So much for the "risk-free" nature of Treasuries

[Kshartle]

So I'm not so much interested in figuring out a number in terms of "what is destruction," so much as "when does a self-fulfilling inflation crisis catch hold?"  That's the line to be really scared of.  That's where you've broken through self-correcting cyclical bounces and into self-fulfilling chain-reaction destruction.  However, this type of destruction, I feel, is far less likely than Austrians would have us believe.  Further, it's usually not just an issue of printing money, it's an issue of massive corruption, war, foreign debts, and destruction of productive capacity (often interrelated haha).

That's fine, I'm just trying to make the point that the dollar has lost 95% of it's value or so in the last 100 years. I think it's lost 80% or more in the last 40 years. We have not had an alien invasion. We have not had our productive capacity shrink. It's the ratio of dollars to goods and services increasing.

Did you see the comment that I posted a few weeks ago from the likely new FED chairperson's speech? She said the FED is ultimately in control of the rate of inflation. Do you think she knows what she's talking about? She expressed an affinity for banks offering negative real interest rates. She can't vote for that but she can make them negative in real terms.

[Kshartle]

Wait... now printing has upward pressure on rates?  I thought printing was "holding rates artifcially low" to a significant degree.

It's tough keep all those doomsday theories straight.

The total amount of capital has been reduced by the waste induced by the incorrect interest rate. That's why they can't stop.

When the government spends money they create income and savings man! It doesn't matter if they are building a bridge to nowhere. All we need is another couple billion printed to put something on the other side of the bridge and people will move there. How about some more welfare housing? I mean.....there are construction workers collecting unemployment right? They might as well build welfare housing and bridges to it right?

Tounge in cheek.

[Kshartle]

I hope nobody takes the jokes personally. It's really just in jest. If you can make fun of my arguments with jokes please go for it.

Sometimes there is truth in jest. I AM happy to have you joke about anything I argue that you think is funny.

[moda0306]

Wait... now printing has upward pressure on rates?  I thought printing was "holding rates artifcially low" to a significant degree.

It's tough keep all those doomsday theories straight.

The short-run effect of printing is to reduce rates. That's why they do it.
The long-run effect of printing is to increase rates when the printing stops or slows down, because the total amount of capital has been reduced by the waste induced by the incorrect interest rate. That's why they can't stop.

Well if you're saying that lowering the rate today can have the effect of setting higher long-term rate expectations, I'd totally agree.  See Japan's recent increase in long-term rates after their own "QE."

However, that's simply due to an expectation of higher future long-term growth as a result of improving the lending environement for real investment, demand, etc.  This isn't an incident of gross misallocation of resources... just more investment in productive assets that will support real growth.

If I thought all investment that happened as a result of low rates today was just an utter speculative waste, that would come crashing down on itself, this would lead me to expect LOW interest rates in the future, not high rates, because the coming crash is just going to send all the investors in this crap right back into treasuries again.


So if rate expectations for the long-term are somehow higher due to faulty investment, why are investors lending to private borrowers at relatively low rates (30 year mortgage @ 4.5%?)? 

Likewise, if these investments are faulty, whether or not rates will rise, why would investors lend to them @ 4.5%?

Furthermore, if there will be massive inflation in the future, or is a high likelihood of it, why would investors lend to them @ 4.5%?


There are three options:

- The market is full of idiots.

- You are wrong.

-

Could you help me through this?

[systemskeptic]

If you follow news and forums you will notice certain memes pop up, and rapidly appear throughout the information-sphere. Now, why is that?

With Crypus you had all the talk of the bail-in, prior to it happening nobody thought that was possible.  It was impossible, then it happened. Now we have all the memes circulating about default, again prior to this nobody could even conceive of it happening.  "It is impossible for a Government who has debt dominated in it's currency to default" the memes would say. 

Clearly, it is not impossible because that is what will happen in little more than a week if nothing changes from today.

So what if the strategy here is the same as Cyrpus: float memes to get people aware and comfortable with them (force them to begin to conceive the inconceivable).  The problem we are facing is that Treasuries are not riskless, they never were but the memes of the time simply would not allow people to wrap their heads around it.  To show just how ingrained these ideas are, many do not seem to understand it even now (they are still clinging onto memes of a distant past).

