Gyroscopic Investing

suppose we find out all this *taper-talk* is just talk...how do our favorite asset classes react? Does Gold and LTT take off?

I think all three (stocks, bonds, gold) get a boost.

I don't think that this is a good time to taper.

The market seems to find QE soothing.

The economy isn't really in that much better shape than it was at the end of previous QE efforts.

MediumTex wrote: I don't think that this is a good time to taper.

The market seems to find QE soothing.

The economy isn't really in that much better shape than it was at the end of previous QE efforts.

Perhaps redistributing purchasing power away from people who have earned it and giving it to those who have stolen it or just want handouts is actually hurting the economy.

Pehaps it is encouraging consumption by those poor baby birds relying on it and ramapant speculation by others rather than encouraging saving and real investment to improve the economy.

It will always be bad to stop QE because QE has enabled bubbles and unsustainable economic activity. Everyday it continues just further distorts.

The markets will not like it. No one is gonna like it much unless they are sitting on cash (maybe even LTBs though I doubt it) when the party's over. But I don't think they will be ending the party anytime soon. They might just go out on a beer run now and are about to show up with more kegs.

Our children deserve an economy that isn't built on printed paper and can go up in smoke with just a spark.

Kshartle wrote: Perhaps redistributing purchasing power away from people who have earned it and giving it to those who have stolen it or just want handouts is actually hurting the economy.

I'm pretty sure this started before QE.

Pointedstick wrote:

Kshartle wrote: Perhaps redistributing purchasing power away from people who have earned it and giving it to those who have stolen it or just want handouts is actually hurting the economy.

I'm pretty sure this started before QE.

How does QE redistribute purchasing power? I thought that all it did was pump banking reserves into the system and possibly lower interest rates.....I don't think your average poor American feels like they have had anything redistributed to them.

Pointedstick wrote:

Kshartle wrote: Perhaps redistributing purchasing power away from people who have earned it and giving it to those who have stolen it or just want handouts is actually hurting the economy.

I'm pretty sure this started before QE.

Yeah but QE is 85 billion additional of it every single month.

doodle wrote:

Pointedstick wrote:

Kshartle wrote: Perhaps redistributing purchasing power away from people who have earned it and giving it to those who have stolen it or just want handouts is actually hurting the economy.

I'm pretty sure this started before QE.

How does QE redistribute purchasing power? I thought that all it did was pump banking reserves into the system and possibly lower interest rates.....I don't think your average poor American feels like they have had anything redistributed to them.

The feelings of the poor have nothing to do with it. Please don't tell me you are denying when someone gets a government handout they haven't actually earned it. You and everyone else knows it was stolen from someone else.

Does QE create additional dollars every month?

Can those dollars be used to buy stuff?

Did the people who make those dollars earn them by producing anything of equal or greater value?

They have redistributed purchasing power away from everyone else with dollars.

They have used it to bid up prices of financial assets.

The owners of financial assets have benefited at the expense of those without.

Some are left with purchasing power they did not earn either through work or investment because the counterfeiting benefited them.

Imagine if instead of buying bonds the FED bought cars with it and gave the cars away. Is it obvious what would happen to car prices, car dealers, car manufacturers, everyone in the car business? Is it obvious that this would misallocate resources and screw the economy up by creating a car bubble? Same thing with the bond buying except that touches everything with the interest rates.

To believe printing slips of paper can improve our standard of living is to believe in magic. To believe counterfeiting is acceptable or sound economic policy is tragic.

And it bears repeating: The government does not possess resources of its own – every cent it spends must be taken from the private sector in one way or another. The government can not add one iota of new wealth to the economy – it can only dispose of already existing wealth by taking it from the private sector. It matters not if this is done by means of taxation or borrowing – the latter method is merely a means of deferring the former

Mdraf wrote: And it bears repeating: The government does not possess resources of its own – every cent it spends must be taken from the private sector in one way or another. The government can not add one iota of new wealth to the economy – it can only dispose of already existing wealth by taking it from the private sector. It matters not if this is done by means of taxation or borrowing – the latter method is merely a means of deferring the former

Bump

Kshartle wrote:

