Not Even Harry Browne Thought It Was Going To Be This Bad

[moda0306]

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.

Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )

YES!!!

Productivity. Is. Everything. 

[Libertarian666]

I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.

But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.

Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )

The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.

[Pointedstick]

The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.

They do, and they can. Now, of course it wouldn't work out well. But you and I both know that the government is actually the true owner of everything.

Try not paying your property taxes sometime and see what I mean. You don't own your land; you're renting it from the government.

[Mdraf]

Once taxation gets too high productivity drops and there is less to tax so it's  "self-adjusting". There's an equilibrium which keeps things going. It can be broken if citizens revolt and stop paying taxes (Boston Tea Party) or government spends too much and tries to tax (or print) more than what the economy can provide.

[moda0306]

But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.

Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )

The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.

No, the government doesn't own everything (though, like most governments, they could theoretically apply the physical force necessary to steal/destroy most property). 

The government provides fiat financial tools to the economy with which people can then use as a medium of exchange and/or store of value.  If they provide too many of these tools there will be inflation... not enough, deflation... but both base money AND treasury bonds represent these tools... and it gets even more complex when the rest of the world wants to use these tools in their economy as well.

Just because government provided the tool that we hold on our balance sheets doesn't mean they "own" the productivity that those tools will act as claims on.

They could try to tax everything, I suppose, but they could do that before (they have a military to help collect taxes if need be), and it would be idiotic if they tried to collect all property as government property.  Further, the U.S. has one of the best track records for low taxation and recognizing/defending property in the world.  I suppose that could change, and in some ways is slowly changing, but I don't see a promise land anywhere else that I'm very confident would survive the collapse of the most previously stable economy and entity in the world...

[moda0306]

Once taxation gets too high productivity drops and there is less to tax so it's  "self-adjusting". There's an equilibrium which keeps things going. It can be broken if citizens revolt and stop paying taxes (Boston Tea Party) or government spends too much and tries to tax (or print) more than what the economy can provide.

But "printing" is best represented by deficits, not "monetizing the debt."  And if you factor how far under capacity our economy was in 2009-2012, the deficits weren't actually that large from a stand point of the government wanting "more than the economy can provide."

[Libertarian666]

The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.

They do, and they can. Now, of course it wouldn't work out well. But you and I both know that the government is actually the true owner of everything.

Try not paying your property taxes sometime and see what I mean. You don't own your land; you're renting it from the government.

Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.

[Pointedstick]

Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.

The government bonds I buy don't have value because the government could ruin the economy by confiscating or destroying everyone's property. It's just the opposite: they have value because the government doesn't.

[Libertarian666]

Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.

The government bonds I buy don't have value because the government could ruin the economy by confiscating or destroying everyone's property. It's just the opposite: they have value because the government doesn't.

Then you agree that the assumption that they could tax at 100% is not a valid way of determining the value of their bonds.

[Pointedstick]

Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.

The government bonds I buy don't have value because the government could ruin the economy by confiscating or destroying everyone's property. It's just the opposite: they have value because the government doesn't.

Then you agree that the assumption that they could tax at 100% is not a valid way of determining the value of their bonds.

Yes.

I think the problem here is that we can talk all day about accounting identities until we're blue in the face, but deriving the value of a bond issued by a fiat reserve currency issuer is a lot more of a subjective process. There's this subtle interplay between the productivity of the economy and the size of the money supply, which is complicated by the fact that we don't have unbacked fiat currency, we have debt-backed fiat currency. And not only that, but the majority of the currency is actually created by banks, and every act of creating debt-backed currency involves getting someone else to become indebted to the entity creating the currency, which may be a private bank, the treasury, or a pseudo-public-private bank that backs the other banks and facilitates the treasury's actions.

It's all pretty crazy. Yet somehow, it hasn't collapsed yet. The power of human beings to prop up something that looks unsustainable is always surprising.

