How many people agree with MR/MT theory described on the forum

[MediumTex]

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.

Who in the world would you loan money to in such a scenario?  Who would be a good credit risk under such conditions? (hint: It's where people from all over the world put their money in the second half of 2008.)

There is no need to speculate about what people with money under such conditions would do since we know from actual experience what they will do, and it's not loan money to other private sector borrowers.

[Kshartle]

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?

They are inflationary if the loans come from a bank that creates the money. If they come from your uncle then no. He doesn't have the magical ability to create money.

This is bad yes but this is the result of crazy violence-backed system where some have magical money-creation powers and everyone is forced by law to accept what they conjur up.

It is still far better if the banks do it and loan in privately since they want to be paid back. The guys in government just want to be popular and win the next election so we get the inflation and the waste of resources.

[MediumTex]

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.

I know the narrative well.  I've made the same argument many times.

I just don't know if it would actually work that way.

A true deflationary spiral triggered by a credit crisis sweeps up everything in its path and ALL loans will default, whether they were good loans to start with or not.

I think that imagining that only the inefficient and ill-conceived loans will default is unrealistic.  That's like saying that only the sinners will die in a flood.

[Pointedstick]

Why does everything eventually turn into factional reserve banking and government being evil? It gets old. I'm pretty sure we've all heard this stuff a million times before. Some of us may even agree with you in a theoretical sort of way inasmuch as it's fun to imagine alternate societies wholly unlike the one we all inhabit. But it gets tiresome when we're trying to discuss the way the world actually works and the conversation keeps getting hijacked with "everything the government does is bad!" I want to say, "okay, I agree with you… but now can we get back to what we were talking about before?"

[Kshartle]

I think that imagining that only the inefficient and ill-conceived loans will default is unrealistic.  That's like saying that only the sinners will die in a flood.

Yes no doubt there will be a lot of people hurt as the economy goes into withdrawal. Trying to get it high again to mask the symptoms will make it feel better in the short run but the eventual recovery will only be that much more painful. If the patient never stops taking the drugs he dies of an overdose (hyper-inflation or just total collapse from the misallocations).

We are moving on that path. Money for college so we have too many in college. Money for sloth so we have too many sloths. Money for bureaucrats so we have too many bureaucrats etc. etc.

The economy is shrinking and things are getting worse. The stimulus isn’t even getting us high anymore. I think they are going to up the dosage so I’ve bet that way. I HOPE they don’t however.

Either way a crash is coming, big-time. The dot-com bubble came from the low rates and inflation of the 90’s. The stimulus and low rate drugs that were given out to mask the pain resulted in the housing bubble. Now the drugs have caused a huge government bubble and I think a debt bubble.

They are getting worse. When this one pops if they fight it off with public sector credit expansion God help us. And I don’t even believe in God.

[moda0306]

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.

Who's willfully ignoring what?  There has been almost no inflation since Q3 2008.  The market obviously has very meager inflation expectations for the future, too.  I think you are the one ignoring things, sir.

The only reason Gumby and I came across this "nonsense" is because we wanted to make sure we understood the pressures on what one investing strategy had as 50% of the portfolio. (75% if you count gold and how it should react in a fiat system vs a gold-reserve system).

I wasn't "willfully ignoring" anything when I spent hours upon hours googling "how the fed prints money" and "are treasury bonds risk free" until I finally found a half-reasonable explanation of the system.  I had no horse in this race.  I still don't.  I see which sides are analyzing these things with logic, history, and perspective, and which sides are letting their anger and pre-conceptions cloud their judgement.  To me, Austrians have their emotional/moral axe to grind, and that is always going to trump reason and perspective if old beliefs are challenged.

Sorry if that sounded condescending but eventually this has to be laid out.  Both Gumby's and my goals in learning about this stuff (testing the theoretical and empirical assertions of HB himself) are well-planted in intellectual curiosity and capitalism (we want to make money!), not some will to have some weak preconceptions and political preferences reinforced by a goofy accounting system and the point of a gun.

