Gyroscopic Investing

Kshartle wrote: I know I'm not good at grabbing the quotes. I didn't mean to imply that you said it although it makes no difference to me. I think Ray needs an econ lesson. Who is he?

Well he manages the biggest hedge fund in the world with $120 billion in assets and he pioneered a PP-like investment portfolio that has done extremely well by following Harry Browne's principles of balancing risks against one another.

He's not just a random dude with a YouTube channel.

Pointedstick wrote:

Kshartle wrote: I know I'm not good at grabbing the quotes. I didn't mean to imply that you said it although it makes no difference to me. I think Ray needs an econ lesson. Who is he?

Well he manages the biggest hedge fund in the world with $120 billion in assets and he pioneered a PP-like investment portfolio that has done extremely well by following Harry Browne's principles of balancing risks against one another.

He's not just a random dude with a YouTube channel.

He should have enough money to buy any of Browne's books on economics then and learn the concepts.

I posted the video because it kind of reconciles what both our "camps" are saying. On the one hand I grudgingly concede about the credit and on the other you must concede about his conclusion - without productivity nothing else matters, see min 28 onward to the end

Mdraf wrote: I posted the video because it kind of reconciles what both our "camps" are saying. On the one hand I grudgingly concede about the credit and on the other you must concede about his conclusion - without productivity nothing else matters, see min 28 onward to the end

I think we will all agree that, completely and totally.

Kshartle wrote:He should have enough money to buy any of Browne's books on economics then and learn the concepts.

Most of Browne's concepts were formalized during a time where private credit was much smaller and the monetary system was based on a commodity. Neither are true anymore. Keep in mind that, by the mid 1970s, the credit market was only ~$4 Trillion. Today, private credit is ~$56 Trillion — and makes up the overwhelming majority of our purchasing power.

Frankly I'd be shocked if you disagree with much of what Dalio says. He is simply describing the mechanics of how a fiat government deleverages an economy that is built almost entirely on private credit. Surely you learned all this when you were a Finance major.

KShartle, the world you keep describing sounds like pre-1972 — when private credit was tiny and gold was our peg. We live in a very different world now.

TennPaGa wrote:

Pointedstick wrote:

Mdraf wrote: without productivity nothing else matters, see min 28 onward to the end

I think we will all agree that, completely and totally.

I don't think any MR person here has ever said otherwise.

Agreed.

Mdraf, you know that Dalio is talking about the private credit debt burden, right? The video is about private credit and how some government money printing can offset deleveraging "beautifully". He never said that the government needs to worry about income like a household or business does. How could he? He was recommending that the government "print money".

So long as the government doesn't print beyond productivity, all is well. We all agree on this. When the private sector is deleveraging the government needs to find the right amount of printing to offset the huge contraction in private credit. It's about finding the right balance.

He uses Weimar as an example of "bad" deleveraging. But, keep in mind that Germany was printing significantly more than what was needed for reflation of contracted credit. Germany was trying to pay off massive foreign-denominated debts. They were printing to the moon! And the more they printed, the farther away the moon got.

TennPaGa wrote:

Pointedstick wrote:

Mdraf wrote: without productivity nothing else matters, see min 28 onward to the end

I think we will all agree that, completely and totally.

I don't think any MR person here has ever said otherwise.

Absolutely PS... I'm amazed that this isn't more clear to our Austrian-leaning counterparts.... in fact they insist vehimently that productive capacity is the underlying constraint in any system, and you can't exceed it... You can facilitate productivity, but you can't just print it out of thin air by any means.

Productivity. Is. Key.

But credit needs to be understood because it is the grease that drives our productivity in a modern economy.  If all banks and the fed blew up tomorrow, we would be in quite the pickle, even though our true productive capacity hasn't really changed.

That's the whole reason that we try to look at two different sides of the economy...

1) The productive capacity and real wealth of private sector (or used by the private sector)... namely business, home, property, etc.


2) And the amount and nature of the nominal fiat paper surrounding that productive capacity, including;

- Net-financial assets to the private sector (T-bills, t-bonds, reserves, cash, coins).

- Private financial assets with a corresponding private liability (bond, stock, deposit in a bank, often with a direct link to a productive asset (home, factory, car, business).


Of some importance is the "moneyness" of assets in those categories, but in financial markets as liquid as ours, with such an oddly-rigged system, having a strictly-defined definition of what "money" is, when it's all really just credit anyway, and the fed's designed to make sure the payment system doesn't fail, is a pretty big mistake.

