What economic cycle are we in right now?

[MachineGhost]

I plagerized a good amount of the above because I'm getting tired of this. Can anyone answer how bonds yields will stay down without more printing or how the US govt will service the debt at higher rates?

You're overthinking things.  Bond yields will stay down as long as the velocity of money is low, i.e. demand to hold bonds is higher than to hold competing assets.  We can't measure deflation and inflation directly, so monetary velocity is a graphical way to see the battle royale play out.  Also, don't confuse the financial sector with the real economy.  Inflation and deflation can be contained within the financial sector and never spill over to the real.  In the 70's, it took inflation-adjusted wage contracts ("wage-push inflation") to raise the price level of the real economy.

[Kshartle]

The people who are winning are the wealthy holding assets that benefit from inflation. The winners are the politicians who make promises they can't keep and get votes. The winners are the US citizens living off the government tit while doing no work. The Chinese work hard and don't have crap while people wit around here collecting checks from money the Chinese loaned the government. The current losers are people in creditor nations who are sending their production to the US and getting IOUs that will never be paid in honest money. The future losers are the people who think this can continue indefinately and are holding the paper or think the government can keep the welfare/warfare state running with a printing press. Once the Chinese stop sending their production here their lives will improve tremendously. They will get to consume their own prodution. They will un-hitch the caboose and the train will move much faster.

[Kshartle]

Bond yields will stay down as long as the velocity of money is low

If you think bond yields will stay low without the FED buying then why do you think they are buying. They've said they are buying to keep rates low. Do you not believe them? Why are they risking rapidly rising prices if not to keep rates low?

[Gumby]

The BOJ can purchase directly from the MOF and return all of the interest payments back to the MOF.

Where do they get the Yen to buy the bonds?

They hit some keystrokes on a computer. Pretty simple. It's an asset swap that allows the MOF to spend on things approved by the Diet (i.e. the parliament).

Central banks are printing and buying dollars, holding them as reserves. When they use the dollars or cash the bonds and try to buy something with them the prices of goods globaly in dollars will be bid up.

These central banks aren't typically allowed to just buy anything willy nilly. They trade their dollars with people who buy things with those dollars — purchased in the United States, mind you — and those dollars become "savings" in people's pockets. The same savings you were whining about that nobody has!

Make up your mind. Do you want Americans to have savings in their pocket or not? You can't whine about the money supply increasing and people not having enough savings at the same time. The two are tied together (unless you are advocating a credit bubble).

[MachineGhost]

If you think bond yields will stay low without the FED buying then why do you think they are buying. They've said they are buying to keep rates low. Do you not believe them? Why are they risking rapidly rising prices if not to keep rates low?

They're buying to offset deflationary demand collapse, i.e. to induce inflation.  The only short term disadvantage is it crowds out private savings.  Long-term, it bakes inflation into the cake.  Either way, the PP has you covered.

[Kshartle]

They buy the bonds by creating Yen. Supply of Yen goes up, price of Yen goes down. Yen holders lose, econ 1.0
That was my point.

You think the central bank can create savings. You don't know what money is nor what savings are. Read a Harry Browne book. He explains both in simple terms.

We have a huge trade imbalance. What do you think that means? Goods come in, dollars go out. More dollars go out every year, about 600 billion of them. Year after year after year. Do you think this will continue forever? What happens when it stops? What happens when it reverses? Do you believe foreigners will continue to subsidise American consumption forever?

Do you believe something can be created out of nothing? Do you believe the central bank can print purchasing power? Do you think doubling the money supply will double the wealth? Do you think more FRNs mean we have more real savings?

[Kshartle]

They're buying to offset deflationary demand collapse, i.e. to induce inflation.  The only short term disadvantage is it crowds out private savings.  Long-term, it bakes inflation into the cake.  Either way, the PP has you covered.

Do you believe they can stave off collapse with only some short-term disadvantage? Do you think the distortions in the market are bigger now or smaller than 4 years ago? Do you think they will be bigger or smaller a year from now? Two years? Can they stave off collapse forever? How? What part of the PP has you covered?

Why do you think Gold has moved up so much in the last 12 years?

[Pointedstick]

Do you believe something can be created out of nothing? Do you believe the central bank can print purchasing power? Do you think doubling the money supply will double the wealth? Do you think more FRNs mean we have more real savings?

If the private sector banking industry destroys a trillion dollars through bad lending and credit defaults, and the fed creates a trillion dollars and uses it to buy bonds and MBS contracts, has the money supply actually expended? Or has the fed restored the money supply back to its previous size?

What you're missing is that the money supply grows and shrinks from two sides: the Fed, led by congressional spending, and also the private banking system as people take out loans, repay them, or default on them. One side can make up for a deficit in the other. Both can grow or shrink at the same time.

