Moving up to 4.9%

[Jack Jones]

Thanks for the reading materials. Sadly, I don’t think we have a reasonably representative government. And anyway, the federal reserve is supposedly not part of the government.

[Pointedstick]

Thanks for the reading materials. Sadly, I don’t think we have a reasonably representative government.

You're welcome. I'll probably be right there with you on subjects like gerrymandering and term limits (and maybe money-in-politics as well?), but personally I feel like our government is quite representative: the USA gets political leadership just as stupid as its population is on average.

And anyway, the federal reserve is supposedly not part of the government.

Well the head of the Federal Reserve and the other governors of the Federal Reserve Board of Governors are political appointees, and the FOMC's legal charter comes from the US Government. So to the extent that what you say is true, I feel it's a distinction without a difference. In practice, they act as one.

[boglerdude]

Fed could buy directly from treasury to fund deficit. eg money supply +10%/year. If they step out of private markets eg stop buying mortgages and corporate bonds, a free market would want ~13% rates. You'd get 10% CPI and businesses might fail with those rates. Japan is rich and creates make-work jobs because the central bank buys stocks. OTOH, I suppose our overlords would not allow the S&P to tank for long, unless there's a real supply shock like Russia's war and their 16% 10yr

Maybe this is where commodities would just match CPI while bonds and stocks drop. I dunno if AQR's secret sauce would be worth the fee...maybe If they have access to cheaper leverage than you

Also, is PFIX the best way to profit from rising long rates?

edit1: https://www.bogleheads.org/forum/viewtopic.php?t=374676

edit2: No k-1 commodity fund https://www.invesco.com/us/financial-pr ... d=ETF-PDBC

edit3: https://www.convexitymaven.com/wp-conte ... ted-sf.pdf

edit4: https://old.reddit.com/r/LETFs/comments ... ification/

[Jack Jones]

A good introduction can be found in "The Seven Deadly Innocent Frauds of Economic Policy", by Warren Mosler, which is available online at https://warrenmosler.com/wp-content/upl ... l-2024.pdf

I'm finding Mosler to be a bit tedious and repetitious. It seems more like a work of propaganda than a serious book on economics.

Therefore, the way I see it, we first set the size of government at the
“right” level of public infrastructure, based on real benefits and real costs,
and not the “financial” considerations. The monetary system is then the tool
we use to achieve our real economic and political objectives, and not the
source of information as to what those objectives are. Then, after deciding
what we need to spend to have the right-sized government, we adjust taxes
so that we all have enough spending power to buy what’s still for sale in the
“store” after the government is done with its shopping.

I've read this book too, and ultimately I find its perspective to be skewed towards theory and ideology rather than being particularly descriptive of the world we live in today. It's thinly-disguised monetarism wrapped up in a whole lot of the author's political ideology and preferences.

According to Mosler's Fraud #1, inflation can arise when government spending is too high or when taxes are too low. We can invert this to say that deflation can arise when government spending is too low or when taxes are too high. So according to (inverted) Mosler, deflation is quite possible, and only depends on government mismanagement of the economy.

Maybe you could save me some time...Does Mosler address your claims about deflation elsewhere?

[dualstow]

He has a website but I didn’t read it, including the following:
https://moslereconomics.com/2008/07/15/ ... -forecast/

[mathjak107]

everything is not invertible and true

i remember my economic professor drew two graphs .

one was inflation rising and the other showed that the preferred activity in high inflation was going to the movies .

and then he said , well there it is , proof that going to the movies causes inflation

[dualstow]

According to Mosler's Fraud #1, inflation can arise when government spending is too high or when taxes are too low. We can invert this to say that deflation can arise when government spending is too low or when taxes are too high. So according to (inverted) Mosler, deflation is quite possible,

everything is not invertible and true
i remember my economic professor drew two graphs .
one was inflation rising and the other showed that the preferred activity in high inflation was going to the movies .
and then he said , well there it is , proof that going to the movies causes inflation

What your professor did was not inversion, or at least not the same inversion as Jack’s.

Jack’s was like, if lowering A increases B, then rising A decreases B.
Your professor joked that if A leads to B, then B causes A. Essentially swapping cause and effect.