So the "nature" of the fiat assets is important, but only to the degree that the private sector views them as fundamentally different.  We view our deposits as money, as well as MM treasury accounts, as well as money in our pocket, and our CD's as well, but only a couple of those can actually technically be used as a medium-of-exchange.

Usually, the closer we think something is to being completely nominally risk-free, then we tend to just look at it as money, and for good reason... It's going to trade for money with ease because the system is rigged so that it gets paid back at market value.

So if the circle-jerkers give us one money-like fiat asset for our other full-money fiat asset with a backdrop of productive capacity that hasn't been destroyed, then nothing fundamental has changed on our confetti side of our balance-sheets.


The real question is what do deficits accomplish, because this is what changes that make-up.  However, in the midst of a collapse in private demand of trillions of dollars, running trillion-dollar deficits isn't going to really accomplish anything substantial... at least as long as we have our (drumroll) productive capacity .

moda0306 wrote: However, in the midst of a collapse in private demand of trillions of dollars, running trillion-dollar deficits isn't going to really accomplish anything substantial... at least as long as we have our (drumroll) productive capacity .

The deficits destroy productive capacity because they incentivise people to waste resources (human and material) building and doing what people don't want.

If they wanted that stuff done they would already be paying for it. Either the price is to high or it's not desired. Printing slips of paper doesn't change the fact that it's a waste.

If the government prints a bunch of money and pays construction workers to build bridges we are now poorer because of it. Those bridges were deemed too costly for the benefits or at least too risky. That is reality. When the government prints to pay for them it is fighting reality. Some of you are fighting reality. There is a consequence to fighting reality. When the bill comes do for all the garbage the government blew money on you see what a disaster it was.

The undesired economic activity can only be sustained with more printing which only makes it worse. Once the printing stops people stop that activity because they never wanted to do it naturally. They were induced by the little green tickets. They got a claim on resources & production (money) that belong to other people not in a fair trade, but through a welfare program from the government.

Deficit spending is just another welfare program.

If you guys continue to willfully ignore the inflationary effect of the Fed's money printing then I wasted my time posting the video. I guess Ray Dalio joins the CBO as being wrong according to your world view. It may help for you all to watch minute 25 onward several times.

Mdraf wrote: If you guys continue to willfully ignore the inflationary effect of the Fed's money printing then I wasted my time posting the video. I guess Ray Dalio joins the CBO as being wrong according to your world view. It may help for you all to watch minute 25 onward several times.

You're being indignant for no apparent reason. We are telling you we agree with Ray Dalio. He was very clear that the Fed cannot print hands into people's hands (he said, "the Fed can only buy/sell financial assets"). In order for the government to reflate the private credit economy, the Treasury (via Congress) must pass spending bills that allow it to spend and raise people's incomes. He was very clear on this.

And furthermore, Dalio advocates money printing to offset the contraction of private credit. THAT'S WHAT WE'VE BEEN SAYING ALL ALONG!

We barely disagree with anything that Dalio said. In fact, I'd say we agree on 95% of what Dalio said. What are you so upset about?

Gumby wrote: In order for the government to reflate the private credit economy, the Treasury (via Congress) must pass spending bills that allow it to spend and raise people's incomes. He was very clear on this.

And furthermore, Dalio advocates money printing to offset the contraction of private credit.

If this is what he truly advocates deep down then he wants people to be poorer and suffer. He wants the government to create money and inflate the paper value of his assets so he get a big bonus. He is either lying to you or he is incredibly stupid.

It's in his best interest as a money manager to have the government print and spend because it transfers wealth to him. It makes a sliver of people richer at the expense of anyone else.

The being said I'll reserve final judgement until after I watch the video.

Mdraf wrote: If you guys continue to willfully ignore the inflationary effect of the Fed's money printing then I wasted my time posting the video. I guess Ray Dalio joins the CBO as being wrong according to your world view. It may help for you all to watch minute 25 onward several times.

I don't think we're ignoring anything. the part of the video at the 25 minute mark clearly explains how QE is inflationary to financial assets, while deficit spending is inflationary to goods and services. This is what we've been saying all along. Do you also agree with Dalio's assessment?

Kshartle wrote:He is either lying to you or he is incredibly stupid.

Because, it couldn't be the fact that maybe, just maybe, you don't fully grasp the impact of what happens when a $56 Trillion private credit market tries to deleverage while less than $1 trillion in base money existed (pre 2008) in comparison. Dalio clearly understands deleveraging much better than you do. The reason I know this is because you never acknowledge the enormity of private credit deleveraging in any of your arguments. But, that's the whole point of the video: Private credit is the most important part of the economy! He was adamant about that.

