Please Mister Custer, I Don't Wanna Go

[rocketdog]

Which is why I believe in diversifying globally, at least up to a point.  I keep my VP stocked with a global stock fund, global bond fund, global REIT, emerging markets stock fund, and I even have an emerging markets bond fund.  Because that's how I roll, baby.

[Ad Orientem]

Exactly, and who would want T-bonds then? 

I would. As much as I generally eschew speculative investing I'd be sorely tempted to buy them for a VP in the scenario you are describing. What you are basically proposing is to follow Herbert Hoover's play book and try to work your way out of a nasty recession by tightening the money supply.

I've seen this movie before and I'm pretty sure how it ends. Think 1930's deflationary depression

If the FED actually just stopped all forms of QE with the economy in it's current state the immediate effect would be a stock market crash and probably a gold crash as well. Conservatively I would expect the S&P to lose 20-30% and gold could drop down to around $1000 oz. Worst case scenario the stock market could lose 50%.

LTT yields might jump a bit in the very short term, but in the intermediate term I think they would plunge. Near term Cash would be the only safe haven and I would not be surprised if we saw a fairly dramatic movement in STTs as panicked investors look for the only thing that's safe. The long term winner would almost certainly be long bonds though. Because what you are proposing is a sure fire recipe for a massive deflationary depression.

Think Japan.

So if the entity that is keeping yields low by buying every bond the Treasury issues stops buying, and the Treasury starts issuing many more bonds to make up for the shortfall in revenues, that will make yields... plunge?

Yes, exactly. The scenario you are proposing would destroy an enormous amount of capital in the stock and gold market crashes. Money would become much more scarce. Credit would evaporate and there would be a huge wave of bankruptcies. That might also extend to the financial sector. So we could have another financial crisis like in the early 30's with a run on banks. Remember that actual bank accounts are only insured up to $250k. Anyone who might still have a lot of money is going to be looking for the only safe bets in a deflationary depression. That's sovereign bonds.

If you want to understand what we are talking about take a look at the US in the early 1930's or Japan over most of the last 20 years. This is why we PPers keep saying that, yes, bond yields can go MUCH lower. In a deflationary depression like what your scenario would likely spark, I could easily see LTT yields near 1%.

People in a depression are interested in one thing only. How do I keep from losing whatever money I have left?

[Ad Orientem]

Which is why I believe in diversifying globally, at least up to a point.  I keep my VP stocked with a global stock fund, global bond fund, global REIT, emerging markets stock fund, and I even have an emerging markets bond fund.  Because that's how I roll, baby.

I don't go quite that far, but you make a very good point. In a severe deflationary depression, like one that might well be sparked by a precipitous end to QE, LTTs by themselves might not be enough to save you from the catastrophic losses you could suffer in stocks and gold. Hedging your stock with some international exposure is a really good idea.

Such diversification might also be helpful in the opposite scenario were we to have a nasty spike in inflation.

[MachineGhost]

So if the entity that is keeping yields low by buying every bond the Treasury issues stops buying, and the Treasury starts issuing many more bonds to make up for the shortfall in revenues, that will make yields... plunge?

Its clear now you don't understand Monetary Realism.  There is no real auction market in Treasuries.  Its all a fixed game with the interest rates set ahead of time by collusion among the Treasury, the Fed and the Primary Dealers.  There are no surprises.  There are no sudden Euro-style defaults imposing austerity because the Treasury simply cannot default.  And without a wholesale destruction of the productive capacity of the good ol' US of A, there is no possibility of hyperinflation.  So what are you left with?  The 1970's or Japan, neither which is exactly a nightmare scenario.

And when the Fed does stop QEternity, it won't effect the real economy anymore than they are effecting the real economy now.  Financial markets can collapse without effecting the real economy as the wealth effect on GDP is practically nonexistent.  There is no strong correlation between the real economy and the financial markets.

[moda0306]

So if the entity that is keeping yields low by buying every bond the Treasury issues stops buying, and the Treasury starts issuing many more bonds to make up for the shortfall in revenues, that will make yields... plunge?

