"Full Faith & Credit" when the inmates take over the asylum

[Kshartle]

Tech,

You might want to tell that to the savers you claim that the fed is punishing by "monetizing the debt."  They really won't like a banking collapse.

There is no painless way out of this. And those savers would be even more unhappy with a worthless currency and all private capital consumed to feed the raging government monster.

Do you know what it was like in Weimar Germany? Is that really what you want?

The point is they think there's a way out without the pain. They don't believe that the debts have to be defaulted or inflated away we can keep going indefinately. Japan is cited as an example of sustaining this endless debt and inflation but the differences are never addressed.

Rising interest rates will expose the insolvencies. To keep them down perpetually requires endless printing. As the economy declines thanks to government intervention the deficits will grow and need to be replaced with more printing. Eventually it's defaults and bank failures or massive expansion of the money supply to inflate the debts away.

As I've been saying let's hope it's the first one.

[Libertarian666]

Tech,

You might want to tell that to the savers you claim that the fed is punishing by "monetizing the debt."  They really won't like a banking collapse.

There is no painless way out of this. And those savers would be even more unhappy with a worthless currency and all private capital consumed to feed the raging government monster.

Do you know what it was like in Weimar Germany? Is that really what you want?

The point is they think there's a way out without the pain. They don't believe that the debts have to be defaulted or inflated away we can keep going indefinately. Japan is cited as an example of sustaining this endless debt and inflation but the differences are never addressed.

Rising interest rates will expose the insolvencies. To keep them down perpetually requires endless printing. As the economy declines thanks to government intervention the deficits will grow and need to be replaced with more printing. Eventually it's defaults and bank failures or massive expansion of the money supply to inflate the debts away.

As I've been saying let's hope it's the first one.

Yes, exactly.

[Gumby]

Rising interest rates will expose the insolvencies. To keep them down perpetually requires endless printing.

As private credit expands, and the economy picks up, the Fed will want to raise rates to slow private credit down.

Japan is cited as an example of sustaining this endless debt and inflation but the differences are never addressed.

We've addressed them before. Lots of similarities. Not as many differences as you might imagine. Feel free to discuss if you like.

[Kshartle]

Rising interest rates will expose the insolvencies. To keep them down perpetually requires endless printing.

As private credit expands, the Fed will likely want to raise rates to slow private credit down.

Yes where will the money come from to pay the hundreds of billions of additional interest expense the government has to pay?

Where will the money come from to pay the interest on the debts that publically traded companies have taken on to buy back their shares?

What will happen to the so-called housing recovery when rising rates make buying impossible for millions?

What will happen to the banks that are holding mortgages and bonds on their balance sheets as assets?

Where will they get the money to pay interest to depositors? From the 10 year government bonds they bought at 2% or the MBS they hold at 4%?

[Gumby]

Yes where will the money come from to pay the hundreds of billions of additional interest expense the government has to pay?

We are fiat. It's not an issue. We just issue more debt.

Where will the money come from to pay the interest on the debts that publically traded companies have taken on to buy back their shares?

Huh?

What will happen to the so-called housing recovery when rising rates make buying impossible for millions?

Rising rates implies a bubble and recovered economy. Rising rates would stifle it.

What will happen to the banks that are holding mortgages and bonds on their balance sheets as assets?

RIsing rates implies an overheated market. It will dampen that overheated market.

Where will they get the money to pay interest to depositors? From the 10 year government bonds they bought at 2% or the MBS they hold at 4%?

From increased Treasury rates.

[Kshartle]

In 2007 the rising rates popped the housing bubble and exposed the insolvency of many institutions. Some of them have shed some debt, others are more indebted. The government and central bank purchased trillions in debts that will never be repaid. There is a debt explosion. The assets people think they have (T-bonds included) will not be the safe havens they thought they were.

Either they will lose to inflation or rising rates or in many cases (likely not treasuries) outright default. To avoid it I think the government will have to shed the dependant classes, reign in the empire and sell assets.

We'll see.

The only bonds I would hold now are treasuries or something not in dollars, Euros, pounds or Yen.

[Pointedstick]

Yes where will the money come from to pay the hundreds of billions of additional interest expense the government has to pay?

They will print it.

