The 30 Year Yield Has Hit Its 2011 High

[Wonk]

I agree that now is as good a time as any for the scaredy cats to jump in with both feet.  The portfolio as a whole has been flat for about 4 months.  LT bonds are at solid support, gold is at solid support, equities are overbought but can get even more overbought and cash is...well, cash.  We could always have another panic liquidation which could present a golden opportunity, but those don't come by too frequently.

[Storm]

The funny thing is, for those not already in the PP, right now looks like possibly the scariest time to buy in:  "Gold and bonds are down!  Why would you buy something that's going down in value?"

Isn't being an emotional investor great?  (sarcasm)

re: Default risk of US Treasuries - there is none.  There is an inflation risk, but the US would never default on its bonds.  They would instantly lose reserve currency status and all the advantages it gives.  There is no need to default when you can just print as much money as you want.  The inflation risk is hedged by gold.  I see a thread above this that spouts this nonsense again, about credit downgrades and default risk.  As others have said, inflation is already priced into the market.

[Storm]

But isn't printing money akin to a partial-default.  Buyers (lenders) of US loans (treasury's) are repaid a sub-real return. Lending $1 to receive 50c back in real terms is a partial default (arbitrary choice of values). After such defaults, instead of pricing future loans at borrower risk premium = 0%, lenders start demanding a higher reward for the higher risk which pushes rates (yields) upwards... until you potentially have another mid/late 1970's early 1980's very high rates type crisis all over again. 

You're absolutely correct, Clive.  Inflation is a partial default.  But we follow the PP because our gold (and to some extent stock) holdings protect us from this scenario.  Personally, I might not mind a high rates crisis again.  I would love to be making 17-18% on my cash portion.  Of course I wouldn't love the other inflationary prices, but if you're willing to live frugally and invest wisely, you can make out pretty well during times of inflation.

[AdamA]

It really is a unique time economically.  One the one hand, we seem to be printing enough money to guarantee pretty bad inflation.  On the other, everyone is scared of debt crisis/municipal default (deflationary depression)  Either scenario seems very feasible.  Then again, markets tend to surprise us, so we could have something different altogether. 

Anyone have any strong opinions/predictions?  (Not that it matters as far as the PP goes).

Adam

[MediumTex]

Anyone have any strong opinions/predictions?  (Not that it matters as far as the PP goes).

Adam

No rising wages = No inflation.

Remember this equation.  It never changes.  Without rising wages, there may be some inflation in some sectors, but over longer periods higher prices without rising wages will simply lead to demand destruction and softness across the whole economy.

In an environment of both static wages and contracting credit (as we are in now), the Fed will do its best to create inflation; without rising wages, though, people simply don't have the money to pay higher prices.

A period of deleveraging following a financial crisis normally takes many years.  During such a period inflation is normally the least of anyone's worries.

This perspective is applicable to first world industrial economies like the U.S.  The developing world is seeing a different set of challenges, and inflation is clearly a problem there.

[AdamA]

MT--

Very interesting perspective, and one that strikes me as true.  In inflation, the price of everything, including labor, should go up.

I think the argument that someone who was a die hard inflationist may make is that the true definition of inflation is simply an increase in the supply of money and credit.  Increases in prices and wages are just symptoms of inflation, not inflation itself.  Since we are printing a lot of money, we, by definition, have inflation.

I'm guessing your counter-argument would be that we are printing one kind of money (dollars) while at the same time the credit "supply" is contracting on an even larger scale, hence low employment and wages and no inflation, just a "soft economy."

Am I close?

Adam

[MediumTex]

I'm guessing your counter-argument would be that we are printing one kind of money (dollars) while at the same time the credit "supply" is contracting on an even larger scale, hence low employment and wages and no inflation, just a "soft economy."

Am I close?

Adam

Yep, that's it.

The Fed is spraying a fire hose into a tidal wave and telling all the people on the beach that everything is fine.

Bear in mind, too, that any upward wage pressure that we do see is likely to be met with more offshoring of jobs to lower cost labor centers.

It's a really ugly cluster of problems.

Japan has already travelled this path.  It's not like the effect of a credit contraction following the bursting of an asset bubble is a mystery.

[AdamA]

That being the case, what is it that determines whether an economy inflates or deflates in bad times?  What makes the US different than Zimbabwe or Argentina? 

Adam

[MediumTex]

That being the case, what is it that determines whether an economy inflates or deflates in bad times?  What makes the US different than Zimbabwe or Argentina? 

Adam

Reserve currency status, most powerful military in the history of the world and a different demographic profile are a few of the differences.

Another important difference between the U.S. and the other countries you mention is the U.S. has a tremendous amount of influence over world capital flows (through instruments like the IMF, World Bank and the U.S. military). 

