Anyone willing to bet on a devaluation of the dollar when all the debt bubbles burst?

[Galen]

(05-26-2016, 03:44 PM)Kinser79 Wrote:

(05-26-2016, 02:29 PM)Eric the Green Wrote: One thing I don't understand is why you consult economists from a century ago to make investment decisions today.

Probably because their economic theory is more sound than the investment advice one gets from the talking heads on the business channels.  As I pointed out earlier, I've not gone broke by doing the exact opposite of what the Wall Street Journal, CNBC, and Fox Business say to do.

That is a pretty good rule of thumb.  I like knowing why something works so that if the game changes it is possible to spot it and take timely action.  Mises and Rothbard have been very helpful in this regard.

[Galen]

(05-26-2016, 05:34 PM)pbrower2a Wrote:

(05-26-2016, 01:36 AM)Galen Wrote: What you expect doesn't really matter. What does, is that you expect a population of fallible people to produce competent and ethical people to rule us.  This is a logical fallacy which is demonstrated by the fact Nixon who contemplated using the IRS for political purposes and later actually did and got away with it.  Then there is the Bush and Clinton crime families just in case you needed a few more examples.  Then there is Congressman X and his book.

This is the reality that neither you or Eric the Obtuse can accept.

That's why we have laws, police, prosecutors, judges, tax collectors, prisons, and at the extreme hangmen.

I have lived in places where all of the above were corrupt and on the take, possibly not the hangmen.  I grew up in a town where the cops were the drug dealers and were all dating the same teenager.  People even caught her going down on one of them while he was on duty and that didn't get a response out of the powers that be.  Last I heard he retired with a full pension.

You must live a very sheltered life to be this naive.

[pbrower2a]

(05-27-2016, 02:14 AM)Galen Wrote:

(05-26-2016, 05:34 PM)pbrower2a Wrote:

(05-26-2016, 01:36 AM)Galen Wrote: What you expect doesn't really matter. What does, is that you expect a population of fallible people to produce competent and ethical people to rule us.  This is a logical fallacy which is demonstrated by the fact Nixon who contemplated using the IRS for political purposes and later actually did and got away with it.  Then there is the Bush and Clinton crime families just in case you needed a few more examples.  Then there is Congressman X and his book.

This is the reality that neither you or Eric the Obtuse can accept.

That's why we have laws, police, prosecutors, judges, tax collectors, prisons, and at the extreme hangmen.

I have lived in places where all of the above were corrupt and on the take, possibly not the hangmen.  I grew up in a town where the cops were the drug dealers and were all dating the same teenager.  People even caught her going down on one of them while he was on duty and that didn't get a response out of the powers that be.  Last I heard he retired with a full pension.

You must live a very sheltered life to be this naive.

So we don't need laws, police, prosecutors, judges, tax collectors, and prisons?

Welcome to the jungle! How long would you live?

[Galen]

(05-27-2016, 10:03 AM)pbrower2a Wrote:

(05-27-2016, 02:14 AM)Galen Wrote:

(05-26-2016, 05:34 PM)pbrower2a Wrote:

(05-26-2016, 01:36 AM)Galen Wrote: What you expect doesn't really matter. What does, is that you expect a population of fallible people to produce competent and ethical people to rule us.  This is a logical fallacy which is demonstrated by the fact Nixon who contemplated using the IRS for political purposes and later actually did and got away with it.  Then there is the Bush and Clinton crime families just in case you needed a few more examples.  Then there is Congressman X and his book.

This is the reality that neither you or Eric the Obtuse can accept.

That's why we have laws, police, prosecutors, judges, tax collectors, prisons, and at the extreme hangmen.

I have lived in places where all of the above were corrupt and on the take, possibly not the hangmen.  I grew up in a town where the cops were the drug dealers and were all dating the same teenager.  People even caught her going down on one of them while he was on duty and that didn't get a response out of the powers that be.  Last I heard he retired with a full pension.

You must live a very sheltered life to be this naive.

So we don't need laws, police, prosecutors, judges, tax collectors, and prisons?

Welcome to the jungle! How long would you live? Or would the self-contained plantation, a place in which the owner controls everything be right for you?
[/quote]

You might want to try reading something useful about the Old West.  It turns out that it was not nearly as violent or lawless as the Hollywood stereotypes would have you believe.  Your assumptions depend on the idea that people in the absence of a ruler will automatically start stealing, killing each other and are completely incapable of resolving disputes without violence.  That actual history of the West suggests something different.

(05-27-2016, 10:03 AM)pbrower2a Wrote: A problem with the self-contained plantation -- it can be a veritable paradise for the planter and his family. Everyone else? Nothing but toil, fear, rags, and hunger.

That is a pretty good description of the US at this point.  Didn't the bailout of the banks demonstrate that the laws for the little people are different than the politicians and their enforcers that you think that we need.  Try not paying taxes and see what happens.  Hint: Its no different than what the mafia does.

[Mikebert]

(05-24-2016, 01:58 PM)Kinser79 Wrote:

(05-24-2016, 09:18 AM)Mikebert Wrote:

(05-24-2016, 12:14 AM)Kinser79 Wrote:

(05-23-2016, 06:27 PM)Mikebert Wrote:

(05-21-2016, 12:19 AM)Kinser79 Wrote: The Fed only has two leavers it can work economically, the interest rates and money printing.  The interest rate is already at its minimum.  That leaves money printing.