[mathjak107]

does anyone seriously think that government underspending is ever going to be a problem here.

i would never invest my money based on that premise

[Jack Jones]

He has a website but I didn’t read it, including the following:
https://moslereconomics.com/2008/07/15/ ... -forecast/

So I guess now we’re looking for an explanation from Mosler about how the modern economy is so much different than it was when this prediction was made (2008), such that now deflation is no longer a significant risk.

Or we can dispense with Mosler as a source for this claim.

[yankees60]

Deflation is not a significant risk in modern economies; they simply don't work that way any more.

You wouldn't buy flood insurance if you live at the top of a hill in the desert. Insure against the risks you actually face.

Wisdom!

[Pointedstick]

In the end I have to admit that my perspective is mostly based on my own observations, and any 3rd-party sources I can provide are mostly after-the-fact rationalizations offering support for what I already concluded. I don't have the ability or desire to defend them.

Mostly I think the economy is really not something it's possible to model mechanistically such that you can say with confidence that if you pull Lever A, then Outcome X will happen, and then if you reverse Lever A, then Outcome X inverts, and stuff like that. It can't be reduced to a mathematical equation.

Rather, over time I feel like I've simply made a bunch of observations of reality that fit together in ways that make sense to me to roughly explain, in a way that's adequate for my own purposes, how a modern economy works. I really like that Warren Buffet quote "it’s better to be approximately right rather than precisely wrong."

Among these observations that I feel are approximately right:

• Most money is virtual and digital today, not "backed" by anything — not even paper! Only a vanishingly small amount of money is physical cash; the rest is simply numbers on spreadsheets, and at least at a technical level, can be created and destroyed as effortlessly as any digital data. Technical barriers to increasing or reducing it are low.
• Inflation and deflation are generally caused by the supply of money de-synchronizing from the supply of purchaseable goods and services, but with unpredictable hysteresis and a lot of caveats. It's not easy to define a 1:1 relationship here; 5% more money does not immediately increase inflation by 5% that year; the effect is muted and delayed in uncertain and unpredictable ways. Also, being perfectly in sync is impossible, and why prices of individual goods and services throughout the economy are constantly inflating and deflating according to supply and demand in their markets. Averaging all of these gives you a general rate of inflation or deflation throughout an entire economy, but with a substantial amount of hysteresis.
• Such aggregate numbers are not very useful for individuals; everyone has a different personal basket of goods and services that they care about, many of which are specific to their local market. If the rate of inflation in the economy as a whole is 1.5% but my rent and food costs are up 10%, I'm not going to feel heard when a politician or economist on TV talks about how we defeated inflation. But I'm going to feel like a genius if the price of energy shoots up 15% when my house and car are all electric with solar. It's all very personal.
• In the USA, the Federal Reserve has been given a mandate by congress to keep the aggregate rate of inflation at or near 2% (and unemployment at or near 4.3%, but let's save that for another time). This roughly requires increasing the overall money supply at a rate roughly 2% faster than the rate at which the amount of purchaseable goods and services in the economy is increasing.
• Four broad entities can affect the size of the money supply:
  • Private banks, through the practice of fractional reserve banking. This is by far the largest contribution to the total size of the money supply, due to its multiplicative effects.
  • Businesses and individuals, by buying foreign goods and services, or selling domestic goods and services to foreigners. I.e. trade deficits or surpluses.
  • Congress, by "spending money into existence" when it allocates funds beyond tax revenues and therefore borrows money through the sale of bonds.
  • The Federal Reserve, through setting the private banks' reserve requirement and the interbank lending rate, as well as FOMC operations.
• As we can see, the money supply is very elastic in practice, and the Federal Reserve is only one contributor to the size of the money supply! I can't even begin to fathom how complex it has to be to try to coordinate market conditions in a way that causes specific money supply size changes. Frankly, the fact that we largely live with low inflation most of the time feels like a minor miracle to me.
• All human-created institutions that run on money — including governments — seem to always feel pressure to spend more of it. Governments only seem to reduce spending when forced to by outside institutions such as the IMF or ECB after they've gotten themselves into trouble and asked for outside help.
• To spend more money, governments lacking a "permanent fund" that's increasing in value and throwing off more dividends can increase taxes or run a deficit by borrowing money. In practice they rarely increase taxes because people hate taxes. Thus government spending mostly amounts to an increase in the money supply via deficit spending.
• If the government's monetary system is trustworthy internationally, then they can lend to foreigners as savings and "flight to safety" assets. If not, they generally have to lend to their own citizens, often in obfuscated form (i.e. financial products that own government debt).
• If they issue their own currency, they can "borrow from themselves", with largely the same net effect as just increasing the money supply generally.
• whatever the government spends money on briefly experiences an increase in the amount of money bidding on the goods and services in that market sector, causing localized inflation in that market sector. Soon enough, other firms catch on that a money spigot has opened here, and they pile into the market. Not only does it tamp down inflation, but this localized increase in the number of purchaseable goods and services increases the size of that market sector relative to other ones. Here too we see hysteresis, since these changed market conditions take time for people to notice and adapt to.
• This kind of localized increase in the size of a market sector is seen as a result of non-government action too; the size of the technology sector has steadily grown for over a decade simply because people are now buying more tech as a fraction of their income than they used to.
• In a general sense, you want for an economy to have more entrepreneurship, economic activity, and labor productivity, which increase the supply of goods and services.
• The supply of goods and services seems to be much easier to break than it is to grow. e.g. when the war in Ukraine started, the supply of basic foodstuffs was immediately disrupted and caused large increases in global food prices which have still not come down over two years later. Building things takes time; destroying them does not.
• Taxes change behavior, but the effects can be difficult to model mechanistically. For example if a good or service has a 0.5% tax attached to it, would we expect exactly 0.5% less consumption of it? Doubtful. But if we raise the tax to 75%, probably the consumption drops not by 75% but by 100%, because all the businesses selling that thing can't compete in the market anymore and go under. There's probably some kind of S-curve here.
• Tax competition is a thing. For example when the corporate income tax rate fell from 35% to 21%, this made U.S. C-corporations more attractive. But relative to what? To being a foreign corporation, a U.S. S-corporation, or a U.S. LLC. All of these entities have different tax treatments, so we can expect some cannibalization here as a result of tax optimization, as opposed to a general net increase in the number of companies. And who benefits from this? The accountants and tax prep companies! Thus the size of the financial services sector increases by a little bitty bit.
• There seems to be a certain amount of age-based stickiness of labor; people often derive personal meaning from their jobs and resist re-skilling and changing market sectors past a certain age. A lot of labor market shifts are driven by demographic and cultural changes as the people who make up the labor pool change due to retirement, kids growing up, immigration, etc.

