Gyroscopic Investing

MediumTex wrote:

Kshartle wrote:

MediumTex wrote: I'll bet Japanese investors would LOVE to be able to buy some 30 year bonds at 3.8%.

During a deflationary period, a 3.8% return is great.

If you say that an extended deflationary period is impossible with the government running gigantic deficits, how would you explain what has been happening in Japan for over 20 years?

I'm not saying that I think that's what will happen here; rather, what I am saying is that if it can happen in Japan it could also happen here and I just want to be protected if it does.

The myth of Japanese deflation is a massive topic. I think it's just about the most misunderstood modern economic situation and forgive me if I need to take a breather before tackling it. It's relevant but it's a huge topic and I think we can learn a lot from it. I'm up for the discussion.

Understand that I don't mean deflation in the sense that prices are falling, I mean deflation as a set of structural economic forces (especially bad demographics coinciding with contracting credit) that make economic expansion very difficult.

MediumTex wrote:
If you are asking for an argument for how LT treasuries could possibly provide a positive real return going forward, couldn't I just point to the last few years and basically say "that's how it would work"?

Do you agree that the U.S. economy is still very fragile?  If you do, I assume that you also agree that a sharp rise in interest rates would push the economy back into recession, right?  If the economy goes back into recession, why wouldn't interest rates fall?

If you say "stagflation", I would say consider the vast differences between the U.S. economy and U.S. population when you compare the 1970s to today, especially the almost complete absence of upward pressure on U.S. wages today.

I just don't get what the catalyst is going to be for a period of sustained high inflation going forward. 

Kshartle wrote:Pointing to 2008 is not the same. The debt was less than half. The economy was much less inflation dependant. 2008 is an interesting example though. Did the money supply even contract at all to cause the crash? I think the rate of increase just slowed for a little bit. And look what they came back with. A huge expansion of M1 to keep, let's call it M3 from contracting. They have to keep uping the ante.

Pointedstick wrote: Something I feel like I've never gotten a satisfactory answer about is how there's going to be sustained or sharp inflation if people don't have the money to pay the higher prices.

Let's say the government keeps printing, and the doo-doo heads inflationistas are right and prices begin to skyrocket.

But as we know, only the people who receive the devalued printed money are going to be able to afford the higher prices since other people won't be able to keep up as fast as the prices are rising, unless this money printing literally takes the form of universal welfare or helicopter drops or a citizen's dividend type thing.

Assuming those don't happen, and wages for most people don't keep up with the rising prices, how are the prices going to continue rising? Won't businesses who have raised their prices and can't get more sales from the beneficiaries of the printing be eventually faced with extremely low sales, and have to either lower their prices or go out of business? Once this happens, won't that stop the inflationary cycle--at least in the part of the economy patronized by the people who didn't get the printed money?

Pointedstick wrote: Something I feel like I've never gotten a satisfactory answer about is how there's going to be sustained or sharp inflation if people don't have the money to pay the higher prices.

Let's say the government keeps printing, and the doo-doo heads inflationistas are right and prices begin to skyrocket.

But as we know, only the people who receive the devalued printed money are going to be able to afford the higher prices since other people won't be able to keep up as fast as the prices are rising, unless this money printing literally takes the form of universal welfare or helicopter drops or a citizen's dividend type thing.

Assuming those don't happen, and wages for most people don't keep up with the rising prices, how are the prices going to continue rising? Won't businesses who have raised their prices and can't get more sales from the beneficiaries of the printing be eventually faced with extremely low sales, and have to either lower their prices or go out of business? Once this happens, won't that stop the inflationary cycle--at least in the part of the economy patronized by the people who didn't get the printed money?

moda0306 wrote: Kshartle,

T-bills are actually considered part of the broad money supply... which means trading reserves for those bills doesn't actually increase the money supply based on that measure.

So what is so precious about one measure of what is money vs another?

Both our currency and T-bonds/bills are liabilities of the federal government and very liquid assets of the private sector.  Why should trading one for the other matter that much?


What matters is not whether we hold T-bills or $100 bills, but how much of that type of "clearing money" is circulating around a certain GDP and private-money (debt) framework.  Currently, there's not enough, evidenced by our massive capacity not being fully used, and people feeling like they just don't have enough money in their checking/savings accounts.

Kshartle wrote: Right now we're getting both....anybody just see 500k left the labor force last month? labor participation just ticked down 2/10ths or a percent. Lowest since 1978. And the FED keeps expanding. M2 is going up 7% per year. They've stopped showing M3.

Kshartle wrote: Inflation doesn't require a single person earning or receiving a wage.

Rising prices don't require a single person earning or receiving a wage.

