Not Even Harry Browne Thought It Was Going To Be This Bad

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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Mdraf » Thu Jul 25, 2013 9:55 am

TennPaGa wrote:
Mdraf wrote: Re: " The government's liability is the private sector's asset."

LOL. You guys. Your logic reminds me of Zeno's Half Distance paradox.
How is the government's liability not the private sector's asset?  To me, this is simply an accounting identity.
Because an asset is by definition something of value. The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued. The government could print $16000 trillion in bonds and the private sector would not be better off because that "asset" would be worthless.  That's what I meant by the Half Distance paradox. The accounting may be right but it is meaningless.  Do you think Detroit could go back to health by issuing bonds in its own currency to its inhabitants?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 10:17 am

Mdraf wrote:The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued.
You are correct that the asset could be devalued by issuing too many without enough productive capacity — nobody disputes that.

But, I don't understand why you still think that the bonds are at risk of not being "paid back". There is never a risk of the bonds not being "paid back" regardless of productivity. For instance, see the statement above about how the debt from WWII has never been "paid off" — and certainly not from any tax collection from the private sector. It was "paid back" by issuing new debt. The debt from WWII simply became our private sector assets. The WWII debt is not an economic burden. These debt deposits in the private sector represent real goods and services in the economy (that's what they were given to us for!). But, that has nothing to do with "paying" the debt. The debt is a creation of the government that will always be "paid back" regardless of any productivity or not.

Furthermore, nobody is advocating any amount of spending here. We are just stating mechanics and accounting identities (i.e. the government's liability is the private sector's asset). The government can provide those assets to the private sector in exchange for real goods and services if the elected politicians vote to do so. That's pretty straightforward.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Thu Jul 25, 2013 10:26 am

moda0306 wrote: Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?
Who has been buying all of the new issuance of Japanese bonds: the Japanese central bank, foreign buyers, or domestic private purchasers?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 10:36 am

Libertarian666 wrote:
moda0306 wrote: Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?
Who has been buying all of the new issuance of Japanese bonds: the Japanese central bank, foreign buyers, or domestic private purchasers?
Circa 2008:

[align=center]Image[/align]

Of course, all this shows is that the Yen is mostly just a domestically held currency — and not much of a globally held currency. A global reserve currency would obviously have far more foreign holders.

Usually people try to argue that the US can spend by being the world's global reserve currency, but explaining Japan's massive spending and low inflation requires ignoring the "global reserve currency" argument :)
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by moda0306 » Thu Jul 25, 2013 10:53 am

Gumby wrote:
Libertarian666 wrote:
moda0306 wrote: Libertarian666,

What's your take on Japan being so much further down the rabbit hole for so much more time than us?
Who has been buying all of the new issuance of Japanese bonds: the Japanese central bank, foreign buyers, or domestic private purchasers?
Circa 2008:

[align=center]Image[/align]
Gumby,

You've probably added months if-not years to my life by helping me in MR discussions.  I hate posting links and quotes.

But to your point on Japan, not only that, but inflation has been all-but nonexistent for decades now in Japan.  One of the key indicators of "artificially low interest rates" is high inflation, because if you can borrow at less than the rate of inflation with ease you'd be an idiot not to, which induces more inflation, which leaves rates even more attractive in comparison, etc, etc.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 11:15 am

As we can see from the pie chart, a lot of Japanese debt is simply purchased by the "Post Bank" which is the largest bank in Japan (it is literally in every Post Office). So, Japanese Savings accounts are responsible for a lot of their government bond purchases. That just illustrates the Japanese citizens' desire to save their money. The net financial assets to fund these savings accounts mostly comes from government spending that lands in people's pockets. Yen is spent into existence, and stays in the Japanese banking system. It's not like everyone in Japan needs to think about buying bonds. All Japanese citizens have to do is put their money into savings accounts and the banks (mostly Japan's "Post Bank") take care of the risk-free bond purchases for them behind the scenes.

This isn't any different from Primary Dealers and private banks purchasing bonds for us when we deposit dollars in our own savings accounts. The only difference between us and Japan is that more foreign investors are willing to hold our government debt — which, by definition, is what makes a global reserve currency.

So, Japan's currency is mostly domestic and ours is more globally held. No massive inflation is currently happening either way.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Mdraf » Thu Jul 25, 2013 11:46 am

Gumby wrote:
Mdraf wrote:The more bonds are issued with no prospect of any future productivity behind them to be paid back the more the asset is devalued.
You are correct that the asset could be devalued by issuing too many without enough productive capacity — nobody disputes that.

But, I don't understand why you still think that the bonds are at risk of not being "paid back". There is never a risk of the bonds not being "paid back" regardless of productivity. For instance, see the statement above about how the debt from WWII has never been "paid off" — and certainly not from any tax collection from the private sector. It was "paid back" by issuing new debt. The debt from WWII simply became our private sector assets. The WWII debt is not an economic burden. These debt deposits in the private sector represent real goods and services in the economy (that's what they were given to us for!). But, that has nothing to do with "paying" the debt. The debt is a creation of the government that will always be "paid back" regardless of any productivity or not.