So how do you make people understand?  You shut down the government and have the mainstream media repeat the words "default" every day for 2 weeks...

Not saying this is what's happening (the politicians could in fact be simplistic morons) just pointing out that there is very recent historical precedence for this type of tactic...float the meme, check the response, if it's not universally negative then consider pursuing making the meme a reality.

This happened with the platinum coin, it was so universally ridiculous it was dropped in days.  What's scary about the default meme, is the response doesn't seem universally negative -- people are still split on both sides (look at this thread, some people think it doesn't matter).

[moda0306]

It's tough keep all those doomsday theories straight.

The total amount of capital has been reduced by the waste induced by the incorrect interest rate. That's why they can't stop.

When the government spends money they create income and savings man! It doesn't matter if they are building a bridge to nowhere. All we need is another couple billion printed to put something on the other side of the bridge and people will move there. How about some more welfare housing? I mean.....there are construction workers collecting unemployment right? They might as well build welfare housing and bridges to it right?

Tounge in cheek.

Kshartle,

I know you're kidding and I don't take offense, but how many times do Communists like Gumby and I have to prove to you that it's all about productive capacity to us... if we create income without the existence of spare productive capacity in the economy, you'll have inflation.  If we try to dream up savings without the ability for the private sector to invest, we'll have inflation.

However, due to this Mexican Standoff we get from time to time due to a monetized economy, the economy can have slack in it... and in fact, right now, we have a LOT of slack.  Slack that's resulting in people with actual skills sitting on their couch collecting unmployment, slowly forgetting the value of work and maybe even getting out of practice.  This is BAD news, and doesn't happen in barter economies, so it's not just about laziness... it's about a common medium of exchange, and it's the ugliest side of all the wonderful things having said medium of exchange brings us.

[Kshartle]

This happened with the platinum coin, it was so universally ridiculous it was dropped in days.  What's scary about the default meme, is the response doesn't seem universally negative -- people are still split on both sides (look at this thread, some people think it doesn't matter).

I don't think everyone here agrees the platinum coin is ridiculous.

[Gumby]

This happened with the platinum coin, it was so universally ridiculous it was dropped in days.  What's scary about the default meme, is the response doesn't seem universally negative -- people are still split on both sides (look at this thread, some people think it doesn't matter).

I don't think everyone here agrees the platinum coin is ridiculous.

It's gimmicky. But it's legal. If you know your bible well (and I know you do), you know that regular debt forgiveness and clean slates were periodic facts if life. They knew that debts just got larger and larger over time. If you think of the platinum coin as a legal form of debt forgiveness, it's not entirely ridiculous. Though it is still gimmicky.

[systemskeptic]

Some of the current memes about the government shutdown:
- US Default is Impossible (this meme now debunked/discarded)
- Treasuries are a riskless asset (this meme now debunked/discarded)
- A default is possible on October 17th
- October 17th is not actually a default because taxes > debt payments
- A default may actually be beneficial
- A new reference for risk may have to be devised / t-bill risk may have to be updated

Case in Point:
http://www.nytimes.com/2013/10/09/us/po ... t-bad.html

[Kshartle]

The total amount of capital has been reduced by the waste induced by the incorrect interest rate. That's why they can't stop.

When the government spends money they create income and savings man! It doesn't matter if they are building a bridge to nowhere. All we need is another couple billion printed to put something on the other side of the bridge and people will move there. How about some more welfare housing? I mean.....there are construction workers collecting unemployment right? They might as well build welfare housing and bridges to it right?

Tounge in cheek.

Kshartle,

I know you're kidding and I don't take offense, but how many times do Communists like Gumby and I have to prove to you that it's all about productive capacity to us... if we create income without the existence of spare productive capacity in the economy, you'll have inflation.  If we try to dream up savings without the ability for the private sector to invest, we'll have inflation.

You don't have to prove anything about production to me. Production is the wealth of the nation. The dollars are just paper. What I've tried to point out is inflation and government spending destroy productivity. That's why I oppose it all. It diminishes our standard of living because it re-allocates resources to what we don't want and towards what buys votes.