It's also important to remember that however corrupt the U.S. system may seem at times, it's still a safer place to park capital than almost anywhere else in the world.

Part of any hyperinflationary dynamic is capital flight, and that's not anything to be concerned about in the world's largest economy with the world's reserve currency.  For example, no matter how bad things got here it's hard to imagine someone closing up their business and heading to Mexico because they though it would be a safer place for their assets.

I think the thing people misunderstand about both inflation and deflation is that they are simply visible effects of causes that may have been corroding the system for a long time.  Once the damage begins to manifest itself in the form of deflation or inflation the window on meaningful mitigation has normally already closed.

The mid 1990s probably would have been the last opportunity to head off what we are seeing today.  Instead, we went in the opposite direction and increased government spending, increased leverage throughout the system and acted as if an unsustainable economic trajectory was somehow going to continue in perpetuity.

[moda0306]

MT, if the US Treasury were to mail a check for $5,000 to 200 million Americans ($1 Trillion), it would worsen the federal government's balance sheet to be sure, but I wonder if you'd answer the following questions:

1) Would most of that go to pay down debt of these individuals?

2) What interest rates on US debt would we start to see (big jump?  about thesame?)?

3) What could the fed do to mitigate any problems arising from question #2?  Could they simply buy more treasuries to pull down rates again?

4) Other than the moral issues associated with redistribution, spending, the federal reserve, do you see a large problem with this?

My overall point is that, forgetting about the morality of the fed, printing money, redistribution of wealth, etc., couldn't the government vastly improve the economy, if not the balance sheets of Americans with massive spending.  Either each American uses it to pay down debt (good, if you ask me), or they use it to buy something (good for businesses that are under capacity and unemployed individuals who need a job).  I have huge moral issues with most of this (thinking Austrian philosophy), but on a pure "improve unemployment and American peoples' balance sheets" perspective, wouldn't that help?  Japan has way more debt as a percentage of GDP than we do... don't we actually have a lot of flexibility in this area?

[moda0306]

Most of the keynesian/monetarist economists and opinions will point out that the fiat currencies that have failed are usually tied to gold or another currency.  For instance, Greece is paying huge interest on its debt because it can not inflate away its debt and there is actual default risk.  Therefore, they are in a trap that could possibly upend their economy.

Some say, that because the US has no default risk, all you're left with is inflation risk, and that you can't have inflation without full employment or close to it because you are obviously under capacity if you have high unemployment so a businesses marginal cost of building more widgets is a matter of hiring a couple guys, not building an additional widget factory.

When you're under capacity as a business, and if the act of producing more widgets every month is just a matter of hiring the unemployed, you're really charging not much more for your widgets at that point, but if demand is so high that you have to build another factory, you'll charge a lot for the widgets you're making with the first factory before building a second, and that's where inflation comes from.  Further, as part of the , buyers of US debt know fu

Money actually has to make its way through a fully utilized or under-utilized system to show you what's going to come out on the other end from increased prices.  There is Billy Blog, whose posts get extremely wonkish, but it's interesting to hear from someone who vehimently supports the full use of a completely fiat system and the federal reserve.  http://bilbo.economicoutlook.net/blog/

[MediumTex]

MT, if the US Treasury were to mail a check for $5,000 to 200 million Americans ($1 Trillion), it would worsen the federal government's balance sheet to be sure, but I wonder if you'd answer the following questions:

1) Would most of that go to pay down debt of these individuals?

I think a lot of it would.  That's what happened with the Bush tax rebates a couple of years ago.

2) What interest rates on US debt would we start to see (big jump?  about thesame?)?

Given that the one year FICA tax cut that was passed in December is similar to the amount you list above, I would say we have already seen what would happen--it's probably worth about a 50 basis point jump in 30 year treasury rates.

3) What could the fed do to mitigate any problems arising from question #2?  Could they simply buy more treasuries to pull down rates again?

We will see later this year.

4) Other than the moral issues associated with redistribution, spending, the federal reserve, do you see a large problem with this?

It will fail.  That's the main problem.  See Japan.

My overall point is that, forgetting about the morality of the fed, printing money, redistribution of wealth, etc., couldn't the government vastly improve the economy, if not the balance sheets of Americans with massive spending.  Either each American uses it to pay down debt (good, if you ask me), or they use it to buy something (good for businesses that are under capacity and unemployed individuals who need a job).  I have huge moral issues with most of this (thinking Austrian philosophy), but on a pure "improve unemployment and American peoples' balance sheets" perspective, wouldn't that help?  Japan has way more debt as a percentage of GDP than we do... don't we actually have a lot of flexibility in this area?

Can a problem of too much debt be solved with more debt?

