Is the PP designed to accomodate something unique in history - U.S. bankruptcy

[Pointedstick]

They do?  I can't find any examples in history where they did.  Wouldn't we still be on a gold standard if they were so successful at that task?

That's always the question I never get a satisfactory answer to.

Seems to me that governments just suspended their gold standards when they got in the way (usually of war spending) until they finally did away with the charade entirely.

The gold solidus was issued with the same weight and fineness for about 800 years by the Byzantine empire:
http://en.wikipedia.org/wiki/Byzantine_coinage

Exactly! It was issued by the Byzantine Empire. They issued it themselves. It didn't bind them because they controlled it. And I would posit that given Byzantine history, it wasn't really a big impediment to whatever military misadventures and domestic spending they wanted to engage in.

[Libertarian666]

That's always the question I never get a satisfactory answer to.

Seems to me that governments just suspended their gold standards when they got in the way (usually of war spending) until they finally did away with the charade entirely.

The gold solidus was issued with the same weight and fineness for about 800 years by the Byzantine empire:
http://en.wikipedia.org/wiki/Byzantine_coinage

Exactly! It was issued by the Byzantine Empire. They issued it themselves. It didn't bind them because they controlled it. And I would posit that given Byzantine history, it wasn't really a big impediment to whatever military misadventures and domestic spending they wanted to engage in.

I have no idea what you are talking about now. We were discussing gold standards vs. fiat paper. The solidus was a gold coin, not paper currency, and it remained the same for 800 years. During that time, the government that issued it would have been unable to spend more than they took in via degrading their currency, because they would have been unable to inflate.

[melveyr]

Maybe it's just me, but does it bother anyone else when people compare money under the mattress to gold or any other commodity over time?

Free floating fiat currencies issued by a government that possesses its own Treasury and CB have the interesting feature of being able to issue nominally risk free debt. This is the denominator that professionals use when evaluating performance investment performance, not money under the mattress. Telling me what money under the mattress would have done over a long period of time is meaningless. I find it much more interesting to see what the real returns of the ST nominally risk free debt have compounded over time. It isn't true for all nations, but the US central bank has been a decent steward and a portfolio of ST risk free debt has actually seen some growth in real terms from 1928 - present.

[Libertarian666]

Maybe it's just me, but does it bother anyone else when people compare money under the mattress to gold or any other commodity over time?

Free floating fiat currencies issued by a government that possesses its own Treasury and CB have the interesting feature of being able to issue nominally risk free debt. This is the denominator that professionals use when evaluating performance investment performance, not money under the mattress. Telling me what money under the mattress would have done over a long period of time is meaningless. I find it much more interesting to see what the real returns of the ST nominally risk free debt have compounded over time. It isn't true for all nations, but the US central bank has been a decent steward and a portfolio of ST risk free debt has actually seen some growth in real terms from 1928 - present.

Really? How interesting. Pray tell, what is the current value of $1 compounded since 1928 in ST "risk free" US debt? Don't forget to subtract relevant taxes, since for much of that time, there were no IRAs, etc.

[Pointedstick]

Libertarian666, would you mind toning the snark down a bit? We're all friends here.

[Libertarian666]

Libertarian666, would you mind toning the snark down a bit? We're all friends here.

Sorry, but where do you think I was being snarky? Saying I didn't understand the point you were making about the solidus, or asking for numbers on the US short term debt since 1928? I was perfectly serious in both those comments. Or was it something else?

I'm certainly not going to say I'm never snarky, but not in those comments...

[Xtal]

Libertarian666, would you mind toning the snark down a bit? We're all friends here.

Sorry, but where do you think I was being snarky? Saying I didn't understand the point you were making about the solidus, or asking for numbers on the US short term debt since 1928? I was perfectly serious in both those comments. Or was it something else?

I'm certainly not going to say I'm never snarky, but not in those comments...

Having just read this thread, I'm going to guess it's certain phrases that may not seem snarky to you if you're typing them quickly, but that may come off that way on a slower read-through.  Phrases such as "How interesting. Pray tell". 

/goes back to lurking.

[MediumTex]

/comes out to moderate

Let's all be friendly please.

The snark-o-meter may have just displayed a false positive signal.  That kind of thing happens with some of the older analog models.

[MachineGhost]

Yeah and from a practical perspective as a self-interested investor, I would hate going back to the gold standard. It would put shackles back on gold, giving us few tools to protect ourselves from inflation. From the 1940s until 1970s investors had a wide open flank, there were few practical tools to hedge against unexpected inflation. Other inflation hedges are much more cumbersome than gold. Gold is so easy to hoard while the other commodities have serious storage costs.

That's not necessarily true.  A lot of Americans sent what is now semi-numismatic gold coins overseas to escape the toothless confiscation order.  And silver was still legal.  In fact I inherited a bunch of very well-circulated Morgan and Peace silver dollars from my grandpappy.  There was also rare stamps, fine wine, art, timber, land, etc..  Muppets are resourceful, never underestimate them!