[systemskeptic]

If you think of the platinum coin as a legal form of debt forgiveness, it's not entirely ridiculous. Though it is still gimmicky.

It doesn't really matter what the details of the meme were, the meme did not catch on because nobody thought the details were believable.  That is, they thought it was gimmicky/B.S.  Had the meme met great acclaim, we might have had a platinum coin by now...

Anyways my intention is not to discuss the coin but just give two examples of recent memes, one that caught on (Cyprus bail in) and one that did not (platinum coin).

[Kshartle]

This happened with the platinum coin, it was so universally ridiculous it was dropped in days.  What's scary about the default meme, is the response doesn't seem universally negative -- people are still split on both sides (look at this thread, some people think it doesn't matter).

I don't think everyone here agrees the platinum coin is ridiculous.

It's gimmicky. But it's legal. If you know your bible well (and I know you do), you know that regular debt forgiveness and clean slates were periodic facts if life.

Not a fact of life, just something the leaders would enforce.

What are the chances you would make a loan if knew next year you would have to forgive it by law.

[moda0306]

Kshartle,

I know you're kidding and I don't take offense, but how many times do Communists like Gumby and I have to prove to you that it's all about productive capacity to us... if we create income without the existence of spare productive capacity in the economy, you'll have inflation.  If we try to dream up savings without the ability for the private sector to invest, we'll have inflation.

However, due to this Mexican Standoff we get from time to time due to a monetized economy, the economy can have slack in it... and in fact, right now, we have a LOT of slack.  Slack that's resulting in people with actual skills sitting on their couch collecting unmployment, slowly forgetting the value of work and maybe even getting out of practice.  This is BAD news, and doesn't happen in barter economies, so it's not just about laziness... it's about a common medium of exchange, and it's the ugliest side of all the wonderful things having said medium of exchange brings us.

  sounds like a catch 22 to me... the only way to get people working is to print money raise debt , the government prints money raises debt by spending, the government spends money by creating industry killing regulations and programs, industry killing regulations and programs mean fewer people end up working.... the only way to get people working........ 

In SOME economic environments, in the SHORT term, the only way to get people to work is to run big deficits.

This isn't all the time, Kshartle.

And most of the "spending money" isn't "by creating indstry-killing regulations."  In fact, I don't know about Gumby, but I was a HUGE proponent of the Payroll Tax Holiday.  I may feel more favorably towards getting some big infrastructure projects going sooner than later, and we may disagree there, but I'm certainly not arguing for greater regulations as the means of stimulus spending. That's just silly.  Regulations should be designed on a much more sound fundamental framework than that... but that's a different discussion.

Businesses simply are not going to hire, no matter how low nominal interest rates are, how low you tax them, how many regulations you take away, if they don't think demand is going to rise to the occasion, and demand is being hampered by our nominal incomes and nominal balance-sheet issues IN THIS ECONOMIC ENVIRONMENT.

PS... My caps aren't me yelling, but speaking a bit more sternly and I don't like having to bold the damn things .

[Kshartle]

Kshartle,

I know you're kidding and I don't take offense, but how many times do Communists like Gumby and I have to prove to you that it's all about productive capacity to us... if we create income without the existence of spare productive capacity in the economy, you'll have inflation.  If we try to dream up savings without the ability for the private sector to invest, we'll have inflation.

However, due to this Mexican Standoff we get from time to time due to a monetized economy, the economy can have slack in it... and in fact, right now, we have a LOT of slack.  Slack that's resulting in people with actual skills sitting on their couch collecting unmployment, slowly forgetting the value of work and maybe even getting out of practice.  This is BAD news, and doesn't happen in barter economies, so it's not just about laziness... it's about a common medium of exchange, and it's the ugliest side of all the wonderful things having said medium of exchange brings us.

  sounds like a catch 22 to me... the only way to get people working is to print money raise debt , the government prints money raises debt by spending, the government spends money by creating industry killing regulations and programs, industry killing regulations and programs mean fewer people end up working.... the only way to get people working........ 