If an economy has made malinvestments based upon phantom demand fueled by cheap credit, is it wise to try to validate the malinvestments by further propping up their value through government intervention?

If there is insufficient demand to support a given level of production, what is the point of trying to artificially prop up this level of production through Keynesian stimulus?

The Keynesian solution always feels good at the time.  When dealing with a debt overhang following the collapse of an asset bubble, however, I know of no example of it actually working to get an economy moving again (other than military Keynesianism, which is surely a solution that is more complicated than the problem it is seeking to solve).

How long can this go on?  A lot longer than anyone would think.  Does that make it good?  Of course not.  The fact that someone is able to engage in self-destructive behavior and not get immediate bad consequences doesn't mean it's a good idea to engage in self-destructive behavior.

[moda0306]

You said it yourself... most of the money would go to pay down debt... so where's the validation of malinvestments if we aren't predicting people to increase their purchases.  This would result in no more plasma tv's, homes, etc purchased (or at least very few).  But what it WILL do is help Americans' balance sheets and reduce the debt overhang sooner so there's less suffering along the way.

You can't have it both ways... you can't say that it's all going to simply go to pay down debt, and then say we're propping up malinvestments.  You can't talk about a worsening debt overhang, and then somehow say that giving people money (most of which they'll use to pay down debt) is actually going to WORSEN that overhang.  There's only so many places the money can go.

There's a consumer debt overhang.  It is a bad thing.  There is only so much money in circulation to address that overhang... what is the most likely thing to make it go away?

[MediumTex]

You said it yourself... most of the money would go to pay down debt... so where's the validation of malinvestments if we aren't predicting people to increase their purchases.  This would result in no more plasma tv's, homes, etc purchased (or at least very few).  But what it WILL do is help Americans' balance sheets and reduce the debt overhang sooner so there's less suffering along the way.

It won't help Americans' balance sheets.  It merely transfers liabilities from the private sector to the public sector (plus the leakage due to governmental inefficiency).  Who is ultimately on the hook for the public sector balance sheet?  The private sector, of course.  It's a bit like saying that a one-earner married household can improve its balance sheet by moving debts from the working spouse's balance sheet to the non-working spouse's balance sheet.

You can't have it both ways... you can't say that it's all going to simply go to pay down debt, and then say we're propping up malinvestments.  You can't talk about a worsening debt overhang, and then somehow say that giving people money (most of which they'll use to pay down debt) is actually going to WORSEN that overhang.  There's only so many places the money can go.

Remember, though, the amount of money we are talking about sending to people is a drop in the bucket when it comes to overall government spending.  I am talking about the overall size and scope of governmental spending relative to the tax base that exists to support it--that is the public sector component of the overhang.  We have created a government that we cannot afford and it is soaking up private sector liabilities that should simply be liquidated (especially considering that many of them were ridiculous malinvestments to begin with).  The entrepreneurs who took the risk should shoulder the losses.

Un-repayable debt cannot be repaid.  All the extend and pretend in the world doesn't change that.  This is the reality that the politician and central banker seeks to bend.

There's a consumer debt overhang.  It is a bad thing.  There is only so much money in circulation to address that overhang... what is the most likely thing to make it go away?

Provide an orderly mechanism for liquidating it and allow the businesses that made the poor credit decisions to absorb the losses.  Absent this mechanism, you wind up with a population of demoralized debt slaves.  Current consumer bankruptcy law falls far short of what is needed in this area.  Student loans by themselves are going to begin to feel like a case of financial herpes to a whole generation of young people who made malinvestments in higher education by taking on too much debt to obtain it.

While holding borrowers to the terms of their commitments may seem like a good idea in theory, if there simply isn't the ability to re-pay the debts under any circumstances, all sort of unintended consequences can flow from not allowing some mechanism for restructuring or liquidating those debts.  See Germany in the 1920s for an example of this problem.

[moda0306]

MT,

So what kind of bankruptcy reforms would you consider helpful?

[MediumTex]

MT,

So what kind of bankruptcy reforms would you consider helpful?

The first step would be to un-do all of the 2005 "reforms."  That was a banking industry-led hold-up of the American people if ever there was one.

The second would be to make student loan debt dischargeable like all other unsecured debt.

Those two changes would go a long way.

[moda0306]

Wow, agreed on the student loan point.

What were some of the worst parts of the 2005 revisions?

[MediumTex]

Wow, agreed on the student loan point.

What were some of the worst parts of the 2005 revisions?

Here is an article from shortly after the bankruptcy changes were signed into law summarizing some of the provisions:

http://money.cnn.com/2005/04/20/pf/bankruptcy_bill/

[Plumbline]

MT - what is your definition of :

1. inflation

2. deflation

It is important that we understand how we are defining these two terms, as they are frequently thrown around with reckless abandon to denote something as simple as rising gas prices.