[MachineGhost]

Exactly! It was issued by the Byzantine Empire. They issued it themselves. It didn't bind them because they controlled it. And I would posit that given Byzantine history, it wasn't really a big impediment to whatever military misadventures and domestic spending they wanted to engage in.

And it wasn't a gold standard either.  The only thing ever approximating what the gold bugs romantically think of as the "gold standard" (out of many variations) was the short period under Napoleon when he actually instituted one across his empire.

[MachineGhost]

Really? How interesting. Pray tell, what is the current value of $1 compounded since 1928 in ST "risk free" US debt? Don't forget to subtract relevant taxes, since for much of that time, there were no IRAs, etc.

[align=center][/align]

Best Case:  2.25% per year
Middle:  0.71%
Worst Case:  -3.63%
(Real Worst Case, Germany -100%)

Guess where the USA is?  Hint: it's not green.  Germany is -100% due to imposed austerity destroying productivity and subsequently causing hyperinflation.  Ring a bell?  Yep, exactly what the weaker members of the EU are going through right now.  If you legally cannot metaphysically print your way out to pay back a bunch of metaphysical debt, it has very nasty real world consequences.  A constraint by a lumpy, shiny piece of metal is no different than a legal one.  Like a pressure cooker that will eventually blow, muppets will have to be fried crispy.

[Libertarian666]

Really? How interesting. Pray tell, what is the current value of $1 compounded since 1928 in ST "risk free" US debt? Don't forget to subtract relevant taxes, since for much of that time, there were no IRAs, etc.

[align=center][/align]

Best Case:  2.25% per year
Middle:  0.71%
Worst Case:  -3.63%
(Real Worst Case, Germany -100%)

Guess where the USA is?  Hint: it's not green.  Germany is -100% due to imposed austerity destroying productivity and subsequently causing hyperinflation.  Ring a bell?  Yep, exactly what the weaker members of the EU are going through right now.  If you legally cannot metaphysically print your way out to pay back a bunch of metaphysical debt, it has very nasty real world consequences.  A constraint by a lumpy, shiny piece of metal is no different than a legal one.  Like a pressure cooker that will eventually blow, muppets will have to be fried crispy.

Oh, I agree that the muppets will need to be fried. But the question was whether an "inert lump of metal" could outperform ST treasurys from 1928. That "inert lump of metal" called a $20 coin is now worth in the neighborhood of $1450 nominal dollars. How many nominal dollars would $20 invested at interest in 1928 be worth now? Less, I'll venture, but I'm willing to be proved wrong.

[MachineGhost]

Oh, I agree that the muppets will need to be fried. But the question was whether an "inert lump of metal" could outperform ST treasurys from 1928. That "inert lump of metal" called a $20 coin is now worth in the neighborhood of $1450 nominal dollars. How many nominal dollars would $20 invested at interest in 1928 be worth now? Less, I'll venture, but I'm willing to be proved wrong.

In the US, gold has earned a 0.84% real CAR since 1900, so on par with the median real T-Bill case out of 16 countries.  The tricky thing would have been to navigate the 1933 gold confiscation where you would have missed out on the upside capital gains due to the dollar devaluation.  So realistically, only since 1975 has gold been legal to own again, so:

Gold: 1.56% Real CAR
T-Bills: .28% Real CAR

[AgAuMoney]

In the US, gold has earned a 0.84% real CAR since 1900, so on par with the median real T-Bill case out of 16 countries.  The tricky thing would have been to navigate the 1933 gold confiscation where you would have missed out on the upside capital gains due to the dollar devaluation.

1933 wasn't the end of the world, just close.

The personal exemption was 5oz (or $100 pre-ban).  Additional exemptions for numismatic coins, for foreign trade or special exemptions for required use in one's occupation (e.g. dental gold by a dentist, etc).

In addition gold held out of the country wasn't subject to the byzantine maze of current regulations (FACTA, FBAR, KYC ...) so if it was there before the executive order, most likely it could have stayed there until you were ready to sell or until the legal situation changed.  (And if I remember correctly, it was legal to keep your gold outside the U.S. under the terms of the first executive order, but not later orders/laws.)

[systemskeptic]

"Is the PP designed to accomodate something unique in history - U.S. bankruptcy"

My opinion is that if such an event to occur, a paper based PP (VTI, TLT, SHY, GLD) would likely experience a 65-90% drawdown.  TLT/SHY would approach 0% in value, cutting the portfolio in half while VTI would likely drop 50-75% as the market reacts to a major crisis. 

Given such an extreme event, I cannot imagine people rushing out to buy another paper product such as GLD, so it would likely either trade at a large discount to the spot value of Physical Bullion, or in a worse case, get wiped out along with the dollar.

On the other hand, someone holding a physical based PP, (VTI, TLT, SHY, Physical Bullion) would probably come out with a NAV near, above, or greatly above what they had before the event, depending on what emerges/transpires in the absence of a dollar based system.