The more I learn, the more in awe I find myself that anything works at all. The world we've built is so fantastically complex and so resilient in the face of global climate shifts and war. It's just amazing.

So I guess my conclusion, if any, would be "People generally want good things, and will work to preserve and re-build them, and so they worked really hard to create this amazingly complex system that throws off enormous benefits, so in general things are better than they seem, even if some things still suck."

And it's ultimately this optimistic conclusion that gives me confidence in being a heavy equities investor at this period of my life.

[boglerdude]

Thats why you dont want a centralized politburo planning the economy. Forcing price controls to hide inflation. Extending credit and grants to their friends industries. OTOH China had their economic miracle. But we saw how they handled the housing bust in 2020. They found a neat way to stop bank runs and protests.

[yankees60]

In the end I have to admit that my perspective is mostly based on my own observations, and any 3rd-party sources I can provide are mostly after-the-fact rationalizations offering support for what I already concluded. I don't have the ability or desire to defend them.

Mostly I think the economy is really not something it's possible to model mechanistically such that you can say with confidence that if you pull Lever A, then Outcome X will happen, and then if you reverse Lever A, then Outcome X inverts, and stuff like that. It can't be reduced to a mathematical equation.

Rather, over time I feel like I've simply made a bunch of observations of reality that fit together in ways that make sense to me to roughly explain, in a way that's adequate for my own purposes, how a modern economy works. I really like that Warren Buffet quote "it’s better to be approximately right rather than precisely wrong."

