Gyroscopic Investing

Kshartle wrote:I just don't see a credible fundamental case for LTBs producing a real gain, that's all.

Here's one... The last time Congress decided to not raise the debt-ceiling, LTTs jumped big time since that was the only "safe" place to store dollars outside of a bank account. I wouldn't be surprised if Congress has another debt-ceiling fight in a few months.

Kshartle wrote: I'm convinced you guys will never answer a straight question and will just keep avoiding it. You keep referring to rising prices/inflation whatever. You are seriously trolling and it's annoying.

It's like I'm pointing out that if it rains and you're outside you'll get wet and you reply "Well...what if it's sunny?"

Heh, heh, where were you when I was in the same boat? 

At least they now agree that  the government's liability is the private sector's asset. So long as the private sector is being productive,

Gumby wrote:

Kshartle wrote:I just don't see a credible fundamental case for LTBs producing a real gain, that's all.

Here's one... The last time Congress decided to not raise the debt-ceiling, LTTs jumped big time since that was the only "safe" place to store dollars outside of a bank account. I wouldn't be surprised if Congress has another debt-ceiling fight in a few months.

You think a debtor getting a bigger line of credit makes them more credit worthy? Can I borrow some money from you? Everytime the bill is due I'll just need you to loan it to me so I can pay it back.

This is the definiton of an irrational market, fundamentals get worse (debtor's debt load gets less servicable) and their borrowing costs go down. This is a long-term trap for the bagholders er, um, bondholders.

Yeah yeah markets can stay irrational blah blah. Good luck getting out or taking the lumps. It'll be one or the other. Unless I'm missing something fundamental which you guys have not pointed out (PS mentioned a surplus which would count but how on Earth would that happen is my question).

Kshartle wrote:

Gumby wrote:

Kshartle wrote:I just don't see a credible fundamental case for LTBs producing a real gain, that's all.

Here's one... The last time Congress decided to not raise the debt-ceiling, LTTs jumped big time since that was the only "safe" place to store dollars outside of a bank account. I wouldn't be surprised if Congress has another debt-ceiling fight in a few months.

You think a debtor getting a bigger line of credit makes them more credit worthy? Can I borrow some money from you? Everytime the bill is due I'll just need you to loan it to me so I can pay it back.

What your point? That's how the monetary system works. All money (except coins) comes from debt. In a debt-based monetary system — where all money comes from debt (except coins) — it's virtually impossible to pay down debt without creating more debt.

And furthermore, how can a currency issuer not be credit worthy? That would be like telling people that a football stadium might run out of points (it's impossible).

When a currency issuer uses debt to issue its own currency, the debt just grows and grows (the "debt" is just another form of currency within the private sector). That's the paradox of debt-based currency. It ain't pretty, but that's how it works.

Kshartle, what straight question are you trying to get us to answer?

Does the government have to pay back its debt with money devalues compared to if there was no money printing? Yes, I agree.

Does the increasing the size of the government debt make it less creditworthy? No, I disagree, because creditworthiness doesn't even enter the picture when you're talking about a counterfeiter with a gun pointed at your head.

Mdraf wrote:

Kshartle wrote: I'm convinced you guys will never answer a straight question and will just keep avoiding it. You keep referring to rising prices/inflation whatever. You are seriously trolling and it's annoying.

It's like I'm pointing out that if it rains and you're outside you'll get wet and you reply "Well...what if it's sunny?"

Heh, heh, where were you when I was in the same boat? 

At least they now agree that  the government's liability is the private sector's asset. So long as the private sector is being productive,

I had to take a 5 month break. It seemed like there was an excessive amount of trolling going on and it stiffled intelligent conversation. I think it's not trolling but some type of justification due to ownership not ownership due to justification. It would be different if there was a credible argument for an expected real return or just an admittance that it's for smoothing volatility. I really would like to hear the former. It's faulty logic to say that an investment that looked bad in the past doesn't look bad now just because it didn't turn out bad.

Yes, it's for smoothing out volatility. Isn't that nice and direct? 

The reason why I began making arguments for the return possibility of bonds is not because I have a ton of faith that their coupon payments are going to beat inflation or that interest rates can fall forever, but because you asked me to:

Kshartle wrote: How do you think you're going to get any real return out of LTBs?

Can the government pay back it's loans with dollars that are not devalued?

Do you think they can pay you back with enough interest to make up for the devaluation if the answer to question one in no?

That is the question.

Stop saying this is the system. It is lame. It is boring. Everyone knows it already. It wastes everyone's time and is annoying. It is repeated over and over anytime anyone anyone suggests the questions posed above. It is trolling. I wish the site could screen for those words and block them from my screen. It adds nothing to the conversation.

Kshartle wrote: Can the government pay back it's loans with dollars that are not devalued?

Yes. If private credit collapses due to some event, and a bad deflation ensues, people will be clamoring for any debt-based cash that comes from the government (see 2008 and 1930).

Also, if the money the government pays out goes into foreign vaults — and can't be spent — then it doesn't devalue the currency.

Kshartle wrote:Do you think they can pay you back with enough interest to make up for the devaluation if the answer to question one in no?

Irrelevant during a bad deflation or permanent foreign holdings.

Kshartle wrote:Stop saying this is the system. It is lame. It is boring. Everyone knows it already. It wastes everyone's time and is annoying. It is repeated over and over anytime anyone anyone suggests the questions posed above. It is trolling. I wish the site could screen for those words and block them from screen. It adds nothing to the conversation.

Fair enough. Though, we could also say the same thing about people who complain about the market being "irrational".