Interest rate policy IS money printing.

I would argue that interest rate policy is indirect money printing.  Lowering the interest rate usually signals to borrowers it is time to borrow and that for spenders it is time to spend.

Interest rate policy is performed using open market operations.  If the Fed wants to keep interest rates low they buy government debt.  They buy it with dollars they create.  Monetary easing adds money to the economy.  When the Fed hikes rates they sell government bonds for dollars, removing those dollars from the economy.

Normally the bond being uses are short term government securities.  One could do open market operations with other kinds of bonds.  When they do that they call it quantitative easing.  During 1942-1951 the Fed performed open market operations with both short term and long term debt maintaining interest rate pegs on both.

Yes, Mike...I know what the Fed does.  I've read a book or two you know.

Then why did you imply interest rate policy was separate from money creation?

[Galen]

(05-28-2016, 07:04 AM)Mikebert Wrote: Then why did you imply interest rate policy was separate from money creation?

I don't think he did.  He has to know that interest rates are a consequence of the Federal Reserve's Open Market Operations which buy up debt in order to hold down interest rates.

[Mikebert]

Ragnarok Wrote:No!  Deflation is defined by the decrease in money + credit relative to the supply of goods + services.  Geeze, no wonder why the Fed is so messed up.

Just because you assert this does not make it so.

Quote:On, deflation.  Interesting.  If the US wasn't such a debt besotted place, then deflation wouldn't be such an issue. Rags would love deflation because that means he could buy more stuff over time since his dollars would fetch more stuff as time passed.

And you have a sufficient supply of dollars that you have no need to generate more?  In a deflationary world the prices of every are continuously falling.  Why buy today, when tomorrow it will be cheaper.  So unless you have enough dollars for the rest of your life right now, you are going to need to get more. How are you going to persuade others to part with theirs?

People take on business business risk in order to earn a return on their capital.  The long term return on capital is about 5%. The long term return on zero-risk securities has been about 1%.  The difference is the risk premium, the extra return businessmen need over the long run in order to be willing to engage in business. Therefore the most deflation the current system could withstand would be about 1%, which would imply a zero risk return of 1% for money in a safe.  But at today's world growth rates a deflationary economy such as would come from a specie-based money would would feature about 2% long-term deflation rates.  Thus businessmen would demand a higher return, which requires restricting investment to only the more profitable, slowing down growth.  The system would go through a series of depressions and expansions in between before things ever settled (if they ever did).  I was assume the system eventually stabilizes it would return to the 5% return on capital, but with only 1% deflation, resulting from GDP growth about 1% slower than we have seen over the last 25 years, which itself is 1% lower than the quarter-century before.

I simply cannot see nuclear-armed developing nations like China or Russia willing to stay in such a straight jacket.  They would have an overwhelming incentive to set up their own trading bloc anchored around one of their own fiat currencies (probably the yuan) and enjoy faster growth, allowing them to more rapidly surpass the Western countries.  We went through this before in the 18th century.  Britain embraced their own fiat currency, while France, because of the unpleasantness in 1720, continued to hug gold.  France was eclipsed by Britain.  Although only a fourth the size, Britain was able to outspend France in the Napoleonic wars.  France eventually threw in the towel and got on board about a century after Great Britain did.

[Kinser79]

(05-28-2016, 08:05 AM)Mikebert Wrote:

Ragnarok Wrote:No!  Deflation is defined by the decrease in money + credit relative to the supply of goods + services.  Geeze, no wonder why the Fed is so messed up.

Just because you assert this does not make it so.

Mike, it isn't an assertion. It is a definition of what deflation is. It is like saying a tree is a plant that is relatively tall, and contains a main woody stem (trunk) with smaller woody stems (branches) attached to that main woody stem and leading eventually to photosynthetic organs (usually called leaves).

Quote:And you have a sufficient supply of dollars that you have no need to generate more?  In a deflationary world the prices of every are continuously falling.  Why buy today, when tomorrow it will be cheaper.  So unless you have enough dollars for the rest of your life right now, you are going to need to get more. How are you going to persuade others to part with theirs?

I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait. Providing others with goods and services for demands that cannot wait (food, water, haircuts) generally produces smaller marginal returns but repeat business.

For demands that can wait, by waiting the consumer can actually purchase more with the same amount of money or sometimes for even less.

Quote:People take on business business risk in order to earn a return on their capital.

In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's matress it makes the accumulation of capital--particularly by those of fewer means--much easier. Often such people would go into providing goods and services that are of immediate fulfillment demands.

Quote:  The long term return on capital is about 5%.

That is a very large assumption you have there. Capital is destroyed all the time through investment, some investments have a larger long term return because they are incredibly risky, other investments have a smaller long term return by cause they are much less risky. I'm only going to agree to this assumption for the sake of argument here. Otherwise it is nothing more than an unsubstantiated assumption.

If we assume that the Fed is right and that 2% inflation is necessary to maintain economic growth (there is no evidence for this but lets for the sake of argument assume they are right), and that long term return on capital is 5% per year then each year the actual return on capital in real terms (purchasing power terms) is only 3%. But it gets worse as I'll show below.

Quote: The long term return on zero-risk securities has been about 1%. 

There is no such thing as a zero-risk security. All investments contain some element of risk. That being said, I'm going to assume you mean very low risk securities like governmental debt instruments (IE Bonds) if the return is 1% per year and inflation is 2% per year the return is -1%. In short people investing in such a manner are paying someone else to park their money in real terms.

