Gyroscopic Investing

Lone Wolf wrote: I know that you guys mean well, but can you please not say things like this?

The PP does not need or require any specific economic worldview.

I agree with what you're saying. That's true. But, what we meant, specifically, was simply understanding the mechanics of why there is no perceived default risk with Treasury bonds. That's all. The PP does depend on that. A lot of people don't understand those mechanics and think that the government will run out of money and be unable to pay its bills. HB was clear that it couldn't happen. We can either take his word (which many are willing to do) or we can try to learn why he was right. But, yeah, I guess we can refrain from making those kinds of extreme statements.

Gumby wrote: I agree with what you're saying. That's true. But, what we meant, specifically, was simply understanding the mechanics of why there is no perceived default risk with Treasury bonds. That's all. A lot of people don't understand those mechanics and think that the government will run out of money. HB was clear that it couldn't happen.

That's right.  Browne said (and I agree) that Treasuries are "virtually free of credit risk".  Not inflation risk, of course, hence the portfolio's hedges with gold coins in a safe deposit box.  (Or secured in the rectum if this is your thing.)

Now with sufficient imagination, we can all concoct scenarios in which there is a default of some kind on Treasuries.  These scenarios are all some version of Armageddon-lite, though, and in all these cases, that 25% in gold is going to be covering our butts in a major way.

I just like the fact that with this portfolio, any or all of us can be completely right or wrong about which model (Austrian, MR, Monetarist, Neo-Classicist, Keynesian, or whatever) is correct... and everything will still continue working just as before.

I'm glad we agree on that, in part because it helps us all sleep at night and it helps take a bit of the "life or death/Thunderdome" edge off of some of the economic debates. 

While a traditional "default" is not in the cards what if, as Lord Turner - the former chief of the Financial Services Authority in Britain -  has suggested, the Fed simply writes off its Treasury portfolio financing "prior" deficits. This could be done with a flick of a switch, reducing our government  debt to a manageable percentage of GDP at a stroke ? Would that not constitute a default?

Mdraf wrote: While a traditional "default" is not in the cards what if, as Lord Turner - the former chief of the Financial Services Authority in Britain -  has suggested, the Fed simply writes off its Treasury portfolio financing "prior" deficits. This could be done with a flick of a switch, reducing our government  debt to a manageable percentage of GDP at a stroke ? Would that not constitute a default?

Sorry, but what is a "manageable" percentage of GDP if you just admitted that "a traditional default is not in the cards"?

See: Robert J. Shiller: Debt and Delusion

For instance, Japan's is over 214% and they have no problem servicing their debt. How do we know what is "manageable" if Debt/GDP thresholds are fairly meaningless, in terms of default, for a currency issuer:

Robert J. Shiller wrote:After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.

Source: http://www.project-syndicate.org/commen ... d-delusion

But, if you're simply talking about having a smaller government, that's a different story altogether.

I think we need to be a little careful about the assumption that any government debt crisis would get a hopeful bounce from hold even if default risk started to enter the picture.

2008 brought a very slight rise in gold. If our long-term bonds go to crap and our short-term bonds do ok or get defaulted on, I'm not as confident that gold would react in time.  I mean if real interest rates are high gold's first instinct might be to go down or stay stagnant.

So I think things look a lot scarier for the PP if treasury bonds contain default risk, and to a degree that might leave gold unsure where to to go due to its typical triggers.

I mean haven't we agreed that the PP is built for a sovereign fiat currency that will not overtly default?  And that any real default risk makes the PP work considerably differently (a la Greece in Europe)?

They do contain the smallest amount of default risk. Even Browne recognized this. He was a master of the English language and no doubt understood perfectly what he was writing. In "Why The Best Laid Investment Plans...." he wrote of Treasury Bonds: "They are virtually free of credit risk, since the U.S. government can, if it needs to, can print the money to pay them off."

According to Webster's:

Virtually means -  very nearly or almost entirely
It's near antonym (near opposite) is listed as: absolutely, totally, entirely, completely etc.

Can means - to be able to do, accomplish.

The sentence could be re-written, without changing it's meaning to "They are very nearly free of credit risk, since the U.S. government is able to, if it needs to, print the money to pay them off"

This is not the same as "They are free of credit risk, since the U.S. government will, if it needs to, print the money to pay them off"

So let's not be confused about Browne saying the US government could not overtly default. The possibility is extremely remote, but as it grows larger the incentive to print grows and this provides clues to what is going on. If base money is becoming a greater percentage of the money supply it means the economic engines are getting weaker and the economy increasingly needs to be propped up with printing. Maybe gold and stocks don't go anywhere and it takes more and more printing just to keep prices from falling. This is a signal that the economy needs to re-adjust and wants to re-adjust. Ignoring it does not make it go away.

