Nothing HAS to happen?

[I Shrugged]

One of my all time favorite Harry Browne sayings is, "Anything can happen, and nothing has to happen."  But, given the course the US government is on, I can't see any way we pay our debts other than significant inflation.  It has to happen. 

Yes?  No?

[moda0306]

I blew my MR fuse.  I just can't do it anymore.  Kshartle, you've found another minion! (No offense, I Shrugged... you'll realize there's some very entrenched national debt and inflation doves on this board, and I'm one of them... you're in good company as well).

Someone else is going to have to battle this one out.

[dragoncar]

Haha yes I think its true.  Look at the inflation we've seen over the last hundred years.  It's "significant," but is it DETRIMENTAL?  I'd say no, we have done pretty darn well in that time.

[craigr]

One of my all time favorite Harry Browne sayings is, "Anything can happen, and nothing has to happen."  But, given the course the US government is on, I can't see any way we pay our debts other than significant inflation.  It has to happen.

Massive inflation is toxic waste in politics. It is suicidal and can cause all sorts of nasty side effects like armed revolutions. Politicians that want to hold onto power don't want high inflation.

So it could happen yes. But also what could happen is a spike in inflation causes interest rates to rise so high that future borrowing becomes extremely expensive for the government. So it could cause a big spending reduction and that could bring inflation back to normal.

That's just one scenario. There are plenty of other ways it could play out.

So no, inflation doesn't have to happen. And if it does happen, it doesn't mean Zimbabwe. It could simply mean something more mundane but results in fundamental changes to bring it back in line.

But eventually yes the dollar will have a serious problem just as all these paper systems do. Usually it happens around the same time a country splits apart due to civil war, secession, etc.

History isn't pretty.

[Gumby]

Haha yes I think its true.  Look at the inflation we've seen over the last hundred years.  It's "significant," but is it DETRIMENTAL?  I'd say no, we have done pretty darn well in that time.

So true.

See also: PragCap: Inflation is not necessarily a different form of default

Warning – this is likely to be an extremely unpopular post with a lot of people.  I apologize in advance for any inconvenience this causes your political biases.  I also apologize for the snarkiness in this warning

Source: http://pragcap.com/inflation-is-not-nec ... of-default

Those who prefer to invest based on their political biases will be upset with that post, but so be it. If you want to fear the future, I won't stop you. Invest accordingly and don't let anyone scare you into overweighting a particular outcome.

[MediumTex]

I tend to think that most well-worn media narratives are mostly false and only well-worn because of how reliable they are in stirring people up.

The whole "The U.S. debt can never be repaid!" narrative is IMHO just something to say when it's a slow news day.  The media has been yelling that the sky is falling on this topic for the last 30 years and interest rates fell steadily the whole time. 

Does it really make any sense for interest rates on any entity's debt to drop steadily for three decades if the risk of default was rising over that same period?

In this odd world we have built for ourselves, overall debt levels of a fiat currency issuer with a strong military and a productive economy do not seem to have much bearing on default risk, or at least that's how I and the treasury market of the last 30 years see it.

The U.S. will certainly face a terminal decline at some point, as all empires eventually do, but I don't think that it's quite as close as my television often tells me it is.

[I Shrugged]

My comments are based on the current budget and debt "showdowns".  There is simply no will to reduce spending or increase taxes.  Every such showdown only further emboldens the borrow and spend status quo.  The system has evolved to the point that electoral success depends on that.  Further, the banking system and powerful elites have evolved to benefit from it.  The regular folk are harmed; they pay the invisible burden and don't know it.  So in a lot of ways, it's perfect for those in charge.

I don't see Zimbabwe coming.  But I do see that inflation is the only way to continue borrowing and spending, and paying obligations resulting from same.  Bonds, pensions, etc.

I haven't read the MR stuff, so I wasn't aware I was stepping into something here. 

[notsheigetz]

I think I'll stick with HB's original saying.

Even if it's true that if we keep going in the same direction we will end up in the place we predict, there is no way to know whether we will keep going in that direction or not and worrying about it will drive you crazy.

As for the MR adherents in the forum, I'm glad they are here because it's just another way of showing that the PP has all bases covered. It means I don't have to figure out whether MR or Austrian economics is true. I'm fairly well versed in the straw-man arguments against both but frankly I don't care much about it any more.

[Gumby]

I haven't read the MR stuff, so I wasn't aware I was stepping into something here.