While this may be acceptable when there is an obvious asset bubble that could pop at any second (like the Stock Market for example) it is totally unacceptable in otherwise normal business climates. As such the return on those low risk instruments has to produce in interest a return higher than the rate of inflation for people to even consider them--driving up interest rates in the case of bonds denominated in a currency.

Quote: I simply cannot see nuclear-armed developing nations like China or Russia willing to stay in such a straight jacket.

I'm sure that no one saw the USSR collapsing under its own weight. I'm also certain you didn't predict the Berlin Wall falling on 9 November 1989 either. But I digress.

Then explain why both are buying gold as fast as they can. It is my assumption that since no other currencies are backed with gold that both are seeing a need that their currencies might aught to be as a hedge against dollar collapse. Furthermore, with more and more dollars being produced and so few goods to buy with those dollars (the US' main exports are wheat, corn, soybeans and timber--in that order no less) and the potential to purchase oil in currencies other than dollars (as with Iran [gold, RMB, INR] and Russia [RUR, and USD--which Russia is converting to physical gold as fast as they get their hands on those USD]) I would say the end of the USD as a reserve currency is no more than 20 years away, and probably within a decade from today.

As such all those dollars are going to have to be repatriated all at once to the US and with so few goods to buy in dollars we'll be seeing bread sell for 1000 bucks a loaf.

 

Quote: They would have an overwhelming incentive to set up their own trading bloc anchored around one of their own fiat currencies (probably the yuan) and enjoy faster growth, allowing them to more rapidly surpass the Western countries.

They have every incentive to do that whether the US uses specie as currency or a fiat currency. Russia in particular does not gain anything from US hegemony, and US hegemony is constraining China and India. Neither are going to slow their development because Americans want them to nor should they.

Quote:  We went through this before in the 18th century.  Britain embraced their own fiat currency, while France, because of the unpleasantness in 1720, continued to hug gold.  France was eclipsed by Britain.  Although only a fourth the size, Britain was able to outspend France in the Napoleonic wars.  France eventually threw in the towel and got on board about a century after Great Britain did.

Your history is bad and you should feel bad for using it. The GBP was throughout the 18th and 19th centuries backed by gold. France's currency was gold or backed by gold most of the same time. France did, during the revolutionary period introduce a fiat currency which wrecked the economy and was undone by Nepoleon.

The differences between France and Britain during this time frame were cultural rather than monetary. As for how the British were able to outspend the French during the Nepoleonic Wars was due primarily to their use of fractional reserve banking which the French rejected. However at no time until WW1 did the British or French Empires abandon the gold standard for their currencies because no foreigner would accept anything but specie for their purchases.

[playwrite]

So many near-misses on this thread; it's probably worth wading through and trying to straighten a few folks out.

Part 1 - Inflation

First, inflation (deflation) is a general sustained increase (decrease) in prices.  People who try to define it differently are trying to sell you a particular political viewpoint or defunct economic model, most likely both (we'll get to Galen in a minute).

Inflation (deflation) occurs when the balance of aggregate demand (spending) in an economy exceeds (falls short of) the economy's capacity to supply and prices begin to rise.

Some people talk about "supply inflation" where the supply of a particular good or service in the economy is reduced to the extent that the demand for it begins to make the price for the good/service rise, often soaring.  This is what happen in the 1970s with the Arab Oil Embargo; it's complicated because energy (oil) underpins so much economic activity that all prices began to rise and it begins to look like general "demand inflation."   If it had been a coffee embargo, we'd have a lot of sleepy people but the impact on the prices of all other goods/services would be hard to measure if it occurred at all.

The key is how sustained is the price(s) increases and does it get mitigate by dealing with a particular good/service.  For example, the deregulation of natural gas prices, and the near immediate switch of oil-fire electric utilities to natural gas nearly crushed the Arab economies and the inflation in the US and other oil importers quickly resided.

What we are actually talking about when we are concerned about inflation (deflation) is the general substanted increase (decrease) in prices, resulting from increases (decreases) of demand/spending relative to the economy's capacity to meet that demand/spending.

Due to decades of brainwashing, here's what a lot of people don't get - some inflation is necessary for a growing healthy economy. 

Without some inflation, we would all still be on subsistence farming - no cars, no Internet, no music other than what a family member might have to offer - basically, pretty shXty lives.  The reason for that is one only needs to think about what is actually happening when inflation occurs - demand is exceeding supply (and what is happening when the opposite is occurring).  In the face of increasing demand, a smart business person can raise his prices only so much before his customers will stop paying or before another person decides they can provide that good or service as well and take market share and profit away from that business person.  At some point, in the face of rising demand, a business person is going to increase his capacity by hiring or investing in capacity, perhaps even coming up with a new way/technology to meet that demand with lower costs - i.e.  he grows the economy, and that's healthy.  If demand is weakening, the exact opposite happens - that's an unhealthy economy.

Bottom line - pray for some healthy inflation.

Next: Part 2 - Too much inflation = bad, BUT let's remember how it comes about.

[Mikebert]

[Kinser] Mike, it isn't an assertion. It is a definition of what deflation is.
[Mike] Definitions are assertions that are generally agreed upon.  You may define a common feline pet as a dog, but most people will continue to define it as a cat.  Austrians choose to define inflation in terms of money supply, everyone else defines it in terms of prices.
 
