Not Even Harry Browne Thought It Was Going To Be This Bad

[MediumTex]

All services are up a lot: plumbers, electricians, lawyers, mechanics, veterinarians, cable TV, internet, land lines, banking fees, movies etc.

Is your pay up a lot? 

If it's not, what do you think is the reason?

If it is, then paying the higher prices shouldn't be as difficult.

[notsheigetz]

Not that it matters, but do poor people build rich people's yachts? If so, I bet the boss pockets the profits and keeps paying the poor people next to nothing. Just guessing.

I think people who have skills in building yachts are probably the ones who stay employed in that endeavor and get rewarded for their work.

The boss keeps "paying the poor", "next to nothing"?

Silly economics - not to mention human relationships.

[Mdraf]

All services are up a lot: plumbers, electricians, lawyers, mechanics, veterinarians, cable TV, internet, land lines, banking fees, movies etc.

Is your pay up a lot? 

If it's not, what do you think is the reason?

If it is, then paying the higher prices shouldn't be as difficult.

Self employed. Down a lot. Reason? China flooded my industry.  Not really complaining, that's the free market. Thankfully I'm nearly retired.

[Mdraf]

True but it's a circular argument. They invest in T-Bonds because they're safe. And the reason they're safe is because the fed will be there to buy them!

No. My argument is that T-Bonds would be safe even if the Fed didn't buy them.

They would not. That is precisely why interest rates go up when the Fed stops buying them. Because they are less safe and there is less demand.

[Libertarian666]

True but it's a circular argument. They invest in T-Bonds because they're safe. And the reason they're safe is because the fed will be there to buy them!

No. My argument is that T-Bonds would be safe even if the Fed didn't buy them.

They would not. That is precisely why interest rates go up when the Fed stops buying them. Because they are less safe and there is less demand.

Aieee! Not this again!
(I agree with you about less demand but this is going to start another firestorm.)

[MediumTex]

All services are up a lot: plumbers, electricians, lawyers, mechanics, veterinarians, cable TV, internet, land lines, banking fees, movies etc.

Is your pay up a lot? 

If it's not, what do you think is the reason?

If it is, then paying the higher prices shouldn't be as difficult.

Self employed. Down a lot. Reason? China flooded my industry.  Not really complaining, that's the free market. Thankfully I'm nearly retired.

You don't think China has done that to other industries as well?

I'm just saying that there are a lot of cross currents out there and some are inflationary and some are deflationary.  China has put downward pressure on many prices in the U.S.

[smurff]

With regard to the topic from the OP, "Not Even Harry Browne Thought It Was Going To Be This Bad," I read on Wikipedia that when he was in the Army, Harry served as one of the "witnesses" of the infamous Castle Bravo hydrogen bomb tests at Bikini Atoll on March 1, 1954.  Because of  miscalculations it was the largest U.S. nuclear test ever exploded, and it was a disaster as many things went wrong, including massive contamination and accidental deaths.  I suspect that the experience informed his beliefs about freedom and liberty as he was discharged from the Army a year or so after the test.

I've often wondered whether Harry's ALS (Lou Gehrig's disease, which he died from in 2006) was related to his being there at that time.

Anyway, Harry Browne has witnessed and experienced some of the worst that could be witnessed or experienced. I really doubt that the recent machinations of the financial and precious metals markets would have roiled him.

http://www.pbs.org/wgbh/amex/bomb/peopl ... MEX51.html
http://en.wikipedia.org/wiki/Harry_Brow ... d_Services
http://www.youtube.com/watch?v=yEje927dygM
http://www.pbs.org/wnet/secrets/feature ... isode/846/

You can watch the amazing 1988 documentary, "Radio Bikini," here: 

https://www.youtube.com/watch?v=4c14uudVDG8

It's about the aftermath for the residents of the island and the members of the U.S. Armed Services who were there to participate (as actors or witnesses) in the events.

[moda0306]

True but it's a circular argument. They invest in T-Bonds because they're safe. And the reason they're safe is because the fed will be there to buy them!

No. My argument is that T-Bonds would be safe even if the Fed didn't buy them.

They would not. That is precisely why interest rates go up when the Fed stops buying them. Because they are less safe and there is less demand.

Actually, if you look at QE and interest rates, you'll notice rates have gone down after the fed quite buying them.

But even if the fed didn't buy treasuries from the open market at such a high rate... The unnatural thing is not that the fed is buying treasury securities at a fast rate or a slow one... It's that a currency issuer is even going into debt to spend in the first place.  This is an unnatural mechanism.

[Mdraf]

No. My argument is that T-Bonds would be safe even if the Fed didn't buy them.