[Kshartle]

Why does everything eventually turn into factional reserve banking and government being evil? It gets old. I'm pretty sure we've all heard this stuff a million times before. Some of us may even agree with you in a theoretical sort of way inasmuch as it's fun to imagine alternate societies wholly unlike the one we all inhabit. But it gets tiresome when we're trying to discuss the way the world actually works and the conversation keeps getting hijacked with "everything the government does is bad!" I want to say, "okay, I agree with you… but now can we get back to what we were talking about before?"

I think I've clearly laid out why it's economically destructive. I've tried to point it out without pontificating too much about the morality. The morality is the easiest way for some to understand why it's bad. They don't have to understand the more complicated economic arguments.

I'm trying to explain how it works. The idea that the government helps the economy by inflating and spending is immoral sure, but apart from that it's also completely non-sensical for the reasons I've stated.

[Libertarian666]

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.

Who in the world would you loan money to in such a scenario?  Who would be a good credit risk under such conditions? (hint: It's where people from all over the world put their money in the second half of 2008.)

There is no need to speculate about what people with money under such conditions would do since we know from actual experience what they will do, and it's not loan money to other private sector borrowers.

The US government is not a good credit risk, as they have a motive and the ability to destroy the value of the money that they borrow. That's one of the reasons that I don't lend them money.

I would lend money to a well-capitalized private sector borrower before I would lend it to a government with such a track record.

[moda0306]

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.

Tech,

The idea that anyone would trust "Techbanc" or whatever you'd call it, in the midst of a crisis where default is running rampant, is absolutely ridiculous, don't you think? 

I mean, imagine yourself in a slightly different twist of 1929 trying to start a bank after the fall or neutarization of the government and most of the financial system?

People maybe would barter and engage in small community debt contracts, or maybe even trade commodities, but to think that if we just allow the entire payments/loans system to collapse that people would run to your little bank (or any bank) to put their money in is a bit far fetched.  I realize you were half-kidding, but the principle is there... after a financial crisis (that's allowed to break the financial system fully, not just 3/4 of the way like 1929 or 1/3 of the way like 2008), nobody trusts any type of payment/loan system that they don't control and understand, if they choose to participate at all.

[Pointedstick]

I think I've clearly laid out why it's economically destructive.

Yes. You have. The problem is that you think we are discussing whether or not deficits and government are good or bad. We're not. We're just trying to figure out how they work mechanically, not whether they are good or bad.

You've said in the past that you don't care about the mechanics of the system. So why do you hijack every discussion of the mechanics to try to discuss the morality or effectiveness of the system? A car mechanic who's asked to fix a crappy car has to fix the car. The car's owner doesn't want to hear "What you've got is a rolling junkpile. I'd take it to the dump and buy a Lamborghini."

[MediumTex]

Why does everything eventually turn into factional reserve banking and government being evil? It gets old. I'm pretty sure we've all heard this stuff a million times before. Some of us may even agree with you in a theoretical sort of way inasmuch as it's fun to imagine alternate societies wholly unlike the one we all inhabit. But it gets tiresome when we're trying to discuss the way the world actually works and the conversation keeps getting hijacked with "everything the government does is bad!" I want to say, "okay, I agree with you… but now can we get back to what we were talking about before?"

I think I've clearly laid out why it's economically destructive. I've tried to point it out without pontificating too much about the morality. The morality is the easiest way for some to understand why it's bad.

I agree that governmental action will almost always be clumsy, inefficient, and lead to unanticipated outcomes.

[Kshartle]

Both Gumby's and my goals in learning about this stuff (testing the theoretical and empirical assertions of HB himself) are well-planted in intellectual curiosity and capitalism (we want to make money!), not some will to have some weak preconceptions and political preferences reinforced by a goofy accounting system and the point of a gun.

Then you guys should understand why since Jan 2009 through yesterday a gold/stock portfolio is up 80% and a ST/LT Bond portfolio is up a meager 6%.

The money expansion is inflating asset prices and it is my bet it will continue. I wish it would stop but I don't think it will and I'm prepared to continue betting that way.

[Libertarian666]

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.

Tech,

The idea that anyone would trust "Techbanc" or whatever you'd call it, in the midst of a crisis where default is running rampant, is absolutely ridiculous, don't you think? 

I mean, imagine yourself in a slightly different twist of 1929 trying to start a bank after the fall or neutarization of the government and most of the financial system?

