Gyroscopic Investing

Posted: **Wed Nov 07, 2012 2:01 pm**

I was talking with my 12 year old daughter last night and she was sharing her thoughts on the election and said something to the effect of: "Isn't Obama bad for the country? I mean, hasn't he run up more debt in 4 years than all the presidents who came before him? Isn't he bankrupting us?"

As she spoke I remembered feeling exactly the same way she does now when I was younger. Thinking back on what she said, I pulled up the data on 30 year treasury bonds and saw that since the U.S. government started going "bankrupt" in the early 1980s (i.e., engaging in significant levels of deficit spending), here is the feedback the market has provided in the form of bonds yields:

If that's what a "bankrupt" borrower looks like, I would hate to see what it would look like if it was "fiscally responsible."

Lots of noise out there. It can make it hard to think clearly.

Posted: **Wed Nov 07, 2012 2:08 pm**

I think everyone at some point was an Austerian. I sure know I was. My teacher once told me how much it would cost per person to pay down the debt, and I basically said, "I'll do it if everyone else will!!" Obviously, on a macro level, the contribution of hundreds of millions of people to pay down the national debt would have been disasterous and probably counter-productive.

Macro has a way of making you so humble you get to a point where you don't know whether to believe what you intuitively think is true on a topic, or automatically assume the exact opposite is true just out of instinct at this point.

Posted: **Wed Nov 07, 2012 2:15 pm**

IMO. Eventually the piper will be paid. The debt levels are also the result of massive expansion of entitlement programs which are difficult to sustain and have their own impacts going forward. Long-term there is no way to get around the fact that America's books are a mess and just get worse each year.

Posted: **Wed Nov 07, 2012 2:27 pm**

craigr wrote: IMO. Eventually the piper will be paid. The debt levels are also the result of massive expansion of entitlement programs which are difficult to sustain and have their own impacts going forward. Long-term there is no way to get around the fact that America's books are a mess and just get worse each year.

That's true, but Chicken Little can only say the sky is going to fall so many times before you stop getting worked up about it.

Certainly I agree that some day the sky will fall, but who knows if it will coincide with one of Chicken Little's rants? What if it happened shortly after Chicken Little got bullish on the sky?

The one thing that would make me nervous would be if individual investors started talking about how great of an investment 30 year treasuries are.

Posted: **Wed Nov 07, 2012 2:30 pm**

MediumTex wrote: That's true, but Chicken Little can only say the sky is going to fall so many times before you stop getting worked up about it.

Yep. Each year the spring winds tighter. I don't know when it will snap. Just stay diversified is the only real answer.

Posted: **Wed Nov 07, 2012 2:37 pm**

I think we are so conditioned by the media to think nonsensical terms that it is hard to approach macroeconomics without a serious handicap. Here is a great video of Paul Samuelson explaining why he thinks it is a good thing to scare the public about imaginary constraints:

http://www.youtube.com/watch?v=G67ha8iV ... sults_main

In reality the government is not constrained by spending, but by its ability to procure real goods and services. By conflating the two, economists don't have to explain the nuances to the public. Have you noticed that money is never an object for financial bailouts or war but we are always "running out" for basic social services that help the populace?

Telling people you don't have money is the oldest trick in the book. I use it almost every day when I pass a homeless person as I walk to school.

Posted: **Wed Nov 07, 2012 3:00 pm**

As long as the US remains a place that allows productive endeavors to flourish, I don't see how we have anything to worry about in terms of hyperinflation (assuming we all agree that hyperinflation, not default, would be our undoing).

If treasury bonds are essentially savings accounts, and tools of our government to manage lending in the private sector, then we can basically just consider treasuries another form of money, or at the very least, simply a financial asset similar to money in the private sector.

Further, if we're trading foreigners $500 Billion of our money every year for $500 billion of their goods, then there must be some value there recognized by them to trade for their widgets.

The backing of the value of paper in our economy is a combination of the productive capacity of our economy in real terms, and the ability for our government to be viewed as legitimate enough to pay our taxes in US dollars every year. Combine those two and there's no reason our economy or currency should collapse. People WANT to and CAN produce wealth because they can trade at least most of their earnings to others, and people view paying taxes as "doable" to the government they may not love, but view as a PITA if they don't pay their taxes. This creates an "artificial" demand for green pieces of paper that now all of a sudden meet all the fun criteria of money. The only reason it should collapse is if productive capacity (or will to produce) is destroyed, or if the government is deemed too inept to legitimately collect those tax dollars to give them value.