They would not. That is precisely why interest rates go up when the Fed stops buying them. Because they are less safe and there is less demand.

Actually, if you look at QE and interest rates, you'll notice rates have gone down after the fed quite buying them.

But even if the fed didn't buy treasuries from the open market at such a high rate... The unnatural thing is not that the fed is buying treasury securities at a fast rate or a slow one... It's that a currency issuer is even going into debt to spend in the first place.  This is an unnatural mechanism.

Elsewhere in these forums some are saying that government debt is a good thing and I don't necessarily disagree. Just like a mortgage is not in itself bad.  But only within limits of sustainability.  What is a government bond after all? It is future taxation. That's all it is.  T-bond = Future taxation. Eventually this future taxation, as it grows, becomes unsustainable and unrealistic. That is why the rating agencies cut the US rating a couple of years ago.  Future taxation cannot be increased ad infinitum. So along comes the Fed and "buys" bonds. With what? The Fed does not earn anything and doesn't add value in any way. It simply creates the money out of thin air.  The mechanism of the whole thing is complex but irrelevant. Government keeps increasing future taxation beyond what it can collect and the Fed makes up the difference in money printing.

[Pointedstick]

What is a government bond after all? It is future taxation. That's all it is.  T-bond = Future taxation. Eventually this future taxation, as it grows, becomes unsustainable and unrealistic.

You're describing a city, a county, a state, or a government without control of its own currency, like Greece or Cyprus. But the U.S. federal government has the ability to pay its debts off by rolling it over into new debt, not unlike how someone with credit card debt might get a new card to pay off the old one. The difference: the U.S. government is a credit card holder with the most weapons and the largest, most productive economy in the world.

Should either of those conditions change, or the fact that the U.S. is the reserve currency issuer which is backstopped by those conditions, then we get a lot closer to the "debt is future taxation" world. But that's not where we're at now, and we have no idea when this will change. It will eventually, as all human institutions and their levels of power are fleeting, but fleeting in a cosmic sense may be and probably is longer than our lifespans.

[Gumby]

True but it's a circular argument. They invest in T-Bonds because they're safe. And the reason they're safe is because the fed will be there to buy them!

No. My argument is that T-Bonds would be safe even if the Fed didn't buy them.

They would not. That is precisely why interest rates go up when the Fed stops buying them. Because they are less safe and there is less demand.

There may be less demand (it depends on market conditions) but there is still demand, and they are no less safe whether T-Bonds are being purchased or sold by the Fed.

All that happens when the Fed stops buying is the rates float with the market (when the Fed wants to loosen its grip). For instance, rates went down after QE2 ended. Nothing was safer than T-Bonds during the post-QE2 panic and the Fed wasn't buying any of them. T-Bonds are the only place to safely park cash reserves.

And the more the government deficit-spends, the more reserves swell and need to be drained into future T-Bonds. In other words, government spending creates demand for T-Bonds (since excess reserves are drained into T-Bonds).

Mdraf, you keep trying to make the argument that T-Bonds aren't "safe" but you offer no evidence. T-Bonds are considered risk free whether the Fed is buying or selling T-Bonds through POMO. POMO is just monetary tool. It doesn't change the government's ability to make good on its promises.

[Mdraf]

Mdraf, you keep trying to make the argument that T-Bonds aren't "safe" but you offer no evidence. T-Bonds are considered risk free whether the Fed is buying or selling T-Bonds through POMO. POMO is just monetary tool. It doesn't change the government's ability to make good on its promises.

And you, my friend, are so caught up in the mechanics that you fail to see the overall picture of the situation, which is in essence that the government prints money to fund its deficit, like all governments have done in history since the Roman Empire and before.

[Pointedstick]

Mdraf, you keep trying to make the argument that T-Bonds aren't "safe" but you offer no evidence. T-Bonds are considered risk free whether the Fed is buying or selling T-Bonds through POMO. POMO is just monetary tool. It doesn't change the government's ability to make good on its promises.

And you, my friend, are so caught up in the mechanics that you fail to see the overall picture of the situation, which is in essence that the government prints money to fund its deficit, like all governments have done in history since the Roman Empire and before.

I think we all see that. Mind you, nobody's endorsing it. We're just telling it like it is.

[Mdraf]

What is a government bond after all? It is future taxation. That's all it is.  T-bond = Future taxation. Eventually this future taxation, as it grows, becomes unsustainable and unrealistic.

You're describing a city, a county, a state, or a government without control of its own currency, like Greece or Cyprus. But the U.S. federal government has the ability to pay its debts off by rolling it over into new debt, not unlike how someone with credit card debt might get a new card to pay off the old one. The difference: the U.S. government is a credit card holder with the most weapons and the largest, most productive economy in the world.

