Gyroscopic Investing

MediumTex wrote:

Libertarian666 wrote:

MediumTex wrote: So you don't think that MR accurately describes the way our current monetary system works and helps to explain why no significant inflation has occurred over the last five years?

Correct.

Which part of MR do you think fails to explain the current monetary system?  If you read any of the pieces that moda and Gumby linked to, what was the largest error(s) you felt that the authors made in their analyses?

Although I think that our post-gold standard monetary system is kind of goofy, I have found MR to be a useful tool in understanding the mechanics of how it actually works, including the role of deficit spending, the effects of interest rates on debt that is being rolled over, what the Fed's QE policies actually do, and how bond auctions work.

I hate to hear that my understanding of all of these things as scene through an MR lens may be wrong, but I suppose it's possible.

I assume that you are also saying that there is no data, analysis or new information that could change your conclusions about MR as a tool to help understand how the monetary system works.  You do now (and will always) view MR in the same way that you view astrology and FSM.  Is that correct?

Over the last 40 years it has been that simple.

Are you suggesting that the stock market might respond to one type of economic expansion differently than it would another?  Why would it?  If corporate profits are increasing, do we care why?  We may care a lot, I just thought I would ask the question.

In my mind, if the economy is expanding in real terms I don't feel the need to look beneath the numbers.  I simply take the expansion at face value.

Will it be that simple going forward?  I don't know.

Libertarian666 wrote: Any system that comes to the following conclusions is clearly incorrect:

Libertarian666 wrote: Any system that comes to the following conclusions is clearly incorrect:
1. That the Fed's buying virtually all the newly issued T-Bonds is insignificant, and that therefore if the Fed stopped buying them, that would have no effect on interest rates. Yes, I know they buy them from the primary dealers, but the primary dealers are merely front-running the Fed and get their commissions without any risk.

2. That the number of dollars borrowed and spent by the Treasury is irrelevant because of the great productive capacity of the USA. That includes at least two obvious logical errors: that the productive capacity of the USA belongs to the government and it can take as much as it wishes without causing a financial calamity; and that people will indefinitely continue to use money that is purposely being devalued.

3. That the fact that the dollar has not collapsed is due to some miraculous property of the USA, which makes it different from every other government in history that has run gigantic deficits with no credible plans to solve such a problem. It is a matter of time. How much time is not predictable because timing of collapse is a matter of mass psychology, not of economics, and anyone who says otherwise is deluded. Confidence must be lost, and it will be lost if nothing is done.

If you can resolve these issues, let me know and I'll re-examine your theory.

glennds wrote: MT,
I wasn't really suggesting anything, just raising the question (to which I don't claim to know the answer myself). I'm interested in your thoughts on this - do you feel the economy at present is expanding or contracting, and are price levels increasing or decreasing?

Pointedstick wrote:

Libertarian666 wrote: Any system that comes to the following conclusions is clearly incorrect:

Speaking of logical errors, you are assuming the conclusion to invalidate the data.

Again, nobody is suggesting that any of this stuff is good. Very few of us like the current crony capitalist system with a rigged banking sector that's pressed into service and requires huge, morally hazardous bailouts every once in a while. But that's what we've got.

Libertarian666 wrote:I suppose one can take the position that it is the government's borrowing that creates money rather than the Fed's buying their bonds

Libertarian666 wrote:1. That the Fed's buying virtually all the newly issued T-Bonds is insignificant, and that therefore if the Fed stopped buying them, that would have no effect on interest rates.

Libertarian666 wrote:Yes, I know they buy them from the primary dealers, but the primary dealers are merely front-running the Fed and get their commissions without any risk.

Libertarian666 wrote:2. That the number of dollars borrowed and spent by the Treasury is irrelevant because of the great productive capacity of the USA. That includes at least two obvious logical errors: that the productive capacity of the USA belongs to the government and it can take as much as it wishes without causing a financial calamity; and that people will indefinitely continue to use money that is purposely being devalued.

Libertarian666 wrote:3. That the fact that the dollar has not collapsed is due to some miraculous property of the USA, which makes it different from every other government in history that has run gigantic deficits with no credible plans to solve such a problem. It is a matter of time. How much time is not predictable because timing of collapse is a matter of mass psychology, not of economics, and anyone who says otherwise is deluded. Confidence must be lost, and it will be lost if nothing is done.