[Kinser]I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait.
[Mike]Yes, but far fewer goods fall into the second category than you might think.
 
[Kinser] In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's mattress it makes the accumulation of capital--particularly by those of fewer means--much easier.

[Mike]Impose a deflationary economy with 1.5% deflation.  People stop buying things they can put off buying, which includes expensive drugs, restaurant meals and lots of other things and so we both lose our jobs as do lots and lots of other people too.  So we fall back on our savings.  Fortunately we do not have to face the risk of losing them in investments, we can just sit on it and watch it increase in value.  So I don’t look for a job and just pull out the same income we have been living on (gross income less savings) and look for a job when it runs out.  It will eventually run out, in 37 years, when both my wife and I will almost certainly be dead.  So I guess I won’t look for a job.  About 1.3% of US households have sufficient savings that they would never run out money. But they probably weren’t working for a living before anyways. I would point out that these folks do the bulk of the investing, and if they can maintain their family’s standard of living forever without taking on the risk of investment, why invest?
 
Remember deflation doesn’t just mean prices go down, workers’ incomes go down too—and faster.  A deflationary economy is depressionary because of the fact that most goods fall into the first of your two categories.
 
[Mike] The long term return on capital is about 5%.
[Kinser]That is a very large assumption you have there.
[Mike]Not an assumption, a fact.  If you want to get picky 4.8% from 1951-2000.
The figures I used were all real rates, after inflation is stripped out.  I should have made that more clear.  Government bonds are zero risk because the government simply creates the money needed to redeem them.  You can always get the face value of the bond at maturity.
 
[Kinser]The GBP was throughout the 18th and 19th centuries backed by gold.

[Mike]Britain went on the gold standard in 1821. http://www.britannica.com/topic/gold-standard. 
 A silver basis for money was in use before.  But there was significant inflation during the 18th century wars.  Price inflation was very high for the Napoleonic wars. Convertibility was suspended in 1797 and did not come back until 1821.  In the US the nation would go “off gold” during wartime and back on afterward.  The war-time inflation was offset by peacetime deflation.  I have modeled this very nicely by treating cumulative federal deficits as a kind of money.  Basically I regress the price index against money/GDP to get a price model and then plot Price/Model to show how price deviated from where is “should” be from a purely monetary standpoint.  The deviations are caused by changes in money velocity.  The cycle you obtain lays onto the classical Kondratieff cycle during the gold standard era, and the cycles continue into the fiat era. 
 
This method provides a way to “remove” the effect of fiat currency to get a detrended price, what I call ”reduced price” in the article.  During the gold standard era, there is no fiat currency effect to remove and the reduced price and the raw price show the same cycles.  During the fiat currency era the reduced price continues to show the same K-cycle.  This is the tool I used to show that economically 1929=2008.
 
My approach to money is kind of “Austrianish” because they also use broader definitions of money, but I do not think they use anything quite like what I am doing.  I would think not, since my system must be double-counting in some places but since I am simply using it to detrend, not make quantitative inflation predictions, that doesn’t matter too much.

[Kinser79]

(06-01-2016, 07:42 AM)Mikebert Wrote: [Kinser] Mike, it isn't an assertion. It is a definition of what deflation is.
[Mike] Definitions are assertions that are generally agreed upon.  You may define a common feline pet as a dog, but most people will continue to define it as a cat.  Austrians choose to define inflation in terms of money supply, everyone else defines it in terms of prices.

Your example is absurd. The general definition of inflation is based on babyish economics. Prices themselves are a mechanism of supply and demand. If there is a vast supply of fiat currency so much so that one could price bread at 1000 dollars then what has caused that increase in price? The supply of the currency in such profusion that the prices had to rise as a consequence of the depreciation of the currency.

Using your infantile definition of inflation it is inflation when prices rise due to supply shortages, even if the supply of money in the economy en toto remains unchanged.

Quote: 
[Kinser]I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait.
[Mike]Yes, but far fewer goods fall into the second category than you might think.

Ultimately most goods that people buy are goods that can be deferred. Food, water, shelter are all immediate needs, most other goods and services can be deferred except perhaps health care in emergency situations. A color TeeVee is not a demand that needs to be satisfied immediately.

Quote: 
[Kinser] In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's mattress it makes the accumulation of capital--particularly by those of fewer means--much easier.

[Mike]Impose a deflationary economy with 1.5% deflation.  People stop buying things they can put off buying, which includes expensive drugs, restaurant meals and lots of other things and so we both lose our jobs as do lots and lots of other people too.  So we fall back on our savings.  Fortunately we do not have to face the risk of losing them in investments, we can just sit on it and watch it increase in value.  So I don’t look for a job and just pull out the same income we have been living on (gross income less savings) and look for a job when it runs out.  It will eventually run out, in 37 years, when both my wife and I will almost certainly be dead.  So I guess I won’t look for a job.  About 1.3% of US households have sufficient savings that they would never run out money. But they probably weren’t working for a living before anyways. I would point out that these folks do the bulk of the investing, and if they can maintain their family’s standard of living forever without taking on the risk of investment, why invest?

Okay there is a lot to respond to, and your terrible coding doesn't help one bit. Seriously you need to learn to use BB code. (Note, all the color codes and font codes apparently aren't working.)

