"Deflationary Paradox" Long term rates will remain low or lower.

[Plumbline]

Dr. Hunt is a must read every quarter. Skip to last page for 30-year rate perspective, but entire article is a reminder of big picture. Enjoy.

http://www.hoisingtonmgt.com/pdf/HIM2012Q4NP.pdf

[Reub]

Thank you! I enjoyed it immensely and agree that it is a must read every quarter.

[clacy]

Lacy Hunt is one smart man IMO. He is not very optimistic about the next 10-20 years for the US though.

[Greg]

I agree that was an interesting read too. It's articles such as this that reaffirm me holding LT bonds (even if I don't want to at some points). The PP is really a beautiful thing because it forces you to understand economics, otherwise who'd want to own LT bonds?

[clacy]

I would highly recommend watching the several Lacy Hunt youtube videos that are available.

[Benko]

"We cannot tax
ourselves into prosperity as FDR’s 1937 effort
and numerous other historical cases demonstrate.

We can, however, deficit spend ourselves into
poverty.  Consistent with the academic research,
we could not find historical precedent for the
proposition that prolonged deficit spending
achieved prosperity."

Wait, so does he not understand fiat money i.e. a country spending money is not like a person spending it because of the way money is created, or I'm still confused because this seems to contradict what was said late in the coin thread.

[Greg]

Couldn't you deficit spend yourself into poverty if the money that is taken out of the private sector for public use is used for malinvestments? This would then lead to a lower amount of actual goods and services produced for the U.S. in general and bring us more towards "poverty". Not sure if that's what he is meaning here or not.

[Pointedstick]

Couldn't you deficit spend yourself into poverty if the money that is taken out of the private sector for public use is used for malinvestments? This would then lead to a lower amount of actual goods and services produced for the U.S. in general and bring us more towards "poverty". Not sure if that's what he is meaning here or not.

Yes indeed, if the government removes money from the private sector through taxation and re-injects it back in through boondoggles and waste, that would be a great way to impoverish a nation.

Another way is if the government keeps deficit spending at an enormous clip during a period of prosperity when the private banking system is creating enough money for the economy, which will push up inflation and thereby impoverish everyone by devaluing the money they hold.

Fiat money isn't a magic bullet and IMHO one can understand it well and still be perfectly skeptical of the government's ability to manage the country.

[Greg]

Couldn't you deficit spend yourself into poverty if the money that is taken out of the private sector for public use is used for malinvestments? This would then lead to a lower amount of actual goods and services produced for the U.S. in general and bring us more towards "poverty". Not sure if that's what he is meaning here or not.

Yes indeed, if the government removes money from the private sector through taxation and re-injects it back in through boondoggles and waste, that would be a great way to impoverish a nation.

Another way is if the government keeps deficit spending at an enormous clip during a period of prosperity when the private banking system is creating enough money for the economy, which will push up inflation and thereby impoverish everyone by devaluing the money they hold.

Fiat money isn't a magic bullet and IMHO one can understand it well and still be perfectly skeptical of the government's ability to manage the country.

I'm more worried about the fact that government normally moves pretty slowly so that once the private sector banking does hit prosperity enough to start moving up that the government won't be able to ratchet down its spending as quickly. I see this because a lot of people in government wouldn't want the gravy train to be stopping of money flowing in.

I say this even though I'm a federal government employee and love getting raises (even though I feel bad about receiving taxpayer's money at times).

[hoost]

"We cannot tax
ourselves into prosperity as FDR’s 1937 effort
and numerous other historical cases demonstrate.

We can, however, deficit spend ourselves into
poverty.  Consistent with the academic research,
we could not find historical precedent for the
proposition that prolonged deficit spending
achieved prosperity."

Wait, so does he not understand fiat money i.e. a country spending money is not like a person spending it because of the way money is created, or I'm still confused because this seems to contradict what was said late in the coin thread.