I don't see the government all of a sudden becoming awful at tax-collection. Maybe business-owners and productive members of society will "Go-Galt," but then I think we should look at historically what has lead to that mass-decision. Methinks widespread corruption, government collapse, or moral hazards the likes of which we can't even fathom.

Posted: **Wed Nov 07, 2012 3:04 pm**

moda0306 wrote:Methinks widespread corruption, government collapse, or moral hazards the likes of which we can't even fathom.

So you think the US improves each year in those measures? I don't. In 30 years it won't be better. Which is why I say the spring is winding tighter and tighter.

The country 30 years ago is much different than it is today and will be in another 30 years. Problem with these macroeconomic theories is they make big assumptions about things being the same as the past when they never are.

Posted: **Wed Nov 07, 2012 4:09 pm**

I find mmr to be a fascinating subject that I know very little about. For instance, I feel like the massive increase in debt has probably made the financial system less stable, I couldn't tell you why, that's just how I feel. Could anyone possibly point me to a link that discusses this?

Thanks much,

Ryan

Posted: **Wed Nov 07, 2012 4:24 pm**

MediumTex wrote: I was talking with my 12 year old daughter last night and she was sharing her thoughts on the election and said something to the effect of: "Isn't Obama bad for the country? I mean, hasn't he run up more debt in 4 years than all the presidents who came before him? Isn't he bankrupting us?"

You have a 12 year old daughter who worries about government debt? I have one 38 years old who doesn't worry about her own debt let alone the governments.

What I wonder is if debt and deficits don't matter then why the fuss about making the rich pay more? For that matter, why not eliminate taxes altogether and finance everything on borrowed money?

Posted: **Wed Nov 07, 2012 4:45 pm**

I'm surprised more people don't seem to worry about the fact that a larger percentage of our GDP each year is spent on interest payments. While Americans are the majority debt holder and so we are in a sense "paying ourselves," that is still money that can't be used for any of the myriad of programs the government runs (good or bad).

Many people resist the comparison to Greece or any of the other troubled EU nations, and they have many valid points. However, one of the biggest that I've heard, that the U.S. could always print their way out of a debt crisis seems to me like it would be the shortest path to the dollar losing it's place as the world reserve currency. I can't imagine anyone thinking that would be positive for the U.S. And once that status is gone, we aren't getting it back.

I personally like some debt since it allows us to trade in these wonderful securities. But when the debt and deficit are growing faster than our economy, that just strikes me as a sure path to ruin. With Federal policies retarding our economic growth and the congressional gridlock preventing any kind of solution to limit debt growth below our economic growth, I'm not very optimistic about the future.

This is anecdotal to the extreme, but the only people I personally know that ARE optimistic about the future are all public sector employees. The exception being my parents, who are both teachers in Illinois (pension disaster 101).

Posted: **Wed Nov 07, 2012 5:52 pm**

Emelianenko wrote: I find mmr to be a fascinating subject that I know very little about. For instance, I feel like the massive increase in debt has probably made the financial system less stable, I couldn't tell you why, that's just how I feel. Could anyone possibly point me to a link that discusses this?

Thanks much,

Ryan

Sure thing... You're talking about Hyman Minsky's financial instability hypothesis...

VIDEO: Crash Course on Hyman Minsky, by L. Randall Wray

Posted: **Wed Nov 07, 2012 5:56 pm**

I just want to do a little temperature test.

How does everyone feel about hypothetical US government surpluses? Specifically, how would you feel if the federal government ran a surplus every year for the next 100 year?

My take:

When you think about it, eventually the private sector would have no dollars. We would be back to a barter system, preceded of course by massive defaults on private debts that were denominated in dollars.

We have state money that comes only from the government, and we have bank money (deposits) that has value because banks promise to convert into state money on request. If the government perpetually takes more state money away than it spends back, the convertibility of bank money into state money eventually breaks down and no new bank money will be created because people won't trust it. You will find yourselves in an unmonetized economy where people are forced to barter.