Mdraf wrote: And it bears repeating: The government does not possess resources of its own – every cent it spends must be taken from the private sector in one way or another. The government can not add one iota of new wealth to the economy – it can only dispose of already existing wealth by taking it from the private sector. It matters not if this is done by means of taxation or borrowing – the latter method is merely a means of deferring the former

Bump

False

Mdraf wrote: And it bears repeating: The government does not possess resources of its own – every cent it spends must be taken from the private sector in one way or another. The government can not add one iota of new wealth to the economy – it can only dispose of already existing wealth by taking it from the private sector. It matters not if this is done by means of taxation or borrowing – the latter method is merely a means of deferring the former

You keep saying that, as if it's fact, but you still haven't explained how that's true. I wish you would.

It sounds like you are trying to suggest that the government spending beyond its ability to tax in the future would result in unfunded liabilities that can't be paid for. So, for example, Greek government employees were promised large pensions and retirement benefits. No money was set aside, as a currency user nation must do to fund future liabilities. And now, despite tax increases, there is not enough tax revenue to keep those promises, and those Greek government workers and retirees are rioting in the streets because of the higher taxes and because they believe they will not get their promised benefits. So, I would agree that Greece is constrained by it's inability to tax the overspent future.

But, of course, Greece is a currency user — not a fiat currency issuer. A fiat currency issuer doesn't technically even need to tax to fund any of its "unfunded liabilities" (a debt-based fiat currency issuer just issues more and more debt and controls its own interest rates). The Federal government taxing within a fiat country is like a stadium asking football teams to fund their own scoreboard points awarded to them.

As you say the Greek metaphor does not apply so why use it?

I assume our government and every other currency issuing government in the world missed the MR memo that they don't need to tax at all ! 

A it would be a good idea to send the memo to the CBO as well. They don't seem to get it like you guys do.

http://www.bloomberg.com/news/2013-09-1 ... risis.html

Mdraf wrote: As you say the Greek metaphor does not apply so why use

Because the Greek metaphor is the only explanation that I could think of that could possibly explain what you're trying to say. And since it seems you don't plan on ever explaining your own logic, we may never know!

Mdraf wrote:I assume our government and every other currency issuing government in the world missed the MR memo that they don't need to tax at all !

Not really. Taxes play a role — they legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

Gumby wrote:

Mdraf wrote: As you say the Greek metaphor does not apply so why use

Because the Greek metaphor is the only explanation that I could think of that could possibly explain what you're trying to say. And since it seems you don't plan on ever explaining your own logic, we may never know!

Mdraf wrote:I assume our government and every other currency issuing government in the world missed the MR memo that they don't need to tax at all !

Not really. Taxes play a role. They legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

In another thread I listed several countries that are currency issuers that defaulted or whose currency crashed but was "explained" that each case was due to something else. Of course in this complex world one can do this ad infinitum.  Your explanation that taxes are necessary for some sort of psychological reason is a little bizarre, but suit yourself. 

As for why don't I explain myself, I just did. It can't be reduced to simpler terms than 2-2=0, and 2-4= -2

Mdraf wrote:In another thread I listed several countries that are currency issuers that defaulted or whose currency crashed but was "explained" that each case was due to something else.

Correct. They all had exogenous triggers. No modern currency issuer has ever defaulted for simply printing debt-based money under normal conditions. But, I have never said that a currency issuer can survive an extreme exogenous event (what government can?)

Mdraf wrote:Your explanation that taxes are necessary for some sort of psychological reason is a little bizarre, but suit yourself.

At least I'll give you the courtesy of explaining my "bizarre" statements (wish you were able to do the same):

Consider the following perspective on Hitler's fiat 'Labor Treasury Certificates' that he used to build up the Nazi military during the '30s...

Bob Green Innes wrote:"Another cautionary note from the German experience is the consideration of how spending money that is not raised from the taxpayer effectively releases the government from it's obligations to the taxpayer. We can wonder if the German people would have gone along with Hitler if they had been bearing the full cost of the military buildup. These examples are extreme examples because of the degree of fiatization involved - virtually 100%."
Source: http://bobgreeninnes.hubpages.com/hub/H ... Fiat-Money

Think about that for a second. In a pure fiat monetary system, taxes don't actually fund anything (i.e. Hitler spent without taxing). But, perhaps taxes do play an important role in holding the government accountable to taxpayers who think they are funding the government? I can't prove it, but at least I explained my statement (wish you would do the same).