I think he understands fiat money; he is not saying that the government will go bankrupt and/or default.  He is saying that government [deficit] spending does not create wealth, it destroys wealth.

[moda0306]

How does government spending destroy wealth?  If they spend it by just giving people money during a recession where we are under productive capacity, it will actually lead to more private investment and wealth creation.

If it's spent on improved roads and intersections and bridges during a recession, it will likely facilitate the creation of future wealth... Unless you think infrastructure doesn't accomplish that :/.

Even if you spend it on make-work programs, if its during a severe recession, it would have likely been idol capacity, and doesn't destroy much wealth at all.

I think what needs to be realized is that recessions are mostly a monetary phenomenon.  If we were still a barter economy, debts get paid off by providing products or services, not a single limited social construct such as money.  Once you have all debts denominated in one single entity (whether it be money or pork bellies), you lend an economy much more to structural upset. 

So we're left with a few choices... Endure the misery of recessions, go back to barter or a multiple currency system (the latter didn't prevent severe recessions in the 1800's), or have the government play a stabilizing role in our monetary system.  I vote for the latter.

[Pointedstick]

I don't think anyone's saying that government spending can't create wealth or always destroys it; just that it's possible for government spending to accomplish nothing or destroy wealth.

Example: The federal government removes $1 trillion from the private sector in taxes and spends $1 trillion on purchasing weapons built in another country. In this case, the private sector is in the aggregate $1 trillion poorer, and the government spending did nothing to stimulate the economy because the purchased goods were sold by foreigners, not Americans. Furthermore, the private sector derives no additional wealth-creating value from the government being better-armed.

Example #2: The federal government removes $1 trillion from the private sector in taxes and spends $1 trillion paying people to destroy their vehicles. In this case, the private sector has the same amount of money it started with in the aggregate, but now has fewer cars. This may stimulate the demand for new cars in the future, but in the present, the private sector is poorer to the tune of the combined value of everybody's now-destroyed cars. Within the private sector, wealth has simply been redistributed from non-car-owners to car owners who are now carless or have profited from getting rid of their oldest and least valuable vehicles.

[moda0306]

PS,

I agree with those examples, but I find that the knee jerk reaction that government is destroying wealth by spending or destroying savings by printing money is not nearly well-enough thought out.  If the economy has a ton of slack, government spending even if simply in stimulus checks, very likely facilitates a significant increase in real wealth production.

I agree, though... Too often it's boondoggles that we spend money on instead of merely concentrating on balance sheet repair and legitimate infrastructure. Oh, and nice big fat tax cuts.  I'm for those too.  I probably appear to be a flaming dem on here but it's mostly because I have to argue with libertarians .

[Pointedstick]

I agree with you too. The problem isn't that the government is incapable of shepherding the monetary system in a sound manner that dampens the economy's cyclical nature... it's that this ideal is never realized by a democratic political body that is addressable to the fickle and short-sighted public, easily corrupted by private interests, and made up mostly of narcissistic megalomaniacs who don't have the first clue as to the monetary effects of their fiscal activities.

The vast power that the government wields to crate a neutral, balanced monetary system is exactly what makes it so appealing to people who want to tilt the playing field toward them or their interests. Government never acts in the manner we would personally prefer and probably never will. It would be great if they all understood MR and spent and taxed counter-cyclically and slashed taxes down to very low levels most of the time and didn't bestow favors to politically-connected private interests...but they do. And they probably always will.

[moda0306]

So would you rather have government ignore recessions and just act like they're not happening?

I think a lot of the counter-cyclical decisions that were spot on.  The natural affect of increased safety net protections, as well as payroll tax cuts and stimulus checks and other tax cuts (bonus depreciation, etc).  Further, at least a decent portion of spending was on legitimate infeastructure.  If some ford expeditions with 150,000 miles on them got destroyed it's not exactly the end of the world.  I'm quite sure that te credit $4 thousand... Meaning that by deductive logic the cars that were destroyed were probably worth about $2k-$3k each on average, if not less due to the need to buy a brand new car. 