I think that's where we are at now and why the economy will continue it's downtrend with periodic short-term boosts; until the printing stops and resources are re-allocated to meet market demands rather than centrally planned artificial demands.

This is why the FED is stuck and why it's still printing despite evidence that it's not helping the economy.

It's like how I believe Andrew Jackson described slavery: "Its like you've got a wolf by the ears. You hate every second of it but you don't dare let go".

The FED doesn't dare let go but there is little hope it will end well.

It's buddies probably also make a killing front-running everyone also. And politicians love it because recessions are very bad for incumbents.

TennPaGa wrote: Are banks counterfeiters?  Why or why not?

The definition of counterfeit is made in imitation so as to be passed off fraudulently or deceptively as genuine; not genuine; forged:

I would submit that 99% of the population isn't aware of fractional reserve banking or how money is created. Banks don't advertise this so there is an element of deception. However they are legally permitted to deceive. So that's the rub. If you believe that legality trumps all then no.

If a soldier kicks down a door in Fallujah and shoots a kid he thinks has an AK but doesn't is he a murderer? Looks like one, smells like one, but is he one..........

Browne wrote on page 30 of "How you can Profit from the coming devaluation" - Inflation is the printing of paper money substitues that are not backed by real money. And it doesn't matter who does the counterfeiting. Any increase in paper money-not backed by real money in storage-is going to cause the same reaction: prices will be higher than they would have been without the inflation.

I would disagree slightly and say counterfeiting is only the illegal reproduction of something with intent to defraud etc.

But the effect is the same. That's why it's easier to understand how the government printing is bad. It's OBVIOUS that anyone else doing it is bad. If they are functionaly identical then it's easy to see that government/FED printing hurts more than it helps.

When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

Kshartle wrote:

TennPaGa wrote: Are banks counterfeiters?  Why or why not?

The definition of counterfeit is made in imitation so as to be passed off fraudulently or deceptively as genuine; not genuine; forged:

I would submit that 99% of the population isn't aware of fractional reserve banking or how money is created. Banks don't advertise this so there is an element of deception. However they are legally permitted to deceive. So that's the rub. If you believe that legality trumps all then no.

If a soldier kicks down a door in Fallujah and shoots a kid he thinks has an AK but doesn't is he a murderer? Looks like one, smells like one, but is he one..........

Browne wrote on page 30 of "How you can Profit from the coming devaluation" - Inflation is the printing of paper money substitues that are not backed by real money. And it doesn't matter who does the counterfeiting. Any increase in paper money-not backed by real money in storage-is going to cause the same reaction: prices will be higher than they would have been without the inflation.

I would disagree slightly and say counterfeiting is only the illegal reproduction of something with intent to defraud etc.

But the effect is the same. That's why it's easier to understand how the government printing is bad. It's OBVIOUS that anyone else doing it is bad. If they are functionaly identical then it's easy to see that government/FED printing hurts more than it helps.

If I "printed money in my basement," deposited it in my TD Ameritrade account and bought some T-Bills with it, and that's it, then I have done something similar to what the fed does when it prints money.  This is going to have a very, very different effect than if I take that money and go out and spend it on stuff. 

MediumTex wrote: When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

Some prices have been anything but stable: The S&P 500 has almost doubled from the low in 2009, and the housing market is now roaring ahead.

That's where the money has been going.

Kshartle wrote:The possibility is extremely remote, but as it grows larger the incentive to print grows and this provides clues to what is going on.

Either you've misconstrued what Browne wrote, or Browne didn't want to wade into the mechanics in his book (i.e. he oversimplified it). There is no "Printing Press" that is rolled out to fund the government when the debt somehow appears to be large. Any left over T-Bonds at auction are always purchased by the excess reserves in the banking system that is created by previous government spending. If the reserves don't exist, they either delay the auctions until they do exist or the Fed makes a short term loan to create the reserves and then the reserves are paid back to the Fed once the Treasury spends to create the reserves. That's how it works. The system is rigged so that the banking system always has the reserves to buy Treasuries at auction.

Currently there is ZERO problem of finding the reserves to buy Treasuries at auction because THERE IS A LARGE SURPLUS OF RESERVES right now that the banks would love to swap for Treasury bonds!

Kshartle wrote:If base money is becoming a greater percentage of the money supply it means

It means very little since Base money is only about 5% of the broad money supply.

Libertarian666 wrote:

MediumTex wrote: When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

Some prices have been anything but stable: The S&P 500 has almost doubled from the low in 2009, and the housing market is now roaring ahead.

That's where the money has been going.

The S&P 500 is only slightly higher than it was over a decade ago.

Housing prices have increased from their recession lows, but they are still mostly lower than their 2006-2007 peaks.

An asset recovering to pre-crisis price levels isn't really what I think of when I think of inflation.