Warren Mosler wrote: Maybe this inflation thing is harder to get going than it looks? And what did go on in the German Wiemar republic, where if you parked a wheelbarrow full of money thieves would take the wheelbarrow and leave the money? Turns out it was those pesky war reparations that caused government deficit spending to soar to something like 50% of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations. As expected, that drove their currency down the rat hole in short order, and kept driving it down, causing that famous bout of hyper inflation that didn’t end until that policy ended. And when all that ended and policy changed the inflation stopped dead in its tracks. In one day. So how about Zimbabwe? Turns out they had a tad of civil unrest that dropped their productive capacity by about 80%, but government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof. Not to mention rumors of insiders using the local currency to buy foreign currencies for personal gain (sound familiar).

Applying this to the US to replicate the Wiemar inflation Congress would have to increase the deficit to about $8 trillion a year and then sell those dollars continuously in the market place, using them to buy the likes of yen, euro, and pounds. And replicating Zimbabwe would mean some kind of disaster that wiped out 80% of our real productive capacity and then continuing to spend federal dollars as if that never happened.

But note that it turns out these examples of hyper inflation are traced back to wildly excessive govt. deficit spending, and not actions by the Central Banks. And, in fact, from what I’ve seen those kinds of levels of deficit spending always cause inflation, no matter what the Central Bank does. For example, deficit spending and indexation of prices paid by government to various measures of inflation propagated all the great Latin American inflations of the relatively recent past, even as the Central Banks desperately hiked rates, didn’t buy securities, and, in general, did all they could to promote price stability.

China gives us an interesting contemporary data point to consider. Deficit spending in China has been running over 20% per year when you include state lending to state owned enterprises, local governments, and other entities where repayment isn’t a factor, making that lending, for all practical purposes, pretty much the same as deficit spending. The only time the US deficit spending got that high, with pretty much the same growth rates, was during World War II. And while considered high, China’s inflation seems to have peaked at about 6%, a far cry form hyper inflation, also, interestingly, much like the US during World War II. And note during World War II, the Fed was entirely accommodative, much like the the Fed is today, buying Treasury securities to keep long term rates low.

What all this tells me is that run away inflation, whatever that might mean, isn’t something hiding around every corner waiting to pounce. In fact, it takes a lot of work to get there, and not from the Fed, but from Congress. And not just what we’d call high levels of deficit spending, but ultra high levels of deficit spending.

Source: http://moslereconomics.com/2011/11/14/i ... inflation/

Libertarian666 wrote:If you can resolve these issues, let me know and I'll re-examine your theory.

Gumby wrote: First off, tech, the idea that you would compare MR to astrology is pretty bold considering just two days ago you were convinced of the inflationary model that a change machine converting dollars into quarters could cause inflation in the hands of laundromat customers.

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Yesterday you seemed to realize that your model was flawed when you said...

Libertarian666 wrote:I suppose one can take the position that it is the government's borrowing that creates money rather than the Fed's buying their bonds

So, to say that MR is worthless is mind-boggling considering you seemed to learn something from MR there. No, the change machine does not create inflation in a laundromat no matter how many Austrians tell you it does.

Libertarian666 wrote:1. That the Fed's buying virtually all the newly issued T-Bonds is insignificant, and that therefore if the Fed stopped buying them, that would have no effect on interest rates.

For the fifteenth time, the answer is here:

http://pragcap.com/who-will-buy-the-bonds

When the Fed stopped buying T-Bonds at the end of QE2, the world did not end. In fact rates went down despite the erroneous Austrian predictions of rates skyrocketing. Austrians were d-e-a-d w-r-o-n-g. The author of that article explained the phenomenon before it even happened, and he was proven right because he understood how QE worked.

Tech, believe it or not, you will actually need to read the article in order to understand why your assertion is wrong.

Libertarian666 wrote:Yes, I know they buy them from the primary dealers, but the primary dealers are merely front-running the Fed and get their commissions without any risk.