I'm not saying I agree with the program, but simply that it's affect on the economy was likely not all that significant. The destruction of each $3k car resulted in the production of a $18k car that likely wouldn't have even occurred. Such is the nature of recessions... People just cease to create nearly as much wealth as they were before. 

[Kshartle]

The destruction of each $3k car resulted in the production of a $18k car that likely wouldn't have even occurred.

The destruction of a $3k car resulted in $3k less wealth for the world. It is not tied to the other event. Demand is limitless. If the $18k car wouldn't have been produced it's only because something else costing $18k was more desirable.

[Pointedstick]

The destruction of each $3k car resulted in the production of a $18k car that likely wouldn't have even occurred.

The destruction of a $3k car resulted in $3k less wealth for the world. It is not tied to the other event. Demand is limitless. If the $18k car wouldn't have been produced it's only because something else costing $18k was more desirable.

I agree with kshartle. Paying people to destroy their cars in no way stimulates the demand for new cars, except for the people who:

1. had old cars they wanted to get rid of but couldn't find a buyer or a buyer willing to pay 3k
and
2. planned to purchase a new car but lacked 3k to do it.

I think that's probably a fairly small number of people compared to the ones who simply used it as an opportunity to get rid of unused cars. I'd be open to some hard data, though.

But in general, if your logic was sound, why couldn't the government pay people to destroy their houses? That would sure stimulate demand for residential construction!

IMHO, this is one of the Austrians' strongest arguments: that we should measure wealth by its accumulation, not how much of it changes hands or how many people are employed to make it. I mean, the government could easily pay people to build structures with hand tools and then demolish them, but what good would that do?

[moda0306]

Kshartle,

Sorry but that's where Austrians are dead-wrong.  Demand could be limitless if people could efficiently barter in a modern economy, but that only happens on a minor scale. The unemployed plumber isn't going to go to the Chevy dealer and remodel their bathroom for a new car.  Demand is limited by our financial assets.

Say's law was proven extremely flawed long ago.  Spending isn't fixed.  We are suffering from a lack of aggregate demand as a result of the structure of a monetized economy, not a supply/productive-capacity problem.

[moda0306]

Pointed,

I agree wealth should be measured by accumulation, but it's tough when you have so much of our consumption simply sustaining ourselves as human beings, possibly the most valuable idea of all. I agree that GDP is a misleading number.  It includes government boondoggles on the same plane as actual demand.

GDP also doesn't include negatives such as human suffering or pollution.

I don't want to make this about cash for clunkers.  Counter-cyclical spending/tax-cuts to me is more about balance sheet repair, payments system and legitimate infrastructure.

However, when you realize that we have a demand problem, it's easy to tell supply-side incentives a are only going to have a limited effect. 

[Pointedstick]

I agree with you that demand-side recessions are about lack of assets and bad balance sheets. The demand didn't just disappear, but people have lost the money or the willingness to spend on their demands.

It's very easy to say, "well, just give people more money and forgive the loans!" or something like that. And indeed, that might smooth things over in the short term. But I think it ignores the systemic incentives of such a policy, and it's also just a band-aid because it doesn't address why balance sheets became so smelly or why people suddenly lost so much money.

If balance sheets are bad because a side effect of a government-created debt-backed fiat money system is ever increasing indebtedness and higher prices for goods purchased on credit, and people are poor because they put their money in risky, expensive assets bought on credit that the government encouraged them to buy... well, I think you know what my policy prescriptions would be. 

[hoost]

Kshartle,

Sorry but that's where Austrians are dead-wrong.  Demand could be limitless if people could efficiently barter in a modern economy, but that only happens on a minor scale. The unemployed plumber isn't going to go to the Chevy dealer and remodel their bathroom for a new car.  Demand is limited by our financial assets.

Say's law was proven extremely flawed long ago.  Spending isn't fixed.  We are suffering from a lack of aggregate demand as a result of the structure of a monetized economy, not a supply/productive-capacity problem.