[yankees60]

To focus for a moment on HB's defined economic conditions, I happen to believe right now we are in a tug of war between deflation and tight money recession. If the Fed has it's way, we would be somewhere between (controlled) inflation and prosperity. If the excess reserves in the banking system end up mobilized and into the money supply, the Fed might have it's way. If they overshoot the goal, we could whipsaw from where we are today to not-so-controlled inflation in which case we'll applauding HB and the gold allocation in the PP. There's no way to know for sure how this will all play out.

I am not sure in all the posts I've seen here if there has been any discussion of say for the last decade which of "HB's defined economic conditions" we've been in for the various time periods within the decade, e.g., from January 1, 2010 to July 28, 2011 we were in.....From July 29, 2011 to August 2, 2014 we were in...."

Is there any objective way of doing so? We have all the economic numbers to do so? Or, not?

Vinny

[yankees60]

I'm not sure I follow your logic, Libertarian666. Are you saying that without Fed interference, interest rates would be much higher?

Yes, of course. They are the only purchasers of T-Bonds. What happens when the only purchasers of anything stop purchasing? The price will go... down. This isn't rocket surgery!

Haven't you been buying T-Bonds too? at least you should have been

No. I don't use the PP.
As for T-Bonds/T-Bills: I am rather heavily short dollars. In a way that can't result in a margin call, of course; I'm not suicidal!

I believe I may have already read this a few times elsewhere and you may have already answered my following questions. But if you have I have no memories of your answers.

What is your current portfolio, your rationale for its composition, and how often times does it change?

Finally, am I correct in assuming that you are a highly intuitive person? Which means that going off on your own to create your own investing rationale / portfolio is NOT a daunting task for you?

Vinny

[yankees60]

[quote author=Gumby link=topic=4852.msg71286#msg71286
My overall point, Libertarian666, is that you have allowed your political biases to drive your investment decisions, which is rarely a good idea.

And my overall point is that you are wrong.

You can believe whatever you want, of course, but I am much more knowledgeable about the basis of my investment decisions than you are.

My investment decisions are based on my own analysis of the risks and rewards of various investment classes.

In the past, I have invested in common stocks and in Treasurys. I no longer do so because I believe that the risk/reward ratios in those investment classes are unfavorable.
[/quote]

Here and in some other subsequent posts in this Topic you did explain your rationale and what you are investing in (presumably 100% gold then?). I nearly intervening 7 years has anything changed for you?

Vinny

[yankees60]

Libertarian666,

Did the 29% return on long term treasuries in 2011 surprise you?

I'm trying to understand your basis for concluding that the Permanent Portfolio is not appropriate for you.

Is it just because you don't like the treasury holdings in the portfolio?

I don't like anything that I consider subject to great risk at the hands of obvious lunatics such as the Federal Reserve. That eliminates all US-based securities.

If I had to wage money on it, I'd bet this has not at all changed for you?

Vinny

[yankees60]

It would be easier to believe you if you could provide maybe a single shred of evidence that your decision is based on some kind of impending threat to our economy.

But, all you've done is told us that, as an Austrian, you don't like US monetary policy — which is just a political statement that has no bearing on the real economy or actual inflation. Having a big government that spends money — no matter how distasteful — does not automatically result in an impending monetary collapse.

If things are so dire for our future, why not at least explain what you think the risk is?

As far as I know, I'm not obligated to explain anything to you, and given your attitude that you know more about me than I do, I see no incentive to do so.

I've read Gumby's posts for a long time and he can sometimes be a bit short, but IMHO he always wants to engage in a fair discussion.

What you seem to be saying is that there are good reasons to tilt one's investments toward an inflationary future, but your reasons do seem to be tied to a belief that a certain type of government meddling in the economy and monetary system will always lead to inflationary outcomes that culminate in currency collapse.  The problem with this position, however, is that it doesn't provide a very good explanation for the incredible economic growth that occurred in the 20th century with governments all over the world endlessly meddling in their economies, and with relatively few currency collapses occurring among productive economies that were not involved in a war.

I think what you are being asked is how you would respond to the following question: "Hey Libertarian666, I really like your take on things and I would like to understand your investment philosophy better.  Can you give me an overview of what you believe and your rationale for those beliefs?"