In SOME economic environments, in the SHORT term, the only way to get people to work is to run big deficits.

This isn't all the time, Kshartle.

And most of the "spending money" isn't "by creating indstry-killing regulations."  In fact, I don't know about Gumby, but I was a HUGE proponent of the Payroll Tax Holiday.  I may feel more favorably towards getting some big infrastructure projects going sooner than later, and we may disagree there, but I'm certainly not arguing for greater regulations as the means of stimulus spending. That's just silly.  Regulations should be designed on a much more sound fundamental framework than that... but that's a different discussion.

Businesses simply are not going to hire, no matter how low nominal interest rates are, how low you tax them, how many regulations you take away, if they don't think demand is going to rise to the occasion, and demand is being hampered by our nominal incomes and nominal balance-sheet issues IN THIS ECONOMIC ENVIRONMENT.

PS... My caps aren't me yelling, but speaking a bit more sternly and I don't like having to bold the damn things .

Are you replying to me? Am I the standard bearer for the argument that government spending destroys our productive capacity? I've gone over this in other threads so I suppose so. I'm more than satisfied that I've proven this. The logic of my arguments was never even challenged. Others can take up the torch. I'm sure they're up to the task.

[moda0306]

Oops.. I thougth that was you.

[Kshartle]

Oops.. I thougth that was you.

NP.

I can see where you might get that   Sounded like something I'd say.

I try to always start my sentences with capital letters though!    Sorry Simon

[moda0306]

When the government spends money they create income and savings man! It doesn't matter if they are building a bridge to nowhere. All we need is another couple billion printed to put something on the other side of the bridge and people will move there. How about some more welfare housing? I mean.....there are construction workers collecting unemployment right? They might as well build welfare housing and bridges to it right?

Tounge in cheek.

Kshartle,

I know you're kidding and I don't take offense, but how many times do Communists like Gumby and I have to prove to you that it's all about productive capacity to us... if we create income without the existence of spare productive capacity in the economy, you'll have inflation.  If we try to dream up savings without the ability for the private sector to invest, we'll have inflation.

You don't have to prove anything about production to me. Production is the wealth of the nation. The dollars are just paper. What I've tried to point out is inflation and government spending destroy productivity. That's why I oppose it all. It diminishes our standard of living because it re-allocates resources to what we don't want and towards what buys votes.

1) If we don't want them, then why does almost every productive economy government provide these same things to their citizens: Roads, healthcare, military, police, sewer, other infrastrcture, etc.  Do you have an example of a productive economy where the government is all-but non-involved in day-to-day economic activity (even if it's just infrastructural)?

2) You can't buy votes from the public.  Voting is irrational, and your marginal cost of voting is 99.9999999999999999999% more likely to cost you money than to make you money.  You can, however, buy votes from congressmen, because voting is their job... if they went an entire term without voting, they'd likely be voted out.

[moda0306]

Oops.. I thougth that was you.

NP.

I can see where you might get that   Sounded like something I'd say.

I try to always start my sentences with capital letters though!    Sorry Simon !

Yeah that's infuriating kinda haha.

At least he uses some punctuation.

[Gumby]

I don't think everyone here agrees the platinum coin is ridiculous.

It's gimmicky. But it's legal. If you know your bible well (and I know you do), you know that regular debt forgiveness and clean slates were periodic facts if life.

Not a fact of life, just something the leaders would enforce.

What are the chances you would make a loan if knew next year you would have to forgive it by law.

I bet it happened a lot. Anyway, the platinum coin would just be a temporary measure to buy time, but I believe that it is too gimmicky to be ever used.

[moda0306]

Some of the current memes about the government shutdown:
- US Default is Impossible (this meme now debunked/discarded)
- Treasuries are a riskless asset (this meme now debunked/discarded)
- A default is possible on October 17th
- October 17th is not actually a default because taxes > debt payments
- A default may actually be beneficial
- A new reference for risk may have to be devised / t-bill risk may have to be updated

Case in Point:
http://www.nytimes.com/2013/10/09/us/po ... t-bad.html

US treasury default hopefully hasn't been referred to as "impossible."  I might have used this term in the heat of an argument, so let me be the lightning rod on that.  It shouldn't have EVER been referred to as impossible.

