PP in a Great Depression Scenario

[LC475]

Your thoughts on the validity of "PP" results pre-1971 led me to believe there might have been some confusion on to the importance or timing of the end of the gold standard.

Oh, did I express such thoughts?  Precisely what sort of validity did I claim they had?  Thanks.

[LC475]

And besides, Xan's right.

In point of fact, the dollar is still defined in terms of gold.

[Xan]

Your thoughts on the validity of "PP" results pre-1971 led me to believe there might have been some confusion on to the importance or timing of the end of the gold standard.

Oh, did I express such thoughts?  Precisely what sort of validity did I claim they had?  Thanks.

Well, when I questioned that a meaningful comparison could be made, you reacted as though I were from Mars or something.

[l82start]

http://gyroscopicinvesting.com/forum/ot ... ivil-6079/ just because Med Tex and Craig are not a visible presence does not mean the cat is away.. please lets keep it civil..

we have two threads getting attitude today, lets try to keep whatever is "in the air" off the forum

thanks

[Xan]

And besides, Xan's right.

In point of fact, the dollar is still defined in terms of gold.

Can you clarify this position?

[LC475]

Well, when I questioned that a meaningful comparison could be made, you reacted as though I were from Mars or something.

Actually, in response I gave you an extremely simple and easy-to-understand illustration of why the chart created by MachineGhost is not only meaningful (it obviously is; it contains data which has meaning) but could even be relevant to something someone might care about.

I already know that the gold situation changed dramatically around 1969-1971.  I could make all your arguments for you.

The opening poster asked a question.  I gave an answer.  You, and a gaggle of others, want to point out the stupidity, irrelevance, and even meaninglessness(!) of the opening poster's question.  And you really, really, want to hammer home that point.  Great.  Go ahead.  I'll just stay over here, off the rails, or off the handle, or wherever it is you think I am.  Thanks.

[LC475]

And besides, Xan's right.

In point of fact, the dollar is still defined in terms of gold.

Can you clarify this position?

In 1971, the definition changed to $38/ounce.  The dollar was still defined in terms of gold.  At the same time, the market price was allowed to float.  So the definition didn't really have anything to do with the actual gold-to-dollar exchange rate any more.  Then in 1973, it was changed to $42.22/ounce (I believe that was the next re-definition).  And, believe it or not, that is still the definition, technically speaking.  The definition doesn't seem to have any practical bearing on the world, but the law defining the dollar as ~1/42nd of and ounce of gold was never repealed, to my knowledge.

[Xan]

The opening poster asked a question.  I gave an answer.  You, and a gaggle of others, want to point out the stupidity, irrelevance, and even meaninglessness(!) of the opening poster's question.  And you really, really, want to hammer home that point.  Great.  Go ahead.  I'll just stay over here, off the rails, or off the handle, or wherever it is you think I am.  Thanks.

Yes, I do believe that it's not possible to meaningfully compare the post-1971 PP to a pre-1971 "PP".  I don't think that means I'm attacking you or the original poster.

Given that belief (which seems to be the mainstream one) am I not allowed to express it when somebody asks a question and gets a response which I believe to be not meaningful?  At the very least, comparisons across that border must be taken with a HUGE grain of salt, do you not agree?

[Pointedstick]

Okay, let me try to express the point we're trying to make in a clearer and hopefully less controversial manner.

The Permanent Portfolio is designed to have an asset that can profit from high levels of inflation. Today, gold is that asset, and can be that asset because it is a freely-tradable commodity with a market-determined value. Before 1971, gold was not a freely-tradable commodity with a market-determined value. As a result, it would only profit from inflation when the government unilaterally pronounced that an ounce of gold was worth more dollars. This made gold unreliable at best for serving as an inflation hedge. Therefore, a Permanent Portfolio that was composed of a quarter gold during the Great Depression was a Permanent Portfolio with a very poor ability to weather high inflation. Without holding a reliable inflation-profiting asset, I would posit that it wouldn't really be a Permanent Portfolio, any more than we would call something a Permanent Portfolio today if it was made up of 25% stocks, 25% long-term government bonds, and 50% T-bills. Not a bad portfolio, but not a Permanent Portfolio.