My parents bought a house in 1972 for $12,500 and sold it in 1981 for $59,500.  That's inflation.

MediumTex wrote: When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

They will have to print a lot more than they are currently. The rate of increase will probably have to increase. I don't think they're going to get much more help from the banks. If the economy produces less as a result of the distortions this will cause prices to rise also since the denominator of the general price level equation is getting smaller.

The wild card is the trade deficit. If other governments fear inflation in their countries and stop propping up the exchange rate then we've got big problems here.

MediumTex wrote:

Libertarian666 wrote:

MediumTex wrote: When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

Some prices have been anything but stable: The S&P 500 has almost doubled from the low in 2009, and the housing market is now roaring ahead.

That's where the money has been going.

The S&P 500 is only slightly higher than it was over a decade ago.

Housing prices have increased from their recession lows, but they are still mostly lower than their 2006-2007 peaks.

An asset recovering to pre-crisis price levels isn't really what I think of when I think of inflation.

My parents bought a house in 1972 for $12,500 and sold it in 1981 for $59,500.  That's inflation.

If the S&P 500 would be 900 in the absence of money printing and is now 1800 in the presence of money printing, then that is an example of inflation.

Of course, the impossibility of knowing what prices would be in the absence of money printing (or any other alternative situation that does not actually obtain) is a main reason that economics is a qualitative science, not a quantitative one: you cannot disentangle all the effects of economic causes in numerical terms. All you can say that prices are higher than they would be in the absence of money printing.

Libertarian666 wrote:

MediumTex wrote:

Libertarian666 wrote: Some prices have been anything but stable: The S&P 500 has almost doubled from the low in 2009, and the housing market is now roaring ahead.

That's where the money has been going.

The S&P 500 is only slightly higher than it was over a decade ago.

Housing prices have increased from their recession lows, but they are still mostly lower than their 2006-2007 peaks.

An asset recovering to pre-crisis price levels isn't really what I think of when I think of inflation.

My parents bought a house in 1972 for $12,500 and sold it in 1981 for $59,500.  That's inflation.

If the S&P 500 would be 900 in the absence of money printing and is now 1800 in the presence of money printing, then that is an example of inflation.

Of course, the impossibility of knowing what prices would be in the absence of money printing (or any other alternative situation that does not actually obtain) is a main reason that economics is a qualitative science, not a quantitative one: you cannot disentangle all the effects of economic causes in numerical terms. All you can say that prices are higher than they would be in the absence of money printing.

last paragrah big ups.

That's why I focus on logic and reason not specific data from this year or that year or this country etc. You don't need any of that noise if you understand the economic principles (some might call them laws).

Also, the effects of the "invisible fist" to distort are nearly impossible for almost everyone to see. When you see it like second nature you are out of the matrix. More preciesly you are in the matrix but aware of it talking to people who aren't aware.

Kshartle,

With demand below productive capacity, what makes you so confident that it's market distortions, not just a simple lack of demand, that is inhibiting investment?

If there was adequate demand for a widget, and you knew the nominal price of the product would go up by over 3% every year (maybe more like 5% or 10% or whatever you think inflation would be), but you could borrow money at 4% to build a factory to churn these out, then why the hell wouldn't you build the factory?

I hear these inflation predictions from Austrians, and that rates are "artificially low," and I'm wondering how on God's green earth there isn't more investment if their assessment of the economy is correct.  If inflation is sure to be high, and rates are artificially low, then investment should be rampant.

moda0306 wrote: Kshartle,

With demand below productive capacity, what makes you so confident that it's market distortions, not just a simple lack of demand, that is inhibiting investment?

If there was adequate demand for a widget, and you knew the nominal price of the product would go up by over 3% every year (maybe more like 5% or 10% or whatever you think inflation would be), but you could borrow money at 4% to build a factory to churn these out, then why the hell wouldn't you build the factory?

I hear these inflation predictions from Austrians, and that rates are "artificially low," and I'm wondering how on God's green earth there isn't more investment if their assessment of the economy is correct.  If inflation is sure to be high, and rates are artificially low, then investment should be rampant.

How could anyone ever know what the government is going to do? All you can know is that they can do whatever they want, and will pay little or no attention to anyone's rights, property or otherwise.

In an environment like that, it's a miracle that anyone is willing to invest in anything productive.

moda0306 wrote: Kshartle,

With demand below productive capacity

Demand isn't below productive capacity. Desires are limitless. The only constraint on demand is production. Everything produced (I mean except a complete turd) will be demanded.

It's productive capacity that is not being maximized. It's not a function of demand. It's a function of being able to produce profitably. More money due to printing or redistribution only gives the illusion of profitability and only at the expense of something better.