US treasury bonds being nominally risk-free depends on the former statement... this is alwas qualified for "unless they want to."


Why would a default be beneficial?  Who does that benefit?  Savers, who are depending on a stable environment to store money?  Businesses, who depend on relatively stable banking system and economic expectations?

Or gold-bugs hunkered down on their compound who want to see everyone else's savings burn while they ready themselves for the zombie apocalypse?

[moda0306]

Kshartle,

If a government builds a bridge between two economies on two sides of a river, there's a few way we can look at this... I hope we can agree this is a pretty reasonable layout of possible interpretations on this government action.

- This is wholly and completely an unnatural act, and all the resources that went to build the bridge could've been used by taxpayers (or lenders) to expand business in some much more preferable way.  In this sense, government is destroying wealth.

- The bridge was probably necessary (or economicall desireable use of resources), but the fact that the government did it means that instead of building a bridge that contained 100 units of quality at a 50 unit cost, it built a bridge that contained 80 units of quality at a 75 unit cost.  Therefore, the government has destroyed wealth, even though in doing so, it will help increase productivity over time... because it did so more inefficiently than the private sector would have.

- The bridge was necessary, and the government did it more efficiently than the private sector would have due to its motivation of public purpose and coordination with the roads system of the two sides of the city.

- The bridge was necessary, and the private sector never would have taken on such a ballsy investment with so much risk (higher risk to a small private entity than a large city/county/state), so it never would've happened.  Therefore, the government has significantly facilitated the creation of wealth from the non-government alternative.

Are those options fair?

I'd argue that at worst, most government infrastructure is the 2nd option, and at best, it's the last option.  You seem to be saying that everthing the government does is is the first option, with maybe some 2nd option exceptions.



And in the end, were not even talking about spending here... we're talking about a G-D payroll tax holiday!!  Can we agree that would have been beneficial after 2008?

[moda0306]

In SOME economic environments, in the SHORT term, the only way to get people to work is to run big deficits.

This isn't all the time, Kshartle.

And most of the "spending money" isn't "by creating indstry-killing regulations."  In fact, I don't know about Gumby, but I was a HUGE proponent of the Payroll Tax Holiday.  I may feel more favorably towards getting some big infrastructure projects going sooner than later, and we may disagree there, but I'm certainly not arguing for greater regulations as the means of stimulus spending. That's just silly.  Regulations should be designed on a much more sound fundamental framework than that... but that's a different discussion.

Businesses simply are not going to hire, no matter how low nominal interest rates are, how low you tax them, how many regulations you take away, if they don't think demand is going to rise to the occasion, and demand is being hampered by our nominal incomes and nominal balance-sheet issues IN THIS ECONOMIC ENVIRONMENT.

PS... My caps aren't me yelling, but speaking a bit more sternly and I don't like having to bold the damn things .

industry killing regulations and programs ...  and i am willing to bet we will disagree on what percentage of programs/regulation do more harm than good.  personally i wouldn't have strong objections to repairing or building infrastructure ether, but when you look at how government goes about it, the word boondoggle tends to pop to mind first..

i also disagree that businesses wait for government to spend demand into existence, most businessmen think they have a idea or product that is of value and that value drives demand and they are willing to take a gamble in the marketplace that what they sell will be in higher demand than what others are selling..  i don't think apple or any other company has ever publicly stated "we are delaying the release of our new gizmo because it is frivolous and the government hasn't spent enough money for people to want frivolous crap".  (many have said we are cutting back do to regulation, cost, and taxes making our product or employment levels unprofitable) keep in mind i don't necessarily disagree with the book keeping realities, but if you don't address the mis-allocation of that spending there is no amount of money large enough to accomplish what you think it will accomplish..

i have expressed my gratitude for the kindness of the posters here in their mostly overlooking my poor punctuation and sometimes sloppy grammar, and must do so again... 

Simon,

It's not always the government that has to spend demand into existence... in fact it's not even really required that government demand anything.... just get the damn nominal assets onto our balance sheets during a recession via a payroll tax holiday.