People maybe would barter and engage in small community debt contracts, or maybe even trade commodities, but to think that if we just allow the entire payments/loans system to collapse that people would run to your little bank (or any bank) to put their money in is a bit far fetched.  I realize you were half-kidding, but the principle is there... after a financial crisis (that's allowed to break the financial system fully, not just 3/4 of the way like 1929 or 1/3 of the way like 2008), nobody trusts any type of payment/loan system that they don't control and understand, if they choose to participate at all.

Who said anything about anyone trusting my bank? I would be lending my own sound money.

Hope that helps.

[Kshartle]

Yes. You have. The problem is that you think we are discussing whether or not deficits and good or bad. We're not. We're just trying to figure out how they work mechanically, not whether they are good or bad.

Ohh sorry. I saw a quote from the Daly guy or whoever saying the government needs to help ease the deleveraging of the private sector by running deficits and Gumby saying we all agree on this. I wanted to explain how this is utterly false.

As far as how they work mechanically, you're right I'm not interested. They spend more money than they took in with taxes by printing or borrowing. All the transaction details aren't important in my opinion, just the effects.

Sorry.

[Pointedstick]

It's okay. I apologize too for being a little brusque. It's just that I feel like I get tired of hearing the same thing over and over again!

[MediumTex]

Yes. You have. The problem is that you think we are discussing whether or not deficits and good or bad. We're not. We're just trying to figure out how they work mechanically, not whether they are good or bad.

Ohh sorry. I saw a quote from the Daly guy or whoever saying the government needs to help ease the deleveraging of the private sector by running deficits and Gumby saying we all agree on this. I wanted to explain how this is utterly false.

As far as how they work mechanically, you're right I'm not interested. They spend more money than they took in with taxes by printing or borrowing. All the transaction details aren't important in my opinion, just the effects.

Sorry.

Kshartle,

Is there a real-world example of a government and central bank simply allowing all loans to default in order to strengthen the economy?

Maybe if we could look at how this process actually unfolded it would be helpful.

I'm not aware of any situations like this, but maybe you are.

[Kshartle]

It's okay. I apologize too for being a little brusque. It's just that I feel like I get tired of hearing the same thing over and over again!

I will retire to my Austrian lair now.

[Pointedstick]

It's okay. I apologize too for being a little brusque. It's just that I feel like I get tired of hearing the same thing over and over again!

I will retire to my Austrian lair now.

I want it to look like this:

[Kshartle]

Yes. You have. The problem is that you think we are discussing whether or not deficits and good or bad. We're not. We're just trying to figure out how they work mechanically, not whether they are good or bad.

Ohh sorry. I saw a quote from the Daly guy or whoever saying the government needs to help ease the deleveraging of the private sector by running deficits and Gumby saying we all agree on this. I wanted to explain how this is utterly false.

As far as how they work mechanically, you're right I'm not interested. They spend more money than they took in with taxes by printing or borrowing. All the transaction details aren't important in my opinion, just the effects.

Sorry.

Kshartle,

Is there a real-world example of a government and central bank simply allowing all loans to default in order to strengthen the economy?

Maybe if we could look at how this process actually unfolded it would be helpful.

I'm not aware of any situations like this, but maybe you are.

I believe the deflationary depression of 1920 was not resisted by the government or FED and so it ended quite quickly and paved the way for growth. Although in the later 20's monetary expansion distored the economy and led to the recession and government meddling turned it into a depression.

http://en.wikipedia.org/wiki/Depression ... E2%80%9321

Unemployment hit 11.7% in 1921 but was down to 2.4% by 1923 according to some study in this article. I have not verified any of that with other sources.

[MediumTex]

It's okay. I apologize too for being a little brusque. It's just that I feel like I get tired of hearing the same thing over and over again!

I will retire to my Austrian lair now.

After 21 pages, as best I can tell the "Kshartle Krew" position is that current Fed policies will definitely lead to inflation (though it's not clear when the inflation will show up in all prices), while the "Gumby Group" position is that current Fed policies might lead to inflation (though it's not clear when such inflation might show up in all prices).

So maybe we are closer to agreeing than we think.