In the short term yes a deflationary economy would impose a depression. Usually one of short duration if historical examples are used. Will people put off buying expensive drugs...yes. Is that necessarily a bad thing? No. The reason that pharmaceuticals are so expensive is two fold. First governmental manipulation of the price through governmental programs, and second government grants of monopolies on those drugs. Also if we include the costs of advertising drugs--something only two countries do, the US and NZ--we find that a great deal of that expense evaporates once advertising for drugs is prohibited and governmental monopolies are reduced. After all how expensive is ibuprofen these days?

Restaurant meals would likely be reduced for a time, but eventually they will come back. Indeed in some situations, they will never really go away. While historically restaurants were rare on ye olde farmstead, they were really common in cities because many flats were constructed without facility to store or prepare food. In most of America's major cities this remains the case. Furthermore, a lack of culinary training more generally has resulted that some restaurants will remain open even with deflationary pressures.

As for your example of living off savings. This assumes that your savings are in a commodity backed currency. I'm willing to guess that your savings is all on paper. If we were to impose historical definition of the Dollar in terms of silver or even gold for that matter, it would take 10 of the old dollars to equal 1 of the new dollar. And that assumes that the state is going to allow you to exchange your paper for gold or silver. Federal Reserve Notes were never convertible and it is conceivable that you'd lose all your savings as it becomes worthless.

After all how many southerners lost their money cause they hoarded confederate bank notes?

Quote: 
Remember deflation doesn’t just mean prices go down, workers’ incomes go down too—and faster.  A deflationary economy is depressionary because of the fact that most goods fall into the first of your two categories.

Deflating the currency would have a depressonary effect until equilibrium is achieved. The fact of the matter is that being a burger assembler at McDonald's only provides so much value. It matters little if that value is determined to be 15 paper dollars or 1.25 dollars in silver per hour. The fact is that even if wages fall, prices also fall, and over the course of time the value of the currency itself increases in purchasing power.

Quote: 
[Mike] The long term return on capital is about 5%.
[Kinser]That is a very large assumption you have there.
[Mike]Not an assumption, a fact.  If you want to get picky 4.8% from 1951-2000.

I don't buy your source. The fact that it comes from the Federal Reserve itself makes it suspect. They have a poor track record of predicting the inflation rate and they supposedly control the currency. I trust them even less on return of capital. But still even if we assume that they are correct, a 5% return/year is erroded by a 2%/year inflation rate.

Quote:The figures I used were all real rates, after inflation is stripped out.  I should have made that more clear.  Government bonds are zero risk because the government simply creates the money needed to redeem them.  You can always get the face value of the bond at maturity.

There is zero risk on retrieving the face value of said bonds but they are not without risk. As I pointed out there is no such thing as a zero risk investment. In the case with a government bond (and I'm going to assume we're talking about Federal Bonds because States can't just print money--and thank the gods for that) we're assuming that inflation of the paper currency won't erode the value of that investment.

Let us suppose for example I buy a $50 bond today at the local post office (I'm actually unsure if the Post Office still does this because I quite simply don't trust the government with my money). It costs me 25 dollars today and matures in 50 years and will pay out 50 dollars at maturity. Realistically there is no risk. Now let us suppose that we only have a 2% inflation rate (and inflation rates vary widely) for those 50 years. I get a 50 dollar bill for that bond on the day it matures but I can still only buy 25 dollars worth of stuff in real terms (assuming 2016 paper dollars). Now let us assume that in 2066, we've had a couple LBJ figures who tried to have a warfare/welfare state with both guns and butter running full force and end up with 1970s style stagflation for a couple decades. Say 4% or greater per year. Then when I cash out the bond I still get 50 dollars but I may only be able to buy 10 dollars worth of goods in 2016 terms.

Those who buy bonds are betting that the rate of inflation will not be so great as to result in a major loss of value of the bonds--something that fiat currencies have a terrible track record with.

Quote: 
[Kinser]The GBP was throughout the 18th and 19th centuries backed by gold.

[Mike]Britain went on the gold standard in 1821. http://www.britannica.com/topic/gold-standard. 

I may have been confused as to when the GBP went onto the gold standard. I do know that the development of the Pound necessitated that for the vast majority of its history it was on the silver standard (240 silver pennies equalling a pound--the Tower Pound I believe but I'd have to double check). That being said, most other currencies were on the gold standard following the conquest of South America. Gold drove silver out of the market.

Quote: A silver basis for money was in use before.  But there was significant inflation during the 18th century wars.  Price inflation was very high for the Napoleonic wars.

Of course, supply of consumer goods were curtailed because the government was busy buying guns. Generally speaking during wars there is less butter because people are making guns instead.

Quote:Convertibility was suspended in 1797 and did not come back until 1821. 

And during that time the UK was almost constantly at war. Do I need to drag out the Hornblower series here? Even so, once convertibility was re-established the pound was re-defined, in terms of gold as Britannica points out

Quote: In the US the nation would go “off gold” during wartime and back on afterward.  The war-time inflation was offset by peacetime deflation.  I have modeled this very nicely by treating cumulative federal deficits as a kind of money.  Basically I regress the price index against money/GDP to get a price model and then plot Price/Model to show how price deviated from where is “should” be from a purely monetary standpoint.  The deviations are caused by changes in money velocity.  The cycle you obtain lays onto the classical Kondratieff cycle during the gold standard era, and the cycles continue into the fiat era. 

So then you can see that commodity currencies always return to their equilibrium point. I fail to see how that presents a problem. If anything that stability in purchasing power would improve investment decisions.