The only reason I can see to even flirt with this possibility would be if there economy was flush with spending power and prices were rising to the point where commerce became confusing. I don't think we are even close to that point.

Posted: **Wed Nov 07, 2012 5:57 pm**

craigr wrote: IMO. Eventually the piper will be paid.

The piper is paid every day, has been for years, and will continue to be paid so long as Congress allows the piper to be paid. The question is whether the piper is paid with money that's worth anything. But, I don't see our dollars going up in smoke while unemployment is so high.

Maybe one day everyone will have a job, too much disposable income, and the government will stupidly continue to overspend and then, yes, at that point the "debt" will most certainly matter for simply the reason that there will be too much money in people's pockets.

But, let's not pretend that the government will struggle to make its payments or have trouble issuing more debt to make those payments.

Posted: **Wed Nov 07, 2012 6:18 pm**

For the people who worry about the debt, ask yourself how you explain the peculiar facts that our debt is humongous and we're running the biggest deficits ever, yet inflation is practically zero, as are interest rates--which are the market's expectation of future inflation, after all. This was the seeming contradiction that got me questioning things. If the debt needed to be repaid, don't you think the very smart people who trade in the bond markets for a living would be freaking out and demanding high coupon payments like they are in Spain and Greece? Ask yourself what the monetary differences are between the USA and Spain.

Posted: **Wed Nov 07, 2012 6:41 pm**

Pointedstick wrote: Ask yourself what the monetary differences are between the USA and Spain.

I look at the USA is currently much more stable in terms of its ability to repay bond-holders interest payments than Spain so the bond rates would be higher for Spain. I feel they are more stable because we control our own currency, we have the biggest Army in the world to be able to enforce things, and we currently have the highest GDP of any single country. For those reasons, I would think other countries would want our dollars out of safety from their own country or just because they feel we will continue to do well. If that changes in time however, the bond-holders could expect a higher bond rate to compensate them for loaning us money.

Posted: **Wed Nov 07, 2012 6:42 pm**

Gumby wrote:
Emelianenko wrote: I find mmr to be a fascinating subject that I know very little about. For instance, I feel like the massive increase in debt has probably made the financial system less stable, I couldn't tell you why, that's just how I feel. Could anyone possibly point me to a link that discusses this?

Thanks much,

Ryan
Sure thing... You're talking about Hyman Minsky's financial instability hypothesis...

VIDEO: Crash Course on Hyman Minsky, by L. Randall Wray

Thanks!

Posted: **Wed Nov 07, 2012 6:53 pm**

melveyr wrote: Specifically, how would you feel if the federal government ran a surplus every year for the next 100 year?

When you think about it, eventually the private sector would have no dollars. We would be back to a barter system, preceded of course by massive defaults on private debts that were denominated in dollars.

If you look at countries which are currently running a trade surplus, you find the answer: super-producers don't save in cash, they save in gold. When you buy gold you sell dollars back into the market, thus avoiding the problem you raise.

Posted: **Wed Nov 07, 2012 7:01 pm**

Pointedstick wrote: For the people who worry about the debt, ask yourself how you explain the peculiar facts that our debt is humongous and we're running the biggest deficits ever, yet inflation is practically zero, as are interest rates--which are the market's expectation of future inflation, after all. This was the seeming contradiction that got me questioning things.

Inflation is low in the U.S. because our inflation is exported abroad -- one of the perks of holding the world reserve currency. When the credibility of the U.S. is lost, and with it our reserve status, all the dollars will come pouring back and you will finally see the high inflation you would expect from the monetization of our humongous debt.

Posted: **Wed Nov 07, 2012 7:13 pm**

systemskeptic wrote:
Pointedstick wrote: For the people who worry about the debt, ask yourself how you explain the peculiar facts that our debt is humongous and we're running the biggest deficits ever, yet inflation is practically zero, as are interest rates--which are the market's expectation of future inflation, after all. This was the seeming contradiction that got me questioning things.
Inflation is low in the U.S. because our inflation is exported abroad -- one of the perks of holding the world reserve currency. When the credibility of the U.S. is lost, and with it our reserve status, all the dollars will come pouring back and you will finally see the high inflation you would expect from the monetization of our humongous debt.

