A 5th Economic Condition?

[doodle]

Moda,

From my understanding a crack-up boom is brought about because people (or countries, I guess in this case) have little confidence in a fiat currency and are very anxious to exchange (divest) that currency for hard assets. This is what happened in Germany. People lost faith in the fiat currency and rushed into hard assets. This didn't lead to a huge boom in manufacturing jobs however.

Apple has a market cap around 350 billion.

If China bought up a few large companies like this and transferred them to China, would it be stimulative to the American economy?

[doodle]

Then again....why buy Apple when you can just copy the whole company: http://www.cnbc.com/id/43833832

[stone]

I thought that the USA has extremely onerous restrictions on what US assets can be bought by Sovereign wealth funds such as the Chinese and Abu Dhabi etc. China can not just by exxon, google apple etc. Even the Abu Dhabi sovereign wealth fund can only by less than controlling stakes in US companies. Restrictions on buying US land are even more draconian. I think Canada prohibits any foreign ownership of farmland?

[stone]

As I see it both inflation and deflation (of different types) are going on to a dramatic extent and have been for the past few years and could do to an increasing extent for years to come. The bursting debt bubble caused deflation. Many people in the US and UK have been funding themselves by piling up personal debt. The age at which many people pay off their debts has extended until they die with negative net worth. That is deflationary.
Inflation is all from currency slippage and wastefulness and those two are connected. The wastefulness is in the form of unemployment, a bloated parasitic financial sector and a bloated military. Unemployment is a weird one because it is both deflationary (reduces demand) and inflationary (supply is restricted because people are unemployed rather than providing waste reduction services or increasing production). If the demand drop from domestic unemployment is made up for by foreign consumption then you just see the inflation side of it via currency slippage. Having an economy where people who in the 1960s would have been engineers instead are working for Goldman Sachs etc is also extremely wasteful.
To me the root cause of all the problems is the distortion caused by inadequate taxation of the wealthy. That is what has led to the amassing of all the extra dollars and pounds etc. Capital wants to get a return. The extra mega banks get concocted to deal with all the extra money. MMTers say that government debt is private sector wealth as though that is a good thing and we need more of it. But handling all of that wealth and trying to get a return from it diverts efforts away from dealing with real life issues such as developing more efficient ways to produce and conserve energy, food etc. Destructive schemes such as the subprime bubble and the commodity bubble are a desperate bid to get a return from the ever expanding mountain of money.
To me the different BRIC economies seem extremely different from each other. The rise of the BRICs is more a case of the fall of the USA, western europe and Japan. Developing economies were getting poorer during the 1980s and 1990s because the "great moderation" asset boom in the developed world meant that rich people from the developing world sunk their money into our asset markets so depressing their currencies and bolstering ours. The fact that that is happening less now is all about us screwing up how we run our countries more than the BRIC countries having found some magic formula. In fact the rot set in when we thought that we could get a free lunch by living off that asset boom and so policy was directed to trying to inflate asset prices rather than trying to nurture the productive prosperity that had given the real value to our property and stock markets.
The austerity movement really seems to me the nail in the coffin. Latvia has been a testing ground for the austerity approach and it has been a total catastrophe.  You don't need wanton make work programs like changing to the metric system. There are ample opportunities for sensible work. It could even all get done by the private sector. Medium Tex's idea of doling out $5000 or whatever has actually been suggested a lot over the years (sometimes called a citizens dividend or even "negative income tax" by Milton Friedman). To me it makes much more sense to have otherwise unemployed people fitting solar water heaters, insulation or renewable energy schemes than fighting wars to enforce acceptance of USD for oil that we wouldn't need if we didn't waste so much.

[moda0306]

Why do people keep ragging on my metric system idea?  I thoguht it was considered a good idea given its universal use in the rest of the world.

[stone]

moda, I guess people from the UK often have a jaundiced view of moving to the metric system because we did it partially which is a bit like a partial conversion from left hand to right hand drive on the roads. We now use mm, inches, meters, miles, ounces, kilos, acres, pints, litres, stones, tonnes- a total zoo. At school we just get taught the metric system but if you ask any Brit how much they weigh they will say "10 and a half stone". Ask them what that means in kilos and they wont have a clue. Ask a Brit how many ounces in a pound and they probably also won't have a clue.

[doodle]

Moda,

I dig your metric idea. When get through "doomsday" I'll be sure to propose it to the centralized rebuilding committee, so that we get this country off on the right foot. 

Actually, I grew up overseas so this crazy British system of measurement looks ass-backwards to me.

[doodle]

Terry Coxon....Harry Browne's long term business partner talks about inflation and US debt issues. One of the better explanations of what is happening that I have read. 
http://contraryinvesting.com/inflation/ ... -analysis/

[AgAuMoney]

If wages are not rising, I don't know where the money will come from to pay higher prices.