I am not putting u in the reckless crowd for sure, but give us your "Official Gyroscope" definitions so that we can at least have a basis for this thread and others that reference these words.  I think we can all agree rising wages is a symptom and not a cause.

[MediumTex]

MT - what is your definition of :

1. inflation

2. deflation

It is important that we understand how we are defining these two terms, as they are frequently thrown around with reckless abandon to denote something as simple as rising gas prices.

I am not putting u in the reckless crowd for sure, but give us your "Official Gyroscope" definitions so that we can at least have a basis for this thread and others that reference these words.  I think we can all agree rising wages is a symptom and not a cause.

For purposes of this discussion, how about this:

Inflation is an economic environment where rising prices are followed by rising wages or rising wages are followed by rising prices.  In either case, the process needs to have an upward "spiral" quality to it that makes it seem as if the process is self-reinforcing as it is occurring.

(As far as upstream causes of inflation, I would say that in a fiat money regime, it is always poorly conceived central bank policies.)

Deflation is a decline in the value of items that are purchased with credit that is triggered by a combination of tightening credit conditions, a reduced willingness of households to take on additional debt and an excess supply of the item in question. 

(As far as upstream causes of deflation, I would say that in a fiat money regime, it is always poorly conceived central bank policies.)

The fact that the price of the small expenditures is rising (e.g., food) while the value of the large expenditures is falling (e.g., housing) makes it sort of confusing to figure out what is really going on.

That's why I say look to wages, because without rising wages inflation in certain sectors of the economy will typically be short-lived.  A great example is what happened to the price of gas in 2008--it looked like it might be the early stages of an upward spiral, but in retrospect it looks a lot more like a head fake, in part because wages weren't rising in tandem with prices.

[AdamA]

I think the true definitions of inflation/deflation are simply  an increase (or decrease) in the overall supply of money and credit. 

The thing is, there are so many different types of money and credit these days that it becomes deceptive to think in these simple terms. 

ie, "We're monetizing debt (printing dollars), so we have inflation." 

versus "A giant credit bubble just burst, so we have deflation." 

Which is true? 

I don't know for sure, but I think it's very useful to think in terms of wages as MT does.  So far, it would seem as though we have deflation (low wages, and unemployment).  If we monetize enough debt, we could have inflation.  To get there, we would have to severely undermine the market for our credit, which doesn't seems to have happened yet. 

In mind my, we will have deflation, until we reach a tipping point, wherein we have monetized so much debt that no one wants it any more.  I'm not sure what that will take.  Like someone said, we're by far the best-looking horse in the glue factory right now...things can change quickly though. 

I'm very interested in this topic, so please let me know if anyone has any strong opinions one way or the other.

Adam

[Plumbline]

The fact that the price of the small expenditures is rising (e.g., food) while the value of the large expenditures is falling (e.g., housing) makes it sort of confusing to figure out what is really going on.

That's why I say look to wages, because without rising wages inflation in certain sectors of the economy will typically be short-lived.  A great example is what happened to the price of gas in 2008--it looked like it might be the early stages of an upward spiral, but in retrospect it looks a lot more like a head fake, in part because wages weren't rising in tandem with prices.

OK MT, we can go with the wage thing to act as an "indentifier" of inflation or deflation. Would you agree that these symptoms,i.e, pick your favorite: wages, or prices, all have at its origin a credit event?  Either the increase of credit or the destruction of credit.  I think we are saying similar things, just trying to make the point that no matter how much the printing press runs, without an expansion of credit there will be no inflation.  Perhaps inflation is in the cards for later, but this current destruction of credit dwafts any stimulas.  Banks are not lending and consumers do not want to borrow.    

[Plumbline]

Don't have the "reply" / "quote" thing down yet for this forum.  How do you guys get the previous quote in the nice little blue box?  Sorry

[moda0306]

MT has mad the point of the fact that people's priorities are changing as it pertains to purchases and taking on more debt.  Food, old used cars, used furniture, food... aka, "the basics" with which you don't use debt to purchase, are rising in price.

Nice big houses, fancy cars, boats, vacations, etc. (non-needs that people often use debt to purchase) are falling in price.

People are 1) avoiding debt (deleveraging), and 2) reprioritizing what's important... food and a reliable car, or a McMansion and a yacht?

Inflation and deflation, depending on how you define them in discussion, can consist of simple changes of demand of available products.

[MediumTex]

Don't have the "reply" / "quote" thing down yet for this forum.  How do you guys get the previous quote in the nice little blue box?  Sorry

Click the "quote" button in the top right hand corner of a post.