Really? It looks to me like most of the major nations that export goods to us have inflation rates that are similarly low or even lower than ours.

https://www.cia.gov/library/publication ... /2092.html

Code: Select all

   COUNTRY      EXPORTS        INFLATION
========================================
1. China:       $334 billion   5.5%
2. Canada:      $252 billion   2.9%
3. Mexico:      $210 billion   3.4%
4. Japan:       $108 billion   -0.3%
5. Germany:     $75 billion    2.3%
6. UK:          $45 billion    4.5%
7. South Korea: $45 billion    4%
8. France:      $35 billion    2.3%
9. Taiwan:      $33 billion    1.4%
10. Ireland:    $30 billion    2.6%

Posted: **Wed Nov 07, 2012 7:45 pm**

systemskeptic wrote:When the credibility of the U.S. is lost, and with it our reserve status, all the dollars will come pouring back and you will finally see the high inflation you would expect from the monetization of our humongous debt.

Can you be more specific? Otherwise, it sounds a lot like fear-mongering. Perhaps you could explain the mechanics of how all that money would come "pouring" back into the hands of American consumers. Will the Chinese buy back all their crap in Wal*Mart?

Posted: **Wed Nov 07, 2012 8:34 pm**

melveyr wrote:Have you noticed that money is never an object for financial bailouts or war but we are always "running out" for basic social services that help the populace?

Because both sides of of those (more bailouts and war vs must increase taxes or you won't get what you want) serve to increase the reach and power of gov't. Like any bureaucracy, gov't seeks to aggrandize its importance.

Posted: **Wed Nov 07, 2012 8:37 pm**

Pointedstick wrote: For the people who worry about the debt, ask yourself how you explain the peculiar facts that our debt is humongous and we're running the biggest deficits ever, yet inflation is practically zero, as are interest rates--which are the market's expectation of future inflation, after all. ... Ask yourself what the monetary differences are between the USA and Spain.

Two main issues.

Obviously we can print money to buy our own debt (which we did to a huge degree in 2011). Spain cannot (unless it leaves the Euro).

The other difference is we are the prettiest corpse at the funeral so we still have willing partners who would rather be seen with us than with any other stinkin' corpse.

Posted: **Thu Nov 08, 2012 10:30 am**

Gumby wrote: Can you be more specific? Otherwise, it sounds a lot like fear-mongering. Perhaps you could explain the mechanics of how all that money would come "pouring" back into the hands of American consumers. Will the Chinese buy back all their crap in Wal*Mart?

Currently countries throughout the world are holding dollars as part of their foreign reserves, are they not? If these countries decide to stop holding these dollars, who will they sell them to? Each other? Private Americans? The USG? If they all decide to stop holding dollars, clearly they cannot sell to other foreign governments or it becomes a game of hot potato.

There are only two outcomes from the loss of reserve status:

1. We are forced to reduce our trade deficit either through austerity in the private sector or from the USG unwinding its Gold reserves to balance the influx of dollars. Either way the dollars come pouring back and suddenly the contradiction of our current low inflation vanishes.

2. Or, the USG simply defaults on the all the foreign dollars in existence.

Where else would the dollars go?

Posted: **Thu Nov 08, 2012 10:52 am**

Pointedstick wrote: Really? It looks to me like most of the major nations that export goods to us have inflation rates that are similarly low or even lower than ours.

Pointedstick,

I do not think that table is enough to prove that the US does not export inflation abroad. If you think about it at a conceptual level, it is undeniable.

Our largest export is US dollars (to the tune of $558 billion a year). What happens when Central Banks receive these dollars? They can't just use the dollars to buy more US assets because they are already buying $558 billion. Nobody wants the dollars because everyone is already saturated with them.

When a central bank receives say, $50 billion $USD, they use those dollars to "buy" $50 billion of their own currency [print new base currency] and then spend their own currency while holding the dollars in reserve. This is how the U.S. exports inflation, and there is no way around the fact that half a trillion is exported each year.

Now imagine if that same half a trillion per year isn't exported to the rest of the planet [and its effect diluted over many countries], what would inflation on that scale look like in a single country?

Gyroscopic Investing

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