Please don't feel defensive.  I'm just interested in picking your brain a little.

Ok. I believe that we are approaching a phase-change, after which very little will look as it does now. My reasons for this include the following facts:

1. The historically unprecedented case of a peacetime US economy with gigantic deficits being covered by money printing by the Federal Reserve.
2. The ever-increasing intrusiveness of the US government's demands for detailed information on any possible assets that its subjects might have that aren't immediately seizable at its whim.
3. The attempts of all major currency blocs worldwide to devalue their currencies to gain an advantage for trade purposes.
4. The increasing militarization of the US police forces and federal agencies.
5. The revelations that the US is spying on everyone all the time to the maximum amount imaginable.

My analysis, based on these facts, is that the current "powers that be" will not give up their power until they can no longer enforce their will. The only event I can foresee that could cause them to lose that ability is currency collapse, which given the competing devaluation would have dire consequences for paper assets in the major currencies.

If that's political, so be it.

Has the "phase-change" been completed because as I read your 5 supporting points it seems that none of them have abated at all with several of them intensifying over the last nearly 7 years?

Vinny

[yankees60]

I suppose one can take the position that it is the government's borrowing that creates money rather than the Fed's buying their bonds,

That's how I look at it.

and that the amount of bonds issued is irrelevant so long as the Fed buys (virtually) all of them.

No.  These are bought by primary dealers.  See Gumby's post 71409 for a sample of auction results.  More recent results can be found here.

...another question, which is whether the government will ever reach a limit as to how much real wealth they can extract from the world economy.

Of course there is a limit.  But please do not confuse wealth with money.  The real wealth of the U.S. is its people, resources, and productive capacity.  If the government commandeers too much productive capacity, then of course this will be bad.

Also, if the relationship between money (too much) and production (not enough) gets out of whack, there will be inflation.  The more out of whack, the more inflation.  This is a real constraint.

But fiat dollars in and of themselves?  There is no inherent constraint.

The Fed is indeed buying almost all of the bonds. Yes, they buy them from dealers, but that is irrelevant. The dealers know the Fed is going to buy them, so they don't care what they pay.

"Treasury Scarcity to Grow as Fed Buys 90% of New Bonds"
http://www.bloomberg.com/news/2012-12-0 ... bonds.html

I am not confusing wealth with money. If there are too many dollars printed (whether by the Fed or the government does not matter), then no one will want to lend them, especially at a low interest rate, because they will expect them to lose value. Instead, they will buy gold or some other asset that cannot be created out of thin air. This is elementary economics. See Zimbabwe for a recent example.

Anyway, we are going over the same ground again and again. I'm not going to convince you, and you certainly aren't going to convince me. We will see soon enough who is right; until then, I don't see any reason to continue a fruitless discussion.

Nearly seven years later has that "soon enough" time period elapsed? If so, how would you describe the outcome compared to what you predicted above?

Vinny

[yankees60]

Re: " The government's liability is the private sector's asset."

LOL. You guys. Your logic reminds me of Zeno's Half Distance paradox.

How is the government's liability not the private sector's asset?  To me, this is simply an accounting identity.

Because an asset is by definition something of value. The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued. The government could print $16000 trillion in bonds and the private sector would not be better off because that "asset" would be worthless.  That's what I meant by the Half Distance paradox. The accounting may be right but it is meaningless.  Do you think Detroit could go back to health by issuing bonds in its own currency to its inhabitants?

Too bad Mdraf is long gone. Because as I've been reading through all the posts in this Topic I just had the same thoughts that I then, seconds later, read he'd written (above).

Vinny

[yankees60]

The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued.

You are correct that the asset could be devalued by issuing too many without enough productive capacity — nobody disputes that.