Official savings stats are just the bank deposits.  They do not include other assets like brokerage accounts, IRAs and 401(k)s.  Also given it takes 18months on average for the bank to kick you out after you quit making payments many people in the U.S. are spending by not paying their house payment (increasing debt).

Along those lines, an interesting bloomberg article:  http://www.bloomberg.com/news/2011-07-2 ... comes.html

Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.
...
After-tax income adjusted for inflation fell 0.1 percent from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2 percent and food climbed 2 percent during the same period.
...

[AgAuMoney]

If the inflation you are expecting is as inevitable as you describe, why do you think the bond market (not just in the U.S. but also in Germany, Japan and the UK) isn't pricing it in in the form of higher interest rates?

I am assuming that you are anticipating an inflationary spiral at some point, not just the plodding 1-3% CPI inflation we have seen in recent years.

Obviously because most people don't believe it.  Just like most people did not believe housing prices could come down and the bubble would burst.

And equally obviously, there is no way to know who is right unless it happens.

As for a spiral, that is the end of a fiat currency. Like I said, I hope it doesn't happen, and the longer until it happens the better.

[AgAuMoney]

As a follow-up question to MT's, what are your thoughts on a liquidity trap?

I believe Bernanke.  He has authored and referenced papers on how to avoid that, and how the U.S. has the necessary components already in place while Japan still does not.  I don't remember all the details.

Some papers have proposed schemes to increase the velocity of money such as by taxing assets held in accounts and by invalidating all bills with a certain digit in a certain place in the serial number.  The selection would be random, so the only way to avoid the risk is to spend the money.

Many people seem to forget that Keynes was writing from a hard-money perspective, not fiat.  He assumed government had to borrow money that already existed or at the very least publicly devalue it ala FDR.  None of that is necessary today even though we usually operate as if it were.  The BEP could print treasury notes as it did up until about 1971 and start spending sending them out at an even greater subsidy than the dollar coins.  The possibilities are endless.

Do you not see a possibility of us getting stuck in such a trap (as Japan has)?

Anything is possible.  However I consider the possibility to be very remote.  If nothing else the Fed could keep buying Treasuries and the government could keep spending the money.  (Not that I agree, but as Bill Clinton has just said, Obama should ignore the debt ceiling and just write the checks.  Make congress take him to court to stop him.)

Seen the news from the Fed audit thus far?  Over $16 trillion in previously unknown loans.

Japan simply hasn't been able or hasn't been willing to take the measures described by Bernanke and others that were inconceivable and impossible 50 years ago and still nearly inconceivable now.

[AgAuMoney]

Maybe this is a correlation, not causation, type of scenario.

Maybe it is.  But when correlation is 100% and the other approach has 0% correlation (gold and silver have never become worthless)...

Anyway, I don't think I would say that the cause of the collapse is fiat.  I view fiat more as an enabler, reference to Greenspan's perspective on trying to manage monetary policy as if on a virtual gold standard.  If fiat were always managed as disciplined as a hard money I think it would be fine and convenient.

However as has been pointed out many times in the gold standard thread, fiat allows the gov't to do "necessary" spending.  Unfortunately history shows that the definition of necessary becomes very flexible and as you said, fraud seems to crop up many times as well.

And your other points are generally my opinion.  Remember that message was using a definition of inflation "prices are rising", so the cause of the rise being increased demand, reduced supply, monetary devaluation, ...  It's all inflation as measured by the CPI.

[AgAuMoney]

I'll also add, that if commodity prices are going up, but aren't going to lead to the kind of 1970's-style balance-sheet expansions and wage increases, then they could very quickly go back down as we snap back into recession and reduced expected future demand.

Only if the surplus is not snapped up by hungry mouths elsewhere.

Does that really sound like a currency collapse scenario?  All of a sudden our stock prices surge and factories open up in the US because China's "sick of our dollars" and starts bidding up the prices of those things?

That's what china is doing now.  The collapse may come later.

If a collapse is imminent, China won't be buying our factories and stocks, and to reverse that, if China starts "investing in America," that's hardly some kind of hyperinflationary scenario as our business-assets get bid-up.

Again, China is divesting themselves of dollars NOW.  And some of that is buying hard assets in yes, America.

This is all pre-collapse machinations to get the maximum value possible for their dollar holdings.  In other words, getting out while the getting is good.  If collapse is imminent, it would be too late.

But if you did believe a collapse was in the future, what would you do with your dollars today?

[AgAuMoney]

You really ought to learn more about 'liquidity trap' economics (when rates are stuck at the zero bound no matter how much money is printed) before you jump to conclusions about helicopter drops and spiraling inflation.