Furthermore, nobody is advocating any amount of spending here. We are just stating mechanics and accounting identities (i.e. the government's liability is the private sector's asset). The government can provide those assets to the private sector in exchange for real goods and services if the elected politicians vote to do so. That's pretty straightforward.
I maintain that WWII debt was paid back and absorbed by inflation. In other words IF those WWII bonds hadn't been issued in the first place (hypothetical since I believe we had no other choice) the private sector would have been better off. Impossible to measure though.

Accounting is a language, not a science. We use it to describe and make sense of a situation. It is by no means definite and final in so much as other countries have different accounting rules. Even ours keep changing over time.  By our accounting rules all those Credit Default Swaps were assets on the banks' balance sheets. But were they really?

Yes, the government can provide those assets to the private sector in exchange for real goods and services but only if the private sector values them to be worth those goods and services.  Currently here in the US they do. But it is not an absolute rule.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 12:08 pm

Mdraf wrote:I maintain that WWII debt was paid back and absorbed by inflation. In other words IF those WWII bonds hadn't been issued in the first place (hypothetical since I believe we had no other choice) the private sector would have been better off. Impossible to measure though.
Well, the debt hasn't diminished so the debt from WWII was literally "paid for" with more debt.

But how exactly has the American saver been hurt from WWII inflation? Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards. You might feel warm and fuzzy inside if it took only $5 to by a bicycle, or an ice cream cost a nickel, but your wages and your savings would likely be 1% of what they are now. Meanwhile our standard of living has increased dramatically since then. And even Harry Browne has pointed out that if you put all your cash into Short Term Treasuries decades ago your savings would have done just fine. The whole "our dollar is now worthless" argument is mostly meaningless political misdirection used to rile up constituents.
Mdraf wrote:By our accounting rules all those Credit Default Swaps were assets on the banks' balance sheets. But were they really?
In our world, yes, because all of our money comes from debt in the first place. That's what money is in our society. It's an IOU. So, CDS is just a form of private credit (i.e. money).
Mdraf wrote:Yes, the government can provide those assets to the private sector in exchange for real goods and services but only if the private sector values them to be worth those goods and services.  Currently here in the US they do. But it is not an absolute rule.
Agreed. But the necessity to pay taxes — and thus stay out of jail — with only that currency does give it some value.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Mdraf » Thu Jul 25, 2013 12:22 pm

Gumby wrote: Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.
I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.
Gumby wrote: In our world, yes, because all of our money comes from debt in the first place. That's what money is in our society. It's an IOU.
A worthless IOU is commonly written off according to our accounting standards

Gumby wrote: Agreed. But the necessity to pay taxes — and thus stay out of jail — with only that currency does give it some value.
If there is nothing to tax there is no tax. If productivity is too low there is not enough tax to make good on the bond
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Thu Jul 25, 2013 12:24 pm

Mdraf wrote: If there is nothing to tax there is no tax. If productivity is too low there is not enough tax to make good on the bond
Exactly. But we're not Zimbabwe. We're probably the opposite of Zimbabwe, really. It seems like you're now grasping that this whole house of cards works best in a healthy, prosperous, and productive society--and that's exactly right! If the government decided to utterly destroy the productive capacity of the economy without slashing the money supply (which of course it would never do), the result would be hyperinflation and currency collapse.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 12:31 pm

Mdraf wrote:
Gumby wrote: Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.
I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.
But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Mdraf » Thu Jul 25, 2013 12:34 pm

Gumby wrote:
Mdraf wrote:
Gumby wrote: Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.
I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.
But the point is that we never "worked off" the debt! We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt.
Well yes, of course. But it is always predicated by the theoretical possibility of payback.  -> Future taxation-> future productivity.
You can refinance your mortgage again and again, but always within your credit rating.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 12:36 pm

Mdraf wrote:
Gumby wrote:
Mdraf wrote: I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.
But the point is that we never "worked off" the debt! We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt.
Well yes, of course. But it is always predicated by the theoretical possibility of payback.  -> Future taxation-> future productivity.
You can refinance your mortgage again and again, but always within your credit rating.
Except for a country that creates it own currency by issuing more debt.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Mdraf » Thu Jul 25, 2013 12:38 pm

Gumby wrote:
Mdraf wrote:
Gumby wrote: Despite the mild inflation that ensued from WWII, we are now one of the wealthiest countries on Earth in terms of living standards.
I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.
But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.
Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Gumby » Thu Jul 25, 2013 12:39 pm

Mdraf wrote:
Gumby wrote:So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.
Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )
YES!!!
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by moda0306 » Thu Jul 25, 2013 12:52 pm

Gumby wrote:
Mdraf wrote:
Gumby wrote:So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.
Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )
YES!!!
Productivity. Is. Everything. 
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Thu Jul 25, 2013 1:26 pm

Mdraf wrote:
Gumby wrote:
Mdraf wrote: I would turn that around and say because of our post WWII  enormous productivity we managed to absorb and work off the debt.
But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.
Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )
The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Thu Jul 25, 2013 1:30 pm

Libertarian666 wrote: The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.
They do, and they can. Now, of course it wouldn't work out well. But you and I both know that the government is actually the true owner of everything.

