Asset Price Inflation

[doodle]

https://realinvestmentadvice.com/where ... -prices/

Pretty obvious that monetary and fiscal policy is failing to meaningfully stimulate inflation in consumer products yet is having a large impact on asset price inflation....houses, stocks, weird internet currencies etc. Maybe people are maxed out on consumption (especially the small percentage of people with plenty to spare)..after all at some point there is a limit as to how much food, clothing, consumer electronics, want to buy. All the superfluous money swimming around needs to find a home however and that process seems to be driving up assert prices to an insane degree. Asset price inflation as the linked article argues is acting like a pressure release valve for all the monetary stimulus. I recently read that in cities like Phoenix housing prices year over year are up more than 12%...during the middle of a pandemic. Same story for stock market, record highs during what has been an economically challenging period.

The fed seems hell-bent on achieving or exceeding it's 2% target but might be looking to gauge inflation targets by looking at data in the wrong places and in the process could be blowing the largest asset bubble this country has ever seen. I wonder how long this can go on for....

[Xan]

What would we invest in to hedge against that? All I can think of are assets...

[glennds]

What would we invest in to hedge against that? All I can think of are assets...

In keeping with the Permanent Portfolio dogma, I suppose the hedge would be Treasury Bonds because the endgame of what doodle is describing would be deflation, maybe even a deflationary depression. In this case bonds would carry the load. And it's noteworthy that of the PP asset buckets, long bonds are about as out of favor as you can get at the moment.

[glennds]

To me, a very tough question would be whether the US might face a debt crisis and could default on its debt.
Previously unthinkable, but with the debt to GDP getting as high as an estimated 130%?
Of course it will probably be called a crisis driven "restructuring" or something cute.

I think I heard that right now the Fed holds 20% of outstanding Treasury debt. Although there are economists who believe the cycle of the Fed buying up Treasury paper with printed money can go on for a very long time, and will keep long term interest rates low for a very long time also. I wish I knew. It all seems like uncharted territory.

[doodle]

To me, a very tough question would be whether the US might face a debt crisis and could default on its debt.
Previously unthinkable, but with the debt to GDP getting as high as an estimated 130%?
Of course it will probably be called a crisis driven "restructuring" or something cute.

I think I heard that right now the Fed holds 20% of outstanding Treasury debt. Although there are economists who believe the cycle of the Fed buying up Treasury paper with printed money can go on for a very long time, and will keep long term interest rates low for a very long time also. I wish I knew. It all seems like uncharted territory.

The idea of a sovereign nation with debt denominated in its own currency defaulting is unthinkable and would only arise from some serious political misunderstanding as to how our fiat currency system operates. I'm not at all concerned about a hard default (inflation obviously being the more obvious and easier path) However, with regards to inflation, it isn't showing up in consumables despite absolutely enourmous stimulus...over 3 trillion in gov deficits for 2020 alone with more projected into the future. Ten years of low interest rates and massive stimulus hasn't really budged prices for everyday goods...gas, food, clothing. I think Chipotle is still charging the same for a burrito bowl as it was over ten years ago. And wages are not experiencing much upward pressure, if anything increasing automation will exert downward pressure on wages. On the other side the stock market is up over three hundred percent in ten years and housing prices have doubled if not tripled in many markets from 2010 lows...that's a year over year year of between 7-10 percent...completely unsustainable in the long run. I wonder if this is a permanent revaluation of asset prices or a bubble that will eventually pop and cause the deflationary spiral that Harry Dent has been talking about for years. Demographically speaking we are also growing very slowly...barely at replacement levels at this point. Really the PP feels like the safest place and honestly I wonder if long bonds have further to run. I've been running light on them of late but thinking of reevaluating that and jumping back in to full 25%

[doodle]

The idea of a sovereign nation with debt denominated in its own currency defaulting is unthinkable and would only arise from some serious political misunderstanding as to how our fiat currency system operates.

Have you ever heard of this place they call Argentina?

Argentina's debt problem was because it was denominated in dollars. As their currency devalued it became increasingly impossible for them to pay it back.

[Hal]

Have you ever heard of this place they call Argentina?

Anyway, Raoul Pal discusses methods of defaulting on the debt. Summary at 29&38 min mark.
https://www.youtube.com/watch?v=NTExhsWPm5s

[doodle]

Have you ever heard of this place they call Argentina?

Anyway, Raoul Pal discusses methods of defaulting on the debt. Summary at 29&38 min mark.
https://www.youtube.com/watch?v=NTExhsWPm5s

I'm occupied and can't watch but I know he isn't talking about a hard default. That will never happen so long as our debt continues to be denominated in dollars.

[SomeDude]

Have you ever heard of this place they call Argentina?

