Kshartle wrote:I just said the US government is at the point where it can only afford negative real interest rates. That means real losses to bondholders even if they don't lose nominally.
What do you mean by "afford"? There is no issue of solvency (other than inflation).
I mean the US cannot pay rates above the inflation rate. If the rates go up the inflation has to go up. Of course it's a slovency issue. If they don't inflate they won't be able to pay (my opinion). That's what we've been talking about for 100 posts. I've asked the question to the board about 50 times now if anyone thinks the government can keep paying without inflation. I don't think anyone has said yes yet. It seems like everyone keeps saying they can pay because they can print. Well.......that's my point. I believe the currency will continue to fall in value. Does anyone disagree with that? I believe if the currency doesn't fall in value the government won't be able to pay.
What are you thinking that the value of the currency will fall in relation to?
Other currencies?
The value of goods and services?
The value of labor?
The value of something else?
If it's true that ALL modern currencies are sort of Ponzi-like in that they are premised on near-perpetual expansions of debt, why is one any worse than another?
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
If long term treasuries are such a bad investment, why do you think that so many institutions continue to purchase them? Even if you assume that the Fed buys a lot of the debt, a lot more is being absorbed into the market.
Once you have identified the other non-Fed buyers of the debt, what is the probability that they will stop buying it, regardless of what rates happen to be?
In the context of the PP, if the relationships among the PP assets maintain their historical correlations, who cares if long term treasuries lose value if the overall portfolio still does just fine, as it did in the 1970s.
If you had set up your PP in 2008 by leaving out long term treasuries, it would have been a much bumpier ride. Would you have wanted that? I like the smooth and easy ride of the PP myself.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
Gumby wrote:
What do you mean by "afford"? There is no issue of solvency (other than inflation).
I mean the US cannot pay rates above the inflation rate. If the rates go up the inflation has to go up. Of course it's a slovency issue. If they don't inflate they won't be able to pay (my opinion). That's what we've been talking about for 100 posts. I've asked the question to the board about 50 times now if anyone thinks the government can keep paying without inflation. I don't think anyone has said yes yet. It seems like everyone keeps saying they can pay because they can print. Well.......that's my point. I believe the currency will continue to fall in value. Does anyone disagree with that? I believe if the currency doesn't fall in value the government won't be able to pay.
What are you thinking that the value of the currency will fall in relation to?
Other currencies? Possibly
The value of goods and services? Yes
The value of labor? Possibly
The value of something else? Yes, gold and stocks
If it's true that ALL modern currencies are sort of Ponzi-like in that they are premised on near-perpetual expansions of debt, why is one any worse than another? The one that is more likely to be inflated is worse to hold. The one that is issued by the debter nations are more likely to get inflated. A good modern example is the US. It's fallen about 300% against the Yen since '71, about 300% against the Swissy since then and about 100% against even the Euro since '98 or so.
When thinking about the type of entity that the U.S. government is, think of it as follows:
The entire world is an Italian neighborhood. The U.S. government is an intelligent and well-connected member of the community with a desire for power and a tendency toward violence. Instead of the U.S., let's call it "Vinny." Vinny goes from door to door and tells each member of the community that he will provide "protection" from anyone else in the community that might harm them in exchange for one-third of the economic output of each person and business in the neighborhood.
Occasionally, a member of the community will attempt to opt out of Vinny's arrangement, but Vinny has small remote controlled planes that patrol the neighborhood, and such people are dealt with by these remote controlled weapons in short order.
At some point, Vinny figures out that his accounting would be a lot easier if he was the issuer of the money used in the neighborhood. Thus, he prints up several million dollars worth of "Vinny-Backs", which he gradually brings into circulation through his own extravagant spending, and because he only accepts his one-third tribute in the form of Vinny-Backs, everyone is always wanting them. He also makes a rule that contracts are only enforceable if payments under the terms of the contract are in Vinny-Backs.
Under such an arrangement, what is the probability that Vinny would ever default on any debt that he may owe to any member of the community? Sure he could default if he wanted to, but why would he since the effect of his default on Vinny-Bonds would just clog up the process of him collecting his economic tribute from the neighborhood.
Since Vinny has the biggest guns and is the best fighter in the neighborhood, no one will attempt to displace his "protection" racket, and thus Vinny's position should actually be pretty stable for the short to medium term. Over time, people would adjust their affairs to account for Vinny and his eccentricities, and eventually they might mostly forget about him and simply pay the tribute and take advantage of his protection services when they are occasionally needed in conjunction with a business or other type of dispute.
When thinking about Vinny, what is the ultimate source of his power? Is it the Vinny-Backs he prints? Is it the Vinny-Bonds he issues? No, it's the force that he controls in the community and the fact that he gets to decide when it is used. All power flows from the agent in society who is able to obtain a monopoly on the use of force. Right now, the U.S. has done a pretty good job of gaining an international monopoly on the use of force, and this is the basis for the power exercised in other areas by the U.S., including the issuance of dollars and treasury debt, and it should come as no surprise to anyone that the U.S. has the number one currency and number one bond market in the world.
