Gyroscopic Investing

Kshartle wrote: Do hyperinflations occur during times of high unemployment and poor economic conditions or good ones?

They usually occur during periods of turmoil that are not being driven by economic factors at all.  War and its aftermath is probably the greatest cause, followed by incompetent political leadership leading to capital flight and/or a foolish currency peg to a much stronger economy's currency.

Can you think of an example of hyperinflation that didn't involve war, capital flight or an ill-conceived currency peg?  I'm not aware of any.

MediumTex wrote:War and its aftermath is probably the greatest cause, followed by incompetent political leadership leading to capital flight and/or a foolish currency peg to a much stronger economy's currency

How so? Please explain the mechanics of how war, etc cause hyperinflation while peacetime money printing doesn't

Mdraf wrote:

Gumby wrote: It's just an asset swap.

LOL. I would like to "swap" back my TLT for the cash I paid for it last May. Can you do that for me Gumby ? No loss to you right? It's just a swap!

Mdraf, are you taking pride in being ignorant? The bonds are swapped for the market price in the secondary market. Nice try though. Anyone who is in the market for LTTs would be happy to swap with your bonds for cash at market price.

MediumTex wrote: Kshartle,

How long do you think that it will take for the conclusions from your logic and reason to start manifesting in the real world?

For example, when do you think that inflation is going to really take off?

Do you think it will be within the next five years?  Ten years?  Twenty years?

The reason I ask is if it takes too long it's not really a helpful analysis since as investors we need to decide how to invest TODAY.  We don't necessarily have twenty years to sit around waiting for an investment thesis to play out.

A lot of the argument you are making today were being made in the early 1980s as well, and they turned out to be almost precisely wrong, even though the logic and reason behind them were very sound.

They are occuring right now. Look at the economy. Look at the FEDs actions. Why are they still printing, and printing at a faster annual rate than when they started? Prices of financial assets and homes are higher but the economy is not better. If QE worked shouldn't we have seen that by now? They've been doing it for years. Do they just need to increase it and then it will work? That's what Krugman is pushing for and I suspect that's what they'll do.

I don't know when consumer prices are going to take off. Hopefully never. The alternative is a crash in the financial markets if the money supply increase rate stays stable or falls over any significant period though. That's what we need to fix the economy. It will suck but sometimes you have to take the pain for the eventual gain. Printing money to improve the economy is trying to get something for nothing. You can't get something from nothing.

It's impossible to guess the future exactly but I think we will start seeing annual consumer goods price increases by 5-10% annualy perhaps as soon as 2015, maybe even next year. That is if they do what I think they're going to do and up the QE over 100 billion a month in the face of a shrinking labor force.

Mdraf wrote:

MediumTex wrote:War and its aftermath is probably the greatest cause, followed by incompetent political leadership leading to capital flight and/or a foolish currency peg to a much stronger economy's currency

How so? Please explain the mechanics of how war, etc cause hyperinflation while peacetime money printing doesn't

I guess the question would be why excessive money printing would ever occur in the first place absent one of those other non-economic events.

For example, in Zimbabwe the only reason that the crazy money printing was occurring was because Mugabe's government was trying to cover up the devastating effect on the country's economy that was caused by the capital flight that was triggered by his decision to confiscate the property of the few productive industries in his country.

The money wasn't being printed just for sport.  It was in response to what was essentially political incompetence leading to capital flight.

The U.S.'s situation couldn't be more different, especially considering that the U.S. is one of the favorite international destinations for capital, especially in a crisis.

Pointedstick wrote:One caveat is that the "RE" of FIRE stands for Real Estate, which most certainly does boil over into the real economy.

True, but I would think the private sector wouldn't be able to afford very many of those inflated real estate prices if the private sector itself isn't getting richer. I would imagine that the inflation wouldn't be all that meaningful in terms of its ability to be sustained (assuming wage growth and employment are still weak).

It's sort of like when oil prices rise, for whatever reason, and then demand at those high prices dries up — sending oil prices back down.

MediumTex wrote:

Kshartle wrote: Do hyperinflations occur during times of high unemployment and poor economic conditions or good ones?

They usually occur during periods of turmoil that are not being driven by economic factors at all.  War and its aftermath is probably the greatest cause, followed by incompetent political leadership leading to capital flight and/or a foolish currency peg to a much stronger economy's currency.