Should either of those conditions change, or the fact that the U.S. is the reserve currency issuer which is backstopped by those conditions, then we get a lot closer to the "debt is future taxation" world. But that's not where we're at now, and we have no idea when this will change. It will eventually, as all human institutions and their levels of power are fleeting, but fleeting in a cosmic sense may be and probably is longer than our lifespans.

Well yes, but that new debt is also more future taxation. Eventually you get to the point when the debt exceeds 100% possible future taxation. The only way out is to grow GDP faster than the debt. That is not what is happening.  Bernanke thinks the only way to do that is by helicopter, but it's not working. There is not enough demand by the private sector for bank loans, so the helicoptered cash sits unused in the bank's coffers.  Why is there not enough demand? Because the Fed's extremely loose monetary policy of the past 10-15 years created overcapacity everywhere. There is absolutely no incentive for capital to be invested in machinery and equipment. Ergo no inflation (yet).

[Gumby]

Mdraf, you keep trying to make the argument that T-Bonds aren't "safe" but you offer no evidence. T-Bonds are considered risk free whether the Fed is buying or selling T-Bonds through POMO. POMO is just monetary tool. It doesn't change the government's ability to make good on its promises.

And you, my friend, are so caught up in the mechanics that you fail to see the overall picture of the situation, which is in essence that the government prints money to fund its deficit, like all governments have done in history since the Roman Empire and before.

Please... I'm well aware of that. I never said any of this is a good thing.

But the mechanics are important because when you say something like...

the government prints money to fund its deficit

...You are implying that the Fed is funding the government. But that is just misunderstanding how the government funds itself. It funds itself through infinite T-Bond issuance (and each bond adds a net financial asset to the private sector in the process). The Fed can only conduct swaps with Primary Dealers, and there's no way for the Fed to swap bonds that weren't borrowed into existence in the first place. All money in our society (except coins) comes from debt issuance. We live in a debt-based fiat monetary system. That's just how it works. (Again, not saying it's a good thing).

The Fed is not authorized to buy bonds directly from the Treasury. The Primary Dealers must find the money to buy the bonds (the Fed gives them a temporary loan if they can't find the money), but there usually isn't a problem finding the money to buy the bonds because as long as the government spends its money, the reserves will be there to buy the next round of bond auctions.

But, none of this really matters since even if the Fed could buy bonds directly from the Treasury, it would just make the money supply more streamlined. Japan already does this, by the way. Unlike our own Federal Reserve, the government-owned Bank of Japan is allowed to (and does) buy government bonds directly from Japan's Treasury (known as the Ministry of Finance). And, of course, any interest payments on the bonds is refunded back to the Treasury. The BOJ has often held Japanese government debt in excess of 100% of the nation’s GDP. And since the government owns the bank, the loan is always interest-free and can be rolled over indefinitely. An interest-free loan rolled over indefinitely is the equivalent of printing fiat money. Has Japan had hyperinflation? No. Not even high inflation. And MR just explains why Japan is in the situation it's in.

Furthermore, you are trying to argue that T-Bonds aren't safe, but your argument makes no sense in a fiat currency (since the government can always roll them over to infinity). They are "fiat" bonds after all. There is no solvency constraint. The only safety issue could possibly be inflation (which I'm well aware of).

And this whole conversation is pretty pointless considering that a fiat government doesn't even need to issue bonds. The whole thing is just a legacy from the gold standard era that is used for oversight, reserve drains and interest rate targets. There is no real "borrowing" going on in a fiat government.

Again... I'm not suggesting that any of this is good. It just is what it is. Invest accordingly.

[moda0306]

What is a government bond after all? It is future taxation. That's all it is.  T-bond = Future taxation. Eventually this future taxation, as it grows, becomes unsustainable and unrealistic.

You're describing a city, a county, a state, or a government without control of its own currency, like Greece or Cyprus. But the U.S. federal government has the ability to pay its debts off by rolling it over into new debt, not unlike how someone with credit card debt might get a new card to pay off the old one. The difference: the U.S. government is a credit card holder with the most weapons and the largest, most productive economy in the world.

Should either of those conditions change, or the fact that the U.S. is the reserve currency issuer which is backstopped by those conditions, then we get a lot closer to the "debt is future taxation" world. But that's not where we're at now, and we have no idea when this will change. It will eventually, as all human institutions and their levels of power are fleeting, but fleeting in a cosmic sense may be and probably is longer than our lifespans.