I'm not going to address your models because they will likely change next week. I simply can't be arsed to keep up with whatever you pull from your rectum. That being said, my approach to money is heavily Austrian, and I've come to that conclusion because I've based my investment strategies around their economic approach and have succeeded.

That being said, personally I think that should we allow a market place in various currencies by repealing legal tender laws we'd see that in time, currency would come to be defined in terms of silver. It is plentiful enough to serve as coinage, has limited jewelry value, and even more limited industrial value in comparison to gold.

What I do find telling is that the Russians, Indians and Chinese are converting their USD into gold as soon as they get their hands on them.

[Eric the Green]

What Galen the Clueless doesn't understand, is that the fallibility of the people applies to free market conservatives like himself, as well as to police, judges, politicians, etc. It is just up to the people to be as good as they can be, whether they are in business or government, and up to the people themselves to make things right, rather than accept their fallibility. And when the people's representatives write laws and constitutions, and they are upheld through a judicial process, then we have a system to protect us that at least transcends the passions, greed and corruptions of the moment. A democratic government, even a partially-democratic one like ours, at least offers the people a voice in creating justice and peace in the country. Against bad business alone, there is really no recourse. If free enterprise is left to its own devices, it becomes the government and dominates the market so that the people have no voice. Of course, if government is left to its own devices, it becomes corrupt. So, neither should be "trusted." The people get both the government and the market they deserve.

If the people are stupid and vote for the stupid party, then we deserve what we get. If we vote for creepy, greedy right-wing ideologues like the Republicans in congress, and fraudulent, lying carnival barkers like Donald Drumpf, then we deserve what we get. If we pay attention to Libertarian ideologues like Galen, we deserve what we get.

There really is no escape from these facts. Recognize them, or be blind and dumb.

[Galen]

(06-01-2016, 12:42 PM)Eric the Obtuse Wrote: If the people are stupid and vote for the stupid party, then we deserve what we get. If we vote for creepy, greedy right-wing ideologues like the Republicans in congress, and fraudulent, lying carnival barkers like Donald Drumpf, then we deserve what we get. If we pay attention to Libertarian ideologues like Galen, we deserve what we get.

There really is no escape from these facts. Recognize them, or be blind and dumb.

Stupid is really your department.  Yes, it would be so horrific to have a government that left people alone for a change.  Then again you would rather have crooks like Clinton running things.

[playwrite]

(06-01-2016, 12:20 PM)Kinser79 Wrote:

(06-01-2016, 07:42 AM)Mikebert Wrote: [Kinser] Mike, it isn't an assertion. It is a definition of what deflation is.
[Mike] Definitions are assertions that are generally agreed upon.  You may define a common feline pet as a dog, but most people will continue to define it as a cat.  Austrians choose to define inflation in terms of money supply, everyone else defines it in terms of prices.

Your example is absurd.  The general definition of inflation is based on babyish economics.  Prices themselves are a mechanism of supply and demand.  If there is a vast supply of fiat currency so much so that one could price bread at 1000 dollars then what has caused that increase in price?  The supply of the currency in such profusion that the prices had to rise as a consequence of the depreciation of the currency.

Using your infantile definition of inflation it is inflation when prices rise due to supply shortages, even if the supply of money in the economy en toto remains unchanged.  

Quote: 
[Kinser]I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait.
[Mike]Yes, but far fewer goods fall into the second category than you might think.

Ultimately most goods that people buy are goods that can be deferred.  Food, water, shelter are all immediate needs, most other goods and services can be deferred except perhaps health care in emergency situations.  A color TeeVee is not a demand that needs to be satisfied immediately.

Quote: 
[Kinser] In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's mattress it makes the accumulation of capital--particularly by those of fewer means--much easier.

[Mike]Impose a deflationary economy with 1.5% deflation.  People stop buying things they can put off buying, which includes expensive drugs, restaurant meals and lots of other things and so we both lose our jobs as do lots and lots of other people too.  So we fall back on our savings.  Fortunately we do not have to face the risk of losing them in investments, we can just sit on it and watch it increase in value.  So I don’t look for a job and just pull out the same income we have been living on (gross income less savings) and look for a job when it runs out.  It will eventually run out, in 37 years, when both my wife and I will almost certainly be dead.  So I guess I won’t look for a job.  About 1.3% of US households have sufficient savings that they would never run out money. But they probably weren’t working for a living before anyways. I would point out that these folks do the bulk of the investing, and if they can maintain their family’s standard of living forever without taking on the risk of investment, why invest?

Okay there is a lot to respond to, and your terrible coding doesn't help one bit.  Seriously you need to learn to use BB code.  (Note, all the color codes and font codes apparently aren't working.)

In the short term yes a deflationary economy would impose a depression.  Usually one of short duration if historical examples are used.  Will people put off buying expensive drugs...yes.  Is that necessarily a bad thing?  No.  The reason that pharmaceuticals are so expensive is two fold.  First governmental manipulation of the price through governmental programs, and second government grants of monopolies on those drugs.  Also if we include the costs of advertising drugs--something only two countries do, the US and NZ--we find that a great deal of that expense evaporates once advertising for drugs is prohibited and governmental monopolies are reduced.  After all how expensive is ibuprofen these days?