Personally, I don't much like this arrangement, but I can't deny its existence.

Why do you think Gold has moved up so much in the last 12 years?

Negative real interest rates. If gold only responded to inflation, its dramatic movements with an inflation rate of 0-2% after a decade of falling in response to inflation rates of 3-6% would make no sense.

[MachineGhost]

Why do you think Gold has moved up so much in the last 12 years?

Because savings is being destroyed, i.e. it pays a negative real rate of interest.  No one wants to hold it, so they hoard commodities instead.

I think you need to get up to speed on Monetary Realism.

[Kshartle]

Why do you guys think Browne recomended only LTTs for a deflation? It's because only LTTs are safe from outright default. They are only safe from outright default because the government can tax and print (both are theft as he points out over and over in his books).

Well......how much more can they steal? At what tax rate do revenues start to shrink? I think we're close to that point. That means the debts are safe from outright default because of printing. You are not going to get back the value you loaned to them in that scenario.

Browne considered US government debt safe when the tax base was much larger and the debt was a fraction of what it is now. LTTs are not safe from a deflation anymore. Only hard cash is. People might herd into bonds. The trap will be set for them and the government will devalue (steal). It can't give them back the value they put in or it anymore. It will collapse.

[Kshartle]

so they hoard commodities instead.

Who is hoarding commodities? People with savings are loaded up on bonds and dollars. Gold ownership is tiny right now. Who are these mysterious commodity hoarders? Talk to someone in their 50s and up and ask where their investments are. Life insurance, annuities, cash, bonds, maybe some utilities or blue-chip stocks.

[Pointedstick]

Why do you guys think Browne recomended only LTTs for a deflation? It's because only LTTs are safe from outright default. They are only safe from outright default because the government can tax and print (both are theft as he points out over and over in his books).

Well......how much more can they steal? At what tax rate do revenues start to shrink? I think we're close to that point. That means the debts are safe from outright default because of printing. You are not going to get back the value you loaned to them in that scenario.

Browne considered US government debt safe when the tax base was much larger and the debt was a fraction of what it is now. LTTs are not safe from a deflation anymore. Only hard cash is. People might herd into bonds. The trap will be set for them and the government will devalue (steal). It can't give them back the value they put in or it anymore. It will collapse.

Wasn't the government devaluing (stealing) during the entire time that Browne advocated buying bonds? Why is today so different? Tax revenues are actually far lower than they were in the 70s and 80s.

I think you need to look beyond the quantity-of-money theory to explain inflation. I used to be a hardcore Austrian myself, but just couldn't find an explanation that didn't involve mental gymnastics for why the government has printed literally trillions for more than five years now, yet inflation is lower than it's been in decades, yet gold is exploding in value after failing to respond to much higher inflation rates in the 90s.

When you start putting yourself through mental gymnastics to support a theory that reality is stubbornly failing to bear out, there's probably an alternative explanation you hadn't considered.

[Gumby]

They buy the bonds by creating Yen. Supply of Yen goes up, price of Yen goes down. Yen holders lose, econ 1.0
That was my point.

You are speaking of the Quantity theory of money (i.e. Monetarism) — which they teach in fist-level econ. Monetarism is dead and QToM was pretty much disproven in the 1930s. No respected economists believe in Monetarism or QToM any more — particularly in the short term. It oversimplified reality and couldn't explain the past two decades. Of course, pundits are well-adept at scaring people with QToM myths.

You think the central bank can create savings. You don't know what money is nor what savings are.

Well, get a dustpan ready, because you are about to have your economic world shattered.

[align=center]All money (except coins) comes from either public debt or private credit, period.[/align]

We live in a debt-based/credit-based monetary system. Even investment savings is a form of private credit. And the government's liability is the private (and foreign) sector's asset. All financial assets (except coins) are a form of debt. And the overwhelming majority of money in our world comes from banks issuing private credit.

It will help you tremendously if you learn about modern money before you argue with gold-standard logic.

See: http://pragcap.com/understanding-modern-monetary-system

We have a huge trade imbalance. What do you think that means?

It means we pay foreigners to make things for pieces of paper they can't easily spend.

Goods come in, dollars go out. More dollars go out every year, about 600 billion of them. Year after year after year. Do you think this will continue forever?

It can possibly happen for longer than you can stay solvent. That's all that matters.

What happens when it stops?

What happens when the sun stops burning? Nothing lasts "forever." Don't invest with an infinite timeline.

Do you believe foreigners will continue to subsidise American consumption forever?

Foreigners do not subsidise American consumption. That's a myth.

See: http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

Do you believe something can be created out of nothing?