Well yes, but that new debt is also more future taxation. Eventually you get to the point when the debt exceeds 100% possible future taxation. The only way out is to grow GDP faster than the debt. That is not what is happening.  Bernanke thinks the only way to do that is by helicopter, but it's not working. There is not enough demand by the private sector for bank loans, so the helicoptered cash sits unused in the bank's coffers.  Why is there not enough demand? Because the Fed's extremely loose monetary policy of the past 10-15 years created overcapacity everywhere. There is absolutely no incentive for capital to be invested in machinery and equipment. Ergo no inflation (yet).

There is no helecopter drop.  It's an asset swap between two different type of fiat-value securities that our currency-issuer puts out into the private sector.  It would be like if I gave you a gallon of gasoline for a gallon of diesel fuel.  You couldn't really go light a fire with

Growing GDP equal to the growth of the debt seems to be quite possible considering you've already admitted we have so much extra capacity.

[MediumTex]

Could we PLEASE stop getting hung up on whether the current system is good or bad, or is destined to fail at some point?

All Gumby and others are trying to do is to explain how the current system actually works, and what constraints it actually faces.

I would say that probably no one here would endorse a system like we have now for many reasons, one of which is that it allows the government to go off on all sorts of adventures that it wouldn't otherwise be able to have if its spending was subject to more constraints.

But the system we have is the system we have.  The only question is whether a person is interested in understanding how it actually works on a day to day basis.

To return to my Britney Spears example, no matter how much I hate her music I can't claim that it has no internal structure and logic.  I can only claim that its internal structure and logic isn't pleasing to my ears.

If anyone is saying that Gumby's and moda's explanations do not match up with reality, please explain in what way their explanations are inconsistent with the way our current system actually works.

The government will never run out of money.

The government will never have a problem selling bonds.

The government isn't reliant upon tax collections to fund its operations.

The government IS, however, constrained by inflation, and inflation could easily be the catalyst for the whole thing to fall apart, but that's the only real risk to the system as it currently exists.

[Mdraf]

It is NOT an asset swap. The T-bonds are backed by future tax collection. They are swapped with Fed funds that are not created by any value added. There is nothing on the other side of the balance sheet of the Fed before the asset swap takes place.

We keep going around in circles and frankly I'm getting bored with the discussion. Let's move on to something else as we all keep repeating the same thing.

[Gumby]

It is NOT an asset swap. The T-bonds are backed by future tax collection. They are swapped with Fed funds that are not created by any value added. There is nothing on the other side of the balance sheet of the Fed before the asset swap takes place.

We all agree that the Fed creates money out of thin air. But when it purchases T-Bonds from Primary Dealers, the Primary Dealers are no richer or poorer after the transaction is complete. In other words, from the Primary Dealer's perspective, it's just a swap (they exchanged one asset for another).

You may not think that's important, but it is.

The Fed doesn't have the authority to do a helicopter drop without taking assets away from the private sector. Whether or not you agree with Krugman's politics, he explains the problems with the mechanics:

The Fed is empowered to buy assets, which is what it does in an open-market operation [with Primary Dealers], but not just to give stuff away. So to do the equivalent of a helicopter drop, the Fed would have to work with the Treasury: it would have to buy government debt, and the Treasury would then hand out the money. But the Treasury can’t do this without enabling legislation.

Source: http://krugman.blogs.nytimes.com/2010/0 ... -question/

There is no Fed-sponsored helicopter drop. It's a myth. The Fed only has the power to swap assets with Primary Dealers. When the swaps are complete, the Primary Dealers are no richer or poorer afterwards.

Scott Fullwiler, Ph.D. (Associate Professor of Economics and James A. Leach Chair in Banking and Monetary Economics at Wartburg College) recently explained why the Fed is not the entity that conducts helicopter drops. If you're not familiar with Scott Fulwiler, he is a leading expert on Treasury/Fed operations. Fullwiler got QE right before before it even started. Fulwiler was asked to testify before Congress, about QE — unfortunately, they cancelled his testimony before he was scheduled to appear. Too bad.

He explains, in great detail, how the Fed operations work:

http://neweconomicperspectives.org/2010 ... tions.html

So, here we see that the open market operation has NOT affected the net worth of either the private entity selling the security or the entity’s bank. This is simply a swap of financial assets. If the financial asset in question was privately issued, then now the issuer has a debt to the Fed, and this is still a simple asset swap with no change in net worth.

Source: http://neweconomicperspectives.org/2010 ... tions.html

Primary Dealers don't get richer when they sell their T-Bonds for cash. They don't. That's a fact. And they don't get richer because they lose a T-Bond in the process (and the interest that goes with it).