[samuraidog]

Sorry for digging up old bones, but this thread is very interesting and relevant to my current concerns.

Towards the end of last week, I watched the video in the thread below and it had me totally paranoid to the point where I couldn't sleep over the weekend with all these doomsday thoughts racing through my head.

http://gyroscopicinvesting.com/forum/go ... ube-video/

The video really struck a chord with me as I watched it, and it had me convinced that hyperinflation (SHTF scenario) will play out in the U.S. in the next decade. I was seriously considering dropping the PP and going more towards a 50% stocks/50% gold allocation.

Anyway, thanks to the responses in this thread, I've been able to calm down to some degree and I think I'll stay the PP course. Maybe the world as we know it isn't coming to an end after all.   

[Pointedstick]

If you think hyperinflation is coming, then the stock market is probably going to get demolished and you'll want closer to 100% gold. Personally if that was what I believed, my priorities would be withdrawing from the paper/electronic financial system, living in a strong neighborhood community, learning to make and store food, making my house off-griddy (e.g. produces its own electricity, has a well/sufficient rainwater catchment system, etc) and stuff like that.

But seriously, don't worry about it too much. There's always someone out there who wants to scare you; most of them are simply looking to profit off it.

[smurff]

So true.

[Gumby]

There's always someone out there who wants to scare you; most of them are simply looking to profit off it.

And most of them are still gladly willing to accept US dollars

That Mike Maloney guy, in that fear-mongering video, literally waits till the end of the video to tell you that he runs a gold and silver bullion dealership to sell precious metals for US dollars. He spends the whole video scaring people to dump their dollars and then he persuades people to send their dollars directly to him!

Beyond the fear-mongering and scare-tactics, he does raise a few good points in the video. But most of his statements are only supported by cherry-picked data and Monetarist theories that were debunked in the 1930s. So, his best arguments are fine for holding 25% gold, but that's about it. The collapse of the dollar is just one possible outcome that may or may not come true in our lifetime.

[WhiteDesert]

There's always someone out there who wants to scare you; most of them are simply looking to profit off it.

Quote of the week.

[rothbardian4life]

Benko, there's nothing bad about government spending per se so long as the productivity of the economy is monetized by it.  It's when there is an excess government spending beyond productivity capacity (among several other factors), that you have a serious problem.  All of the doom-porners don't realize we've already been in the exact situation they fear so much back in the 1970's and we survived it just fine.  They are just ignorant of history or are muppets.

I have to disagree with you here.  Things are much more different than they were in the 70's.  In the 70's there was much less govt debt, a smaller welfare state, a smaller financial sector as a whole, no ETFs in existence then, and it hadnt been that long since Nixon closed the gold window.  That one event in 1971 put the whole world on a fiat standard with the US dollar as reserve currency, and there has never been an experiment like this in all of history.  All money was commodity backed until then. 

I don't think it's fair to demean a certain group by name calling them doom-porners.  I myself am not a doom and gloom type, but it should be entirely logical that the US dollar will not remain the reserve currency forever.  With a debt over 16 trillion, and unfunded liabilities over 200 trillion, and the biggest welfare state the country has seen, i don't see how there could not be a default one way or the other.  I won't pretend to know when this will happen, but I just don't see how anyone can say it's not inevitable.

[mod: I edited this to reflect the original poster's quote correctly. CraigR]

[Hal]

Following from what SamuraiDog wrote earlier...

I was seriously considering dropping the PP and going more towards a 50% stocks/50% gold allocation.

I too happened to watch that clip.  If my memory serves me correctly, in the new Permanent Portfolio book it talks about an option of replacing the Long Term Bonds with Gold. That would give a total Gold allocation of 50%. and would be pretty close to the 50/50 allocation mentioned earlier.

What was the rationale again for replacing the Bonds with Gold? Was it the risk of Bankruptcy....

Looking forward to your thoughts,
Hal

/ Looks at supply of canned beans and tin foil hats

[Marc De Mesel]

Is the PP designed to accomodate something unique in history - U.S. bankruptcy

Very good question.

Depends on your goal. If your goal is preservation of purchasing power I think the PP will do that also in case of government default, thanks to the 25% physical gold.

If your goal is to increase your purchasing power I think the pp will fail in case of your government going broke, be that via default or inflation, simply because the 25% physical gold will just be enough to make up for the losses in the 25% stocks, and 50% gov bonds.

Iceland is a good example in case it would be a default via inflation (just replace krona with USD): http://europeanpermanentportfolio.blogs ... eland.html


Peter Schiff is a man not able to admit his mistakes, such as his portfolio totally failing in 2008. In case you want to not only preserve but make money if the US gov would default, I think you will have to take a risk and hold more physical gold than 25%. Ofcourse you then also risk to lose money if it doesn't happen. That being said, I think it's a good bet to take.