Can you think of an example of hyperinflation that didn't involve war, capital flight or an ill-conceived currency peg?  I'm not aware of any.

Your post suggested that inflation was difficult to acheive "because there is high unemployment, contracting private sector credit and excess productive capacity."

Now this would suggest that hyperinflation (same thing just to a larger degree) is EXTREMELY difficult to acheive "because there is high unemployment, contracting private sector credit and excess productive capacity."

I'm saying it's not. Hyperinflation occurs where those element you described are present. This is not a constraint that is difficult to overcome. The government just has to print and spend. What could be easier? It's like flunking a test at school. It takes no effort. The hard thing to do is get an A.

Gumby wrote:

Mdraf wrote:

Gumby wrote: It's just an asset swap.

LOL. I would like to "swap" back my TLT for the cash I paid for it last May. Can you do that for me Gumby ? No loss to you right? It's just a swap!

Mdraf, are you taking pride in being ignorant? The bonds are swapped for the market price in the secondary market. Nice try though. Anyone who is in the market for LTTs would be happy to swap with your bonds for cash at market price.

Furthermore, he takes pride in being a doo-doo head.

Kshartle wrote: They are occuring right now. Look at the economy. Look at the FEDs actions. Why are they still printing, and printing at a faster annual rate than when they started? Prices of financial assets and homes are higher but the economy is not better. If QE worked shouldn't we have seen that by now? They've been doing it for years. Do they just need to increase it and then it will work? That's what Krugman is pushing for and I suspect that's what they'll do.

Just to make sure we are on the same page, I don't think that QE is a good idea, or that it "works" in any way.  I'm just trying to understand what QE is, and its likely effects.

I don't know when consumer prices are going to take off. Hopefully never. The alternative is a crash in the financial markets if the money supply increase rate stays stable or falls over any significant period though. That's what we need to fix the economy. It will suck but sometimes you have to take the pain for the eventual gain. Printing money to improve the economy is trying to get something for nothing. You can't get something from nothing.

If the government was printing money and it was showing up in any part of my economic life (i.e., my wages or the average prices I paid for the things I buy) I would agree with you.

I also agree that you can't get something for nothing, unless you happen to think of nothing as something like a Buddhist monk might.  He might argue that he gets something for nothing from the universe every moment.

It's impossible to guess the future exactly but I think we will start seeing annual consumer goods price increases by 5-10% annualy perhaps as soon as 2015, maybe even next year. That is if they do what I think they're going to do and up the QE over 100 billion a month in the face of a shrinking labor force.

Why is the labor force shrinking?  I thought that there were a lot more people looking for jobs than there were jobs available--i.e., we currently have excess productive capacity, especially when it comes to labor.

MediumTex wrote:

Mdraf wrote:

MediumTex wrote:War and its aftermath is probably the greatest cause, followed by incompetent political leadership leading to capital flight and/or a foolish currency peg to a much stronger economy's currency

How so? Please explain the mechanics of how war, etc cause hyperinflation while peacetime money printing doesn't

I guess the question would be why excessive money printing would ever occur in the first place absent one of those other non-economic events.

For example, in Zimbabwe the only reason that the crazy money printing was occurring was because Mugabe's government was trying to cover up the devastating effect on the country's economy that was caused by the capital flight that was triggered by his decision to confiscate the property of the few productive industries in his country.

The money wasn't being printed just for sport.  It was in response to what was essentially political incompetence leading to capital flight.

The U.S.'s situation couldn't be more different, especially considering that the U.S. is one of the favorite international destinations for capital, especially in a crisis.

So government confiscation of property led to capital flight that devastated the economy, choking of funding for the government so it turned to printing to finance it's operations.

Question - Are taxes confiscation of property? Is money property? Do regulations lead to capital flight?

Kshartle wrote:The government just has to print and spend. What could be easier?

As Pointedstick explained so clearly — and confirmed by Bernanke's own statement — QE isn't money printing. Money is swapped for bonds and the money doesn't enter circulation — it stays at the Fed representing the exact same amount of deposits that existed prior to the swap (Pointedstick said it better).