[Kshartle]

Yes. You have. The problem is that you think we are discussing whether or not deficits and good or bad. We're not. We're just trying to figure out how they work mechanically, not whether they are good or bad.

Ohh sorry. I saw a quote from the Daly guy or whoever saying the government needs to help ease the deleveraging of the private sector by running deficits and Gumby saying we all agree on this. I wanted to explain how this is utterly false.

As far as how they work mechanically, you're right I'm not interested. They spend more money than they took in with taxes by printing or borrowing. All the transaction details aren't important in my opinion, just the effects.

Sorry.

Kshartle,

Is there a real-world example of a government and central bank simply allowing all loans to default in order to strengthen the economy?

Maybe if we could look at how this process actually unfolded it would be helpful.

I'm not aware of any situations like this, but maybe you are.

I think Estonia is another example (tiny one) of a nation reacting to a bursting bubble not with stimulus but with real austerity (actual spending cuts) and now returning to vibrant economic growth, the best in Europe.

http://danieljmitchell.wordpress.com/20 ... l-krugman/

I am not an Estonia ecpert though and don't know if they're staying on the same path and still growing at a fast clip.

[Kshartle]

After 21 pages, as best I can tell the "Kshartle Krew" position is that current Fed policies will definitely lead to inflation

If they never stop. It will lead to a deflationary collapse once they do though.

It will not lead to a revived economy anymore than sending an electric current through a corpse can revive it. The muscle contraction might look like a sign of life but once you end the current it will fall bank on the table smoking and smelling worse than before.

[MediumTex]

Kshartle,

Is there a real-world example of a government and central bank simply allowing all loans to default in order to strengthen the economy?

Maybe if we could look at how this process actually unfolded it would be helpful.

I'm not aware of any situations like this, but maybe you are.

I believe the deflationary depression of 1920 was not resisted by the government or FED and so it ended quite quickly and paved the way for growth. Although in the later 20's monetary expansion distored the economy and led to the recession and government meddling turned it into a depression.

http://en.wikipedia.org/wiki/Depression ... E2%80%9321

Unemployment hit 11.7% in 1921 but was down to 2.4% by 1923 according to some study in this article. I have not verified any of that with other sources.

There have been a lot of economic expansions and contractions in the U.S. in the last 90 years and it was during that period that the U.S. came to be the largest and most productive economy in the world with unprecedented levels of prosperity.

How do you feel about this almost century of prosperity achieved with a government and central bank constantly meddling in the economy?

I assume that the answer is that it would have been even better had the government and central bank left things alone.

[moda0306]

Let's take a look at the main moral claim for a minute that Austrians and the like are asserting... cuz there are flaws there too... maybe for a different thread...

They say, "'Monetizing' is hurting savers by creating inflation and engineering artificially low interest-rates."


A few problems here:

a) This contradicts the claim that the fed "artificially raises the price of treasury bonds and other financial assets including MBS's and the stock market."  The owners of those bonds are savers... you can't have it both ways .

b) "Saving" is simply earning income but not spending it.  You can always immediately trade that savings for any type of asset to retain wealth, whether that be gold, bonds, cash under the mattress, stocks, or land.  Nobody's forcing you to hold cash.

c) The fed isn't doing anything it hasn't said it would do!!  The fed has never made any promises about interest rates other than they'll use them as a tool.  The fed wants to balance inflation with unemployment. Inflation has been below the fed target for the last 5 years.  When people make saving/investing decisions, they do so with the knowledge that the fed likes 2% inflation (even if we think they really want it at 3% and to tell us it's at 2%).  So how have these judicious savers been punished?  They invested assuming 2% or 3% inflation and have received less than 2%.

So not only can people choose the assets within which they are going to save, but most of those assets have actually RISEN in value due to the fed bringing rates down (per Austrian's own admittance), and inflation has been lower than the fed target to boot.

[Kshartle]

(though it's not clear when the inflation will show up in all prices

It will probably take another year or two. It's already in bonds, gold, stocks, real estate, medical care, education, anything the government subsidises also.

The falling demand for energy as the economy shrinks and we have fewer working people is holding consumer prices down as well as the cheap goods from overseas where we export green paper and import stuff...seemingly for free right now.