Anyway, Raoul Pal discusses methods of defaulting on the debt. Summary at 29&38 min mark.
https://www.youtube.com/watch?v=NTExhsWPm5s

I'm occupied and can't watch but I know he isn't talking about a hard default. That will never happen so long as our debt continues to be denominated in dollars.

Doodle we agree on something! I might have to check my thought process................

A hard default would require politicians to swallow bitter tasting medicine. Much easier to print baby print.

Now I can think of instances where it might be politically popular to default. This would be if there was some type of hot war against China for example, the trillions we owe them might be defaulted on. It could also be that the US government goes full communist and the wealthy are even more vilified. Millionaires or billionaires owning treasuries might see them nullified somehow. I don't know how this would happen exactly, but if it's politically popular.......the government will do just about anything.

[doodle]

Have you ever heard of this place they call Argentina?

Anyway, Raoul Pal discusses methods of defaulting on the debt. Summary at 29&38 min mark.
https://www.youtube.com/watch?v=NTExhsWPm5s

I'm occupied and can't watch but I know he isn't talking about a hard default. That will never happen so long as our debt continues to be denominated in dollars.

Doodle we agree on something! I might have to check my thought process................

A hard default would require politicians to swallow bitter tasting medicine. Much easier to print baby print.

Now I can think of instances where it might be politically popular to default. This would be if there was some type of hot war against China for example, the trillions we owe them might be defaulted on. It could also be that the US government goes full communist and the wealthy are even more vilified. Millionaires or billionaires owning treasuries might see them nullified somehow. I don't know how this would happen exactly, but if it's politically popular.......the government will do just about anything.

I think it's important before anything that we nail down how our monetary system functions. The government is the monopoly issuer of currency, it's not a user of the currency. We can debate whether that's the best system, but currently that's what we have. A default makes no sense because the government isn't indebted to anyone. It's some weird carryover terminology from the gold standard that we talk about government debt at all. It's like saying the stadium is indebted to the Patriots when they issue 7 points after they score a touchdown and the stadium has to collect those points by taxing points from other teams in order to reward them.

In order to have a discussion about all of these topics we have to understand the mechanics of the monetary system we currently have. I'll admit, a lot of this is fuzzy to me as it's been over a decade since I've looked at this topic at all. I internalized a lot of it and erased all the details after jumping into the deep end many years ago.

[doodle]

Under our current system in order for the private sector to have money to spend the government must issue it into existence. That is an obvious truth being that they are the only one able to print and issue dollars. Were the government to eliminate it's 'debt' they would simply remove assets from the private sector. It's a balance sheet. Government debt = private sector assets .....as far as I recall

[SomeDude]

Under our current system in order for the private sector to have money to spend the government must issue it into existence. That is an obvious truth being that they are the only one able to print and issue dollars. Were the government to eliminate it's 'debt' they would simply remove assets from the private sector. It's a balance sheet. Government debt = private sector assets .....as far as I recall

Government Debt = Private sector assets sure. But government debt isn't a capital or consumer good. It might be an asset, but it's not wealth. Otherwise the government could borrow a bunch of money and magically we'd all be wealthier. That's nonsensical, so there's a piece that's missing.

What's missing is, in order to make good on it's debts the government has to cough up dollars in the form of interest or principle payments. The person receiving those dollars can then bid for the real tangible wealth of others.

The government defaulting on it's debts does not change the amount of wealth in existence anymore than it's borrowing creates wealth. However, by hard defaulting on some of the debts, the purchasing power and ultimately the tangible wealth the creditors thought they had is now gone.

Defaulting on the treasuries China owns would certainly make the Americans richer as now China would not be able to claim as much tangible wealth in the world or bid away US wealth in exchange for dollars it no longer has. - In essence, we would have gotten a trillion manufactured goods from China over the years for free. Right now we still owe them payment in the form of tangible goods or services they haven't collected yet.

[SomeDude]

Modern Monetary Theory is not Modern.

Governments have been inflating their currencies for as long as humans have had governments and currencies.

My hometown has a very nice Museum of History with a wing for the Roman Empire. You can go around a room and trace the history and decline of the Empire through their coinage. It starts with beautiful silver coins with the Emperors visage on it. A few hundred years later the coins are green corroded copper slurries since the government would periodically add copper to dilute the silver content but claim the new coin had the same face value.

Again, there is nothing modern about MMT and it's not much of a theory since it doesn't even work in theory.

My unofficial numbers show the dollar has lost 98% of it's value against gold in 50 years. The dollar still has value for sure, but it's down 98% in 50 years compared to a shiny rock. I doubt the next 50 years will be as good for the dollar. We'll see.

[Kriegsspiel]

Under our current system in order for the private sector to have money to spend the government must issue it into existence. That is an obvious truth being that they are the only one able to print and issue dollars. Were the government to eliminate it's 'debt' they would simply remove assets from the private sector. It's a balance sheet. Government debt = private sector assets .....as far as I recall

Banks issue it into existence when they make loans.