Where will the money come from to pay the interest on the debts that publically traded companies have taken on to buy back their shares?

Why would companies do that?

What will happen to the so-called housing recovery when rising rates make buying impossible for millions?

Prices will fall.

What will happen to the banks that are holding mortgages and bonds on their balance sheets as assets?

Probably more debt will be defaulted on, and they will make more money on the debt that people don't default on.

Where will they get the money to pay interest to depositors? From the 10 year government bonds they bought at 2% or the MBS they hold at 4%?

They will create it out of thin air.

[Kshartle]

Where will they get the money to pay interest to depositors? From the 10 year government bonds they bought at 2% or the MBS they hold at 4%?

By issuing more unstable private credit. I never said it would end well.

The deposits are credit. People are loaning their money to the bank like a bond. The bonds are more expensive not less.

If the bank is paying out more than it's taking in.......it's sunk.

[Gumby]

Where will they get the money to pay interest to depositors? From the 10 year government bonds they bought at 2% or the MBS they hold at 4%?

By issuing more unstable private credit. I never said it would end well.

The deposits are credit. People are loaning their money to the bank like a bond. The bonds are more expensive not less.

If the bank is paying out more than it's taking in.......it's sunk.

Sorry I misunderstood you. I thought you were talking about companies paying interest. Banks get the money to pay interest from Treasuries and FFR and IOR, loans, issuing credit, making profits, etc.

[moda0306]

Why should there be pain?  For the most part, we have an amazingly productive economy.

This is one areas Austrians seem stuck in some neverland.  They just KNOW we should all have to go through pain, and that we're all bankrupt and just deferring it.

The thing is, debts aren't one-sided, nor are they that unhealthy.  There are two sides to debt.  In net, debt is neither an asset or liability.  It nets to zero.  You can be a tool to failitate the creation of wealth, but in the end it is just that... a tool that nets to zero direct intrinsic value.  There is no reason that it should be some kind of massive burden to the macro-economy, because one person's burden is another one's benefit.

Yet we're still asked to believe that we just HAVE to suffer, because some people collect social security and others rely on government support or bought flat TV's that they can't afford, we should all end up in some sort of economic Mexican Standoff.

We don't all need to suffer.  We live in an amazinly productive world, and anything ever demanded had to be supplied by someone else, so we can't be "living beyond our means" as a whole.  We supply and demand everything we consume as a world, and as a county, to the extent we consume more than we supply, we have a foreign country accepting the terms of our financial system.

[Gumby]

In 2007 the rising rates popped the housing bubble and exposed the insolvency of many institutions. Some of them have shed some debt, others are more indebted. The government and central bank purchased trillions in debts that will never be repaid. There is a debt explosion.

You are describing the fragility of private credit. You are stating the obvious. And we've been telling you that private credit is unstable for quite awhile. We all agree that private credit is unstable. But, it is the largest segment of our purchasing power and, hey, at least it's created by private entities (i.e. not the government) in an open market. As Ray Dalio pointed out, it's the most important part of the economy. Government spending pales in comparison.

Private credit runs in boom/bust cycles because of its unstable nature. Always has. Always will. (Or at least until private credit completely breaks down and a revolt brings the government down with it!).

The assets people think they have (T-bonds included) will not be the safe havens they thought they were.

Well, now you aren't making sense anymore. If private credit markets are toast, Treasuries will be the only safe haven for dollars. There won't be any other choice!

Either they will lose to inflation or rising rates or in many cases (likely not treasuries) outright default.

This is why your inability to grasp the sheer size of private credit is hindering you. If private credit markets are toast, that would mean a severe deflation and a significant destruction of purchasing power. Not inflation.

You are describing private credit cycles and you don't even know it! Credit bubbles form and pop (just like Ray Dalio described). Boom and bust. Rinse and repeat.

To avoid it I think the government will have to shed the dependant classes, reign in the empire and sell assets.

Why would a fiat government sell anything? Money is useless to a fiat government. It can neither be rich or poor in terms of its own fiat currency. That would be like a football stadium selling doorways to fund the points it awards to teams. It's nonsensical.