Inflation/whatever only requires expansion of the money supply.

Rising prices only require the exapansion of the money supply above and beyond the total amount of goods and services available to purchase.

If 90% of barbers quit and the money supply stayed the same the price of a haircut would go up. Same thing for everything. It doesn't require more money....it doesn't require fewer workers.....it does require one of them though and the ratio to change.

Kshartle wrote: I've never talked trading assets. It doesn't matter. I think this the MMT pseudo-keynsian confusion nonsense at work. uughghhhghgh.......do you not think the money supply is expanding?

kka wrote:

Kshartle wrote:Pointing to 2008 is not the same. The debt was less than half. The economy was much less inflation dependant. 2008 is an interesting example though. Did the money supply even contract at all to cause the crash? I think the rate of increase just slowed for a little bit. And look what they came back with. A huge expansion of M1 to keep, let's call it M3 from contracting. They have to keep uping the ante.

There was massive deleveraging (reduction in total debt -- as gumby points out, government debt is a small fraction of total debt in our debt-based monetary system) during the crash, I think around 25%.

Is there an expiration date for your inflation prediction?  If by 2018, inflation as measured by http://bpp.mit.edu/usa/ remains under or near 3%, will you acknowledge that the next 5-year period was similar to the previous one and you were wrong?

Pointedstick wrote:

Kshartle wrote: Inflation doesn't require a single person earning or receiving a wage.

Rising prices don't require a single person earning or receiving a wage.

Inflation/whatever only requires expansion of the money supply.

Rising prices only require the exapansion of the money supply above and beyond the total amount of goods and services available to purchase.

If 90% of barbers quit and the money supply stayed the same the price of a haircut would go up. Same thing for everything. It doesn't require more money....it doesn't require fewer workers.....it does require one of them though and the ratio to change.

I feel like we're getting to the meat of our disagreement now.

In your example, 90% of barbers quit, and let's say that the price of a basic haircut rises to $1,500.

So these remaining barbers put up new signs saying "High quality haircut, only $1,500!"

And they wait for a customer to enter the store.

And they wait. And they wait. And wait and wait and wait.

Meanwhile, the bills keep rolling in and the barbers aren't barbering because the price they've set is simply higher than what people are willing to pay.

It seems to me that after the initial price inflation, unless the people who ordinarily pay those prices can't do so, then the prices will need to fall or else the remaining sellers will go out of business.

Right? I mean, prices don't exist in a vacuum. As a seller myself, I can't raise my prices higher than what my customers are willing to pay irrespective of what the money supply is doing.

Kshartle wrote: Imagine there is one barber in the entire world. Do you think the price of a haircut from him would be higher than the current average price? It's the same principle regardless of how much you reduce supply by.

Kshartle wrote: It's called supply and demand. As supply goes down prices go up to meet the demand that will support the higher price.

Since so many prices are distored by government and not market driven it's understandable why people get confused.

Imagine there is one barber in the entire world. Do you think the price of a haircut from him would be higher than the current average price? It's the same principle regardless of how much you reduce supply by.

As supply goes down prices go up to meet the demand that will support the higher price.

Rising prices don't require a single person earning or receiving a wage.

Inflation/whatever only requires expansion of the money supply.

Rising prices only require the exapansion of the money supply above and beyond the total amount of goods and services available to purchase.

MediumTex wrote: If the money supply is expanding relative the supply of goods and services, why do you think that we aren't seeing significant price increases across the whole economy?  Shouldn't that be happening?

I guess it also depends on what the increased supply of money is spent on too.  If I received a $10,000 check from the government tomorrow, it wouldn't be inflationary if I spent it to pay down debt, right?

Kshartle wrote:

moda0306 wrote: Kshartle,

T-bills are actually considered part of the broad money supply... which means trading reserves for those bills doesn't actually increase the money supply based on that measure.

So what is so precious about one measure of what is money vs another?

Both our currency and T-bonds/bills are liabilities of the federal government and very liquid assets of the private sector.  Why should trading one for the other matter that much?


What matters is not whether we hold T-bills or $100 bills, but how much of that type of "clearing money" is circulating around a certain GDP and private-money (debt) framework.  Currently, there's not enough, evidenced by our massive capacity not being fully used, and people feeling like they just don't have enough money in their checking/savings accounts.

I've never talked trading assets. It doesn't matter. I think this the MMT pseudo-keynsian confusion nonsense at work. uughghhhghgh.......do you not think the money supply is expanding?