Try not paying your property taxes sometime and see what I mean. You don't own your land; you're renting it from the government.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Mdraf » Thu Jul 25, 2013 1:35 pm

Once taxation gets too high productivity drops and there is less to tax so it's  "self-adjusting". There's an equilibrium which keeps things going. It can be broken if citizens revolt and stop paying taxes (Boston Tea Party) or government spends too much and tries to tax (or print) more than what the economy can provide.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by moda0306 » Thu Jul 25, 2013 1:36 pm

Libertarian666 wrote:
Mdraf wrote:
Gumby wrote: But the point is that we never "worked off" the debt! The debt is much larger now. We paid back the coupons by issuing more debt and we spent more and more. The debt doesn't get "paid off". The coupons are paid by issuing more debt. The amount of work had nothing to do with the means to pay the coupons. As you correctly point out, the hard work is only necessary to give the currency real value (i.e. the currency represents real goods and services).

So, maybe we are saying the same thing. We work hard, and the government gives us more debt to pay the previous debt payments.
Exactly. Bottom line is productivity. And productivity = value. So government bonds cannot exceed productivity (present and expected )
The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.
No, the government doesn't own everything (though, like most governments, they could theoretically apply the physical force necessary to steal/destroy most property). 

The government provides fiat financial tools to the economy with which people can then use as a medium of exchange and/or store of value.  If they provide too many of these tools there will be inflation... not enough, deflation... but both base money AND treasury bonds represent these tools... and it gets even more complex when the rest of the world wants to use these tools in their economy as well.

Just because government provided the tool that we hold on our balance sheets doesn't mean they "own" the productivity that those tools will act as claims on.

They could try to tax everything, I suppose, but they could do that before (they have a military to help collect taxes if need be), and it would be idiotic if they tried to collect all property as government property.  Further, the U.S. has one of the best track records for low taxation and recognizing/defending property in the world.  I suppose that could change, and in some ways is slowly changing, but I don't see a promise land anywhere else that I'm very confident would survive the collapse of the most previously stable economy and entity in the world...
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by moda0306 » Thu Jul 25, 2013 1:37 pm

Mdraf wrote: Once taxation gets too high productivity drops and there is less to tax so it's  "self-adjusting". There's an equilibrium which keeps things going. It can be broken if citizens revolt and stop paying taxes (Boston Tea Party) or government spends too much and tries to tax (or print) more than what the economy can provide.
But "printing" is best represented by deficits, not "monetizing the debt."  And if you factor how far under capacity our economy was in 2009-2012, the deficits weren't actually that large from a stand point of the government wanting "more than the economy can provide."
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Thu Jul 25, 2013 1:49 pm

Pointedstick wrote:
Libertarian666 wrote: The implication of that is that the government owns everything in the country, or (equivalently) that they can tax everything at 100%. I'm not sure that would work out too well.
They do, and they can. Now, of course it wouldn't work out well. But you and I both know that the government is actually the true owner of everything.

Try not paying your property taxes sometime and see what I mean. You don't own your land; you're renting it from the government.
Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Thu Jul 25, 2013 1:53 pm

Libertarian666 wrote: Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.
The government bonds I buy don't have value because the government could ruin the economy by confiscating or destroying everyone's property. It's just the opposite: they have value because the government doesn't.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Thu Jul 25, 2013 2:19 pm

Pointedstick wrote:
Libertarian666 wrote: Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.
The government bonds I buy don't have value because the government could ruin the economy by confiscating or destroying everyone's property. It's just the opposite: they have value because the government doesn't.
Then you agree that the assumption that they could tax at 100% is not a valid way of determining the value of their bonds.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Thu Jul 25, 2013 2:27 pm

Libertarian666 wrote:
Pointedstick wrote:
Libertarian666 wrote: Yes, of course I know that. The question is whether people who lend them money (e.g. investors in the HBPP) can really count on their being able to tax at 100% in determining the value (if any) of their bonds.
The government bonds I buy don't have value because the government could ruin the economy by confiscating or destroying everyone's property. It's just the opposite: they have value because the government doesn't.
Then you agree that the assumption that they could tax at 100% is not a valid way of determining the value of their bonds.
Yes.

I think the problem here is that we can talk all day about accounting identities until we're blue in the face, but deriving the value of a bond issued by a fiat reserve currency issuer is a lot more of a subjective process. There's this subtle interplay between the productivity of the economy and the size of the money supply, which is complicated by the fact that we don't have unbacked fiat currency, we have debt-backed fiat currency. And not only that, but the majority of the currency is actually created by banks, and every act of creating debt-backed currency involves getting someone else to become indebted to the entity creating the currency, which may be a private bank, the treasury, or a pseudo-public-private bank that backs the other banks and facilitates the treasury's actions.

It's all pretty crazy. Yet somehow, it hasn't collapsed yet. The power of human beings to prop up something that looks unsustainable is always surprising.
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