But, I don't understand why you still think that the bonds are at risk of not being "paid back". There is never a risk of the bonds not being "paid back" regardless of productivity. For instance, see the statement above about how the debt from WWII has never been "paid off" — and certainly not from any tax collection from the private sector. It was "paid back" by issuing new debt. The debt from WWII simply became our private sector assets. The WWII debt is not an economic burden. These debt deposits in the private sector represent real goods and services in the economy (that's what they were given to us for!). But, that has nothing to do with "paying" the debt. The debt is a creation of the government that will always be "paid back" regardless of any productivity or not.

Furthermore, nobody is advocating any amount of spending here. We are just stating mechanics and accounting identities (i.e. the government's liability is the private sector's asset). The government can provide those assets to the private sector in exchange for real goods and services if the elected politicians vote to do so. That's pretty straightforward.

I maintain that WWII debt was paid back and absorbed by inflation. In other words IF those WWII bonds hadn't been issued in the first place (hypothetical since I believe we had no other choice) the private sector would have been better off. Impossible to measure though.

Accounting is a language, not a science. We use it to describe and make sense of a situation. It is by no means definite and final in so much as other countries have different accounting rules. Even ours keep changing over time.  By our accounting rules all those Credit Default Swaps were assets on the banks' balance sheets. But were they really?

Yes, the government can provide those assets to the private sector in exchange for real goods and services but only if the private sector values them to be worth those goods and services.  Currently here in the US they do. But it is not an absolute rule.

Based upon his explanations I continue to side with Mdraf…

Vinny

[Libertarian666]

I suppose one can take the position that it is the government's borrowing that creates money rather than the Fed's buying their bonds,

That's how I look at it.

and that the amount of bonds issued is irrelevant so long as the Fed buys (virtually) all of them.

No.  These are bought by primary dealers.  See Gumby's post 71409 for a sample of auction results.  More recent results can be found here.

...another question, which is whether the government will ever reach a limit as to how much real wealth they can extract from the world economy.

Of course there is a limit.  But please do not confuse wealth with money.  The real wealth of the U.S. is its people, resources, and productive capacity.  If the government commandeers too much productive capacity, then of course this will be bad.

Also, if the relationship between money (too much) and production (not enough) gets out of whack, there will be inflation.  The more out of whack, the more inflation.  This is a real constraint.

But fiat dollars in and of themselves?  There is no inherent constraint.

The Fed is indeed buying almost all of the bonds. Yes, they buy them from dealers, but that is irrelevant. The dealers know the Fed is going to buy them, so they don't care what they pay.

"Treasury Scarcity to Grow as Fed Buys 90% of New Bonds"
http://www.bloomberg.com/news/2012-12-0 ... bonds.html

I am not confusing wealth with money. If there are too many dollars printed (whether by the Fed or the government does not matter), then no one will want to lend them, especially at a low interest rate, because they will expect them to lose value. Instead, they will buy gold or some other asset that cannot be created out of thin air. This is elementary economics. See Zimbabwe for a recent example.

Anyway, we are going over the same ground again and again. I'm not going to convince you, and you certainly aren't going to convince me. We will see soon enough who is right; until then, I don't see any reason to continue a fruitless discussion.

Nearly seven years later has that "soon enough" time period elapsed? If so, how would you describe the outcome compared to what you predicted above?

Vinny

Obviously we aren't there yet. The US dollar is still widely accepted around the world, and the bills for all of the impossible promises made by the government in the last century haven't come due yet.

I see no reason to believe that for the first time in history, printing money with wild abandon is a sustainable model.

Fortunately my weird gold-heavy portfolio is still doing well enough for me not to be worried about the future, even though it has lagged behind the stock market for the last few years. I can remain solvent indefinitely, which is longer than the market can remain irrational.

[yankees60]

I suppose one can take the position that it is the government's borrowing that creates money rather than the Fed's buying their bonds,

That's how I look at it.

and that the amount of bonds issued is irrelevant so long as the Fed buys (virtually) all of them.

No.  These are bought by primary dealers.  See Gumby's post 71409 for a sample of auction results.  More recent results can be found here.

...another question, which is whether the government will ever reach a limit as to how much real wealth they can extract from the world economy.