Restaurant meals would likely be reduced for a time, but eventually they will come back.  Indeed in some situations, they will never really go away.  While historically restaurants were rare on ye olde farmstead, they were really common in cities because many flats were constructed without facility to store or prepare food.  In most of America's major cities this remains the case.  Furthermore, a lack of culinary training  more generally has resulted that some restaurants will remain open even with deflationary pressures.

As for your example of living off savings.  This assumes that your savings are in a commodity backed currency.  I'm willing to guess that your savings is all on paper.  If we were to impose historical definition of the Dollar in terms of silver or even gold for that matter,  it would take 10 of the old dollars to equal 1 of the new dollar.  And that assumes that the state is going to allow you to exchange your paper for gold or silver.  Federal Reserve Notes were never convertible and it is conceivable that you'd lose all your savings as it becomes worthless.

After all how many southerners lost their money cause they hoarded confederate bank notes?

Quote: 
Remember deflation doesn’t just mean prices go down, workers’ incomes go down too—and faster.  A deflationary economy is depressionary because of the fact that most goods fall into the first of your two categories.

Deflating the currency would have a depressonary effect until equilibrium is achieved.  The fact of the matter is that being a burger assembler at McDonald's only provides so much value.  It matters little if that value is determined to be 15 paper dollars or 1.25 dollars in silver per hour.  The fact is that even if wages fall, prices also fall, and over the course of time the value of the currency itself increases in purchasing power.

Quote: 
[Mike] The long term return on capital is about 5%.
[Kinser]That is a very large assumption you have there.
[Mike]Not an assumption, a fact.  If you want to get picky 4.8% from 1951-2000.

I don't buy your source.  The fact that it comes from the Federal Reserve itself makes it suspect.  They have a poor track record of predicting the inflation rate and they supposedly control the currency.  I trust them even less on return of capital.  But still even if we assume that they are correct, a 5% return/year is erroded by a 2%/year inflation rate.

Quote:The figures I used were all real rates, after inflation is stripped out.  I should have made that more clear.  Government bonds are zero risk because the government simply creates the money needed to redeem them.  You can always get the face value of the bond at maturity.

There is zero risk on retrieving the face value of said bonds but they are not without risk.  As I pointed out there is no such thing as a zero risk investment.  In the case with a government bond (and I'm going to assume we're talking about Federal Bonds because States can't just print money--and thank the gods for that) we're assuming that inflation of the paper currency won't erode the value of that investment.

Let us suppose for example I buy a $50 bond today at the local post office (I'm actually unsure if the Post Office still does this because I quite simply don't trust the government with my money).  It costs me 25 dollars today and matures in 50 years and will pay out 50 dollars at maturity.  Realistically there is no risk.  Now let us suppose that we only have a 2% inflation rate (and inflation rates vary widely) for those 50 years.  I get a 50 dollar bill for that bond on the day it matures but I can still only buy 25 dollars worth of stuff in real terms (assuming 2016 paper dollars).  Now let us assume that in 2066, we've had a couple LBJ figures who tried to have a warfare/welfare state with both guns and butter running full force and end up with 1970s style stagflation for a couple decades.  Say 4% or greater per year.  Then when I cash out the bond I still get 50 dollars but I may only be able to buy 10 dollars worth of goods in 2016 terms.

Those who buy bonds are betting that the rate of inflation will not be so great as to result in a major loss of value of the bonds--something that fiat currencies have a terrible track record with.

Quote: 
[Kinser]The GBP was throughout the 18th and 19th centuries backed by gold.

[Mike]Britain went on the gold standard in 1821. http://www.britannica.com/topic/gold-standard. 

I may have been confused as to when the GBP went onto the gold standard.  I do know that the development of the Pound necessitated that for the vast majority of its history it was on the silver standard (240 silver pennies equalling a pound--the Tower Pound I believe but I'd have to double check).  That being said, most other currencies were on the gold standard following the conquest of South America.  Gold drove silver out of the market.

Quote: A silver basis for money was in use before.  But there was significant inflation during the 18th century wars.  Price inflation was very high for the Napoleonic wars.

So then you can see that commodity currencies always return to their equilibrium point.  I fail to see how that presents a problem.  If anything that stability in purchasing power would improve investment decisions.

I'm not going to address your models because they will likely change next week.  I simply can't be arsed to keep up with whatever you pull from your rectum.  That being said, my approach to money is heavily Austrian, and I've come to that conclusion because I've based my investment strategies around their economic approach and have succeeded.

That being said, personally I think that should we allow a market place in various currencies by repealing legal tender laws we'd see that in time, currency would come to be defined in terms of silver.  It is plentiful enough to serve as coinage, has limited jewelry value, and even more limited industrial value in comparison to gold.

What I do find telling is that the Russians, Indians and Chinese are converting their USD into gold as soon as they get their hands on them.

The basic mistake you are making is the same mistake people make when they talk about inflation in terms of what they had to pay for bread or for movie tickets compared to umpteen years ago - that's not inflation.  Nor is the price of this or that going down, deflation.

Both terms are in regard to generalized, systemic changes in ALL prices.  What is problematic for both is what Mike is saying, it is the positive feedback loops that not only sustain but accelerate the change across ALL price points. 

The key difference between the two as to their being problems is the tools we have to effectively deal with them.  The most common one is monetary policy, the price of money.  But, as we've seen, once you get even close to ZIRP, monetary policy is pretty flaccid for dealing with deflation.  One of the reasons why we want some level of healthy inflation is to help assure that there is no deflation getting started but not yet accounted for - it's like bedbugs, hard to get rid of once it's there.