Rates are quite irrelevant and Krugman is apparently ignorant.  Sorry I didn't point that out sooner, but maybe by the time I get to the end of this thread where I did, perhaps someone else will have before me. 

Krugman believes people will sit on the money, I've mentioned two approaches to prevent that which have been documented in economics journals.  Another one mentioned is to simply pay off debts for people.  At some point people will spend money.

American and Japanese spending habits could hardly be more different.

[AgAuMoney]

On a side note, Does the Fed even have the legal authority to do a helicopter drop? (Perhaps this is a good question for HB Reader).

I'm not sure they do. The Fed would have to buy government debt and the Treasury would then hand out the money. The Treasury can't hand out the money without enabling legislation. And you can't get the legislation to hand out free money without Congress.

Bernanke says they do.

And preliminary results from the Fed audit say they loaned $16 trillion from the "oops, forgot to mention that" category.

[AgAuMoney]

Wow, you really don't think commodities aren't driven by speculation??

http://www.zerohedge.com/article/blame- ... peculation

[code]CME corn futures trade at a rate that is 10Xs global consumption of 861 million tones.

CME wheat turns over 5Xs global consumption.

NYMEX Crude volume is equal to trade at 5Xs total global consumption of 32 billion barrels. [/code]
Source: http://www.zerohedge.com/article/blame- ... peculation

Absolutely commodities are not driven by speculation.  Ever been on a sailboat?  Speculation is the little gust or temporary shift in the wind that makes the sails snap a bit even tho the wind is still from the same direction.

Shorts can suppress prices for a time, but they are eventually going to have to settle either thru buying back the contract for a loss, or thru delivering the goods.  With limited funds, the limit will be reached.

Longs can hold up prices for a time, but eventually they are either going to have to pay up the contract and take delivery, or they are going to have to sell the contract and take a loss.  Again, with limited funds, the limit will be reached.

If they supply the goods or take delivery, by exchange definition they are not speculators.

Of those that are speculators, there is simply no way they can set prices unless they have unlimited funds.  Of course, if it really is the Fed, then they do have unlimited funds.    The best a speculator can do is ride along the momentum that is already there, much like that sailboat.

Oh, and Zero Hedge?  I try to read it every now and then, but WAY TOO MANY articles are WAY TOO STUPID!  Irrational thought processes and unsupportable conclusions.  This is one of them.  Nice tease, some interesting data, but the data has nothing to do with establishing his point.

Volume has nothing to do with price since for every buyer there is a seller.  Things tend to move when volume is high, but the move might be up one day and down the next.  Volume doesn't set a price.  If as he claimed it was people taking money from checking and savings to establish a position, where is the money going from all the sellers?

[AgAuMoney]

The problem with most commodities is that when the price runs up the market delivers more of them, which tends to push the price back down.

Corn goes up, next season more farmers plant more corn, guess what happens next season?  Corn prices drop.

Oil has a different dynamic.  In the last 10 years the price of oil has risen by a factor of 8 but world oil production has only increased a little.  An economist would tell you that this price runup should have resulted in an enormous world oil glut.  A geologist, however, would tell you it's not that simple.  The story for gold is similar.

Two other factors:

Time.  It can sometimes take a long time to bring additional supply on line.  This means the supply cannot react quickly to changes in demand.

Psychology.  "This demand won't be sustained, I won't create additional supply" thought process causes more delay.  Another is the "all my neighbors are going to plant corn next year, I'll plant soy."  Enough do that, and next year corn prices still go up because the supply didn't increase enough.  And it can be very expensive sometimes to bring on additional supply, which exacerbates the psychological aspects.

And finally, sometimes the supply just cannot be increased so the market is going to clear at a new higher price until the demand reduces for whatever reason.

[pershing83]

I do not read every post but wondered if anyone has posted the YTD results of the classic H Browne PP? My PRPFX is up 8+% YTD. I'd be interested to know how PP is coming along.

[pershing83]

I have a friend who is buying VWINX 90% and GLD/TGLDX 10% for the last several yrs. He is aiming at 10-12% EOY. This is cheaper than PRPFX. He considers this his core holding. This is an easy way to go and maybe gets you where you want to be.

[HB Reader]

On a side note, Does the Fed even have the legal authority to do a helicopter drop? (Perhaps this is a good question for HB Reader).

I'm not sure they do. The Fed would have to buy government debt and the Treasury would then hand out the money. The Treasury can't hand out the money without enabling legislation. And you can't get the legislation to hand out free money without Congress.

Gumby --

I think Bernanke's "helicopter drop" statement probably wasn't meant to be taken too literally.  But the Fed could flood the economy with more liquidity if it wanted to, whether or not it was handed out by Treasury.