Of course there is a limit.  But please do not confuse wealth with money.  The real wealth of the U.S. is its people, resources, and productive capacity.  If the government commandeers too much productive capacity, then of course this will be bad.

Also, if the relationship between money (too much) and production (not enough) gets out of whack, there will be inflation.  The more out of whack, the more inflation.  This is a real constraint.

But fiat dollars in and of themselves?  There is no inherent constraint.

The Fed is indeed buying almost all of the bonds. Yes, they buy them from dealers, but that is irrelevant. The dealers know the Fed is going to buy them, so they don't care what they pay.

"Treasury Scarcity to Grow as Fed Buys 90% of New Bonds"
http://www.bloomberg.com/news/2012-12-0 ... bonds.html

I am not confusing wealth with money. If there are too many dollars printed (whether by the Fed or the government does not matter), then no one will want to lend them, especially at a low interest rate, because they will expect them to lose value. Instead, they will buy gold or some other asset that cannot be created out of thin air. This is elementary economics. See Zimbabwe for a recent example.

Anyway, we are going over the same ground again and again. I'm not going to convince you, and you certainly aren't going to convince me. We will see soon enough who is right; until then, I don't see any reason to continue a fruitless discussion.

Nearly seven years later has that "soon enough" time period elapsed? If so, how would you describe the outcome compared to what you predicted above?

Vinny

Obviously we aren't there yet. The US dollar is still widely accepted around the world, and the bills for all of the impossible promises made by the government in the last century haven't come due yet.

I see no reason to believe that for the first time in history, printing money with wild abandon is a sustainable model.

Fortunately my weird gold-heavy portfolio is still doing well enough for me not to be worried about the future, even though it has lagged behind the stock market for the last few years. I can remain solvent indefinitely, which is longer than the market can remain irrational.

For the record I'm 100% with you on this one: "I see no reason to believe that for the first time in history, printing money with wild abandon is a sustainable model." It seems to defy all logic and common sense to argue otherwise.

Vinny

[Smith1776]

Harry Browne did foresee that it would be this bad.

In his own prescient words. "The best keep secret in the investing world: almost nothing turns out as expected."

I am less gung ho on the idea of the Golden Butterfly these days relative to a while back. That appeal of the prosperity tilt may very well be due to recency bias on my part. We've just had such a strong bull run in stocks. I am more partial to the classic PP allocations today.

As I mentioned in another thread, if I were to try and goose the returns, I'd rather just keep the 4x25 and tilt to SCV. Emerging market SCV in particular.

[sophie]

Bronsucheki (sp?) who started this thread was an employee of the Perth Mint at the time. Having him following the board was priceless. He doesn't work there anymore but it would be so nice if he dropped in again and commented on this!

If you are in the US I don't know that you need long US treasuries to be the world's #1 flight to safety asset, but there is probably a boost to the PP's returns because of it. Luckily for us, it looks like they still are despite the debt, the rise of cryptocurrency, etc. Has anyone changed their mind on the subject of the future of US Treasuries?

[Libertarian666]

Bronsucheki (sp?) who started this thread was an employee of the Perth Mint at the time. Having him following the board was priceless. He doesn't work there anymore but it would be so nice if he dropped in again and commented on this!

If you are in the US I don't know that you need long US treasuries to be the world's #1 flight to safety asset, but there is probably a boost to the PP's returns because of it. Luckily for us, it looks like they still are despite the debt, the rise of cryptocurrency, etc. Has anyone changed their mind on the subject of the future of US Treasuries?

Of course Treasurys are eventually going into the dustbin of history. That's what happens to every debt instrument in the long run.

But for the time being I think short Treasurys (bills) are about as safe a place to park cash as is available. I have most of my cash in two-month bills.

[Smith1776]

Another reason why I like the PP. Libertarian666's comment about Treasurys going to the dustbin of history would raise some concerns among typical investors. Many would go on the attack at the very idea.

For a PP investor? Snooze. Let 'em fail. I got my gold.

[I Shrugged]

For a PP investor? Snooze. Let 'em fail. I got my gold.