The other tool, fiscal policy, is the more powerful tool for both deflation and inflation.  There's an entire party, the GOP, that is made up of dedicated extremists in the application of fiscal policy to deal with inflation - calling for austerity is their modus operandi regardless of actual economic conditions.  On the other hand, politicians, of any strip, with both the brains and the gonads to use fiscal policy for addressing deflation are far too few - basically, FDR and Obama to date.


P.s. I get special joy from taking Austrians' lunch money away.

[Mikebert]

(05-26-2016, 03:44 PM)Kinser79 Wrote: And I only have to handle one piddly little retirement account.  Well that and a safe, but I'm not going to talk about that.

Why on Earth would you have to consult economists for guidance on how to manage a piddly little retirement account?  It is not rocket science.  Buy low sell high.

[Eric the Green]

(06-01-2016, 12:59 PM)Galen Wrote:

(06-01-2016, 12:42 PM)Eric the Obtuse Wrote: If the people are stupid and vote for the stupid party, then we deserve what we get. If we vote for creepy, greedy right-wing ideologues like the Republicans in congress, and fraudulent, lying carnival barkers like Donald Drumpf, then we deserve what we get. If we pay attention to Libertarian ideologues like Galen, we deserve what we get.

There really is no escape from these facts. Recognize them, or be blind and dumb.

Stupid is really your department.  Yes, it would be so horrific to have a government that left people alone for a change.  Then again you would rather have crooks like Clinton running things.

Let the wealthy and powerful alone so they can run roughshod over the people and the environment for their own gain. That's what you and your libertarian economics does.

I would rather have the people running things.

[Ragnarök_62]

(06-03-2016, 04:51 PM)Mikebert Wrote: Why on Earth would you have to consult economists for guidance on how to manage a piddly little retirement account?  It is not rocket science.  Buy low sell high.

Uh, all investment classes I know of are bubbled up from fraudulent FED flaky fenagling.

Bonds/T-bills : return interest < inflation rate.  Slot machine investment there. Slot machines are what pay the casino's light bills.
REIT's : Inflow of hot money from China has messed this up.
Stawks.: It's a picker's market. Reasonable valuations are there, but you have to look for them.  Needle in a haystack proposition.

So: Winnow process is needed.
a. company must pay a dividend.  All else = greater fool.
b. low debt/equity ratio.
c. Company should be un PC so "socially conscious" entities like public employee pensions, university endowments, etc. sell them 'cause they look bad on the ole' portfolio.

so: Rag's politically incorrect IRA fund has these among others.
XOM:  CO2 spewing filthy Big Oil company.  Owns Congress.
UTX:  MIC stock.
MO: Big Tobacco. The "For the Kids" brigade hates this puppy.
ADM: Big Ag.
MON: proud producer of Roundup.

So. The alternative in bubbleland is to buy investments everyone else hates! Consultations with economists not needed, but cynicism certainly is.  Except for these which are needed for diversity.

FSLR : owns a gold/tellurium mine 'cause tellurium is used in solar panels.
MFST: Cash rich and is in the tech sector. After all, unicorns are forbidden by Rags!

[Kinser79]

(06-03-2016, 04:51 PM)Mikebert Wrote:

(05-26-2016, 03:44 PM)Kinser79 Wrote: And I only have to handle one piddly little retirement account.  Well that and a safe, but I'm not going to talk about that.

Why on Earth would you have to consult economists for guidance on how to manage a piddly little retirement account?  It is not rocket science.  Buy low sell high.

Some of us Mike, not that you'd know anything about this, actually study what we plan on investing in. I manage my own finances, I'm not about to be taken on a 401K ride like my mother did. She basically lost everything in '08 except her house and her state pension, which isn't that much anyway (and she only squeaked into the state pension).

I can't speak for you but I plan on living to be at least 75, after that it is diminishing returns and I'd prefer to live in relative comfort. Thankfully the house should be fully paid off by then.

[Galen]

(06-03-2016, 05:19 PM)Eric the Obtuse Wrote:

(06-01-2016, 12:59 PM)Galen Wrote: Stupid is really your department.  Yes, it would be so horrific to have a government that left people alone for a change.  Then again you would rather have crooks like Clinton running things.

Let the wealthy and powerful alone so they can run roughshod over the people and the environment for their own gain. That's what you and your libertarian economics does.

I don't see the left doing much about the crony capitalism. Indeed they seem to be in as in bed with the banks as the Republicans. Curious that Clinton won't release the speeches that she was paid hundreds of thousands for by Goldman-Sachs. Bernie is just another economic illiterate. So not much help there.

(06-03-2016, 05:19 PM)Eric the Obtuse Wrote: I would rather have the people running things.

I would rather people ran their own lives and benefited of suffered the consequences of their own decisions.

[Galen]

(06-03-2016, 04:51 PM)Mikebert Wrote:

(05-26-2016, 03:44 PM)Kinser79 Wrote: And I only have to handle one piddly little retirement account.  Well that and a safe, but I'm not going to talk about that.

Why on Earth would you have to consult economists for guidance on how to manage a piddly little retirement account?  It is not rocket science.  Buy low sell high.

Under current circumstances, the Fed doing massively stupid things, figuring out what to buy is hard.  The exit strategy is even harder and this is where the Austrian Business Cycle theory has been most helpful.