Among these observations that I feel are approximately right:

• Most money is virtual and digital today, not "backed" by anything — not even paper! Only a vanishingly small amount of money is physical cash; the rest is simply numbers on spreadsheets, and at least at a technical level, can be created and destroyed as effortlessly as any digital data. Technical barriers to increasing or reducing it are low.
• Inflation and deflation are generally caused by the supply of money de-synchronizing from the supply of purchaseable goods and services, but with unpredictable hysteresis and a lot of caveats. It's not easy to define a 1:1 relationship here; 5% more money does not immediately increase inflation by 5% that year; the effect is muted and delayed in uncertain and unpredictable ways. Also, being perfectly in sync is impossible, and why prices of individual goods and services throughout the economy are constantly inflating and deflating according to supply and demand in their markets. Averaging all of these gives you a general rate of inflation or deflation throughout an entire economy, but with a substantial amount of hysteresis.
• Such aggregate numbers are not very useful for individuals; everyone has a different personal basket of goods and services that they care about, many of which are specific to their local market. If the rate of inflation in the economy as a whole is 1.5% but my rent and food costs are up 10%, I'm not going to feel heard when a politician or economist on TV talks about how we defeated inflation. But I'm going to feel like a genius if the price of energy shoots up 15% when my house and car are all electric with solar. It's all very personal.
• In the USA, the Federal Reserve has been given a mandate by congress to keep the aggregate rate of inflation at or near 2% (and unemployment at or near 4.3%, but let's save that for another time). This roughly requires increasing the overall money supply at a rate roughly 2% faster than the rate at which the amount of purchaseable goods and services in the economy is increasing.
• Four broad entities can affect the size of the money supply:
  • Private banks, through the practice of fractional reserve banking. This is by far the largest contribution to the total size of the money supply, due to its multiplicative effects.
  • Businesses and individuals, by buying foreign goods and services, or selling domestic goods and services to foreigners. I.e. trade deficits or surpluses.
  • Congress, by "spending money into existence" when it allocates funds beyond tax revenues and therefore borrows money through the sale of bonds.
  • The Federal Reserve, through setting the private banks' reserve requirement and the interbank lending rate, as well as FOMC operations.
• As we can see, the money supply is very elastic in practice, and the Federal Reserve is only one contributor to the size of the money supply! I can't even begin to fathom how complex it has to be to try to coordinate market conditions in a way that causes specific money supply size changes. Frankly, the fact that we largely live with low inflation most of the time feels like a minor miracle to me.
• All human-created institutions that run on money — including governments — seem to always feel pressure to spend more of it. Governments only seem to reduce spending when forced to by outside institutions such as the IMF or ECB after they've gotten themselves into trouble and asked for outside help.
• To spend more money, governments lacking a "permanent fund" that's increasing in value and throwing off more dividends can increase taxes or run a deficit by borrowing money. In practice they rarely increase taxes because people hate taxes. Thus government spending mostly amounts to an increase in the money supply via deficit spending.
• If the government's monetary system is trustworthy internationally, then they can lend to foreigners as savings and "flight to safety" assets. If not, they generally have to lend to their own citizens, often in obfuscated form (i.e. financial products that own government debt).
• If they issue their own currency, they can "borrow from themselves", with largely the same net effect as just increasing the money supply generally.
• whatever the government spends money on briefly experiences an increase in the amount of money bidding on the goods and services in that market sector, causing localized inflation in that market sector. Soon enough, other firms catch on that a money spigot has opened here, and they pile into the market. Not only does it tamp down inflation, but this localized increase in the number of purchaseable goods and services increases the size of that market sector relative to other ones. Here too we see hysteresis, since these changed market conditions take time for people to notice and adapt to.
• This kind of localized increase in the size of a market sector is seen as a result of non-government action too; the size of the technology sector has steadily grown for over a decade simply because people are now buying more tech as a fraction of their income than they used to.
• In a general sense, you want for an economy to have more entrepreneurship, economic activity, and labor productivity, which increase the supply of goods and services.
• The supply of goods and services seems to be much easier to break than it is to grow. e.g. when the war in Ukraine started, the supply of basic foodstuffs was immediately disrupted and caused large increases in global food prices which have still not come down over two years later. Building things takes time; destroying them does not.
• Taxes change behavior, but the effects can be difficult to model mechanistically. For example if a good or service has a 0.5% tax attached to it, would we expect exactly 0.5% less consumption of it? Doubtful. But if we raise the tax to 75%, probably the consumption drops not by 75% but by 100%, because all the businesses selling that thing can't compete in the market anymore and go under. There's probably some kind of S-curve here.
• Tax competition is a thing. For example when the corporate income tax rate fell from 35% to 21%, this made U.S. C-corporations more attractive. But relative to what? To being a foreign corporation, a U.S. S-corporation, or a U.S. LLC. All of these entities have different tax treatments, so we can expect some cannibalization here as a result of tax optimization, as opposed to a general net increase in the number of companies. And who benefits from this? The accountants and tax prep companies! Thus the size of the financial services sector increases by a little bitty bit.
• There seems to be a certain amount of age-based stickiness of labor; people often derive personal meaning from their jobs and resist re-skilling and changing market sectors past a certain age. A lot of labor market shifts are driven by demographic and cultural changes as the people who make up the labor pool change due to retirement, kids growing up, immigration, etc.

