt theories of money) are concerned with the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that credit and debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt), at least in eras where money is not backed by a commodity such as gold. Two common strands of thought within these theories are the idea that money originated as a unit of account for debt, and the position that money creation involves the simultaneous creation of money and debt. Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.

... According to Joseph Schumpeter, the first known advocate of a credit theory of money was Plato. Schumpeter describes Metallism as the other of "two fundamental theories of money", saying the first known advocate of metallism was Aristotle.

Source: http://en.wikipedia.org/wiki/Credit_theory_of_money

The problem is that our currency isn't based on metal anymore. It's fiat now. The Monetarists have simply swapped out metal for fiat and never updated their models.

Silly Monetarists.

In these discussions I sometimes feel like I am trying to describe the idea that the sun rises in the east and sets in the west and the retort is: "But some day the sun is going to explode, and then what you are saying will no longer be true."

Even though the retort is accurate, it's not really what I was getting at in my initial description, which was basically to provide the sunlight information we might need in order to plan our day tomorrow, next week and next month.

By the way, what the heck is an "MT/MR" advocate?

I assume you are trying to say MMT (not "MT") — which is the belief in a liberal theoretical "Job Guarantee" that nobody discusses here. "Descriptive MMT" — the part of MMT that describes how the monetary system works is slightly different than MR (Monetary Realism), and both are the descriptive understanding of modern credit-based and debt-based money.

But, since we rarely discuss Descriptive MMT here, I think just defining it as simply "MR" is a better choice.

MediumTex wrote: In these discussions I sometimes feel like I am trying to describe the idea that the sun rises in the east and sets in the west and the retort is: "But some day the sun is going to explode, and then what you are saying will no longer be true."

Even though the retort is accurate, it's not really what I was getting at in my initial description, which was basically to provide the sunlight information we might need in order to plan our day tomorrow, next week and next month.

Terrific analogy. Well said.

It's worth noting that if you had asked us this question two or three years ago, the results would have been very different. Most of us would have dismissed MR back then.

Gumby wrote:

MediumTex wrote: In these discussions I sometimes feel like I am trying to describe the idea that the sun rises in the east and sets in the west and the retort is: "But some day the sun is going to explode, and then what you are saying will no longer be true."

Even though the retort is accurate, it's not really what I was getting at in my initial description, which was basically to provide the sunlight information we might need in order to plan our day tomorrow, next week and next month.

Terrific analogy. Well said.

It's worth noting that if you had asked us this question two or three years ago, the results would have been very different. Most of us would have dismissed MR back then.

I would have said that it was irreverent, irrelevant, and moronical.

MediumTex wrote:I would have said that it was irreverent, irrelevant, and moronical.

And it may well be some or all of those things, but regardless, it describes how our monetary system in fact functions.

It's unfair. Only the devotees are lobbying on this thread. We  should have a rule. You can't stand near the polling place holding clubs.

I buy that it mostly describes reality, but I disagree that taxation is what gives a fiat currency value.  Which option do I choose for that?

Simonjester wrote: i voted disagree in spite of the fact that i find the description of monetary mechanics, and reality's of debt they describe to be accurate. the reason voted this way is that MR refuses to look at the bigger picture human nature, and the corrupting  influence, aspect of fiat economics in their discussions.  while i now tend to agree that debt and even incomprehensibly large debt numbers may not cause inflation or loss of faith in the dollar, i still believe that a government that must spend to feed the economy must expand to spend, and that such endless expansion is the real measure of how long till that faith is lost, an ever expanding ever spending ever corrupting government cannot survive indefinitely, no matter what the mechanics of being a currency issuer has to say about the book keeping...

Now I'm confused because, MR followers would agree with you because MR is a descriptive economic framework. Just because you agree with it's descriptions doesn't mean you endorse the system.

Remember, the poll wasn't asking if you endorse a fiat credit-based monetary system (I don't!). It was simply asking if you agree with the description (no matter how sick it might make you feel).