These positions are far from unstable or fleeting. You show me a country that has the largest economy in the world, the largest bond market in the world, vast natural resource deposits, vast productive capacity, the largest military in the world, and a popular culture saturated with violence (especially toward outsiders that are disliked), and I will show you a very dangerous and formidable country that is in a very strong position to maintain economic dominance for as long as it chooses to.
That's what the rest of the world sees when it looks at the U.S. For whatever reason, many American want to see all the flaws in the U.S. without seeing all of the enormous and durable strengths that got us where we are in the first place.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
Kshartle wrote:
If it's true that ALL modern currencies are sort of Ponzi-like in that they are premised on near-perpetual expansions of debt, why is one any worse than another? The one that is more likely to be inflated is worse to hold. The one that is issued by the debter nations are more likely to get inflated. A good modern example is the US. It's fallen about 300% against the Yen since '71, about 300% against the Swissy since then and about 100% against even the Euro since '98 or so.
How are you defining debtor nations? I would think that Japan would be considered the worst debtor nation in the world (they certainly appear to have the most risk if you judge by their sovereign debt load), and yet the yen has remained very strong in recent years compared to other world currencies.
In a large modern first world economy, how much do you think that interest rates are influenced by monetary and fiscal policy? I would suggest that interest rates are not really affected that much by those things (note that interest rates had been falling for 25 years before Bernanke even became Fed chairman).
What drives interest rates IMHO is more whether the economy is contracting or expanding and what expectations are with respect to future economic expansion or contraction. I would say that the Fed's meddling has possibly pushed down interest rates on long term bonds by perhaps 25-50 basis points, but probably not much more. What is happening in the U.S. is happening in Japan, Germany and the U.K., just to name a few. There is something more going on here than just central bank meddling. It's a bigger and longer term trend and is driven in part by demographic shifts and in part by the fallout from the popping of an international asset bubble (which WAS facilitated, in part, by short-sighted central bank policies).
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
If long term treasuries are such a bad investment, why do you think that so many institutions continue to purchase them? Even if you assume that the Fed buys a lot of the debt, a lot more is being absorbed into the market. This is a great question and there are no doubt many different reasons why different players are buying. Some on this board are buying because they believe they are made safer. Some are buying because their funds require it. Foreign central banks are buying to maintain pegs. None of the buying is justification for the investment though. That's like saying if houses are such a bad investment in 2006, why are there so many buyers. Or if tech stocks are such a bad investment in '99, why are there so many buyers?
Once you have identified the other non-Fed buyers of the debt, what is the probability that they will stop buying it, regardless of what rates happen to be? I can't say what the probability is. I can say that as the rates move more negative they are less likely to buy. The more that is issued the less attractive it becomes. It will become increasingly less attractive to rational investors of which the FED is not.
In the context of the PP, if the relationships among the PP assets maintain their historical correlations, who cares if long term treasuries lose value if the overall portfolio still does just fine, as it did in the 1970s. If the 70s repeat then the treasuries will be a big drag. I believe the correlations will hold up and the relative values will diverge greatly. I expect a lot of rebalancing INTO treasuries after portfolio gains not out of them after losses in gold and stocks.
If you had set up your PP in 2008 by leaving out long term treasuries, it would have been a much bumpier ride. Would you have wanted that? I like the smooth and easy ride of the PP myself. Definately not. I wish I had bought zero coupon treasuries on margin in 2008. I would like a smooth easy ride up for the purchasing power of my investments. I think the cash and treasuries will not permit that. I'm not concerned with the nominal value as much.
Personally, I hope for a deflationary collapse, even if it means the nominal value of my investments goes down. The economy needs to re-structure rather than lurch along like Japan has been doing for decades or stagflation or hyperinflation which would be the worst. Those look like the options at this point before we have prosperity again. The people are at the mercy of the government and central bank.
Also if the bondholders get creamed in an outright default they might be less likely to loan a pariah like the government their money to help impose more regulations on them and invade more countries. They might demand credit worthiness. We might get a better world. I'm not holding my breath.
Kshartle wrote:
Personally, I hope for a deflationary collapse, even if it means the nominal value of my investments goes down. The economy needs to re-structure rather than lurch along like Japan has been doing for decades or stagflation or hyperinflation which would be the worst. Those look like the options at this point before we have prosperity again. The people are at the mercy of the government and central bank.
Also if the bondholders get creamed in an outright default they might be less likely to loan a pariah like the government their money to help impose more regulations on them and invade more countries. They might demand credit worthiness. We might get a better world. I'm not holding my breath.