Now, as Ad Orientem pointed out, this non-Permanent-Portfolio would have done okay during the Great Depression (like all other cash-and-bond-heavy portfolios of the time), but have gotten crushed during WWII due to its lack of meaningful inflation protection (like all other cash-and-bond-heavy portfolios of the time).

Does that make sense?

[Libertarian666]

Thoughts on a HBPP in the 1930's (Great Depression) and World War II (1941-45)...

One reason why an actual HBPP probably would have done quite well in the deflationary depression years is that it was 75% cash and bonds (50/25) with only 25% in stocks. And then you get to add in the pure luck of having half your cash (gold) arbitrarily revalued from $22.67 oz. to $35.00. So you get an instant book profit of a little over 40% on that part of your PP at a time when the stock market is looking like Hiroshima right after we dropped the bomb. (We will ignore the inconvenient fact that privately held gold was nationalized right before the big increase in price. Perhaps you had yours stashed in Switzerland?) All of this means you are doing quite well in a deflationary nightmare world.

Alas nothing good lasts forever...

When World War II rolls around the same formula that made you a mint during the depression will kill your portfolio. World Wars, for those who are not great students of history, are ALWAYS inflationary. Often brutally. And with gold pegged at $35.00 oz you are in effect stuck with 50% in cash, 25% in long bonds and only 25% in stocks. That's a recipe for huge inflation adjusted losses.

But yeah, the HBPP would have been a whole different animal before 1971. Which is why a return to a hard money regime is probably the only thing that could make me abandon it.

Yes, that would have been good in the great depression other than the minor detail you mentioned, which would have made it very inconvenient to rebalance. 

[LC475]

Hey all,

I am back, returning triumphantly, and hopefully with drier Cheerios (less pissy) than before.

I can see that I was not properly confirming to the friendly and non-confrontational vibe we want here, and I apologize for that.

Okay, let me try to express the point we're trying to make in a clearer and hopefully less controversial manner.

The Permanent Portfolio is designed to have an asset that can profit from high levels of inflation. Today, gold is that asset, and can be that asset because it is a freely-tradable commodity with a market-determined value. Before 1971, gold was not a freely-tradable commodity with a market-determined value. As a result, it would only profit from inflation when the government unilaterally pronounced that an ounce of gold was worth more dollars. This made gold unreliable at best for serving as an inflation hedge. Therefore, a Permanent Portfolio that was composed of a quarter gold during the Great Depression was a Permanent Portfolio with a very poor ability to weather high inflation. Without holding a reliable inflation-profiting asset, I would posit that it wouldn't really be a Permanent Portfolio, any more than we would call something a Permanent Portfolio today if it was made up of 25% stocks, 25% long-term government bonds, and 50% T-bills. Not a bad portfolio, but not a Permanent Portfolio.

Now, as Ad Orientem pointed out, this non-Permanent-Portfolio would have done okay during the Great Depression (like all other cash-and-bond-heavy portfolios of the time), but have gotten crushed during WWII due to its lack of meaningful inflation protection (like all other cash-and-bond-heavy portfolios of the time).

Does that make sense?

hmm, I wonder. What kind of high-inflation scenario could take place wherein the government was *not* going to unilaterally pronounce the dollar to be worth less gold than before? Mmm?

You may say: well, it could happen, what if they did such-and-such maneuver! But remember: we are not talking about a little bit of inflation. Gold is there as a protection against high- and especially against hyper-inflation. There is no way the monetary issuer could perform *meaningful* (a term with a history in this thread! but the right term here), they couldn't do a *meaningful* long-term inflation without devaluing the money that they're issuing. By definition!

So to answer: Yes, @PointedStick , your post makes sense. And I respect you a lot, PointedStick, by the way. However, I do not think it tells the full story. I think it is very important to realize that *inflation is impossible without the money becoming less valuable in terms of gold*. Logically, that seems undeniable. If anyone would like to try to deny it, please try your hand at it.

And so actually, gold would have been a really good inflation hedge in the 1920s US as well as at any other time and place. That is my claim.

[dualstow]

Hi there
Should we call you LC or ….?