In order for the government to "print and spend" (and by that we mean adding a new net financial asset in the private sector) Congress must authorize the Treasury to deficit spend. Given the gridlock in Washington, it's not as easy as you might imagine.

Mdraf wrote:

Gumby wrote: It's just an asset swap.

LOL. I would like to "swap" back my TLT for the cash I paid for it last May. Can you do that for me Gumby ? No loss to you right? It's just a swap!

Mdraf,

If you access whatever your TLT is sitting in, you'll notice that you can swap it for cash in about 2 minutes.

Kshartle wrote: Question - Are taxes confiscation of property? Is money property? Do regulations lead to capital flight?

Yes. But the degree is important. Confiscating 15% of one's profit (e.g. capital gains tax) is a very different affair than confiscating 100% of one's basis (what Mugabe did).

It's all confiscation but we humans are funny creatures. We'll put up with a lot, it turns out.

If you were right, the USA should have experienced widespread capital flight and hyperinflation already due to our high taxes. But it turns out that "high" is relative. Many other first world nations have income taxes of 60% or more and a 25% sales tax! And those countries aren't experiencing hyperinflation either. Something else must be going on here…

MediumTex wrote: I thought that there were a lot more people looking for jobs than there were jobs available--i.e., we currently have excess productive capacity, especially when it comes to labor.

Labor force participation rate is the lowest in 35 years. The percentage of working age adults actually working is lower than it was when QE started or anytime in the last 35 years. You may or may not think QE is related or you might think it would be even lower absent the QE. It probably would have gone lower had they not done QE but I believe we would now be recovering quite well rather than slipping back into recession. A recession they are going to fight with more QE.

Gumby wrote:

Mdraf wrote:

Gumby wrote: It's just an asset swap.

LOL. I would like to "swap" back my TLT for the cash I paid for it last May. Can you do that for me Gumby ? No loss to you right? It's just a swap!

Mdraf, are you taking pride in being ignorant? The bonds are swapped for the market price in the secondary market. Nice try though. Anyone who is in the market for LTTs would be happy to swap with your bonds for cash at market price.

So one loses (or gains) value and the other doesn't.  So it's a "swap at market value"?  Maybe you mean a "sale"? 
And thank you for the "ignorant" comment.

Mdraf wrote:So it's a "swap at market value"?  Maybe you mean a "sale"?

Yes. A "sale" that does not result in any new net financial assets. Are you not familiar with Permanent Open Market Operations (POMO)?

Mdraf wrote:And thank you for the "ignorant" comment.

My apologies, but you were literally cracking jokes while simultaneously misconstruing POMO.

So...money is "swapped" for bonds...then later swapped back at market value which is less than the initial swap. Have the bonds lost value?

Choose one answer

a) No they have not lost value
b) Yes they lost value

Pointedstick wrote:

Kshartle wrote: Question - Are taxes confiscation of property? Is money property? Do regulations lead to capital flight?

Yes. But the degree is important.

No kidding he was pointing out what led to Zimbabwae printing 100 trillion dollars bills. War, energy crises, captial flight were all thrown out there.

What led to the capital flight in Zimbabwae? According to MT it was confiscation of property by the government. I didn't even mention the US I just asked if money is property and taxes confiscation of property. Also, do regulations cause capital flight.

These are simple questions.

You guys make these crazy leaps so much.

If I said "Welfare encourages people to not work" the response I expect to get is "Well, we've had welfare for decades now in the USA and people are still working so CLEARLY YOUR PREDICTIONS about welfare are wrong hmmm don't you think?

By God they are some crazy leaps.

Mdraf wrote:

Gumby wrote:

Mdraf wrote: LOL. I would like to "swap" back my TLT for the cash I paid for it last May. Can you do that for me Gumby ? No loss to you right? It's just a swap!

Mdraf, are you taking pride in being ignorant? The bonds are swapped for the market price in the secondary market. Nice try though. Anyone who is in the market for LTTs would be happy to swap with your bonds for cash at market price.

So one loses (or gains) value and the other doesn't.  So it's a "swap at market value"?  Maybe you mean a "sale"? 
And thank you for the "ignorant" comment.

Mdraf,

You're not ignorant... we're probably just arguing past each other.  You could call it a sale.  Swap or sale is fine, basically indicating a trade for equal value.  Neither really "gain or lose," or I guess you could say that they both gain since they enter the transaction, but essentially it's just a trad/sale/swap for equal value.