[Gumby]

KShartle,

Honestly not trying to be rude, but I've gotta say, you are asking a lot of questions about things that you should have learned as a "Finance major". It feels like you are just beginning to learn about private credit markets, private credit cycles, where banks get interest from and where the government finds the reserves to fulfill auctions, IOR, FFR, etc. I don't understand how you don't know this already! (I'm genuinely confused, not trying to be rude). If you were a finance major pre-1980, then your confusion might make some sense — there were lots of monetarist professors back then and private credit was much smaller than it is today. Otherwise, I'm genuinely confused as to why you don't know these mechanics.

We are all happy to answer these questions for you, but if you are a Finance major, and studied all this, I'd think you would more than interested to learn more about these mechanics in your own time before slinging unfounded myths around about dollar crashes that are only backed up by obsolete Monetarist theories that have never been proven.

[Mdraf]

  For the most part, we have an amazingly productive economy.

While it is still good it is getting worse, and compared to other countries - much worse.

[moda0306]

Mdraf,

I'm not saying the U.S. is in a perfect postion, but our productive potential is staggering.

So is your solution to our relative lack of productivity compared to these other countries really to slash government?

It seems to me that those competing countries have something else to say about whether government involvement in education, healthcare, regulation, etc aids productivity.

[Mdraf]

Not sure moda but we should take a look at what Sweden, Austria and Germany are doing. Anyone know what's happening there to account for for their trend-bucking?

[Mdraf]

And...MT and others who claim helicoptering has not harmed Japan....this graph came in as a bonus

[moda0306]

Mdraf,

There are probably some positive cultural elements those countries and goodinvestment decisions they have made, but at the very least I see no indication that government spending or a robust welfare state is at the heart of productivity problems.

And regarding Japan, the standard line by Austrians is that helcoptering creates inflation and artificial booms, not deflation and stangant GDP.  if anything, this shows that "helecopter dropping" isn't nearly as inflationary or expansionary as we might believe, if the conditions are correct.

Trust me, you really don't want to invoke Japan in a debate about the damage of high debt levels and "artificially low" interest rates.

[Gumby]

And...MT and others who claim helicoptering has not harmed Japan....this graph came in as a bonus

You sure it doesn't have something to do with the fact that a huge majority of the population is aging and getting too old to work? I think it does. I bet the enormous Earthquake and nuclear meltdown probably didn't help much either.

You can't blame everything on printing.

[Libertarian666]

Not sure moda but we should take a look at what Sweden, Austria and Germany are doing. Anyone know what's happening there to account for for their trend-bucking?

Here is one difference:

Tax revenues as percentage of GDP (per Heritage Foundation)

Austria  43.4
Germany  40.6
Sweden 45.8
U.S. 26.9

Not sure if this accounts for the difference, obviously.

How about spending as a % of GDP? Since the US is currently spending about 50% more than it taxes, that would be a lot closer.

[Kshartle]

KShartle,

Honestly not trying to be rude, but I've gotta say, you are asking a lot of questions about things that you should have learned as a "Finance major". It feels like you are just beginning to learn about private credit markets, private credit cycles, where banks get interest from and where the government finds the reserves to fulfill auctions, IOR, FFR, etc. I don't understand how you don't know this already! (I'm genuinely confused, not trying to be rude). If you were a finance major pre-1980, then your confusion might make some sense — there were lots of monetarist professors back then and private credit was much smaller than it is today. Otherwise, I'm genuinely confused as to why you don't know these mechanics.

We are all happy to answer these questions for you, but if you are a Finance major, and studied all this, I'd think you would more than interested to learn more about these mechanics in your own time before slinging unfounded myths around about dollar crashes that are only backed up by obsolete Monetarist theories that have never been proven.

I appreciate the concern. I ask to try and get you to think about consequences and effects. I've been unable to teach you economics so I'm trying get you to work through things by asking questions of you. I'm practicing my ability to teach but some are unteachable. The point is I'm trying to ask you questions about your beliefs until you start saying such absurd statements that it becomes obvious to you that your thinking is screwed up. It's proven impossible. You believe the government can mint a platinum coin and actually solve problems with it.

You just said:

"Private credit runs in boom/bust cycles because of its unstable nature."

You have no idea why because you don't understand what causes the cycles. You think it's just a force of nature (unstable nature). It comes from artificially low interest rates and government guarantees that distort the credit market, not the nature of private credit. There is no private credit market when the money supply and interest rates are controlled or manipulated for political purpose.