[Pointedstick]

I think it is very important to realize that *inflation is impossible without the money becoming less valuable in terms of gold*.

I think I get that your point is that we have to have something objective to measure against, something that isn't itself changing — or else we can't measure the thing. I would agree with that.

But gold is changing. It's a commodity just like oil, copper, electricity, water, and food. It's traded in a worldwide market.

What if, over a period of time, both prices and wages denominated in dollars were relatively flat but for some reason gold doubled? Would we say that there'd been 100% inflation? That wouldn't make much sense to me. It would be using the word "inflation" in a way that makes it non-useful.

You might say, "well that would never happen because gold is an inflation hedge". But that's backwards. Gold is an inflation hedge only because it reacts in a certain way to inflation (or its absence). If it stops behaving that way, then it's not an inflation hedge, or at least not a very good one.

[Pointedstick]

I also think it can be obfuscating to talk about "inflation" as if it's one thing. There are many nuances and interesting details hidden behind the average value.

If rent goes up by 30% but I own a house, I don't care. At least, not until I have to move or my kids leave home. But if I'm a renter, I'm fucked, and may become impoverished.

Similarly, if food goes up by 100% when previously it was only 2% of my income, it's an annoyance. If it was 50% of my income, now I'm at risk of starvation.

So it's possible for someone in a somewhat comfortable situation to feel no real economic pain from inflation, while a large fraction of the population might be seething with completely justified anger and resentment over the feeling that they're being pushed towards a cliff.

These are the kinds of stories I find a lot more interesting these days than the general rate of inflation. There's this phenomenon that's starting to be named "luxury poverty" to describe a sort of inversion of the historical norm; now poor people can now afford the latest iPhone and a nice vehicle (at least through long-term financing) but there's no possible chance they can live in a good part of a good city, and their food and healthcare bills grow all the time while quality falls. They'll be unable to build home equity and have to spend 2 hours a day driving to and from work while their health deteriorates — but they'll have a never-ending supply of Netflix and Xbox games for a low monthly price, and free 2-day shipping for all the junk they could want!

Is this inflation? Well, it's inflation of the necessities, coupled with massive deflation of the luxuries.

It's a fascinating and worrying story, I think.

[mathjak107]

what you have to understand is time and inflation can be the great equalizer .

when i bought my first home it was 35k in suffolk county long island in the 1970s . that was an amazing amount of money to me back then and way more in cost than my rent was .

well , today i don’t own that house but if i did that house would be paid off and taxes are 15k a year .

that paid off mortgage wouldn’t even cover the utility bill today which are running 600 a month .

so ownership is no guarantee anything is affordable .

we no longer own any real estate and rent but our costs are no where near buying a a house today since we have just a two bedroom two bath apartment in a nice building with pool and tennis courts and the money we had decided not to put back in a house is generating 40-45k a year in income for us .


last year we gave some thought to relocating to sun city hilton head in south carolina .

we wanted new construction if we did .

we calculated that the house with no mortgage would run us about 15k a year for taxes , hoa , insurance , sewer , water and the house was 650-700k.

the difference between rent and that house was the house was 10k cheaper than our rent a year .

but that 650-700 k tied up in the house would no longer be generating 40-45k a year in income .

i gave my wife the ball and i was okay with moving or not .

she decided it was a no go .

not only because we would take big income hit buying. and the fact the one day a week i enjoy working would be gone too. but the main reason was she decided it was to far from our six grand kids .

so tying up hundreds of thousands of dollars in to a house at this stage , where appreciation no longer means a thing to us at this age , financially was a worse situation cash flow wise . that income we enjoy now would be gone while the only savings in housing costs would be about 10k

so whether renting is better or not depends on a lot more parameters as well as one’s financial situation and resources.

big difference between a renter with no money vs a renter with a lot of money to deploy else where .

different geographical areas and choices in where and how you live alter the equation greatly .

it also gets a bit of an apple / steak comparison too as few rent as much home as they would buy so while areas like here offer high rise living where costs are very low compared to a house other areas have people buying a lot more house then if they were renters. so it’s rarely do i buy or rent the same house .

each situation is going to be pretty personal to just you .