Permanent Portfolio Blinders

[doodle]

Okay....I'm going to get lambasted for saying this.

Does anyone think that the PP is acting like a set of blinders to the scarier realities of what is happening?

Does anyone think that the numbers just don't add up??

If we take on 2.5 trillion more in debt by the next election to reach 17 trillion in debt there is a very real problem if interest rates rise to just 4% because debt payments will equal about 1/3 of tax revenue.

In addition all of these deficit plans include unrealistic growth rate projections, huge expected savings from troop drawdowns etc. that everyone knows will not happen.

There is no plan, no responsible dialogue, no chance that this problem can be fixed without a major crisis.

[moda0306]

With 25% of my portfolio in gold, any collapse of the US Dollar or our bonds is something I'm not too worried about.  Maybe the bond portion of our portfolio has blinders on, but is your assertion that the PP won't properly protect us if the US dollar goes into decline?

I'm just excited for all the foreign demand for our goods that will result from foreign divestment of our dollars/bonds... but we've been through all this before, it seems.

[Gumby]

Okay....I'm going to get lambasted for saying this.

Does anyone think that the PP is acting like a set of blinders to the scarier realities of what is happening?

Does anyone think that the numbers just don't add up??

If we take on 2.5 trillion more in debt by the next election to reach 17 trillion in debt there is a very real problem if interest rates rise to just 4% because debt payments will equal about 1/3 of tax revenue.

In addition all of these deficit plans include unrealistic growth rate projections, huge expected savings from troop drawdowns etc. that everyone knows will not happen.

There is no plan, no responsible dialogue, no chance that this problem can be fixed without a major crisis.

The PP would only be a set of blinders if there were only one possible outcome to this mess.

Oddly, it still seems that you are unable to comprehend the possibility of more than one outcome, when in fact there are many different conclusions one can come to, such as...

Debt, Deleveraging, and the Liquidty Trap: Eggertsson (NY Fed), Krugman (Princeton)

Why is the concept of other possible outcomes so hard to understand?

[doodle]

Moda,

I think the question is "when do we become Greece?"

No matter how much MMT/econ. quant mumbo jumbo you want to go into, an economy is quite a simple system. Fundamentally an economic system as a whole can only consume/invest what it can produce. Money just facilitates this process.

Now debt is not necessarily bad if it results in investment that improves future productivity, but in the case of the United States our debt is not invesment, it is consumptive debt. In a rosy scenario we are looking at a national debt of at least 20 trillion dollars within the next 5-7 years with nothing to show for it but a bunch of failed wars and well fed complacent population. Because our debt servicing is impacted by interest rates (and interest rates tend to rise when balance sheets deteriorate), if we get a modest rise in interest rates servicing the debt could easily account for 1/3rd or more of the tax revenues.

This is a debt trap. Can someone please explain to me how this "debt trap" is not our reality?

(Japan has huge domestic savings and current account which makes it quite unlike the US....They are also facing a massive debt trap themselves if interest rates were to marginally rise due to improvement in stock market causing capital flows out of bonds....or a lower domestic savings rate)

[doodle]

Can someone please explain what happens when servicing debt accounts for 50% or more of government revenue?

This could happen even at 1% interest rates..so at some point it becomes a reality.

[Gumby]

This is a debt trap. Can someone please explain to me how this "debt trap" is not our reality?

We've been over this 1,000 times already.

[doodle]

Thanks for the piece by Krugman,

I appreciate the housing bubble that his model of economic reflation created after the tech bubble burst. As if one bubble wasn't enough, Krugman style economics practically brought about the destruction of the entire financial system:

Krugman in 2001:

In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package”?

Thanks, Paul. Any other Nobel Prize winning ideas?