Ok.....assets are being traded.....ummmm....but then you have to concede they both exist now where before they didn't. Gubmit creates a bond and the FED creates dollars. Through the banks the FED gets the bond and the gubmit gets the dollars. The gubmit buys something with the dollars and bids up prices for whatever it buys. Whoever gets those dollars buys something else and bids up prices for that. After a couple years the new dollars work their way through the enitire economy and the overall impact of the new dollars on the economy is a higher general price level.

Do you not think prices are higher than they were 5, 10, 15, 20, 50 years ago? Why do you think prices are higher? Because wages are higher? Because we're more productive? Why are prices higher? Because there are more dollars relative to goods and services.

Why are prices lower in gold terms since 1971...because there is less gold relative to goods and services.

MediumTex wrote: If there were only one barber, the price of a haircut might be less than it is now because people would have so completely arranged their lives around not having access to a barber's services.

Kshartle wrote: That being said......has the price of food not gone up in 5 years? Gas? Electricity? The prices for essential things have gone up. Maybe home prices haven't but they had gone sky high in the previous years. A lot of it is just that people can't afford the things they used to so there is less demand for those (cars, plane tickets). The effect of the inflation doesn't neccessarily have to translate into higher prices, it can just be a lower living standard.

Pointedstick wrote:
Wait, now I'm confused. Is the price level a function of supply and demand in the marketplace? You said:

Kshartle wrote:

MediumTex wrote: If there were only one barber, the price of a haircut might be less than it is now because people would have so completely arranged their lives around not having access to a barber's services.

Come on man. Imangine there was one 1967 Mustang in the world? Or one brain surgeon then?

You are really grasping at straws here to argue against the most basic economic principle of supply and demand. You are just being argumentative about nonsense.

MediumTex wrote:

Pointedstick wrote: Something I feel like I've never gotten a satisfactory answer about is how there's going to be sustained or sharp inflation if people don't have the money to pay the higher prices.

Let's say the government keeps printing, and the doo-doo heads inflationistas are right and prices begin to skyrocket.

But as we know, only the people who receive the devalued printed money are going to be able to afford the higher prices since other people won't be able to keep up as fast as the prices are rising, unless this money printing literally takes the form of universal welfare or helicopter drops or a citizen's dividend
type thing.

Assuming those don't happen, and wages for most people don't keep up with the rising prices, how are the prices going to continue rising? Won't businesses who have raised their prices and can't get more sales from the beneficiaries of the printing be eventually faced with extremely low sales, and have to either lower their prices or go out of business? Once this happens, won't that stop the inflationary cycle--at least in the part of the economy patronized by the people who didn't get the printed money?

As most people here know, that's always my question as well.

In the 1970s we had protectionist trade policies and strong labor unions to help facilitate wage gains in response to price increases (not to mention a lack of surplus productive capacity).  None of that is present today.  We are almost too productive for our own good.

Part of the reason that war is such a great economic event is that you are destroying stuff as a way of preventing a supply glut in the marketplace.  Imagine how happy Ford would be if half of the cars that rolled off its assembly lines had been destroyed by IEDs within six months.  Imagine how sad they would be if this arrangement ever stopped.  You might say that they would reallocate their productive resources to something else that provided more benefit to society, but the problem is there may simply not be any other such activity because of a surplus of productive capacity in their industry.

I know that the comments above sound like "the broken window fallacy", but in a world where there is simply too much productive capacity relative to consumers' wants (and ability to pay), maybe the broken window fallacy isn't as a much of a fallacy as it at first appears.

Stated differently, the discussion that we are having in the "Pointless Jobs" thread is really just another type of broken window fallacy situation.  If, however, we eliminated all of those pointless jobs what would the people who are doing them now do every day?

In many ways we have almost become too productive for our own good, but this has always been one of the problems with capitalism--i.e., it has the ability to generate enormous production, whether or not society actually wants or needs that level of production.  I think that part of what has made wars so ugly and destructive in the age of industrial capitalism is that a capitalist economy can generate an incredible amount of weapons, bombs, etc., whereas past kings and tyrants had to be careful that they didn't run out of weapons as they battled because it wasn't quite so easy to deliver more to the battlefield.

Kshartle wrote:

Pointedstick wrote:
Wait, now I'm confused. Is the price level a function of supply and demand in the marketplace? You said:

Combo. The general price of a good or service is a function of the supply and demand for it. Since we price most everything in dollars you have to factor in the supply of dollars. If we used something else we'd have to factor that in instead.

This is why the dollar price of something can go up while the Euro price can go down. There are essentially three factors because we have such volitile money supplys.

Kshartle wrote:

stuper1 wrote: What if yields drop to 1% over the next 10 years?  Is that long enough to be long-term?

What if it starts raining Gatorade? Will the elecrolytes make the crops grow better?

Why stop at 1%? How about negative 50%?