Basically, the overwhelming majority of what we call "money" in our monetary system is "private credit" (CDs, loans, commercial paper, agency debt, shadow banking, MBS, CDS, etc., etc.). The total debt accrued by our government over the past 237 years is ~$16 Trillion. The total amount of private credit issued by banks since the 1970s >$50 Trillion. The total shadow banking credit issued during that same time is ~$100 Trillion (I believe some of that $100 Trillion includes the ~$56 Trillion in private credit).

It should be more than obvious that banks have created most of our inflation in our credit-based monetary system. But, as the post points out, this isn't necessarily bad when purchasing power is being created to fund worthy endeavors, vetted by bankers — it can raise our standard of living, as we have seen over the past century all while the dollar has lost 95% of its value. Yes, the government creates some inflation as well. But, it pales in comparison to what banks are responsible for. You will find that anyone who tells you otherwise is typically trying to sell you a political narrative.

[Kshartle]

I can't see any way we pay our debts other than significant inflation.  It has to happen. 

Yes?  No?

Step into my parlor said the spider to the fly........

No, it doesn't have to happen. The US has trillions in assets it can auction off. It has massive amounts of "non-essential" workers it can drop. It has trillions in promises to seniors, welfare recipiants, government pensions etc. it can slash. It can just tell the Chinese and Japanese too bad so sad. It can do all kinds of things to service the debt without just printing.

Here's the problem, the US government doesn't really exist. It's a collection of individuals. It's like how a forest doesn't really exist, just trees. To think the government will do what it has to in order to bondholders first is to assume some of these people are willing to sacrifice their political careers. Show me 3 congressmen out of 435 willing to vote for military cuts and social security/medicare cuts. Show me a district willing to put someone like that in office.

I don't think they're going to hyper-inflate. I expect the dollar to lose half it's value in the next ten years or so and yes this is bad and it is in fact a default of another kind, on bondholders and other dependants of the government.

This level of inflation is not going to solve their problem though. Inflation can't solve their problem. The more they print the more they distort the economy and the weaker it gets (this is a major point of dissagreement here so I'll offer it as my opinion, explained in other threads). There is a level to which they cannot push the rates negative any further and expect institutions as well as the Asians to continue to accept the losses. I think they are very close right now. That means a higher inflation rate will result in higher nominal yeilds.

The groupthink that prevails here is an asumption that rates will be kept low forever. They will not. Japan is not proof that rates will stay low here. The US cannot afford higher rates. Even at just 4-5% short term rates within 3 years a huge amount of the debt will be rolled over. Interest alone will start running north of 500 billion annually and continue to climb. At some point the market will realize there is no way out and the wholesale dumping will begin. No telling when this will be but I think since you cannot time this and you cannot escape after it's too late it's better to be early. Therefore I loan them no money. The highest levels of their organization have said if they can't borrow more they might default. Sounds like a junk bond to me.

This is only the tip of iceberg of my analysis of the LTBs. I've skipped a ton, it's just an exhausting topic and can we go down dozens of scenarios and reasons for this or that. Maybe you can share some scenarios you think are more likely and we can look at how likely they really are or figure how they might occur?

[Gumby]

The groupthink that prevails here is an asumption that rates will be kept low forever. They will not. Japan is not proof that rates will stay low here. The US cannot afford higher rates. Even at just 4-5% short term rates within 3 years a huge amount of the debt will be rolled over. Interest alone will start running north of 500 billion annually and continue to climb.

KShartle naturally misunderstands the "group think". Rates won't stay low forever. The Fed will raise rates when it wants to tame the +$100 Trillion credit market and shadow banking system from creating too much credit-based inflation. Government inflation pales in comparison to inflation from private credit and KShartle's political biases prevent him from grasping that basic math. The government can print all the interest it needs to by rolling over its debt. $500 billion in interest isn't even a drop in the bucket compared to the private credit market. Anyone who spends all their time complaining about government-sponsored inflation is oblivious to the sheer size and magnitude of private credit.

[Kshartle]

The groupthink that prevails here is an asumption that rates will be kept low forever. They will not. Japan is not proof that rates will stay low here. The US cannot afford higher rates. Even at just 4-5% short term rates within 3 years a huge amount of the debt will be rolled over. Interest alone will start running north of 500 billion annually and continue to climb.

KShartle naturally misunderstands the "group think".

Naturally!