The debate over whether accellerating road repair, bridge-building, etc during a recession is another debate altogether, but at the worst these things are probably what government would have built to facilitate business growth in the future anyway.

[moda0306]

Let's also not forget that there's a difference between government spending and government consumption/investment.  The former just puts nominal assets onto our balance sheet.  The latter implies that government is actually procuring resources from the private sector to build stuff.

Both help put the private sectore in more of a position to spend, though.

Most of the idea of stimulus isn't to build the bridge today vs in 2015... it's to create a spending multiplier to offset an "austerity multiplier" that has just occured.  Building the bridge today is probably also a good idea simply because 1) it will put someone to work while the economy is still recovering, and 2) if the economy's fully recovered in 2015, building a bridge will be pulling resources away from private ventures, and therefore cause short-term interest rate hikes, inflation, and congestion.

[Kshartle]

1) If we don't want them, then why does almost every productive economy government provide these same things to their citizens: Roads, healthcare, military, police, sewer, other infrastrcture, etc.  Do you have an example of a productive economy where the government is all-but non-involved in day-to-day economic activity (even if it's just infrastructural)?

I would like to clear up something that really hampers discussions here. The argument is constantly made here that if you can't produce evidence of something it is not true. This is a fallacious argument. It is called the Argument from Ignorance. The principle you guys would do well to learn is that "Absence of evidence is not evidence of absence".

When people say things like..."If that's true then show me where it exists"..they are implying if the other person can't show proof of existance than their argument is incorrect. Logic is never attempted. This is a false argument. It's barely worth pursuing, it's tiresome for the other person, it is a diversion that distracts from the discussion, and nothing ever goes anywhere.

To say "If Government spending is destructive then show me a productive society without government" is not an argument. At least, it's not one that is valid. People can choose to speculate as to why one doesn't exist, but they don't need to provide one to prove Government spending is destructive". Requiring one for proof of existance is an example of a lack of understanding of the principles being discussed.

This happens here all the time. It's like saying "If drunk driving leads to car wrecks how come I drove drunk last night and didn't get into a wreck!?!?  Explain that one!"

I'm done responding to this fallacious argument anymore. It's unpleasant to ignore people's points and insist on the argument from ignorance. My only response will be to point out the fallacious nature of the argument.

Really not trying to be mean guys. You might not be aware to the extent this argument is used here. It's the backbone of many positions and it's false. I'm just hoping that as iron sharpens iron we can sharpen each other's deductive reasoning ability and stop with the false arguments. Lord knows i can use sharpening myself.



http://en.wikipedia.org/wiki/Evidence_of_absence

[systemskeptic]

US treasury default hopefully hasn't been referred to as "impossible."  I might have used this term in the heat of an argument, so let me be the lightning rod on that.  It shouldn't have EVER been referred to as impossible.

US treasury bonds being nominally risk-free depends on the former statement... this is alwas qualified for "unless they want to."


Why would a default be beneficial?  Who does that benefit?  Savers, who are depending on a stable environment to store money?  Businesses, who depend on relatively stable banking system and economic expectations?

Or gold-bugs hunkered down on their compound who want to see everyone else's savings burn while they ready themselves for the zombie apocalypse?

Moda,

Previously it was not possible to even have a discussion about US default because the topic was so far outside the mainstream that it was, as you say, only something for people in bunkers talking about the apocalypse.  To find an example of this, look at any past thread on US bankruptcy/default on this forum. 

I use the term "impossible" because previously any mention of the words "US Default" was met with "The US will never default because it can print its debt away, etc." aka it is basically impossible as it would never happen.  Well, nobody can make that argument any longer can they?  Not when a default is 8 days away unless something changes...

It went from impossible to the plan of record in less than 1 month.  Interesting, the power of memes.

As for whether the default is beneficial, I'm not saying it is, just pointing out the major memes circulating now. 

You guys should know by now, it is not the details of a meme that matter, only that the meme is believable enough for both sides to construct a semi-plausible argument that enables the group to be divided into two camps, and the meme to prosper. 

What's scary is that's exactly what happened with Cyprus, and it seems to be what is happening today with the government shutdown...