All "stimulation" of demand makes us poorer, wastes resources, impoverishes some at the expense of others, destroys lives, families, creates crime and poverty. It's extremely imoral as viewed either by it's results or the basic recognition that it's theft.

When you understand and accept the last sentence you don't even have to go any further.

Kshartle wrote:Demand isn't below productive capacity. Desires are limitless.

Oh brother... 

Libertarian666 wrote:

moda0306 wrote: Kshartle,

With demand below productive capacity, what makes you so confident that it's market distortions, not just a simple lack of demand, that is inhibiting investment?

If there was adequate demand for a widget, and you knew the nominal price of the product would go up by over 3% every year (maybe more like 5% or 10% or whatever you think inflation would be), but you could borrow money at 4% to build a factory to churn these out, then why the hell wouldn't you build the factory?

I hear these inflation predictions from Austrians, and that rates are "artificially low," and I'm wondering how on God's green earth there isn't more investment if their assessment of the economy is correct.  If inflation is sure to be high, and rates are artificially low, then investment should be rampant.

How could anyone ever know what the government is going to do? All you can know is that they can do whatever they want, and will pay little or no attention to anyone's rights, property or otherwise.

In an environment like that, it's a miracle that anyone is willing to invest in anything productive.

And yet in the current generation the most economic prosperity we experienced coincided with the government beginning to run enormous budget deficits that were used to build weapons of mass destruction that created a very realistic risk of annihilation of the whole human species.

If there were ever a period when wacky governmental policies seem like they should have damaged the economy, it was the 1980s, and yet they didn't.

That's weird, isn't it?

Gumby wrote:

Kshartle wrote:Demand isn't below productive capacity. Desires are limitless.

Oh brother... 

Well put.

Kshartle wrote: Demand isn't below productive capacity. Desires are limitless. The only constraint on demand is production. Everything produced (I mean except a complete turd) will be demanded.

If there is plenty of stuff out there to buy, why are many companies having trouble selling all of it?

What is keeping you from buying all of the stuff that you want?

Kshartle wrote:

Libertarian666 wrote:

MediumTex wrote: The S&P 500 is only slightly higher than it was over a decade ago.

Housing prices have increased from their recession lows, but they are still mostly lower than their 2006-2007 peaks.

An asset recovering to pre-crisis price levels isn't really what I think of when I think of inflation.

My parents bought a house in 1972 for $12,500 and sold it in 1981 for $59,500.  That's inflation.

If the S&P 500 would be 900 in the absence of money printing and is now 1800 in the presence of money printing, then that is an example of inflation.

Of course, the impossibility of knowing what prices would be in the absence of money printing (or any other alternative situation that does not actually obtain) is a main reason that economics is a qualitative science, not a quantitative one: you cannot disentangle all the effects of economic causes in numerical terms. All you can say that prices are higher than they would be in the absence of money printing.

last paragrah big ups.

That's why I focus on logic and reason not specific data from this year or that year or this country etc. You don't need any of that noise if you understand the economic principles (some might call them laws).

Also, the effects of the "invisible fist" to distort are nearly impossible for almost everyone to see. When you see it like second nature you are out of the matrix. More preciesly you are in the matrix but aware of it talking to people who aren't aware.

The effects aren't that much of a mystery of the "invisible fist" if you're looking at how it's fisting the economy correctly .

Reason and logic are great, but if you're simply closing your mind to the idea that there isn't that much fundamentally different between treasury debt and reserves (both liabilitiesof the government and assets of the private sector), then you're reason and logic will fail... and has decade after decade.

Literally, this is where it's at.  Increasing the money supply, when there is a corresponding decrease in another form of near-money, is not going to be fundamentally inflationary.  Forget about velocity.... there's not even really more quantity there.

And the quantity can be taken away to boot!  The fed can remove the reserves as the inflation level kicks up and/or unemployment drops.  The fed has given us very little reason to think it won't do this, unless maybe it would kick off a US government debt-crisis (but then that would likely be deflationary and induce high unemployment, thereby re-inducing the fed to buy treasuries with reserves).

Your reason and logic is built around a mix of assumptions about the role of the fed and banks and who benefits from these actions that seem to change depend on what you're trying predict.  Either the fed is independent or it's not.  Either the market sets rates or it does not.  Either banks are complicit in the circle-jerk or they are not.  Either "artificially low rates" induce inflation or they do not.  Either savers are hurt by QE or they benefit.  Either business owners benefit from expanded credit, or they do not.  Either treasury debt is essentially interest-bearing cash due to fed non-independence, or it is a normal debt, and the fed will act independently to balance inflation and unemployment.

You can't weave your logic and narrative in and out of opposing positions over and over and then brag about using reason or logic (sounded snarky... really not meant to).  We need to at the very least be consistent in our assertions about what is fundamentally happening here.