[Kshartle]

There are many different opinions here regarding the effects of government spending. Some feel it is neccessary to ensure maximum employent of capital and resources. Some, like myself see it as the forced redistribution of purchasing power and resources away from what the market naturally wants and towards unsustainable activies (housing booms, military adventures, welfare spending, etc.). The productive segments of the economy have produced so much wealth due to the relative freedom in this country it's allowed the state to grow to epic proportions. It's past the tipping point now where the growth of state is causing the productive part to shrink. Eventually the effects of violence, manifest in the state have to be reigned in to prevent total collapse.

I don't see them doing this on their own. Their creditors will have to cut them off when they are realizing too great of losses on their loans to the government. The FED will have to take away the printing press and the resulting spike in interest rates will force the government to cut spending on a massive scale and possibly reduce the principle it promises to pay on it's bonds to at least some creditors. I think it's more likely the Asians get screwed since they can't vote.

Another differeing opinion that's common here is what is inflation and are we experiencing this. Many feel inflation is rising prices. I disagree along with some others and instead view inflation as the expansion of the money supply. Rising prices are mearly an effect of inflation. You will find that some people don't believe we've had much inflation over the past 5 years or so. This is primarily because consumer prices for everyday things like food and fuel (and others) have not jumped as high as the percentage increase in the money supply. Well....bonds are the first thing to go up with government created inflation followed by stocks, housing, and anything else the government is buying like healthcare and education. These have all exploded in price in five years or in the case of housing, prices have stabalized where the market would have taken them likely a lot lower due to over-supply. The effects of inflation are all around and it's only a matter of time before they work through the entire economy affecting all prices (my opinion).

The government's cost keep going up due to inflation so to say they can print their way out is to ignore that they actually have to buy stuff with money also. The 500 billion that doesn't seem like a lot to print will be a trillion soon enough, then 2 trillion and so on, with increasing interest rates and rising prices exacerbating it.

The only way for the government to cover it's debts is to dramatically slash spending. Is it capable of doing this? What will the consequences be? Turmoil, unrest, collapsing industries built up by the inflation and welfare/warfare state? Won't tax collection contract during that time? These are the questions you should probably ask yourself before putting 50% of your money in their debt. Again you'll hear that the 25% in gold will save you from the fallout. I'm not convinced I want to risk 50% of my money in an investment I can't for the life of me see a way to profit in.

But I could always be wrong......

[Gumby]

Another differeing opinion that's common here is what is inflation and are we experiencing this. Many feel inflation is rising prices. I disagree along with some others and instead view inflation as the expansion of the money supply. Rising prices are mearly an effect of inflation.

That is literally right out of the mouth of Milton Friedman — and the central belief of Monetarists who were laughed out if economics decades ago. There aren't any respected economists who believe that anymore. It is the go-to definition of inflation for fear-mongerers, gold bugs, gold dealers and political pundits who have deep political biases. Back on planet Earth, inflation is widely measured by and defined by economists as the rise in prices.

[moda0306]

Another differeing opinion that's common here is what is inflation and are we experiencing this. Many feel inflation is rising prices. I disagree along with some others and instead view inflation as the expansion of the money supply. Rising prices are mearly an effect of inflation.

That is literally right out of the mouth of Milton Friedman — and the central belief of Monetarists who were laughed out if economics decades ago. There aren't any respected economists who believe that anymore. It is the go-to definition of inflation for fear-mongerers, gold bugs, gold dealers and political pundits who have deep political biases. Back on planet Earth, inflation is widely measured by and defined by economists as the rise in prices.

Gumby,

Are you sure you're not misunderstanding Friedman?  He was a huge proponent of significant monetary expansion during the depression.

Monetarists don't necessarily measure inflation from an adjustment in money supply.... They just love using monetary policy rather than fiscal to generate a recovery.

One thing I like about monetarists is that unlike Austrians, they're not liquidationists.  They actually think unemployment and foreclosure is a bad, unnatural thing.

[AdamA]

I haven't read the MR stuff, so I wasn't aware I was stepping into something here.

Are you ever. 

It's been hotly debated here, especially over the past couple of months. 

I think most people who post here have held your inflation fears at one time or another.  Some still do, but others feel like it's more complicated than the conventional "printing money" narrative would have you believe. 

I think Gumby has done a really nice job of posting the counter arguments.  If you search the site you can get a pretty good idea as to what they are.  A lot of the links are informative.

[Gumby]

Gumby,

Are you sure you're not misunderstanding Friedman?

I'm not saying Friedman was an idiot. I'm just saying that he defined inflation as the increase in the money supply.

See: http://utip.gov.utexas.edu/papers/Colla ... ivered.pdf

Economists threw out his definition of inflation after the 1980s when the money supply exploded and prices remained pretty stable.