The Fed can buy -- i.e., monetize -- non-government debt or other assets, although for a variety of reasons (relating to its own balance sheet, maintaining orderly markets, etc.)  it usually likes to stick to shorter term Treasuries.  It did buy MBS in QE1.  Just like net positive purchases of secondary market government debt, this is new money injected into the system that doesn't go directly to the Treasury.  In short, they could do another round of QE by buying large amounts of government and/or non-government debt or assets.  Although this wouldn't require Congressional approval, depending on the timing and context they might well get a lot of political blowback from Congress, including threats to pass legislation threatening their independence.  I'm pretty sure they could figure out some other creative ways to pump money into the system, but debt monetization is their preferred big tool.

Now, as to the short or long term effects and wisdom of such actions (from either our or the Fed's perspective), I won't speculate here.   

[doodle]

I urge those interested people to view the attached videos (or read my synopsis of them) in this thread: http://gyroscopicinvesting.com/forum/in ... pic=1207.0

I think that the information contained within them will help many to understand why a lot of the terminology that we are using like "monetize debt" don't really make much sense.

Debt = equal to money.....how do you monetize it? Without debt, there would be no money. In addition,  if money supply is created through the fractional reserve system, where does the "new" money required to pay the interest on debt come from?

The videos in the attached thread do a much better job of explaining all of these issues than I do. I really recommend them.

[Gumby]

I believe Bernanke.  He has authored and referenced papers on how to avoid that, and how the U.S. has the necessary components already in place while Japan still does not.  I don't remember all the details.

Well, if Bernanke said it, what could possibly go wrong?

But, in all seriousness the part that I find most puzzling of all, is that you are so confident in your position on inflation, at this point, that nothing — not even some years of actual deflation — would convince you otherwise.

I think that's the part that I don't really get.

It seems incredibly risky to get so invested in one particular outcome — to the point where one can't (or is unwilling to) envision any other outcome.

I only bring it up because I agree that inflation may happen, and it probably will happen. But, I tend to be wrong about a lot of things, and I certainly wouldn't put the majority of my money towards that hunch.

AgAu... in a way, I think you've structured your life and investments in such a way that you have no choice but to have an unwavering bias to believe in high inflation. So, every other argument against that stance — whether its logical or not — is instantly dismissed without serious thought.

How is that helpful when the other side of the coin may be right?

[MediumTex]

I believe Bernanke.  He has authored and referenced papers on how to avoid that, and how the U.S. has the necessary components already in place while Japan still does not.  I don't remember all the details.

Well, if Bernanke said it, what could possibly go wrong?

But, in all seriousness the part that I find most puzzling of all, is that you are so confident in your position on inflation, at this point, that nothing — not even some years of actual deflation — would convince you otherwise.

I think that's the part that I don't really get.

It seems incredibly risky to get so invested in one particular outcome — to the point where one can't (or is unwilling to) envision any other outcome.

I only bring it up because I agree that inflation may happen, and it probably will happen. But, I tend to be wrong about a lot of things, and I certainly wouldn't put the majority of my money towards that hunch.

AgAu... in a way, I think you've structured your life and investments in such a way that you have no choice but to have an unwavering bias to believe in high inflation. So, every other argument against that stance — whether its logical or not — is instantly dismissed without serious thought.

How is that helpful when the other side of the coin may be right?

Gumby,

I was thinking about that this morning.  I don't mind AgAuMoney's views at all, and I appreciate his thoughtful and well-reasoned posts.

What I wonder about, though, is how something like the PP strategy would be appealing to someone who had such a high level of confidence in one particular economic outcome.  What's the point of hedging against the range of possible future scenarios when you are so sure that the one you envision is the one that is going to happen?

I personally find the case for deflation pretty strong, but not nearly strong enough that I would bet the farm on it.

[MediumTex]

I do not read every post but wondered if anyone has posted the YTD results of the classic H Browne PP? My PRPFX is up 8+% YTD. I'd be interested to know how PP is coming along.

Yahoo Finance is showing PRPFX up 5.26% YTD.

[doodle]

The mechanisms of how our money and banking system work are confusing to me.

As we have determined money = debt. In other words banks create money by fabricating it out of thin air and lending it to people to whom it becomes debt.

These people have to pay back the debt with interest however, which requires a growing money supply, otherwise there will not be enough money system wide to cover a repayment of principal + interest throughout the entire system. If the money supply is contracting rather than expanding, all that will result is the mathematically impossible act of paying down outstanding debt (100 dollars + interest) out of a money supply that consists of only (100 dollars). In other words, more foreclosures and a dysfunctional economy.

The government must continue to print money to fill the gaping hole left by banks failing to multiply the money supply by issuing loans or we will spiral down even further. If we achieve a society where there is no debt, then we have in essence no money.