Its clear now you don't understand Monetary Realism.  There is no real auction market in Treasuries.  Its all a fixed game with the interest rates set ahead of time by collusion among the Treasury, the Fed and the Primary Dealers.  There are no surprises.  There are no sudden Euro-style defaults imposing austerity because the Treasury simply cannot default.  And without a wholesale destruction of the productive capacity of the good ol' US of A, there is no possibility of hyperinflation.  So what are you left with?  The 1970's or Japan, neither which is exactly a nightmare scenario.

And when the Fed does stop QEternity, it won't effect the real economy anymore than they are effecting the real economy now.  Financial markets can collapse without effecting the real economy as the wealth effect on GDP is practically nonexistent.  There is no strong correlation between the real economy and the financial markets.

MG,

I think this is my favorite post of yours of all time.  I love when we agree.

[MachineGhost]

I think this is my favorite post of yours of all time.  I love when we agree.

I have you, Gumby and others on here to thank as well as my own ingenuity, as I've never read any of those endless MR/MMT blogs except for once.  No time, nor interest in joining another cult.  I've had my fill.

[rocketdog]

And when the Fed does stop QEternity, it won't effect the real economy anymore than they are effecting the real economy now.  Financial markets can collapse without effecting the real economy as the wealth effect on GDP is practically nonexistent.  There is no strong correlation between the real economy and the financial markets.

Please stop misusing the word "effect"; it's hurting my brain and it dilutes your argument. 

"Effect" means "to bring about," so what you said 3 times implies that the Fed will bring about a real economy (which implies that no "real economy" currently exists).  I think what you meant is that the Fed will produce change in the real economy (which acknowledges that a real economy already exists).  So the word you're looking for is "affect". 

Your 4th use of "effect" was correct in reference to the "wealth effect".  It's a subtle but critical difference when you're trying to make a point. 

Sorry to be such a stickler -- I usually ignore grammatical errors here and there because everyone makes them now and again (yes, even me).  But both my parents were in education so when I see someone blissfully unaware that they've misused the same word multiple times in a row it's like fingernails on a chalk board to me.

[Libertarian666]

So if the entity that is keeping yields low by buying every bond the Treasury issues stops buying, and the Treasury starts issuing many more bonds to make up for the shortfall in revenues, that will make yields... plunge?

Its clear now you don't understand Monetary Realism.  There is no real auction market in Treasuries.  Its all a fixed game with the interest rates set ahead of time by collusion among the Treasury, the Fed and the Primary Dealers.  There are no surprises.  There are no sudden Euro-style defaults imposing austerity because the Treasury simply cannot default.  And without a wholesale destruction of the productive capacity of the good ol' US of A, there is no possibility of hyperinflation.  So what are you left with?  The 1970's or Japan, neither which is exactly a nightmare scenario.

And when the Fed does stop QEternity, it won't effect the real economy anymore than they are effecting the real economy now.  Financial markets can collapse without effecting the real economy as the wealth effect on GDP is practically nonexistent.  There is no strong correlation between the real economy and the financial markets.

You are describing the situation obtaining during QEternity. If they ever stopped printing "money" to buy newly issued T-bonds, the primary dealers would not buy them at anything resembling current interest rates, as doing so would cause them tremendous capital losses when they tried to sell them into the secondary market. Right now that isn't a problem because they are merely frontrunning the Fed, which is supporting the entire "secondary market" by its purchases.

If this were not the case, then there would be no reason for the Fed to be buying securities at all. They are doing that to keep interest rates suppressed so that the Federal budget doesn't explode due to a gigantic increase in their interest rates.

[MachineGhost]

Sorry to be such a stickler -- I usually ignore grammatical errors here and there because everyone makes them now and again (yes, even me).  But both my parents were in education so when I see someone blissfully unaware that they've misused the same word multiple times in a row it's like fingernails on a chalk board to me.

Whoops, thats a new low, even for me!

[MachineGhost]

If this were not the case, then there would be no reason for the Fed to be buying securities at all. They are doing that to keep interest rates suppressed so that the Federal budget doesn't explode due to a gigantic increase in their interest rates.

The Fed doesn't mark to the market, so its of no real world consequence if their balance sheet goes into the red.  I presume you are thinking the Fed is monetaizing the debt via Treasuries to make sure its illegally-acquired mortgage-backed securities don't "explode" by higher interest rates.  What will cause these higher interest rates short of economic expansion and why would economic expansion be a bad thing?