Pointedstick wrote: If you were right, the USA should have experienced widespread capital flight and hyperinflation already due to our high taxes.

Right about what?

Mdraf wrote: So...money is "swapped" for bonds...then later swapped back at market value which is less than the initial swap.

Sorry, but your question isn't very clear. QE purchases typically causes bonds to increase in value (since there are less of them in existence). But, by the time the bond is purchased there has typically been a few interest payments that have been made at the auction rate (thus reducing the size of the remaining bond).

Let's try again.

Let's say you can buy 300 eggs for $100. Instead of buying eggs you buy a T-bond in May 2013. In September 2013 you sell that T-Bond for roughly $90.  Can you buy 300 eggs for $90  or not?

What happened to the vanished $10?

Kshartle wrote: No kidding he was pointing out what led to Zimbabwae printing 100 trillion dollars bills. War, energy crises, captial flight were all thrown out there.

What led to the capital flight in Zimbabwae? According to MT it was confiscation of property by the government. I didn't even mention the US I just asked if money is property and taxes confiscation of property. Also, do regulations cause capital flight.

These are simple questions.

You guys make these crazy leaps so much.

If I said "Welfare encourages people to not work" the response I expect to get is "Well, we've had welfare for decades now in the USA and people are still working so CLEARLY YOUR PREDICTIONS about welfare are wrong hmmm don't you think?

By God they are some crazy leaps.

The problem is that you're trying to distill complicated issues down to basic principles. I don't think that works very well.

Does welfare reduce the desire to work? Yes. Does confiscation precipitate capital flight? Yes. HOWEVER! I would posit that the "scale" of these interventions isn't linear. For example, a 1% increase in taxes will not create a 1% increase in capital flight. I think that the "scale" is exponential; that until welfare and taxes/confiscation reach a certain very high level, they won't really do much to change the behavior or productive people with assets. And I think we would be surprised at just how high these levels can be. As I mentioned, many other advanced countries have income taxes of more than 60% and sales taxes of 25% or more. Do these taxes encourage capital flight? Yes. But apparently not enough to cause hyperinflation.

Pointedstick wrote:

Kshartle wrote: No kidding he was pointing out what led to Zimbabwae printing 100 trillion dollars bills. War, energy crises, captial flight were all thrown out there.

What led to the capital flight in Zimbabwae? According to MT it was confiscation of property by the government. I didn't even mention the US I just asked if money is property and taxes confiscation of property. Also, do regulations cause capital flight.

These are simple questions.

You guys make these crazy leaps so much.

If I said "Welfare encourages people to not work" the response I expect to get is "Well, we've had welfare for decades now in the USA and people are still working so CLEARLY YOUR PREDICTIONS about welfare are wrong hmmm don't you think?

By God they are some crazy leaps.

The problem is that you're trying to distill complicated issues down to basic principles. I don't think that works very well.

Does welfare reduce the desire to work? Yes. Does confiscation precipitate capital flight? Yes. HOWEVER! I would posit that the "scale" of these interventions isn't linear. For example, a 1% increase in taxes will not create a 1% increase in capital flight. I think that the "scale" is exponential; that until welfare and taxes/confiscation reach a certain very high level, they won't really do much to change the behavior or productive people with assets. And I think we would be surprised at just how high these levels can be. As I mentioned, many other advanced countries have income taxes of more than 60% and sales taxes of 25% or more. Do these taxes encourage capital flight? Yes. But apparently not enough to cause hyperinflation.

The point is you don't need war to wreck the economy to really get the government encouraged to print baby print. At least according to MT. I would agree.

Mdraf wrote: Let's try again.

Let's say you can buy 300 eggs for $100. Instead of buying eggs you buy a T-bond in May 2013. In September 2013 you sell that T-Bond for roughly $90.  Can you buy 300 eggs for $90  or not?

No idea. It depends on the market price of eggs in September.

Mdraf wrote:What happened to the vanished $10?

A portion of the $10 you got back in the form of coupon payments and the rest of the $10 is a drop in the value of the asset between May and September.  On the actual day of the transaction, the sale does not raise or lower your net worth (i.e. purchasing power).