Your own economic arguments seem to be from a world where private credit is either tiny or doesn't exist. And those arguments would all make sense if that were true. But, it's not. Our economy is almost entirely based on private credit.

Until you shift the conversation from the miniscule amount of base money, to the enormous level of private credit, you'll never get what Dalio is saying.

Gumby wrote: Because, it couldn't be the fact that maybe, just maybe, you don't fully grasp the impact of what happens when a $56 Trillion private credit market tries to deleverage while less than $1 trillion in base money existed (pre 2008) in comparison.

What happens?

Kshartle wrote:

Gumby wrote: Because, it couldn't be the fact that maybe, just maybe, you don't fully grasp the impact of what happens when a $56 Trillion private credit market tries to deleverage while less than $1 trillion in base money existed (pre 2008) in comparison.

What happens?

https://en.wikipedia.org/wiki/Great_rec ... on_the_U.S.

Pointedstick wrote:

Kshartle wrote:

Gumby wrote: Because, it couldn't be the fact that maybe, just maybe, you don't fully grasp the impact of what happens when a $56 Trillion private credit market tries to deleverage while less than $1 trillion in base money existed (pre 2008) in comparison.

What happens?

https://en.wikipedia.org/wiki/Great_rec ... on_the_U.S.

Yep. And the video explains it all step-by-step. It's very well done.

Now is when I expect kshartle to tell us how it's largely the government's fault that the crisis happened to begin with, and point out specific policies that contributed to it. KEY POINT: most of us will agree what that! But that's not what we're talking about here. We take it as a given that the government masses things up. What we're discussing is the mechanics of how they can respond to it.

So pre-emptively: kshartle, please don't bust out a huge post about how the Great Recession was the government's fault. You'd be telling us things we already know.

What's ironic to me about Kshartle's argument is that if you really follow it through it would also suggest that private sector credit expansion is inflationary and thus should be curtailed, even thought private sector credit expansion is a symptom of a healthy economy.

Stated differently, why would it matter whether credit was being created in the public sector or private sector if credit expansion were inflationary in either case?

If we are going to say that private sector credit expansion is somehow different from public sector credit expansion when it comes to inflation, I would say in what ways and why?  In both cases there is more money chasing around the same amount of good and services, right?  That would explain why we had more inflation in the decades before QE started (because private sector credit was expanding) compared to the period after QE started (when private sector credit was static or contracting).

It's hard for the public sector to fully offset a secular contraction in private credit, especially in an enormous economy like the U.S.

I think that we get so accustomed to beating the "decline of the U.S." drum that we sometimes forget that the U.S. is the most productive economy in the history of the world, and when the economic output of an economy like that begins to contract it's anything but inflationary because private sector credit begins to contract as well, and that's what gets this whole "deflationary spiral" thing swirling--i.e., private sector credit can begin contracting at a faster rate than the economy is contracting and the tightening private sector credit conditions can make further economic contraction inevitable because suddenly no one has any money to buy anything.

Pointedstick wrote: We take it as a given that the government messes things up. What we're discussing is the mechanics of how they can respond to it.

Then you are discussing insanity if you think they can solve the problem they create.

The deleveraging is the solution. They are just interfering and exacerbating it.

Do you think the problems of unsustainable debt that led to the great recession have been solved due to the government's intervention? Or have they been made larger?

MediumTex wrote: Stated differently, why would it matter whether credit was being created in the public sector or private sector if credit expansion were inflationary in either case?

The public sector is a euphamisim for vote-buying.

Politicians tax, borrow and print to buy votes.

We get the bill.

They buy food for people who aren't working so they can stay not working, roads and bridges they put their names on that no one else would pay for, wars, studies of the mating habits of mosquitos. I mean seriously guys, seriously. At this point it's been pointed out so many times.....I mean, are you guys really Obama and Bernanke?

Kshartle wrote: The deleveraging is the solution. They are just interfering and exacerbating it.

Do you agree that the deleveraging process can begin to feed on itself and begin to cause ALL loans to default, whether they were prudent loans in the first place or not?

Don't say that if it was defaulted upon it was, by definition, not a prudent loan.  If we assume that most people either have a car of house payment or some kind and that an extended period of unemployment would cause them to default on these loans, that doesn't mean that all of the loans were not prudent in the first place.  That would be like saying that it's not prudent to build houses in areas that are subject to tornadoes or hurricanes, just because there will occasionally be a lot of storm damage.