[moda0306]

So if the entity that is keeping yields low by buying every bond the Treasury issues stops buying, and the Treasury starts issuing many more bonds to make up for the shortfall in revenues, that will make yields... plunge?

Its clear now you don't understand Monetary Realism.  There is no real auction market in Treasuries.  Its all a fixed game with the interest rates set ahead of time by collusion among the Treasury, the Fed and the Primary Dealers.  There are no surprises.  There are no sudden Euro-style defaults imposing austerity because the Treasury simply cannot default.  And without a wholesale destruction of the productive capacity of the good ol' US of A, there is no possibility of hyperinflation.  So what are you left with?  The 1970's or Japan, neither which is exactly a nightmare scenario.

And when the Fed does stop QEternity, it won't effect the real economy anymore than they are effecting the real economy now.  Financial markets can collapse without effecting the real economy as the wealth effect on GDP is practically nonexistent.  There is no strong correlation between the real economy and the financial markets.

You are describing the situation obtaining during QEternity. If they ever stopped printing "money" to buy newly issued T-bonds, the primary dealers would not buy them at anything resembling current interest rates, as doing so would cause them tremendous capital losses when they tried to sell them into the secondary market. Right now that isn't a problem because they are merely frontrunning the Fed, which is supporting the entire "secondary market" by its purchases.

If this were not the case, then there would be no reason for the Fed to be buying securities at all. They are doing that to keep interest rates suppressed so that the Federal budget doesn't explode due to a gigantic increase in their interest rates.

Libertarian666,

You seem to be suggesting that we are at grossly-below natural interest rates.  I tend to disagree.  At first glance, it might appear it's the fed's doing... super high US government debt and lots of QE by the fed.  However, interest rates are nothing more than a price for a good/service.  Prices are a product of supply and demand.  The largest determinant of the "demand" of loanable funds is the amount of credit-worthy borrowers that are in a position to want to take out a loan.  The supply is essentially whatever money banks can make available to borrow.  I don't think with our quasi-infinite-fractional reserve banking system that the "loanable funds model" holds up perfectly by any means, but the principal is still there that if there is low demand for loanable funds (which is very common in an economic contraction, especially when you realize that most "demand" is simply to refinance existing debt, therefore not really demand at all).

However, I could blather on all day about it... As much as you probably hate Paul Krugman, he does a very balanced job of describing three main indicators that would suggest that rates are low because the economy, in aggregate, wants them to be low... not gross government mismanagement of the supply of debt.

http://krugman.blogs.nytimes.com/2013/0 ... ypothesis/

1) Let's look at country's with a sovereign currency that haven't been doing a whole lot of QE.  They are seeing very low rates as well.

2) If QE is causing rates to be grossly unnaturally low, we should see a spike in interest rates when QE stops.  We see almost the opposite.

3) Very simply, if rates were grossly unnaturally low, we'd be seeing crippling inflation.

Once you realize that QE is simply trading paper for paper, with only limited effects in a severe recession since they CAN'T keep rates unnaturally low (ie, negative nominal).  I really think you need to fundamentally change your perspective on what money is and what QE is... because everything in our economy makes so much more sense now.  I feel like I swallowed the Red Pill and now see things for what they actually are.  This still leaves room for libertarian opinions... but my predictive capabilities I feel are far more balanced than they were in 2007 when I was a property-owning deficit hawk who wouldn't have bought a savings bond to save my life.  Keep in mind, my respect and understanding of gold has developed as well.  I used to see it as the monetary equivalent to a Micky Mantle baseball card and hated that it was rooted in needy women's psychology (this isn't meant to sound nearly as offensive as it probably does).  I feel like I fundamentally understand gold now and it puts me smack between the gold bugs and the "traditional" investors that see gold as a useless yellow metal.  It's an odd place to be.

[Pointedstick]

Very well put, moda. I had a similar transformation, and I think the entire PP puts us in an odd position vis-a-vis most investors. We own assets that most people like half of and hate the other half of.

I will say that I think coming to understand the true workings of the monetary system has made me a better libertarian. There's no sense insisting that something must be a certain way because a theory says it is, when it plainly isn't. We owe it to ourselves to oppose government on the basis of how it actually works rather than how we would prefer it to work, or how we fear it works.