The Primary Dealers are just trying to drain their excess reserves. As the government deficit spends, their excess reserves will swell again, and they will need to be drained into T-Bond auctions. That is their mandate and they do it willingly because they don't want excess reserves. Why are you unwilling to grasp that?

Libertarian666 wrote:2. That the number of dollars borrowed and spent by the Treasury is irrelevant because of the great productive capacity of the USA. That includes at least two obvious logical errors: that the productive capacity of the USA belongs to the government and it can take as much as it wishes without causing a financial calamity; and that people will indefinitely continue to use money that is purposely being devalued.

I'll let Moda handle that one.

Libertarian666 wrote:3. That the fact that the dollar has not collapsed is due to some miraculous property of the USA, which makes it different from every other government in history that has run gigantic deficits with no credible plans to solve such a problem. It is a matter of time. How much time is not predictable because timing of collapse is a matter of mass psychology, not of economics, and anyone who says otherwise is deluded. Confidence must be lost, and it will be lost if nothing is done.

See, the problem with Austrian economics is that they gloss over the inflation stories. They tell you it's just about printing money — but if that were true, we would have had inflation a long time ago. If you actually took the time to understand why Zimbabwe and Weimar were "different" you'd find some very interesting phenomenons. Warren Mosler explains:

Warren Mosler wrote: Maybe this inflation thing is harder to get going than it looks? And what did go on in the German Wiemar republic, where if you parked a wheelbarrow full of money thieves would take the wheelbarrow and leave the money? Turns out it was those pesky war reparations that caused government deficit spending to soar to something like 50% of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations. As expected, that drove their currency down the rat hole in short order, and kept driving it down, causing that famous bout of hyper inflation that didn’t end until that policy ended. And when all that ended and policy changed the inflation stopped dead in its tracks. In one day. So how about Zimbabwe? Turns out they had a tad of civil unrest that dropped their productive capacity by about 80%, but government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof. Not to mention rumors of insiders using the local currency to buy foreign currencies for personal gain (sound familiar).

Applying this to the US to replicate the Wiemar inflation Congress would have to increase the deficit to about $8 trillion a year and then sell those dollars continuously in the market place, using them to buy the likes of yen, euro, and pounds. And replicating Zimbabwe would mean some kind of disaster that wiped out 80% of our real productive capacity and then continuing to spend federal dollars as if that never happened.

But note that it turns out these examples of hyper inflation are traced back to wildly excessive govt. deficit spending, and not actions by the Central Banks. And, in fact, from what I’ve seen those kinds of levels of deficit spending always cause inflation, no matter what the Central Bank does. For example, deficit spending and indexation of prices paid by government to various measures of inflation propagated all the great Latin American inflations of the relatively recent past, even as the Central Banks desperately hiked rates, didn’t buy securities, and, in general, did all they could to promote price stability.

China gives us an interesting contemporary data point to consider. Deficit spending in China has been running over 20% per year when you include state lending to state owned enterprises, local governments, and other entities where repayment isn’t a factor, making that lending, for all practical purposes, pretty much the same as deficit spending. The only time the US deficit spending got that high, with pretty much the same growth rates, was during World War II. And while considered high, China’s inflation seems to have peaked at about 6%, a far cry form hyper inflation, also, interestingly, much like the US during World War II. And note during World War II, the Fed was entirely accommodative, much like the the Fed is today, buying Treasury securities to keep long term rates low.

What all this tells me is that run away inflation, whatever that might mean, isn’t something hiding around every corner waiting to pounce. In fact, it takes a lot of work to get there, and not from the Fed, but from Congress. And not just what we’d call high levels of deficit spending, but ultra high levels of deficit spending.

Source: http://moslereconomics.com/2011/11/14/i ... inflation/

Libertarian666 wrote:If you can resolve these issues, let me know and I'll re-examine your theory.

Done. Your turn.

Libertarian666 wrote: I didn't say I agreed that the government creates money when it borrows. I said that one could take that position, but it wouldn't mean that this borrowing was irrelevant. In other words, for the sake of argument, EVEN IF the government were creating money when it borrowed, that would not mean that the borrowing was irrelevant.

So MR has added nothing to my store of knowledge.

Hope that helps.

