PP in a Great Depression Scenario

[LC475]

Your thoughts on the validity of "PP" results pre-1971 led me to believe there might have been some confusion on to the importance or timing of the end of the gold standard.

Oh, did I express such thoughts?  Precisely what sort of validity did I claim they had?  Thanks.

[LC475]

And besides, Xan's right.

In point of fact, the dollar is still defined in terms of gold.

[Xan]

Your thoughts on the validity of "PP" results pre-1971 led me to believe there might have been some confusion on to the importance or timing of the end of the gold standard.

Oh, did I express such thoughts?  Precisely what sort of validity did I claim they had?  Thanks.

Well, when I questioned that a meaningful comparison could be made, you reacted as though I were from Mars or something.

[l82start]

http://gyroscopicinvesting.com/forum/ot ... ivil-6079/ just because Med Tex and Craig are not a visible presence does not mean the cat is away.. please lets keep it civil..

we have two threads getting attitude today, lets try to keep whatever is "in the air" off the forum

thanks

[Xan]

And besides, Xan's right.

In point of fact, the dollar is still defined in terms of gold.

Can you clarify this position?

[LC475]

Well, when I questioned that a meaningful comparison could be made, you reacted as though I were from Mars or something.

Actually, in response I gave you an extremely simple and easy-to-understand illustration of why the chart created by MachineGhost is not only meaningful (it obviously is; it contains data which has meaning) but could even be relevant to something someone might care about.

I already know that the gold situation changed dramatically around 1969-1971.  I could make all your arguments for you.

The opening poster asked a question.  I gave an answer.  You, and a gaggle of others, want to point out the stupidity, irrelevance, and even meaninglessness(!) of the opening poster's question.  And you really, really, want to hammer home that point.  Great.  Go ahead.  I'll just stay over here, off the rails, or off the handle, or wherever it is you think I am.  Thanks.

[LC475]

And besides, Xan's right.

In point of fact, the dollar is still defined in terms of gold.

Can you clarify this position?

In 1971, the definition changed to $38/ounce.  The dollar was still defined in terms of gold.  At the same time, the market price was allowed to float.  So the definition didn't really have anything to do with the actual gold-to-dollar exchange rate any more.  Then in 1973, it was changed to $42.22/ounce (I believe that was the next re-definition).  And, believe it or not, that is still the definition, technically speaking.  The definition doesn't seem to have any practical bearing on the world, but the law defining the dollar as ~1/42nd of and ounce of gold was never repealed, to my knowledge.

[Xan]

The opening poster asked a question.  I gave an answer.  You, and a gaggle of others, want to point out the stupidity, irrelevance, and even meaninglessness(!) of the opening poster's question.  And you really, really, want to hammer home that point.  Great.  Go ahead.  I'll just stay over here, off the rails, or off the handle, or wherever it is you think I am.  Thanks.

Yes, I do believe that it's not possible to meaningfully compare the post-1971 PP to a pre-1971 "PP".  I don't think that means I'm attacking you or the original poster.

Given that belief (which seems to be the mainstream one) am I not allowed to express it when somebody asks a question and gets a response which I believe to be not meaningful?  At the very least, comparisons across that border must be taken with a HUGE grain of salt, do you not agree?

[Pointedstick]

Okay, let me try to express the point we're trying to make in a clearer and hopefully less controversial manner.

The Permanent Portfolio is designed to have an asset that can profit from high levels of inflation. Today, gold is that asset, and can be that asset because it is a freely-tradable commodity with a market-determined value. Before 1971, gold was not a freely-tradable commodity with a market-determined value. As a result, it would only profit from inflation when the government unilaterally pronounced that an ounce of gold was worth more dollars. This made gold unreliable at best for serving as an inflation hedge. Therefore, a Permanent Portfolio that was composed of a quarter gold during the Great Depression was a Permanent Portfolio with a very poor ability to weather high inflation. Without holding a reliable inflation-profiting asset, I would posit that it wouldn't really be a Permanent Portfolio, any more than we would call something a Permanent Portfolio today if it was made up of 25% stocks, 25% long-term government bonds, and 50% T-bills. Not a bad portfolio, but not a Permanent Portfolio.