And there's still just as much--if not more--room for opposition to regulatory oversight that harms the economy. Heck, even mainstream MR proponents must oppose these regulations if they're to be intellectually consistent, because the entire position is that debt is just a big shared illusion and real productivity is the real driver of our economic and fiscal health. Kill that real productivity through costly regulations and you kill the economy.

[MachineGhost]

"Property is theft. Nobody 'owns' anything. When you die, it all stays here."

Property cannot be theft if nobody "owns" anything.  Who would it be stealing from, Mother Nature which is a metaphysical concept?

[moda0306]

"Property is theft. Nobody 'owns' anything. When you die, it all stays here."

Property cannot be theft if nobody "owns" anything.  Who would it be stealing from, Mother Nature which is a metaphysical concept?

I know.  It's just a snarky quote I was using to make a point that property, at the very least, isnt what it seems.

[Ad Orientem]

"Property is theft. Nobody 'owns' anything. When you die, it all stays here."

"If I can't take it with me, I will have it forwarded on."
-Jack Benny

[moda0306]

Very well put, moda. I had a similar transformation, and I think the entire PP puts us in an odd position vis-a-vis most investors. We own assets that most people like half of and hate the other half of.

I will say that I think coming to understand the true workings of the monetary system has made me a better libertarian. There's no sense insisting that something must be a certain way because a theory says it is, when it plainly isn't. We owe it to ourselves to oppose government on the basis of how it actually works rather than how we would prefer it to work, or how we fear it works.

And there's still just as much--if not more--room for opposition to regulatory oversight that harms the economy. Heck, even mainstream MR proponents must oppose these regulations if they're to be intellectually consistent, because the entire position is that debt is just a big shared illusion and real productivity is the real driver of our economic and fiscal health. Kill that real productivity through costly regulations and you kill the economy.

This is what I think is huge.  Production is huge. Here is what we should be focusing on:

1) Is the government creating moral hazard that tend to move our economy away from legitimate real output to either laziness or make-work to a degree that's going to hamper our medium to long-term productivity?

2) Is the government building things that facilitate or are a detriment to education, the creation of wealth, and a feeling of general security and confidence, but to a balanced-enough degree to allow the private sector access to the majority of the productive decision-making, with the government more-or-less facilitating growth that the private sector "desires" to occur (not building bullet trains into the desert... unless it's Las Vegas )).

3) Are there any exterior threats to our confidence or productive capacity?  Ie, foreign invading forces (probably would have to be aliens at this point), natural disasters (massive), running out of natural resources, foreign-denominated debt.

Our monetary base, national debt, and member bank lending practices are just a few of the ways the government controls the levers surrounding our productive capacity.  They're very important, but if we don't see them for what they are, it's really just causing us to freak the eff out about things that we not only can't control, but we are probably wrong about anyway and cause us way too much stress in our lives unnecessarily.

To give this all a bit of perspective, I'd be willing to bet that most if not all people on this board started out as deficit hawks.  Doodle, myself, Gumby, and several others that have admitted have switched sides.  It took a fat piece of humble pie to all admit that we were looking at things in a very skewed way.

And like PS said, you don't have to give up your libertarian beliefs to believe MR has merit.  You could think that the government managing the money supply the way it does over-benefits borrowers, or banks, or government officials, or even savers! (giving them positive real interest rates on risk-free investments for 20 years).  You could say that there should be no connection between government and something as important as money.

I hate to be the one to go into the first Nazi/Hitler analogy, but the moral disaster that was the Holocaust is very easy to identify and acknowledge.  But I'll be damned if I would have been screaming that the German government, due to all its property confiscation, genocide and war mongering, appeared to be a Banana Republic that would sink under the weight of its own idiocy.  The f*cker actually came pretty close to controlling a huge chunk of Europe, and was very successful and efficient at producing well-engineered weaponry and containing/killing millions of Jews and other minorities.  A couple strategic moves different by Hitler and our world may look a lot different today.  I'd have been confident in my moral position against the Nazi's, but underestimating your enemy's ability to remain a economic and genocidal (or confiscatory, etc, etc that you'd describe our gov't as) powerhouse is a bad idea.