Libertarian666 wrote:I didn't say I agreed that the government creates money when it borrows. I said that one could take that position

Libertarian666 wrote:but it wouldn't mean that this borrowing was irrelevant. In other words, for the sake of argument, EVEN IF the government were creating money when it borrowed, that would not mean that the borrowing was irrelevant.

Cullen Roche wrote:Some people claim that Monetary Realism says budget deficits don’t matter. That is a vast misrepresentation of the position. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government based on an understanding of the sectors of the economy. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy. When the economy is running cold the deficit can afford to be higher. When it is hot the deficit should be lower. Again, someone who understands MR would never describe themselves as a supply sider or a demand sider because the answer is always “it depends”?.  There are many variables that play into the understanding of whether a government should run a budget deficit, a budget surplus or a balanced budget.  MR does not seek to provide policy options, but monetary understandings that make it easier to assess proper policy options.

Source: http://pragcap.com/understanding-the-mo ... ent-page-1

Federal Reserve Bank of New York wrote:The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

Source: http://www.newyorkfed.org/markets/pomo/display/

MediumTex wrote:

Libertarian666 wrote: I didn't say I agreed that the government creates money when it borrows. I said that one could take that position, but it wouldn't mean that this borrowing was irrelevant. In other words, for the sake of argument, EVEN IF the government were creating money when it borrowed, that would not mean that the borrowing was irrelevant.

So MR has added nothing to my store of knowledge.

Hope that helps.

If a government was setting up a debt-based fiat currency arrangement in a new country, how would the first dollar come into existence?

Libertarian666 wrote:

MediumTex wrote:

Libertarian666 wrote: I didn't say I agreed that the government creates money when it borrows. I said that one could take that position, but it wouldn't mean that this borrowing was irrelevant. In other words, for the sake of argument, EVEN IF the government were creating money when it borrowed, that would not mean that the borrowing was irrelevant.

So MR has added nothing to my store of knowledge.

Hope that helps.

If a government was setting up a debt-based fiat currency arrangement in a new country, how would the first dollar come into existence?

This has never happened to my knowledge, and there is a good reason for that: no money can come into existence that does not have a link back to a commodity. This is the "regression theorem" in Austrian economics.

Pointedstick wrote:

Libertarian666 wrote:

MediumTex wrote: If a government was setting up a debt-based fiat currency arrangement in a new country, how would the first dollar come into existence?

This has never happened to my knowledge, and there is a good reason for that: no money can come into existence that does not have a link back to a commodity. This is the "regression theorem" in Austrian economics.

What do you think of Bitcoin then? What's the commodity backing that?

MediumTex wrote:

glennds wrote: MT,
I wasn't really suggesting anything, just raising the question (to which I don't claim to know the answer myself). I'm interested in your thoughts on this - do you feel the economy at present is expanding or contracting, and are price levels increasing or decreasing?

I think that the economy is clearly expanding at a sluggish rate, with mixed expectations about the future, though the stock market seems pretty giddy.

Price levels are currently rising at a modest rate, with mixed future expectations there as well.  As we saw in early 2008, inflationary expectations based upon current inflation levels can be deeply misleading.  The price of gold seems to suggest that people are suspicious of sustained future price inflation as well.

Overall, I think that we are still in a secular deflationary trend that is being driven by a number of factors.  The Fed is trying to walk a tightrope of arresting these deflationary forces without triggering undesirable inflation. 

Any time you have short term rates at zero for almost five years, I would say that deflation is probably the threat that the central bank is trying to counter.  I'm not saying "deflation" as in "prices are deflating", but rather deflation as in there are strong forces favoring private sector credit contraction and reduced overall economic output as a result of demographic shifts in the U.S. (which is also deflationary because it can lead to a contraction of the entire economy as aggregate demand becomes softer and softer).

I think that the key to understanding what is going on right now is to be able to distinguish between secular and cyclical trends.  We are currently in a cyclical bear market for gold in the midst of a strong secular bull market.  We are currently in a strong cyclical bull market for stocks in the midst of a secular bear market.  We are currently in a cyclical bear market for long term treasury bonds in the midst of a secular bull market.

I always like to keep an eye on the secular market trend and ignore cyclical markets as much as I can (though sometimes it's hard because cyclical moves in the opposite direction of the secular trend can be so powerful).