"Treasuries will be the only safe haven for dollars"

There is no safe haven for dollars when inflation is raging. Default through inflation vs. Outright is a distinction without a difference.

Why would a fiat government sell anything? Money is useless to a fiat government.

The government buys stuff with money. That's how it pays its soldiers, taxman, everyone. If they wreck the paper they sow their own destruction. You don't get this. People don't work for free, it's not a charity. If they have crushing debts and rates rise they can't escape by printing, they need to sell assets and cut spending.

You seem to believe in economic magic. I ask you questions, as simple as I can think of to help you to think about how absurd these beliefs are when you chop them into bite-size pieces. The response is usually a topic change, stating something obvious and irrelevant or something nonsensical.

No need to close the thread I'm not going to pursue this. It's not a good use of my time.

[Gumby]

I appreciate the concern. I ask to try and get you to think about consequences and effects. I've been unable to teach you economics so I'm trying get you to work through things by asking questions of you. I'm practicing my ability to teach but some are unteachable.

I don't buy it. What are you teaching? Monetarism? It's not "economics". You seem completely confused by the mechanics of our monetary system. I also find it incredulous that, as a "finance major", you had never even heard of Ray Dalio. To be a student of finance and to not know the most influential people in finance — and only get your lessons from Peter Schiff-types — is mind boggling. It shows a huge lack of willingness to learn anything beyond your comfort zone.

"Private credit runs in boom/bust cycles because of its unstable nature."

You have no idea why because you don't understand what causes the cycles.

Sure I do. It was explained in Ray Dalio's video — which you have been unable to refute.

"Treasuries will be the only safe haven for dollars"

There is no safe haven for dollars when inflation is raging. Default through inflation vs. Outright is a distinction without a difference.

We were talking about a collapse in private credit — which is the definition of deflation. You should have learned that as a "finance major". How do you not understand that simple concept?

If they have crushing debts and rates rise they can't escape by printing, they need to sell assets and cut spending.

Why would rates rise while they are still spending on stimulus? Rising rates implies an overheated economy. You offer no evidence whatsoever to support what you are saying. Surely a "finance major" can support his statements with something besides fear mongering?

You seem to believe in economic magic.

The MR description of the system lines up almost perfectly with Ray Dalio's. Still waiting for you to dismantle that video. You've failed miserably at that.

Come on, "finance". Show us you actually went to some of your classes and tell us why one of the world's most successful Hedge fund manager is "absurd" and believes in "magic". 

[moda0306]

Gumby,

We almost had him converted! (who am I kidding... we didn't)  But regardless, no need to crank the snarkasm to 11.

I know I'm one to talk.  Just want to get us to the same page eventually, and we eventually got doodle, so I think anything's possible if we're willing to do this long enough.

[Gumby]

Gumby,

We almost had him converted! (who am I kidding... we didn't)  But regardless, no need to crank the snarkasm to 11.

I know I'm one to talk.  Just want to get us to the same page eventually, and we eventually got doodle, so I think anything's possible if we're willing to do this long enough.

Sorry, but when he tried to claim that his confusion and lack of understanding was him just playing dumb to "teach me economics" and that I'm "unteachable" I had to call his bluff. I don't believe it anymore. I feel like I'm talking to someone who is just learning these mechanics for the first time.

I totally understand that KShartle doesn't want to hear what I have to say, but if he really is a student of finance — and finds finance to be fascinating — you would think that he would be willing to listen to one of the world's most influential and successful hedge fund managers. So, I've asked KShartle, multiple times, to listen to and try to refute what Dalio has to say. If he can't do that, then there's nothing else to say.

[Mdraf]

<--Ray Dalio's video - This is how money works--> Correct up to this point <--Ray Dalio's video - Consequences of helicoptering without productivity-->  ignored by MR

[Gumby]

<--Ray Dalio's video - This is how money works--> Correct up to this point <--Ray Dalio's video - Consequences of helicoptering without productivity-->  ignored by MR

Correct. We agree. But where are we helicoptering beyond productivity?

Ray Dalio is talking about helicoptering to reflate a portion of the lost private credit — not helicoptering beyond productivity.