Mdraf wrote:As for why don't I explain myself, I just did. It can't be reduced to simpler terms than 2-2=0, and 2-4= -2

It's a weak explanation considering that a currency issuer can still function with virtually no tax income (beyond what it needed to simply create demand for the currency). I really wish you could explain yourself with words. It would make your statements more believable. Please try.

Kshartle wrote:

doodle wrote:

Pointedstick wrote: I'm pretty sure this started before QE.

How does QE redistribute purchasing power? I thought that all it did was pump banking reserves into the system and possibly lower interest rates.....I don't think your average poor American feels like they have had anything redistributed to them.

The feelings of the poor have nothing to do with it. Please don't tell me you are denying when someone gets a government handout they haven't actually earned it. You and everyone else knows it was stolen from someone else.

Does QE create additional dollars every month?

Can those dollars be used to buy stuff?

Did the people who make those dollars earn them by producing anything of equal or greater value?

They have redistributed purchasing power away from everyone else with dollars.

They have used it to bid up prices of financial assets.

The owners of financial assets have benefited at the expense of those without.

Some are left with purchasing power they did not earn either through work or investment because the counterfeiting benefited them.

Imagine if instead of buying bonds the FED bought cars with it and gave the cars away. Is it obvious what would happen to car prices, car dealers, car manufacturers, everyone in the car business? Is it obvious that this would misallocate resources and screw the economy up by creating a car bubble? Same thing with the bond buying except that touches everything with the interest rates.

To believe printing slips of paper can improve our standard of living is to believe in magic. To believe counterfeiting is acceptable or sound economic policy is tragic.

+1

Gumby wrote: Not really. Taxes play a role — they legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

Is this the mindset of a budding totalitarian....or a casualty of Stockholm Syndrome?

Kshartle wrote:Does QE create additional dollars every month?

No. QE does not create any additional dollar-denominated financial assets in the private sector. The bank is no richer after a POMO transaction, period.

Kshartle wrote:Imagine if instead of buying bonds the FED bought cars with it and gave the cars away.

Sorry, but it's a bad example considering that A) it's illegal for the Fed to buy non-financial assets and B) the Fed doesn't give anything away — it always removes an asset of equal value from the private sector. The Fed has no authority to make anyone in the private sector feel richer. Try again.

murphy_p_t wrote:

Gumby wrote: Not really. Taxes play a role — they legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

Is this the mindset of a budding totalitarian....or a casualty of Stockholm Syndrome?

Is there anything more totalitarian about taxing to promote value of a fiat currency vs taxing to fund government?  Both are holding a gun to someone's head.

Kshartle wrote:

doodle wrote:

Pointedstick wrote: I'm pretty sure this started before QE.

How does QE redistribute purchasing power? I thought that all it did was pump banking reserves into the system and possibly lower interest rates.....I don't think your average poor American feels like they have had anything redistributed to them.

The feelings of the poor have nothing to do with it. Please don't tell me you are denying when someone gets a government handout they haven't actually earned it. You and everyone else knows it was stolen from someone else.

Does QE create additional dollars every month?

Can those dollars be used to buy stuff?

Did the people who make those dollars earn them by producing anything of equal or greater value?

They have redistributed purchasing power away from everyone else with dollars.

They have used it to bid up prices of financial assets.

The owners of financial assets have benefited at the expense of those without.

Some are left with purchasing power they did not earn either through work or investment because the counterfeiting benefited them.

Imagine if instead of buying bonds the FED bought cars with it and gave the cars away. Is it obvious what would happen to car prices, car dealers, car manufacturers, everyone in the car business? Is it obvious that this would misallocate resources and screw the economy up by creating a car bubble? Same thing with the bond buying except that touches everything with the interest rates.

To believe printing slips of paper can improve our standard of living is to believe in magic. To believe counterfeiting is acceptable or sound economic policy is tragic.

Dollars alone are not the only purchasing power. Anything with nominal value on our balance sheets is purchasing power.