I believe debt can be issued from nothing and swapped for dollars created out of thin air.

Do you believe the central bank can print purchasing power?

You aren't aware of this (yet), but the Fed does not print money from nothing. The Treasury issues debt and the Fed swaps it with the private sector. The Fed doesn't really print in the way you suggest. The Fed can only swap assets with the private sector — it doesn't do helicopter drops.

Do you think doubling the money supply will double the wealth? Do you think more FRNs mean we have more real savings?

You are arguing among myths.

Please read: http://pragcap.com/understanding-modern-monetary-system

Feel free to ask questions.

[MediumTex]

Kshartle,

If you believe that an inflationary spiral is inevitable, and since rising wages are a necessary ingredient for a true inflationary spiral, when do you think that these wage increases will start showing up in the U.S.?

[Kshartle]

Kshartle,

If you believe that an inflationary spiral is inevitable, and since rising wages are a necessary ingredient for a true inflationary spiral, when do you think that these wage increases will start showing up in the U.S.?

I don't believe it's inevitable.

[Kshartle]

I used to be a hardcore Austrian myself

I don't know what that means

[Pointedstick]

I used to be a hardcore Austrian myself

I don't know what that means

Sorry, shorthand for "Austrian economics." There's a lot of value in Austrian Economics, IMHO, but it never really dealt with the death of the gold standard and the monetary changes that it entailed.

[Kshartle]

Why do you think Gold has moved up so much in the last 12 years?

Negative real interest rates. If gold only responded to inflation, its dramatic movements with an inflation rate of 0-2% after a decade of falling in response to inflation rates of 3-6% would make no sense.

The five year averaged 4-5% from 2000-2008. Gold tripled. Were rates negative then?  If you believe that then you can't believe inflation has been 0-2%.  Which one is it?

[Kshartle]

Sorry, shorthand for "Austrian economics." There's a lot of value in Austrian Economics, IMHO, but it never really dealt with the death of the gold standard and the monetary changes that it entailed.

I've heard the term but I don't really know what it means.

[Pointedstick]

Why do you think Gold has moved up so much in the last 12 years?

Negative real interest rates. If gold only responded to inflation, its dramatic movements with an inflation rate of 0-2% after a decade of falling in response to inflation rates of 3-6% would make no sense.

The five year averaged 4-5% from 2000-2008. Gold tripled. Were rates negative then?  If you believe that then you can't believe inflation has been 0-2%.  Which one is it?

Check out Gosso's thread on this: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3

And Lawrence Summers' paper on the topic.

His conclusion was that above a real rate of 2% or so, gold was fairly inert, but as the real fate falls, and eventually ducks below 2% real, gold increases in attractiveness because basically the government is giving us a raw deal and not fairly compensating us for holding their paper. 2% real is his tipping point. The negative real rates that we have right now are below that.

[Gumby]

The five year averaged 4-5% from 2000-2008. Gold tripled. Were rates negative then?  If you believe that then you can't believe inflation has been 0-2%.  Which one is it?

Gold is bought/sold on a world market. In general, nobody knows exactly what motivates billions of Chinese and Indian citizens to buy so much gold. As these countries develop, they have tended to buy more gold.

[MediumTex]

Kshartle,

If you believe that an inflationary spiral is inevitable, and since rising wages are a necessary ingredient for a true inflationary spiral, when do you think that these wage increases will start showing up in the U.S.?

I don't believe it's inevitable.

How do you have inflation as a result of currency devaluation that doesn't reach across the entire economy?

It's inconceivable to me that the prices of everything people buy would be rising rapidly and there would be no increase at all in wages.  IMHO, without wages increasing in tandem with prices, price increases will rapidly outpace consumers' ability to pay them and demand will simply dry up, which places strong downward pressure on prices.

In the 1970s, workers enjoyed strong wage gains throughout the decade.  The wage gains didn't keep up with inflation, but they were still nice wage gains.

In a currency devaluation scenario, the price of everything goes up, including the price of labor.  I don't see any evidence that we are in that kind of situation right now.  Do you?

[Gumby]

Sorry, shorthand for "Austrian economics." There's a lot of value in Austrian Economics, IMHO, but it never really dealt with the death of the gold standard and the monetary changes that it entailed.

I've heard the term but I don't really know what it means.

Didn't they teach that in "Econ 1.0"?

Not sure you want to tell people they "don't know what money is" when you don't know what Austrian Economics is.

[Kshartle]

Well, get a dustpan ready, because you are about to have your economic world shattered.

That is awesome

[Gumby]

Well, get a dustpan ready, because you are about to have your economic world shattered.

That is awesome

If it makes you feel any better. My economic world was shattered a little over a year ago. The world hasn't looked the same since. I used to be where you are now.