Were you serious when you said you didn't know what "Austrian Economics" was referring to?
What you are describing is a pretty standard Austrian economist's prescription for fixing an economy damaged by the bursting of a credit fueled asset bubble.
The problem is, what starts off as a desire to simply purge bad debts from the system can become a deflationary spiral in which bad debts simply create more bad debts.
Irving Fisher wrote "The Debt Deflation Theory of Great Depressions" in which he argues pretty convincingly that simply allowing debts to default doesn't necessarily have any logical stopping point, and for that reason might be an outcome that we would seek to avoid.
Gumby wrote:
Note: This cannot be unseen and might lead to a different perspective, and possible brain re-wiring.
Oil was under 3,000 yen per barrell in '96. It's now about 9,000 yen.
I'm trying to find the price of rice hah! Throw cotton for clothing in there and maybe medical costs and you've food, energy, health care and clothing. Anyone want to help? The chart shows consumer prices flat in the land of the rising sun for 16+ years. Actually maybe even go back to '95 or '94.
I bet the Japanese government have the same "sophisticated" method of measuring inflation. Japanese have a 33% tax rate for those making 100k US or more. That's a good chunk of the country (high per capita income). After paying taxes on thier pitiful interest I don't think the the ones saving in Yen have done very well. Rates on the 10 year were 6% in '90 and have never gotten higher. They've been below that since 2000. After taxes have they even been breaking even?
My point is a lot of people are hoing the US can muddle along like Japan and if I was 60-70 I would hope for a lost decade like that as the best case scenario too. They interventions have not helped them. They are worse off than they were in 1990, looking totally screwed.
Kshartle wrote:
My point is a lot of people are hoing the US can muddle along like Japan and if I was 60-70 I would hope for a lost decade like that as the best case scenario too. They interventions have not helped them. They are worse off than they were in 1990, looking totally screwed.
I don't think that any of us are arguing for more central bank intervention in the economy.
Rather, we are simply recognizing the the central bank DOES intervene in the economy, and you need to protect yourself against this risk, and the PP does a pretty good job of providing that protection.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
This paper makes a pretty good argument that inflation has already been happening, and that real interest rates have been negative for quite some time; possibly since the mid 90s. Additionally, growth is over-reported, while unemployment and inflation are under-reported.
It's a great read, full of data and sprinkled with dry wit. Wasn't sure if this thread was the best place to post it, but it seems relevant.
(As far as this relates to the PP, I am more sure with each passing day that I want to buy gold -- the tangible kind. I have some IAU in my 401(k), but that is not really doing enough for me, as far as helping me to sleep at night.)
Kshartle wrote:Oil was under 3,000 yen per barrell in '96. It's now about 9,000 yen.
Nice try. No way Japan's consumption of oil caused that price hike. The country is the size of California and their demand has not significantly increased during that time. If anything their demand for oil decreased over those years as their economy was stagnant. That price hike is almost entirely due to oil demand from emerging nations and regional instability around oil producing nations. That's one of the reasons why oil/energy is excluded from consumer prices. Monetary policy responses would be too volatile if central banks tried to counteract every blip from exogenous situations that were out of their control.
Kshartle wrote:I'm trying to find the price of rice hah! Throw cotton for clothing in there and maybe medical costs and you've food, energy, health care and clothing. Anyone want to help? The chart shows consumer prices flat in the land of the rising sun for 16+ years. Actually maybe even go back to '95 or '94.
See real estate in Japan during that time. Your mind will melt.
Kshartle wrote:I bet the Japanese government have the same "sophisticated" method of measuring inflation.
Hope you aren't one of those kooks who thinks ShadowStats is real. The official inflation numbers match a wide range of third-party inflation tracking — including the entire bond market.
Kshartle wrote:Japanese have a 33% tax rate for those making 100k US or more. That's a good chunk of the country (high per capita income). After paying taxes on thier pitiful interest I don't think the the ones saving in Yen have done very well.
You really need to take the time to read that first paper — carefully. Taxing the private sector reduces the private sector's net financial assets. So, if anything, a statement like that implies that too much money is leaving the private sector — which doesn't sound very inflationary by your own definition.
Kshartle wrote:Rates on the 10 year were 6% in '90 and have never gotten higher. They've been below that since 2000. After taxes have they even been breaking even?
Not even sure what you are arguing at this point. A few seconds ago you were trying to convince us that there was actually inflation in Japan all these years. Now you're saying people have lost their savings to high taxes. Those statements are contradictory.
Please read the first paper already.
Last edited by Gumby on Thu Feb 07, 2013 10:40 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Xtal wrote:This paper makes a pretty good argument that inflation has already been happening, and that real interest rates have been negative for quite some time; possibly since the mid 90s. Additionally, growth is over-reported, while unemployment and inflation are under-reported.