[doodle]

Krugman vs. Mises -

Credit transactions are in fact nothing but the exchange of present goods against future goods. (The Theory of Money and Credit p. 47)

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness. (Planning for Freedom)

No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion. (Planning for Freedom p. 63)

The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment. (Human Action p. 556; p. 559 Credit)

What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse. (Human Action p. 559; p. 561 Credit)

If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. (Human Action p. 559; p. 562 Credit )

The final outcome of the credit expansion is general impoverishment. Human Action p. 562; p. 564 Credit

Credit expansion is the governments foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous. (Human Action p. 788; p. 794 Credit)

Every grant of credit is a speculative entrepreneurial venture, the success or failure of which is uncertain. (Human Action p. 536; p. 539 Creditors)

Ludwig von Mises Lenders of money have been held in odium, at all times and among all peoples. (The Theory of Money and Credit p. 264 Creditors)

[stone]

moda "I'm just excited for all the foreign demand for our goods that will result from foreign divestment of our dollars/bonds... but we've been through all this before, it seems."

The value of the dollar can fall due to foreign antipathy towards holding dollars and that does not imply an increase in foreign demand for US goods. If each time USD change hands amongst foreigners, the person who previously held them is willing to accept less oil or Rupees or whatever in exchange, then the value of the USD will fall. Its just like the way the market capitalization of Citi bank fell in 2008. There were still as many Citi shares in circulation. They just were worth less.

[moda0306]

We become Greece when congress tries to get us to default on our debt.

Uh oh.

More seriously, though, I guess I don't see increased interest rates as such a huge problem.  Think of 5 different things we could play the MMT game to spend money on right now, that would vastly increase the deficit:

1) Payroll tax holiday
2) Metric-system makeover
3) Another military adventure
4) Debit-card mailout
5) Increased interest on our debt

If we can "afford" any of these, why can't we "afford" #5?  Higher interest payments may be a weak form of "stimulus," but at worst, you've acknowledged before, that interest will maybe lead to a little bit of inflation if we monetize debt equal to the increase in interest payments.  I think the real question is, can we afford another XXX billion in deficits... and if so, how much will it matter whether those deficits go towards interest vs more stimulative places.

Further, higher interest rates usually will reflect one of a few things:

1) Default Risk
2) Inflation
3) "Opportunity Cost" (ie, what else is out there to attract capital)

If you believe #1 "shouldn't" happen, then it's hard to say that the US will get into the kind of default spiral that can afflict households, businesses, and Greece.

If you think of #2 as a soft default, that's fine, but it still doesn't carry the same self-fulfilling disastrous effects of hard-default Greece-style tail-chasing.

[MediumTex]

I think the question is "when do we become Greece?"

On our current trajectory I would say we will become Greece in about 2,000 years.

I'm imagining what the ruins of that flashy new Cowboys Stadium will look like.

The better question would probably be "when do we become Great Britain?"

[Gumby]

Doodle, you will be unlikely to see other points of view if you take everything you read and then go search Mises.org for a copy-and-paste rebuttal. That's not going to broaden your mind in any way. All that does is cause us to repeat the same conversation every Tuesday.

This is why you are coming to the same conclusion over and over again.

[AdamA]

There is no plan, no responsible dialogue, no chance that this problem can be fixed without a major crisis.

What kind of crisis?  

[doodle]

According to Mises, a collapse of the debt based money system.

[MediumTex]

According to Mises, a collapse of the debt based money system.

A bunch of pretty sophisticated bond traders don't seem to see it that way.

Are they wrong?

I would suggest that at any given point in time there is far more going on in the world than can be squeezed inside a television screen or newspaper.  It is often these "off screen" events that actually determine what happens and we never know about most of them--we just see the results and wonder at what a strange world we live in.

I appreciate your worry about how screwed up the world is, but I believe what is causing your worry is the belief that the world just recently got this screwed up, rather than the realization that the world has been screwed up in one way or another for a long time.

[doodle]

When I say crisis, I don't mean the end of the world. As Adam Smith said "there is a lot of ruin in a nation". Refering to how many screwups nations can take before breaking down.

Nevertheless, parabolic trends in all aspects of life tend to end badly in collapse. Our debt has basically gone parabolic.  Will this be the exception?

[doodle]

Is what is written below crazy talk??? Or is it rational? Could abolishing the Federal Reserve really benefit the nation? What purpose does the Federal Reserve have in our system?

Let us go back to the 1930's when America experienced "The Great Depression". During that time, America had skilled and willing workers, good farmland, a highly efficient transportation system, industries; all that was needed to form a rich nation - all except an adequate supply of money to carry on trade and commerce. Few people knew that the Bankers had purposely withheld $8 billion from going into circulation by refusing loans to the population while, at the same time, demanded payment on existing loans, so that money was rapidly taken out of circulation and not replaced.
 