Now, as Ad Orientem pointed out, this non-Permanent-Portfolio would have done okay during the Great Depression (like all other cash-and-bond-heavy portfolios of the time), but have gotten crushed during WWII due to its lack of meaningful inflation protection (like all other cash-and-bond-heavy portfolios of the time).

Does that make sense?

[Libertarian666]

Thoughts on a HBPP in the 1930's (Great Depression) and World War II (1941-45)...

One reason why an actual HBPP probably would have done quite well in the deflationary depression years is that it was 75% cash and bonds (50/25) with only 25% in stocks. And then you get to add in the pure luck of having half your cash (gold) arbitrarily revalued from $22.67 oz. to $35.00. So you get an instant book profit of a little over 40% on that part of your PP at a time when the stock market is looking like Hiroshima right after we dropped the bomb. (We will ignore the inconvenient fact that privately held gold was nationalized right before the big increase in price. Perhaps you had yours stashed in Switzerland?) All of this means you are doing quite well in a deflationary nightmare world.

Alas nothing good lasts forever...

When World War II rolls around the same formula that made you a mint during the depression will kill your portfolio. World Wars, for those who are not great students of history, are ALWAYS inflationary. Often brutally. And with gold pegged at $35.00 oz you are in effect stuck with 50% in cash, 25% in long bonds and only 25% in stocks. That's a recipe for huge inflation adjusted losses.

But yeah, the HBPP would have been a whole different animal before 1971. Which is why a return to a hard money regime is probably the only thing that could make me abandon it.

Yes, that would have been good in the great depression other than the minor detail you mentioned, which would have made it very inconvenient to rebalance. 

[LC475]

Hey all,

I am back, returning triumphantly, and hopefully with drier Cheerios (less pissy) than before.

I can see that I was not properly confirming to the friendly and non-confrontational vibe we want here, and I apologize for that.

Okay, let me try to express the point we're trying to make in a clearer and hopefully less controversial manner.

The Permanent Portfolio is designed to have an asset that can profit from high levels of inflation. Today, gold is that asset, and can be that asset because it is a freely-tradable commodity with a market-determined value. Before 1971, gold was not a freely-tradable commodity with a market-determined value. As a result, it would only profit from inflation when the government unilaterally pronounced that an ounce of gold was worth more dollars. This made gold unreliable at best for serving as an inflation hedge. Therefore, a Permanent Portfolio that was composed of a quarter gold during the Great Depression was a Permanent Portfolio with a very poor ability to weather high inflation. Without holding a reliable inflation-profiting asset, I would posit that it wouldn't really be a Permanent Portfolio, any more than we would call something a Permanent Portfolio today if it was made up of 25% stocks, 25% long-term government bonds, and 50% T-bills. Not a bad portfolio, but not a Permanent Portfolio.

Now, as Ad Orientem pointed out, this non-Permanent-Portfolio would have done okay during the Great Depression (like all other cash-and-bond-heavy portfolios of the time), but have gotten crushed during WWII due to its lack of meaningful inflation protection (like all other cash-and-bond-heavy portfolios of the time).

Does that make sense?

hmm, I wonder. What kind of high-inflation scenario could take place wherein the government was *not* going to unilaterally pronounce the dollar to be worth less gold than before? Mmm?

You may say: well, it could happen, what if they did such-and-such maneuver! But remember: we are not talking about a little bit of inflation. Gold is there as a protection against high- and especially against hyper-inflation. There is no way the monetary issuer could perform *meaningful* (a term with a history in this thread! but the right term here), they couldn't do a *meaningful* long-term inflation without devaluing the money that they're issuing. By definition!

So to answer: Yes, @PointedStick , your post makes sense. And I respect you a lot, PointedStick, by the way. However, I do not think it tells the full story. I think it is very important to realize that *inflation is impossible without the money becoming less valuable in terms of gold*. Logically, that seems undeniable. If anyone would like to try to deny it, please try your hand at it.

And so actually, gold would have been a really good inflation hedge in the 1920s US as well as at any other time and place. That is my claim.

[dualstow]

Hi there
Should we call you LC or ….?