How are "Economic Truths" Useful When They are Distorted by Government?

[Gumby]

My path as well.

It's just kind of funny, because Cullen branched off from MMT because he really just wanted to use MR to make money (for himself and his clients). Mosler made his money and has always wanted to get involved in politics. I find politics to be so boring these days. I find the art of investing and economics to be much more interesting — even though I personally never act on those analyses. For me, it's just about sleeping well at night (the entire point of the PP)!

So, I like it when people try to challenge MR, to test it. And whenever they can't I sleep even better because I can see how the PP works within the context of MR.

[Gumby]

How are textbook "Economic Truths" useful for determining investment allocations when you have an idea of how much the government is going to spend into the private sector  — and the government spending will therefore distort those truths?

I think I may have figured it out.

I think textbook "Economic Truths" are useless for general investment purposes — particularly when governments are distorting those economic truths. However, when governments fail, those "Economic Truths" are no longer distorted and are therefore exposed. While all governments eventually fail, the distortions from government can artificially keep the government alive for periods that are much longer than our lifespan — for generations, in fact. So, I think — given the extended timeline — we cannot rely on "Economic Truths" to guide the majority of our investments if we are investing for the short time that we are on this Earth.

In similar fashion, the science of astronomy teaches us — based on observing other stars and our knowledge of the elements — that the Sun's energy cannot be sustained forever. Eventually, the Sun will run out of energy and it will have trouble servicing its own core (sound familiar?). We are told this is a scientific fact — and I believe it is. So, should I tailor my investment strategy for the eventual collapse of the Sun, given that I know its undeniable fate in advance?

What about Eta Carinae? Eta Carinae is a star that lies about 7,500 light years away from Earth. The star is extremely close to dying. It may have even died already, but the light just hasn't hit us yet...

For Eta Carinae, that violent end might not be long in coming, according to a report in the latest Nature. "We know it's close to the end of its life," says astronomer Armin Rest of the Space Telescope Science Institute and the lead author of the paper. "It could explode in a thousand years, or it could happen tomorrow." In astronomical terms, a thousand years might as well be tomorrow; as for a supernova blowing up literally tomorrow, well, that's almost unheard of.

Source: http://content.time.com/time/health/art ... 04,00.html

So, we know starts will die. We just don't know when.

I think the "Economic Truths" that are distorted by the government are fairly useless for investment purposes. Maybe they get you to buy gold at the right time, or maybe they don't. Why not just acknowledge the "Economic Truths" exist and hold some gold (maybe 25%) for insurance instead? But, I don't see how "Economic Truths" help us invest if they are convincing us that a Supernova is about to happen soon. Even Eta Carinae — the dying star — can stay alive longer than we can stay solvent.

[Kshartle]

However, when governments fail, those "Economic Truths" are no longer distorted and are therefore exposed. While all governments eventually fail, the distortions from government can artificially keep the government alive for periods that are much longer than our lifespan. So, I think — given the extended timeline — we cannot rely on "Economic Truths" to guide the majority of our investments if we are investing for the short time that we are on this Earth.

I haven't taken the time to put my investment philosophy down yet but I think it's going to be great to get it down on electronic paper.

What you've written is part of the foundation. I'll expound on this and pull out some historical examples, at least two from recent history.

The point is if you can understand the effect of intervention.....you have a good idea of how things will change immediately post-intervention. Then you have to look for when the intervention required to keep the government's "reality-fighting" becomes so costly and damaging that it can no longer be sustained.

The second part is not easy to do. Getting the timing right is impossible. You will either be early or late. If you late it's too late so you have to be early. Being early looks like a problem for a while, maybe a long while, that's why you need a longer time-horizon. Even if you're early, as long as you're in position for the correction you make it all up in the end and more. That is if you've correctly analyzed the "invisible fist's" impact on the current market.

That's why I'm avoiding LTBs at the moment. To me they require so much intervention/distortion when it eventually becomes unsustainable it's going to be a either a total loss or stocks/gold have to skyrocket.

I'm prepared to wait for years without blinking. To change course would require fundamental change. The problems are growing though and making the result more certain.

Anyway, since I'll basically be making a full case for my investment philosophy I'll probably do it this weekend.

I appreciate the question though, it forces me to really examine the logic.

[Gumby]

What you've written is part of the foundation. I'll expound on this and pull out some historical examples, at least two from recent history.

Cool. It sounds like we agree more than we think we disagree.

The point is if you can understand the effect of intervention.....you have a good idea of how things will change immediately post-intervention.

For what it's worth, MR already does this. Understanding MR doesn't mean you have to think government spending is good in any way shape or form. All it does is describe the distortion and lets you be the judge.

Then you have to look for when the intervention required to keep the government's "reality-fighting" becomes so costly and damaging that it can no longer be sustained.

MR would call that "inflation".

The second part is not easy to do. Getting the timing right is impossible. You will either be early or late.

With MR we literally just look at how much the government plans on spending and where other sources of profits might be coming from (personal savings, foreign, etc). For instance...

“The following chart shows the sector contribution of corporate profits as a % of GDP.  What this chart is showing us is that corporate profits have been primarily driven by private investment historically, but the housing bubble and bust caused an unprecedented decline in private investment.

In the last 5 years this decline was offset primarily by government spending which added directly to corporate profits and has helped send profits to record highs.  The risk to corporate profits, in my opinion, appears to be to the downside as the deficit is shrinking quickly and we’re unlikely to see an equally offsetting increase from any other component barring another housing bubble and investment boom.”?

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Source: http://pragcap.com/the-most-important-charts

So, it gives you a birds-eye view of where profits are coming from and filters out the noise — such as QE swaps — that have very little direct effect on corporate profits. MR is just a way to understand the distortions — not to endorse them.

I appreciate the question though, it forces me to really examine the logic.

And I appreciate the sincere reply. It's pretty awesome.