Because of this control on the money, America was put into deep trouble. Jobs were waiting to be done, goods were available to be bought, but there was no money. Food was thrown into the ocean while people were starving. Twenty-five percent of the workers were laid off. The greedy Bankers took possession of hundreds of thousands of farms, homes, and business properties.
 
Believe it or not, some of the economic experts of that time blamed the moon for bringing about all the economic hardship. Others blamed the politicians. Still others blamed the consumers for not wisely spending their money. But the truth is: the Depression was purposely brought on by the Bankers through their artificial control of the money.
To the end the Depression, the United States Government borrowed huge sums of money from the Bankers for military equipment, which put a new supply of money into circulation. People were hired back to work, industries began to blossom, farmers sold their produce, and the economy boomed.
 
The same Bankers, who in the early 30's had no loans for peacetime houses, food and clothing, suddenly had unlimited billions to lend the Government for war purposes. The nation, which a few years earlier could hardly feed its own people, was now producing bombs to send free to its allies. Upsetting? You bet it is! And to think it is all because some private Bankers, who call themselves the Federal Reserve, have the legal right to create and control the money to run the country - as they so wish!
 
President Woodrow Wilson had this to say about the Federal Reserve: "A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world - no longer a Government of free opinion no longer a Government by conviction and vote of the majority, but a Government by the opinion and duress of small groups of dominant men."

[moda0306]

A collapse of credit would be extremely deflationary to long-lived assets and make the dollar extremely valuable.  This very well could have happened in 2008 (and did to some degree).

Of course, if this collapse leads to such social unrest to the point where our government's permanence is quesitioned, that could lead to currency issues, but I think this is an extremely odd way to look at things... I think I'll hold my bonds for the slamming deflation and then decide if revolution looks likely.

You can call MMT mumbo-jumbo if you want, but I think that's willful ignorance in some ways, because at no point does the interest become some kind of self-fulfilling default mess like Greece has right now.  You can have corruption, malinvestment, crony capitalism, inflation, high unemployment, an angry populace, etc., and these are all concerns to be sure, but the whole Greek self-fulfilling default-risk trap isn't one of them.  Maybe Ben Bernanke's big green "monetize" button will break, but I'm sure he's got another one ready to hook up just in case.

Also, pointing out that the US citizenry is much more indebted than Japan's is valid in some ways, but I don't think any useful conclusions can be derived from that.  In fact, I'd lean towards that being even more possibly deflationary because in recessions people will snap back their spending significantly faster if they have a debt overhang (us) than if they have a pile of savings (Japan).

[doodle]

It seems that the problem with MMT is that it puts no contraints on the debt money produced during boom times. Growth of money supply gets out of hand and floods the system creating malinvestment. When the economic contraction happens central banks just ramp up the money supply trying to keep the boom times going. This inevitably leads to long term collapse.

The benefit of a gold standard is that it limits economic growth and investment and forces bankers and investors to be judicious with their investments....they only can get so many investments. When the economic contraction happens it should be relatively short lived as the world hasn't been flooded with bad investments.

Greenspan makes a decent argument here before his Fed days: http://www.321gold.com/fed/greenspan/1966.html

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

[stone]

Doodle, what the MMTers say is, if the "bankers" (or whoever) withhold money, then the government needs to fill the gap with deficits. I think the description you paste about the 1930s collapse in demand also applies for today. Bankers have a responsibility  to only lend to people who can repay the loans. To me the problem is not one of missing credit but of unequal ownership. You can't expect bank lending to rectify what is just a symptom of unequal ownership. To my mind rather than the MMT solution of deficit spending, it would make more sense to recycle the money back into circulation with a citizens dividend/ asset tax combination.

[doodle]

I am leaning toward a return to a gold standard type currency /bitcoins...something that keeps wild credit expansion in check.

Humans routinely fail to live up to their ideals. MMT seems to be based on an idealist view of ever expanding growth with no economic contraction. This idea of economic utopia in the world of human greed and corruption seems ridiculous to me.