MR, didn't invent the Credit Theory of Money. Everyone from Austrians to Plato have understood that credit is money — despite the fact that few ever endorsed it...

http://en.wikipedia.org/wiki/Credit_theory_of_money

MR works up until the point where people lose faith in the issuer. Then the whole things flies apart.

So what MR describes is technically correct in so far as the issuing authority still maintains control. But the moment that goes out the window, then all bets are off.

Also I think MR ignores a lot of significant questions like what government spending actually does in areas that are detriments to society. For instance the MR people may say debt doesn't matter because the government controls the currency. But if that debt is being used to build a fleet of unmanned aerial vehicles, fund wars, and expand the surveillance state by building a massive data storage facility in Utah to spy on all communications, then I think the MR types are missing the point. I'd much rather have spending constrained with a metallic standard if it means I don't have to worry about what the government is recording about who I communicate with, watching me with drones, subsidizing stupid policies, etc. with that new debt. And I don't really care whether it has to be paid back or not. All I care about is that they are juggling the books around in a way that is a net negative for citizens.

craigr wrote: MR works up until the point where people lose faith in the issuer. Then the whole things flies apart.

So what MR describes is technically correct in so far as the issuing authority still maintains control. But the moment that goes out the window, then all bets are off.

Also I think MR ignores a lot of significant questions like what government spending actually does in areas that are detriments to society. For instance the MR people may say debt doesn't matter because the government controls the currency. But if that debt is being used to build a fleet of unmanned aerial vehicles, fund wars, and expand the surveillance state by building a massive data storage facility in Utah to spy on all communications, then I think the MR types are missing the point. I'd much rather have spending constrained with a metallic standard if it means I don't have to worry about what the government is recording about who I communicate with, watching me with drones, subsidizing stupid policies, etc.

Simonjester wrote: agreed plus i would add paying bureaucrats and regulators to perpetually create kudzu vine like regulation that chokes the real drivers of prosperity.

I agree. We don't use MR for political analysis. It's just descriptive of the banking system. That's all!

Gumby wrote:I agree. We don't use MR for political analysis. It's just descriptive of the banking system. That's all!

I think MR mostly provides an ex-post academic smokescreen for big government and bad spending policies. Policies that ultimately are going to do serious harm to the country.

Simonjester wrote: true enough but "accurate description but still a gawd awful mess doomed to collapse" wasn't an option

Heh... Well, I would have voted that way too if it was an option!

I voted "don't know/don't care" although what I really mean is that "I don't know, but do care".

I see validity in several of the monetary schools of thought that I've looked into, including MMT/R.  However, any time you have real humans making the decisions, emotions (fear, greed and the pursuit of power) will taint the "theory" and cause it to become imperfect.

clacy wrote: I voted "don't know/don't care" although what I really mean is that "I don't know, but do care".

I see validity in several of the monetary schools of thought that I've looked into, including MMT/R.  However, any time you have real humans making the decisions, emotions (fear, greed and the pursuit of power) will taint the "theory" and cause it to become imperfect.

I agree with your point about things not working one day. However, it's important to note that a descriptive framework, like MR, doesn't say "this will always work". It is just descriptive of the banking system and it doesn't offer any prescriptions.

It's just like your car manual. Your car manual doesn't suggest that the car won't crash due to human error or from an external situation. It simply describes how the car works and is put together. That's it!

Again, we were simply asked whether or not you agreed with the description — not if you liked it or thought it would work forever.

edsanville wrote: I buy that it mostly describes reality, but I disagree that taxation is what gives a fiat currency value.  Which option do I choose for that?

What do you think gives it value?  I mean other than our massively productive economy around it.

Simonjester wrote:as the poll question is worded i admit i am technically a yes... but my biggest problem with MR is the failure of MR discussions (and poll questions) to address bigger picture issues, to use your analogy it would be like a doctor describing over all lung health and when asked  about the harm/benefit of smoking he just repeatedly rambled on about the cellar makeup of alveoli and made comprehensive arguments against some pre-microscope understanding of lung function.
focusing on the descriptive side without ever addressing the rest of what fiat dollars do seems myopic.

or to put it simply i voted disagree not because the the description is wrong but as a protest vote because the conversation is perpetually incomplete

I think it's more like protesting a car manual because it doesn't acknowledge that lighting a match in the gas tank will cause it to explode.