I guess a firm can argue anything if they include enough scary pictures of crumbling ancient civilizations in their brochure report.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
I found the pictures rather lovely to look at. At any rate, the report seems plausible and densely-argued, and doesn't seem to be overtly selling anything. If you disagree with it, that's fine, but I found its arguments to be fairly sound.
(Incidentally, dismissing one of your interlocutors by lumping them in with "kooks" in a classic ad hominem doesn't exactly strengthen your position.)
Xtal wrote:(Incidentally, dismissing one of your interlocutors by lumping them in with "kooks" in a classic ad hominem doesn't exactly strengthen your position.)
Nor does creating a new puppet username, kshartle.
Last edited by Gumby on Thu Feb 07, 2013 11:18 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Xtal wrote:(Incidentally, dismissing one of your interlocutors by lumping them in with "kooks" in a classic ad hominem doesn't exactly strengthen your position.)
Nor does creating a new puppet username, kshartle.
I don't think that's what's happening. Probably best to stick to the facts; they're your strongest hand.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
Kshartle wrote:
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.
Sorry, I meant the "smart money", especially those that use naive diversification strategies such as the PP. But even a broken clock gets tired of being wrong 22 hours a day and eventually adapts.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Please note that gold collapsed 50% in 1975-1976 as real rates went up on an economic recovery. Even the expectations or fear of real rates rising can be enough to get the collapse started. Right now thats the case with nominal yields rising and inflation staying fixed or decreasing, pushing real rates higher, so gold is a sucky investment in USD at the moment.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Kshartle wrote:
Here's a quote I agree with "Therefore, government has an incentive to promote productive output and maintain sound stewardship of its currency. Otherwise, they risk devaluing the currency and possibly threaten the stability of their currency system. Paying its citizens to sit at home doing nothing, buy cars they don’t need or purchase homes they can’t afford are unproductive forms of spending that are likely to turn a nation of producers AND consumers into a nation of consumers. If government is corrupt in its spending and becomes an institution that is mismanaged and detracts from the private sector’s potential prosperity then it is only right that the citizens revolt, denounce the nation’s currency and demand change."
That reminds me of the MR debates I had with Gumby last year, where I said:
INFLATION = ( GOVERNMENT SPENDING + CHANGE IN VELOCITY ) - PRODUCTIVITY
Take note that I've said over and over it is UNPRODUCTIVE government spending, not spending per se, that causes inflation. War -- an extreme version of the Broken Windows Fallacy -- is an example. Look at Iran's hyperinflation right now: holding government spending constant, it has an increasing change in velocity as people dump their money along with declining productivity as imports and costs rise by the hour, hence inflation of the existing supply of money previously spent into existence by the government. This is all in accord with MMR (and probably some parts of MMT?). So my point has nothing to do with the QUANTITY of money nor am I alleging Monetarism.
It seems that since that time, some of the MR leaders have graduated from the taxing power basis to a productivity basis to explain why people accept political, debt-based, fiat money as a medium-of-exchange and for savings.
The only remaning question in my mind is: can inflation manifest in the general price level without wage-push inflation and is wage-push inflation inherently unproductive? We will find out by the end of the decade whether this Keynesian tenant is really solid gold or not. The equilibrium theory that is the foundation of finance suggests it is not necessary as people will drive up prices anyway to compensate for depreciated purchasing power.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
MediumTex wrote:
Occasionally, a member of the community will attempt to opt out of Vinny's arrangement, but Vinny has small remote controlled planes that patrol the neighborhood, and such people are dealt with by these remote controlled weapons in short order.
Illegal tax protestors! Orwell would be proud.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
MachineGhost wrote:It seems that since that time, some of the MR leaders have graduated from the taxing power basis to a productivity basis to explain why people accept political, debt-based, fiat money as a medium-of-exchange and for savings.
I agree. They changed opinions from functional MMT as they began to refine MR.
I generally think taxes play some psychological roles (i.e. a sense of holding government "accountable" to its taxpayers, and giving the currency some legitimacy), but it's hard to quantify that psychology.
Last edited by Gumby on Fri Feb 08, 2013 6:53 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Seriously Gumby (if that even is your real name!) somebody should be able disagree with you without you getting paranoid. I'm sure I'm not the only person who disagrees with your opinion on US gov't debt and inflation.
It's not that contraversial a position:
A. I believe inflation is significantly higher than the government is reporting.
B. I believe the Central bank will continue expanding the money-supply until there is a real dollar crisis then will start raising rates (or the market will force them up)
C. The US government will be unable to service it's debt without additional inflation.
D. Long-term bondholders are sure to lose purchasing power over time because real rates with either be negative or the Government will write off some of it's debt through a partial re-structuring. (This might only apply to foriegn bonholders or the very wealthy where it is politically palatable, either way rates are gonna go up as investors recognize the creditworthiness of the US is not AAA, it's more like junk)