What all that comes down to is that I see modest economic expansion that stocks have benefited from, though the stock market is probably way ahead of the actual economy.  Gold and long term bonds have gone down recently because the Fed has made noises about raising rates, which would presumably help to dampen inflation and bring us closer to emerging from the negative real interest rate situation we have been in for a long time.  I think, however, that the Fed is way premature in its suggestion about raising rates, and I would think that gold and long term bonds would return to the secular trend at some point, and stocks will also return to their long term trend as people realize that the economy is still very wobbly.

The expectation I have right now regarding the future is that the economy will contract in real terms and prices will rise.  Of course, I have no idea what will happen and that could all be wrong.

I'm comfortable with the PP in light of everything I described above.  IMHO, gold is the most appealing PP asset right now, based primarily on the illusory sense that many people have that a full recovery from the 2008 financial crisis has occurred, even though current Fed polices should make it clear to an impartial observer that this is far from the case.

Part of the key to understanding the inter-relationship of PP assets is that a lot of it is based upon future expectations, as opposed to the reality today.  Right now, future expectations regarding all future economic scenarios seem a little murky to me, and thus it isn't surprising that the PP has stumbled a little of late.

glennds wrote: I'll try to articulate my question about different kinds of expansion. To use a clumsy analogy, let's think about weight loss. There is good healthy weight loss and not-so-good weight loss. Similarly it seems to me there can be economic expansion for solid, sustaining reasons, and there can be perceived economic expansion based on manipulated conditions. An example might be a central bank's manipulation of interest rates to zero or near zero levels. This condition could materially reduce borrowing costs and perhaps these reduced interest expenses are a driver of increased corporate profits but that's not the same as corporate profits growing because of increased sales. Similarly, the real estate bubble was fueled in part by low cost of money and irresponsible lending practices. It wasn't sustainable and we eventually had a crash. So I wondered if would matter to the PP if the economic conditions were driven by solid reasons or short term influences. In reading your replies and thinking about the PP under these conditions, I suppose the stock market would respond the same either way but the bull run would just be shorter and we'd see volatility (I hear them call it whipsaw) and the PP would flex its response accordingly. Would you agree?

Libertarian666 wrote:

MediumTex wrote:

Libertarian666 wrote: I didn't say I agreed that the government creates money when it borrows. I said that one could take that position, but it wouldn't mean that this borrowing was irrelevant. In other words, for the sake of argument, EVEN IF the government were creating money when it borrowed, that would not mean that the borrowing was irrelevant.

So MR has added nothing to my store of knowledge.

Hope that helps.

If a government was setting up a debt-based fiat currency arrangement in a new country, how would the first dollar come into existence?

This has never happened to my knowledge, and there is a good reason for that: no money can come into existence that does not have a link back to a commodity. This is the "regression theorem" in Austrian economics.

moda0306 wrote: All of a sudden, each citizen receives various denominations of fiat currency in the mail.  They don't even really know what it is or what to do with it.  Just as they're about to throw it in the garbage, they see the note along with it saying that 100 units of this paper must be paid to the government every week, or they'll go to jail.

Tadaaa.  You've got a fiat currency with taxation as the value creation mechanism.

Pointedstick wrote:

moda0306 wrote: All of a sudden, each citizen receives various denominations of fiat currency in the mail.  They don't even really know what it is or what to do with it.  Just as they're about to throw it in the garbage, they see the note along with it saying that 100 units of this paper must be paid to the government every week, or they'll go to jail.

Tadaaa.  You've got a fiat currency with taxation as the value creation mechanism.

And before you object, Libertarian666 (and please do come back), yes, this "value creation mechanism" is exactly the same value that is being created when you acquiesce to a mugger's demand for your money or your life. One need not approve of this to understand the concept.

Libertarian666 wrote: The fact is that I sleep a lot better with my admittedly unusual asset arrangement than I would with any more common one, even the PP. And isn't that the point of the PP in the first place?

Libertarian666 wrote:risk/reward ratio, which scares the crap out of me, to put it bluntly. I trust the US financial system exactly as far as I can throw it, and that isn't very far.