Anyway, technically political discussions aren't even allowed on this forum unless they relate to investments...

http://gyroscopicinvesting.com/forum/pe ... /politics/

craigr wrote:This is an investing forum, not a politics forum.

1) Political commentary is OK if it is factual and pertains directly to the topic of investing

Source: http://gyroscopicinvesting.com/forum/pe ... /politics/

And anybody is free to say, "I agree with MR's description, but boy do I wish the government was smaller". And most of us would nod our heads in agreement.

craigr wrote:

Gumby wrote:I agree. We don't use MR for political analysis. It's just descriptive of the banking system. That's all!

I think MR mostly provides an ex-post academic smokescreen for big government and bad spending policies. Policies that ultimately are going to do serious harm to the country.

Fair enough. It sounds like you prefer your economic frameworks to have your political ideologies baked in. I prefer to keep economic frameworks separate from political agendas.

But, I'll point out that those of us who use MR are doing so for an understanding of investments, the markets and the banking system. We typically aren't interested in using it to analyze the political ramifications of government spending — as interesting or important as that may be. (And to be honest, MR would do terrible at analyzing such ramifications since it is simply a descriptive framework of the banking system.)

If you disagree with big government, that's totally your prerogative to say so, and I suspect a number of MR followers would agree with you.

But, when we are trying to discern what policies are inflationary or deflationary, it helps to not get wrapped up in political/moral distractions.

Gumby wrote:But, when we are trying to discern what policies are inflationary or deflationary, it helps to not get wrapped up in political/moral distractions.

I have said that government debt/stimulus does not need to be inflationary and have said this to Austrian adherents that are good friends of mine back in 2008 when the QE was first going on. They can't make people spend money/take on debt and there is only so much that kind of activity can accomplish:

https://web.archive.org/web/20160324133 ... portfolio/

So my general feelings diverge from Austrians in that regard, but I don't think the actions will have no consequences. That's why I stay agnostic and own LT bonds along with gold.

But I don't think MR is going to do any better job predicting inflation/deflation than any other theory. I don't even know if what it is saying is that revolutionary in terms of looking at government issuing money, debt, etc. A lot of this process is as old as the hills in terms of what governments have done.

Since I think that monetary problems are trailing, not leading, indicators of trouble I just don't get wrapped up in these debates. By the time a currency shows a problem things have gotten pretty far out of hand in most other areas.

TennPaGa wrote:Why do you think adherence to a metal standard will stop surveillance and drones?  History shows me that people in government will do stuff I don't like regardless of whether we have a gold standard or not.

I think anything that slows down the ability of government to easily get into debt is a good thing. If they were angels it might not be a problem. But since a lot of people involved in government aren't angels, I figure it's best to keep them away from the bottomless checkbook for everyone's own good. Even if the method (metallic) isn't perfect, it's at least a start.

craigr wrote:That's why I stay agnostic and own LT bonds along with gold.

Me too. While you had the ability to grasp this on your own, I needed to understand MR, and how the banking system worked, to help me see why LTTs are safe and worth owning in a portfolio. Otherwise I probably would have been convinced to shun them and become a gold bug. My interest in explaining MR is often to make the case for LTTs.

I think it's very easy for people to shun LTTs when they let their politics guide their investments.

We can debate about the nature of the government making claims on private resources, and putting them to different uses in the economy, and what those effects will be.

We can debate about the speculative growth as a result of easy lending.

We can debate about the advantages and disadvantages about whether a government should manage a money supply.


Here are a few things that I don't think are all that debatable:

- The government's fiat, nominal liabilities (treasury bonds and reserves) are fiat, nominal assets on our inividual balance sheets.

- Those fiat nominal assets give us purchasing power in the real economy.