Demand is certainly not limitless (and I personally haven't heard an Austrian say that it is); desire is limitless.  In order to have demand, you have to have desire combined with the ability and willingness to purchase at a given price.

Please elaborate on what you mean when you say that "We are suffering from a lack of aggregate demand as a result of the structure of a monetized economy...".

[moda0306]

PS,

It's more than that, though.  If we were in a barter economy, people could simply work off their debt, but when we have an unemployment problem that's extremely difficult to do, in aggregate.  Once again, people make mistakes, but a monetized economy has certain structural fragilities that a barter economy doesn't.

Everyone during the debt-fuelled boom made decisions knowing things may have been unsustainable, including businesses and bond holders.  I don't know how useful looking at trying to blame certain people is, and if private citizens are plent to blame on all fronts, the government can only take so much of it.  Interest rates were hardly low enough to justify buying a home vs renting in the US.  This was obviously a pricing error of the private sector as much as anything.


hoost,

Recessions occur largely as an effect of zillions of contracts all based on cash flow, and sudden scarcity of cash for self-fulfilling reasons.  If you can imagne a "debt boom" in a barter economy, readjustments would result simply in those who went into too much debt having to work harder to pay off their IOU's.  There's no artificial social construct underlying every contract.  The economy can adjust more easily when people can repay their debts by providing real value, as opposed to trying to hoard a medium of exchange that everyone else is trying to hoard.  It would be similar to an entire country monetizing itself in pork bellies and promises to pay pork bellies, and all of a sudden there is a pig famine.  The economy would be crushed.  Much moreso than if an economy was built on barter of various products and services. 

Does that make some sense?  It was a new concept to me a while back but some MR guys and melveyr probably do a much better job than I of illustrating it.

[Pointedstick]

I'm not really blaming individuals for making bad choices. On a micro level, many did (I know a bunch), but you're right that on a macro level, that can't be the whole story if it happened en masse. I think that a credit-based economy systemically encourages everyone to go into debt because debt contracts are how the private sector increases the money supply.

But when something is extensively paid for with credit (houses, cars, college degrees), there are far fewer constraints on its price rising because the true sticker price becomes hidden behind the usually-easy-to-afford monthly payments. Low interest rates play a part, but the fact that the sticker price is so high that one needs to resort to credit in the first place is something that I believe becomes a self-perpetuating cycle of higher prices and more reliance on credit.

This is the nature of debt-based money, but it's also enhanced by government policies incentivizing certain purchases, usually large ones made on credit like the aforementioned houses, cars, and college degrees.

[Kshartle]

Ok, desires are limitless. Demand is limited to what is or can be produced, otherwise it's a desire. In that sense you could argue that destroying a $3k car stimulated demand for a replacement, but that's only because the replacement's value has been increased. Wealth has been destroyed though and in total humans are poorer for the destruction. Something else that would have been valued more wasn't created because of the government/violent intervention.

The government uses violence to organize the economy. The result is a far less-efficient economy than we would have with voluntary exchange. The government/violence makes some rich, but makes the society poorer. The more violence (North Korea, many African nations etc. the poorer the countries.

Sometimes the line between demand and desire is blurred but I think desires for actual goods in service or attainable ones is a good enough definition.

[Kshartle]

  Demand is limited by our financial assets.

Imagine a deserted island with just a couple people on it scrounging for fish and crabs and coconuts. Then you dump a bunch of financial assets on them. How are they better off other having kindling? They need production to match their desires. Production or productive capacity must come before the good or service can be demanded. Capital is required to produce and that comes from savings of prior production. Fiat money printing does not make a society wealthier. Neither does the government using it's monoploy on force to overrule the free market (humans trading voluntarily) make us richer.

Reccessions are the neccessary correction of mal investments and reorganizing of the economy towards market demands vs. government/violence driven demands forced on people.

We should fully embrace reccessions because we will come out the other end much better off, provided the government doesn't "help".