The more I learn, the more in awe I find myself that anything works at all. The world we've built is so fantastically complex and so resilient in the face of global climate shifts and war. It's just amazing.

So I guess my conclusion, if any, would be "People generally want good things, and will work to preserve and re-build them, and so they worked really hard to create this amazingly complex system that throws off enormous benefits, so in general things are better than they seem, even if some things still suck."

And it's ultimately this optimistic conclusion that gives me confidence in being a heavy equities investor at this period of my life.

Simply superb! Many thanks for all the time you put into creating the above.

I read it twice to make sure I did not miss anything in it.

[ppnewbie]

Thanks @Pointedstick. Need to read that a few times especially the part about money supply.

[Jack Jones]

When utilized according to ICAPM theory, bonds allow one to profit from the term risk premium while not actually being subject to it!

The key is to use them for liability/goal matching, ensuring that coupon payments and/or maturities satisfy needs/goals. Then you can hold to maturity, capturing the term risk premium without paying for it in risk of uncertain outcomes.

In this way, you end up with a liability matching portfolio that uses mostly bonds (money you can’t afford to lose) and a long term growth portfolio that uses mostly equities. Further, you’re not perpetually disappointed at your bonds not protecting your equities, or whatever you hoped for them to achieve.

[dualstow]

…
Then you can hold to maturity, capturing the term risk premium without paying for it in risk of uncertain outcomes.

I love holding shorter-term bonds to maturity and getting my money back, especially when stocks are tanking.
BUT, what if you have a portfolio in which you’re supposed to hold very long-term bonds, and you’re not young anymore?

[mathjak107]

it isn’t about holding them to maturity, it’s about under the right circumstances they act as fighter cover and if they are. up enough you sell some off

[dualstow]

it isn’t about holding them to maturity, it’s about under the right circumstances they act as fighter cover and if they are. up enough you sell some off

It turns out there’s more than one strategy out there, mathjak.
But of course, you’re right. That’s why the pp has rebalancing bands. I was just responding to Jack’s post about ICAPM and holding to maturity.

[mathjak107]

got it

[Jack Jones]

…
Then you can hold to maturity, capturing the term risk premium without paying for it in risk of uncertain outcomes.

I love holding shorter-term bonds to maturity and getting my money back, especially when stocks are tanking.
BUT, what if you have a portfolio in which you’re supposed to hold very long-term bonds, and you’re not young anymore?

I think you’re supposed to consider your goals and liabilities first, and then use that to inform your asset allocation. You’d need the help of a financial advisor with planning software to arrive near an optimal allocation. That said, long term bonds are useful for matching a long term fixed liability like a 30 year mortgage.

Here are three sources that have opened my mind to this approach:

- Risk Less and Prosper by Bodie and Taqqu
- The Missing Billionaires by Hagani and White
- https://rationalreminder.ca/podcast/338

I had been grappling w/ the idea of a risk-free asset. It just didn't seem like a reasonable assumption to me. The key insight that this model provided is that the risk-free asset depends on the goal/liability you have. If you need a lump sum of money in 30 years, then your risk-free asset might be 30 year treasury zeros. For your emergency fund, the risk-free asset might be cash/bills. For property taxes, maybe TIPS.

[dualstow]

Thanks!