- The fed, treasury and member banks do a circle jerk that makes them all part of an overall monetary system.

- Supply and demand are both two sides of the same coin.  One requires the other.  A lack of one hinders the possibility of expansion of the other.



I think there's a pretty simple clarification that needs to be made here.  There are only a couple possibilities... Either the markets set treasury rates, or the fed does, and if the fed does, they have a couple methods they could use to set rates

- If markets set rates, then default is possible, but that means then that they are screaming at the federal government "please borrow my money from me.  PLEASE!

- If the fed sets rates, and do so independently with the standard inflation/unemployment balance they like to strike, then the fed MIGHT let the government default if conditions are right, but are currently simply following their mandate of keeping rate low when inflation is low and unemployment is high.  This means that any money "created" would likely be removed once inflation rises.

- If the fed sets rates, but is in such a tight circle-jerk with the treasury and member banks that they won't let the treasury default, then we have NO default risk on treasury debt, and treasury bonds/bills are essentially as good as cash, but just have an interest rate element to them.


So, for those who don't buy into MR, which is it? 

Does the market set rates, and therefore the government is being ASKED to borrow at negative real rates by the market in spite of all this monetizing?

Does the fed set rates, and simply abiding by their simple and logical independent mandate, and therefore those reserves could very well leave as quick as they came if inflation fires up, thereby making QE a non-event from the perspective of guaranteed inflation indicator?

Or does the fed set rates in a circle-jerk with the treasury and member banks, essentially making treasury-bonds as good as cash, and QE a non-event?

No matter which way you answer, you don't arrive to the standard Austrian line.  You can't say that the fed is in a tight circle jerk with the government and banks and is their whipping boy, only to say that government bonds contain default risk and that the market will eventually force rates back up.... these are inconsistent with one another

Gumby wrote:

craigr wrote:That's why I stay agnostic and own LT bonds along with gold.

Me too. While you had the ability to grasp this on your own, I needed to understand MR, and how the banking system worked, to help me see why LTTs are worth owning in a portfolio. Otherwise I probably would have been convinced to shun them and become a gold bug. My interest in explaining MR is often to make the case for LTTs.

I think it's very easy for people to shun LTTs when they let their politics guide their investments.

Exactly!  The main reason I googled the sh!t out of this and found Warren Mosler and MMT writings in the first place was because I didn't feel confident trying to grasp HB's assertion that t-bonds and T-bills were completely free of default risk and worth holding 50% of my freaking wealth in!

And keep in mind that NOBODY was giving well-laid-out descriptions of how the monetary system functioned a few years ago.  Not Paul Krugman (liquidity trap, etc)... definitely not Austrians (OMG printing money REVOLUCION!).  HB was the closest thing to MR/MMT I had going for me, from the standpoint of investing in t-bills and calling it "cash."

I wasn't looking for a socialists guide to monetary control.

I just wanted to know that my goddamn bonds were going to get paid back no matter what, even if it was in inflated dollars .  The last thing I wanted was default risk in my portfolio, and not have gold skyrocketing to make up for the loss.

If you think about it, the entire premise of the PP depends on MR being accurate.  If t-bills actually do carry default risk, and aren't hot-swappable for cash on our balance sheets, then what the hell are we doing debating macroeconomics while 1/4 - 1/2 of our PP could perform WILDLY different than what we expect.  We could have a deflationary credit collapse, and a self-fulfilling debt/interest-rate spiral in T-bonds/bills and be f'ked from all sides while gold falls too, a la 1981.

Little did I know that "t-bills are as good as cash" also might work on a macroeconomic scale a well when looking at the effects of "monetizing the debt," which makes one even more comfortable.

Guys... if we're having such a big issue debating MR, maybe we need to decide if the PP is even the correct investment strategy if we truly believe that 75% of our portfolio could nearly collapse in a debt crisis (not hyperinflation) without a corresponding reaction from gold, because our portfolio is friggin built on the idea that the treasury bonds we have are nominally risk-free.  We could see a self-fulfilling deflationary depression with very little favorable reaction from gold.