Unfortunately, I feel that returning to sound money at this point will require wresting an enourmous deal of power from the bankers who currently control the politicians. It is a system which is wrought with problems.

[moda0306]

Doodle,

That's the fairest and probably most agreed upon problem with MMT, IMO.  Misallocation of resources and malinvestment are great things to be concerned about.

But keep in mind, all this malinvestment may come back to bite your corporate bonds or FNMA bonds in your retirement portfolio, but it's probably going to benefit treasuries when the populace finally realizes that their "safe" bonds aren't that safe any more and people start deleveraging to repair their balance sheets from the bubble pop.

So if there's anything that's going to hurt treasuries, it's probably in the run-up, when it looks like all these other "investment options" (ie, bubbles) are much more lucrative and safe than they really are, thereby making treasuries need to compete on some level.  When the crash comes, the necessary deleveraging and deflating of said bubbles is going to make previously issued LT treasuries do well, because they didn't have some McMansion as collateral, and deleveraging brings interest rates down, especially for the safest assets.

When the big crash happens, the fact that our government caused the mess does not in any way, shape or form mean that treasuries are going to suffer... in fact it probably means the opposite.  I don't know if that's fair or irrelevant on a moral level, but it's the truth.

So rest assured that most of us agree or are at least concerned with the malinvestment argument.  Unfortunately (or fortunately?) as long as our government has clout & a military & an IRS agent, their bonds won't suffer for their sins of propping up a housing market, or any other bubble.

[moda0306]

I'd add that even if the MMT folks are wrong about whether MMT causes malinvestment, they seem to be right about the flexibility we have to go into debt.  Whether exercising that flexibility will lead to prosperity is a different issue than whether it exists in the first place vs it causing an inflationary or default spiral.

Keep in mind your argument hasn't been focused simply on prosperity vs malaise or recession, but the fact that the bond market and dollar will collapse as well.  These are two totally different issues to me, because they drastically change the nature of a sound portfolio.

Important: I think this shines a light on the mental hurdle that one has to cross before you can buy government-issued debt.  If you don't think a company is properly managed, you wouldn't loan them money on the cheap.  This logic, oddly, doesn't hold true with government bonds, and it's a tough hurdle to overcome.  Insustainable bubbles may be government's fault, but that doesn't reflect on the performance of their bonds.  HB hated big government, but he was able to look past his own biases and realize that the monetary system we have set up, and being the reserve currency, and with politicians usually looking to please the populace (and not default on purpose...erm...) that looking at whether our government is properly managed as a gauge as to whether to buy there bonds or not would be a huge mistake.  In fact, it's their incompetence that, as you say, causes these bubbles from which people have to run back to safety after they crash.  It's the recessions and ultimate deleveraging that governments may cause that make their bonds so important to own.

[stone]

The idea that the US military somehow conveys value to the USD seems to me very dodgy. Iraq shows just how expensive it is to try and get one country to sell oil for USD. To me the idea that you can bomb foreigners into being willing to save in USD is nonsense. The only thing that really conveys value to the USD is making sure all (or at least most) Americans are prosperous. Throwing all your resources at the military seems to me to do the opposit of that.

[doodle]

The problem is how do we get down off of this ridiculous credit bubble and then return to a sane level of growth.

A central issue to all of our problems is that an economy must grow at  3 percent a year to be healthy. Everyone knows that exponential growth in a finite system is impossible. We must create an economic system that functions with a steady state of growth.

In addition we must limit the expansion of the money supply and return to saner lending standards. We cannot get carried away with unsustainable debt fueled growth during boom times because that only leads to inevitable crashes as bad debts stemming from malinvestment fail.

Currently we are not letting these private bad debts fail and we are instead converting private debt into public debt, in the process eroding one of money's primary purposes which is a store of value.

This crazy private banker controlled money supply is absolutely crazy and it is ceding government power to a greedy cartel. Governments can't be trusted either with money because they just print and print and print which seems to support the idea of a gold standard.

I mean, all of this is in the constitution. Our founding fathers put it there for a reason. This kind of free and easy money shenanigans has been happening since the time of the greeks and romans. Although we might be more technologically advanced, the fundamental nature of humans still hasn't evolved. Until the the time that it does, it needs to be constrained by physically backed money.