TennPaGa wrote:When the assets are purchased from non-banks?  I suppose so, in that it is "easier" (mechanically speaking) to spend money that is in a checking account vs. a savings account.

It's irrelevant since the Fed is only allowed to swap financial assets with Primary Dealers. They don't have the authority to interact with anyone else.

The account holders at Primary Dealers don't notice a difference in their statements if their savings accounts are held as T-Bonds or excess reserves (besides a slightly lower interest rate when their accounts are held as reserves) so it makes no difference to them.

If anything, people wind up with less savings in their bank accounts with QE, since the private sector winds up with less interest income.

Guys it's cool really. We can't discuss this stuff here. We should avoid the topic of QE and it's effect on the economy. Heck we should avoid the actual economy and stick to Breaking Bad (a fine topic) or where to best store gold (another one).

This always turns into a discussion of whether or not a dollar is different from a bond or whether or not anything changes when a dollar is created by the FED and a bond is purchased.

How can you guys possibly think the bank having bonds on it's balance sheet is the same as cash?  The only thing it can buy with it's bonds is cash. (correct me if that's wrong please)

You might as well forget the bank. What QE is, in effect, is an interest free loan to the government.

Imagine a closed system, an island perhaps. I'm there, MDRAF, Gumby and some others. We all use the same paper money.

Further imagine MDRAF is married to a drunk who will not help him. He has 19 kids to feed. It costs him 4k per month for diapers and formula. He only make 2k per month working OT at a gas station. (Sorry MDRAF)

Gumby loans him the other 2k per month needed to get by. He receives a note that promises repayment with interest.

I have a counterfeiting machine. Every month I print 2k or slightly more and buy the note from Gumby. Now he is made whole and I have the note. I also have a side agreement with MDRAF that I will send all interest except a tiny portion back to him. The tiny fee is for my valuable service masking his "loan" which is really just expansion of the money supply to enable him to buy diapers and formula.

At the end of our story MDRAF is not paying interest on a loan, Gumby has as much money or possibly slightly more, MDRAF has 2k more which will be spent and bid up prices.  I also have slightly more from the fraction of interest.

Who is hurt by all this? *Hint* - it's not me and it's not MDRAF.

MDRAF is the government in this example and I am Ben Bernanke.

moda0306 wrote:
Dollars alone are not the only purchasing power. Anything with nominal value on our balance sheets is purchasing power.

What is nominal purchasing power? What is it measured in? What do you buy with non-dollar assets?

TennPaGa wrote:

Kshartle wrote: Imagine a closed system, an island perhaps. I'm there, MDRAF, Gumby and some others. We all use the same paper money.

Further imagine MDRAF is married to a drunk who will not help him. He has 19 kids to feed. It costs him 4k per month for diapers and formula. He only make 2k per month working OT at a gas station. (Sorry MDRAF)

Gumby loans him the other 2k per month needed to get by. He receives a note that promises repayment with interest.

I have a counterfeiting machine. Every month I print 2k or slightly more and buy the note from Gumby. Now he is made whole and I have the note. I also have a side agreement with MDRAF that I will send all interest except a tiny portion back to him. The tiny fee is for my valuable service masking his "loan" which is really just expansion of the money supply to enable him to buy diapers and formula.

At the end of our story MDRAF is not paying interest on a loan, Gumby has as much money or possibly slightly more, MDRAF has 2k more which will be spent and bid up prices.  I also have slightly more from the fraction of interest.

Who is hurt by all this? *Hint* - it's not me and it's not MDRAF.

MDRAF is the government in this example and I am Ben Bernanke.

How does Gumby have more money than had before?  Before, he had an IOU from MDRAF.  Now he has cash from you equal to the value of the IOU.  But, because you pushed the interest rate down, he has less money than he would have prior to your pushing the interest rate.

And MDRAF had the $2000 from Gumby prior to your getting involved.  How did your involvement change anything (besides lowering MDRAF's interest payments on future IOUs that he issues to Gumby by $1 per month)?

And, yes, you have that extra $1 per month in interest payment now.  Big freaking deal.  You can't actually buy anything like diapers or food with that money.

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

No one has actually earned anything or produed anything and yet there is more money. Is that not obvious? Let's just stick with the example here before moving on and understand what has actually happened.