Just allowing all loans to default is a harder thing to do than most people imagine, especially when they begin to realize that it might shut an economy down for years as there will simply be no credit (or even banks) available for anyone to do anything (since presumably the government would not be attempting to fill the credit void in any way).

In such a scenario every bank would be out of business in a month.

MediumTex wrote: What's ironic to me about Kshartle's argument is that if you really follow it through it would also suggest that private sector credit expansion is inflationary and thus should be curtailed, even thought private sector credit expansion is a symptom of a healthy economy.

Stated differently, why would it matter whether credit was being created in the public sector or private sector if credit expansion were inflationary in either case?

Actually, both private and public credit expansion are inflationary, as they add to the stocks of "money substitutes". This is a key finding of Austrian theory. There is however a major difference in that the former is limited by bankruptcy of the over-extended lender(s), who are therefore careful not to lend excessively, while the latter is limited only by repudiation of the debt, whether explicit or via hyperinflation.

MediumTex wrote:
If we are going to say that private sector credit expansion is somehow different from public sector credit expansion when it comes to inflation, I would say in what ways and why?  In both cases there is more money chasing around the same amount of good and services, right?  That would explain why we had more inflation in the decades before QE started (because private sector credit was expanding) compared to the period after QE started (when private sector credit was static or contracting).

It's hard for the public sector to fully offset a secular contraction in private credit, especially in an enormous economy like the U.S.

I think that we get so accustomed to beating the "decline of the U.S." drum that we sometimes forget that the U.S. is the most productive economy in the history of the world, and when the economic output of an economy like that begins to contract it's anything but inflationary because private sector credit begins to contract as well, and that's what gets this whole "deflationary spiral" thing swirling--i.e., private sector credit can begin contracting at a faster rate than the economy is contracting and the tightening private sector credit conditions can make further economic contraction inevitable because suddenly no one has any money to buy anything.

It is impossible for "no one [to have] any money to buy anything". At some price, everything will be sold to someone.

MediumTex wrote:

Kshartle wrote: The deleveraging is the solution. They are just interfering and exacerbating it.

Do you agree that the deleveraging process can begin to feed on itself and begin to cause ALL loans to default, whether they were prudent loans in the first place or not?

Don't say that if it was defaulted upon it was, by definition, not a prudent loan.  If we assume that most people either have a car of house payment or some kind and that an extended period of unemployment would cause them to default on these loans, that doesn't mean that all of the loans were not prudent in the first place.  That would be like saying that it's not prudent to build houses in areas that are subject to tornadoes or hurricanes, just because there will occasionally be a lot of storm damage.

Just allowing all loans to default is a harder thing to do than most people imagine, especially when they begin to realize that it might shut an economy down for years as there will simply be no credit (or even banks) available for anyone to do anything (since presumably the government would not be attempting to fill the credit void in any way).

In such a scenario every bank would be out of business in a month.

New banks with sound money and sound lending policies would be in business in a week. I'd start one.

Kshartle wrote:

MediumTex wrote: What's ironic to me about Kshartle's argument is that if you really follow it through it would also suggest that private sector credit expansion is inflationary and thus should be curtailed, even thought private sector credit expansion is a symptom of a healthy economy.

Nope. You must be mistaking someone else's posts for mine.

When an individual or institution lends it's money, based on an expectation of a greater return, it's because it's weighed the risk to reward ratio and found it acceptable.

When an individual borrows money for investment they do so with the expectation they can create more value and return the money with interest.

This occurs a lot when the economy is either in good shape (ideal) or because government interference messes up the risk/reward ratio (bad).

So if I take out a loan to buy a tank to protect my rural retreat it isn't inflationary, but if the government issues a bond and uses the proceeds to buy a similar tank it IS inflationary?

If a private company issues $100 million in bonds to build a tollway it isn't inflationary, but if the government issues $100 million in bonds to build a similar roadway it IS inflationary?

I'm not following the distinction.  Both transactions involve an increase in the money supply, right?

MediumTex wrote: Do you agree that the deleveraging process can begin to feed on itself and begin to cause ALL loans to default, whether they were prudent loans in the first place or not?

Not all loans of course but certainly the decrease in unsustainable economic activity as the economy re-organizes and prices fall will cause disruption and hardship.

The government cannot solve this it can only postpone it and make it bigger.

They never want to let it crash because they will be out of ehhhhh i guess we'll call it a job.

If they had the presses and not the FED my God........it would be $1,000 for a stick of gum in a year. Every bill would just be huge gobs of pork as the feeding frenzy of vote-buying went into sheer beast-mode.