[moda0306]

I think what this all comes down to is whether there is a fundamental difference between a fiat treasury bill an a fiat dollar bill. There are some important differences, but fundamentally there is just no reason to think these are completely different animals.

You may hate the refs in hockey, but lets not act like they're playing the game.  They're just tools in the process of keeping score.  Whether they award you with a blue point or a green point, it's still a point. You still have a fiat asset that could help you claim massive amounts of resources in the private sector if the game is set up so millions want to watch it. If the refs are bad, and people quit wanting to watch, the refs switching from red points to blue points isn't going to fundamentally change anything. It's the same score. 

What will change things is the quality with which refs make good calls and award the right team with the right penalties. But nowhere do we say that the refs didn't score enough points or that they cheated by blowing a whistle to make the game stop.  They are playing an entirely different game and abide by a different set of rules.  You may not like the rules or how they use them, but we aren't going to get anywhere if we look at the ref's like they're just players who cheat, and expect fans to agree and make the same assertions you do.

[moda0306]

Who says that a bond is backed by future tax collections?  That's like saying "the US dollar is backed by gold."  It just simply ain't true.

A treasury bond is just another asset on our balance sheet.  One we know is risk free in nominal terms.

[Gumby]

I will throw you a bone, however, Mdraf....

There is one situation where the Fed can enable the Treasury's fiat spending more freely. The Fed can technically provide a short term loan or repo to a Primary Dealer. The Primary Dealer can use that money to purchase T-Bonds at the auction. And the Fed can then swap that T-Bond from the Primary Dealer for some cash. But, the Primary Dealer still owes the money back to the Fed when the loan is due.

So, the Primary Dealer is no richer or poorer after it pays back the loan.

However, the Fed absorbed the T-Bond as if it were purchased directly from the Treasury — enabling the Treasury to spend fiat dollars on whatever Congress has approved in its budget. And now the private sector has less Treasuries to drain its deficit dollars into — causing excess reserves to swell to unhealthy levels (i.e. it's not all that helpful since the private sector could really put the T-Bond to good use for draining excess reserves into a risk-free return).

Whether the government uses this approach or not, it is still a "fiat" currency issuance either way. So it makes no difference if the money is printed directly from a printing press or through roundabout bond auctions since a fiat government doesn't even need bond auctions to begin with! But, the T-Bonds play an important role because they enable the private sector to save its deficit dollars (sort of like a government savings account).

In other words, the government's "liability" is the private sector's asset. But, is it really possible for a fiat government to have a true "liability" in the very currency it creates from its own debt issuance? No, not in the traditional sense of the word because it's impossible for that fiat government to run out of bonds or money. They can always create more.

It's all fiat no matter how you slice it. But, the important part to understand here is that a fiat nation has no problems paying its bills.

Inflation is the only constraint.

[Gumby]

Who says that a bond is backed by future tax collections?  That's like saying "the US dollar is backed by gold."  It just simply ain't true.

Precisely. Federal taxes are totally unnecessary for a fiat government (though, they do play a psychological role in holding politicians to a social contract). And the government could simply run T-Bond auctions indefinitely and never need another penny in taxes to stay solvent (tax collections are already small compared to expenditures anyway).

In a debt-based fiat monetary system all our money (except coins) comes from public debt or private credit. So, to say that bonds are backed by future tax collection is to ignore that all but a minuscule amount of our money supply comes from fiat debt issuance and private credit in the first place!

[Mdraf]

A bond is a future tax because the government has no other way to repay the bond other than to tax.  The government does not possess resources of its own. The government can not add one iota of new wealth to the econ­o­my nor to pay for the bonds– it can only dispose of already existing wealth by taking it from the private sector. How is that so difficult to grasp?

As for Primary Dealers being no richer or poorer, I agree. But the so called asset they received for their bond was created and injected into the economy and WAS NOT backed by future taxes nor anything else.

[MediumTex]

Who says that a bond is backed by future tax collections?  That's like saying "the US dollar is backed by gold."  It just simply ain't true.

Precisely. Federal taxes are totally unnecessary for a fiat government (though, they do play a psychological role in holding politicians to a social contract). And the government could simply run T-Bond auctions indefinitely and never need another penny in taxes to stay solvent (tax collections are already small compared to expenditures anyway).

In a debt-based fiat monetary system all our money (except coins) comes from public debt or private credit. So, to say that bonds are backed by future tax collection is to ignore that all but a minuscule amount of our money supply comes from debt and credit in the first place!

...and if all of this comes apart completely, isn't it reasonable to think that it will happen in Japan long before it happens here?