Kshartle wrote: Can the government pay back it's loans with dollars that are not devalued?

Unless they run a surplus by impoverishing the private sector (unlikely), then no.

Kshartle wrote: Do you think they can pay you back with enough interest to make up for the devaluation if the answer to question one in no?

Possibly, but maybe not. Right now the real return is small but positive, if you believe today's CPI numbers. But things could get ugly in the future, sure. If I buy a bond at 4% and inflation rises to 15% for the next 30 years, are those bonds going to get whacked? Yes.

But as PP owners, we don't hold bonds for their coupon payments. We hold them for their reaction to falling interest rates, deflationary conditions, and fear in the markets. Dealing with punishing inflation is why I also have gold! Bonds aren't there to protect you from inflation. They do a lousy job of that, and anyone holding bonds and hoping to preserve their purchasing power is not being sensible. They serve a different role in the portfolio: overall portfolio dampening, by acting as another asset to harvest volatility from.

Pointedstick wrote:

Kshartle wrote: Can the government pay back it's loans with dollars that are not devalued?

Unless they run a surplus by impoverishing the private sector (unlikely), then no.

PS, if during a private credit collapse, the value of the dollar increases considerably, the dollars spent by the government would not devalue the currency from a net standpoint. In other words, the overall value of the dollar could still increase while the government is spending money.

I mean, that's why we hold LTTs... for deflation.

Obviously, if Private Credit tanked by $8 Trillion, the government would have to net spend a lot more than $1 Trillion/year in order to devalue the currency.

Gumby wrote:

Pointedstick wrote:

Kshartle wrote: Can the government pay back it's loans with dollars that are not devalued?

Unless they run a surplus by impoverishing the private sector (unlikely), then no.

PS, if during a private credit collapse, the value of the dollar increases considerably, the dollars spent by the government would not devalue the currency from a net standpoint. In other words, the overall value of the dollar could still increase while the government is spending money.

I mean, that's why we hold LTTs... for deflation.

I know. I was just conceding kshartle his point that any printing is inflationary compared to not printing--from a comparative standpoint, not net. If private credit falls by 10 trillion, and the government prints 5 trillion, it's going to reduce the deflation less than if they printed 10 trillion. It's not exactly how I would phrase things, but it's not wrong.

Pointedstick wrote:

Gumby wrote:

Pointedstick wrote: Unless they run a surplus by impoverishing the private sector (unlikely), then no.

PS, if during a private credit collapse, the value of the dollar increases considerably, the dollars spent by the government would not devalue the currency from a net standpoint. In other words, the overall value of the dollar could still increase while the government is spending money.

I mean, that's why we hold LTTs... for deflation.

I know. I was just conceding kshartle his point that any printing is inflationary compared to not printing--from a comparative standpoint, not net. If private credit falls by 10 trillion, and the government prints 5 trillion, it's going to reduce the deflation less than if they printed 10 trillion. It's not exactly how I would phrase things, but it's not wrong.

I see. Well, I think it's clear he's missing the big picture then, if he doesn't consider what's happening with private credit.

Everyone keep in the mind this last half year has been one of the largest bond yield spikes in decades yet the Fed is still buying $1 trillion a year and the major foreign central banks are not even selling yet. Just imagine a scenario where these two factors aren't true...

Mdraf wrote: Everyone keep in the mind this last half year has been one of the largest bond yield spikes in decades yet the Fed is still buying $1 trillion a year and the major foreign central banks are not even selling yet. Just imagine a scenario where these two factors aren't true...

I'm trying to imagine a scenario where major foreign central banks are attempting to sell, however I can't imagine how the sales could ever be executed when they'd need to find large enough buyers able to actually purchase those bonds. A central bank can't just "sell" a good chunk of its bonds on the open market without lining up a buyer of the same size in advance. I mean, you're talking about enormous assets that can't really be sold very easily. It would be like trying to sell the Great Wall of China — not easy to find a capable buyer.

And even if they could be sold, somehow, the "elephant-in-the-pool" effect would take place. The elephant cannot get out of the pool without sinking the water level in that pool considerably. In other words, most foreign central banks can't sell their bonds without destroying the value of their bonds in the process. And, since they can't find buyers of a similar size to even start such a process, they are pretty much just stuck with their bond holdings.

Gumby wrote:
I see. Well, I think it's clear he's missing the big picture then, if he doesn't consider what's happening with private credit.

It's clear you are missing the big picture. At the present moment the government requires a trillion dollars of printing just to get by. There is no end in sight to their expanding budgets. Any temporary credit contraction is only going to exacerbate their problems and require more and more printing. Any temporary deflation where they maintain interest payments (which is all they are doing, they are expanding principle) needs to be met with more and more printing. They can't stop without collapsing it and if it all collapses where will they get the money to pay the interest let alone anything else like ever expanding welfare/warfare state? They will have to print.

The dollar can rally and bonds yields can fall simultaneously in the short run but it can not be sustained. - My opinion. What credible way do you think you can get paid back on a bond you buy today over the next 30 years in real terms? How on Earth can the US government send you interest payments and a principle payment at current rates that beats inflation (let's call it M3 so it grabs everything) over 30 years? Please don't say if there's a deflation. You are acting like the government will not be forced to respond to a deflation with massive printing. Think of the consequences of short-term deflation (bank failures, municipality failures, vital industry failures etc.....) Ohhhh how the presses will roll in response. 2008 was a warm up and look at how much printing they had to do then. Or do you think the dollar has gained purchasing power since then?

There is no way out for them other than shedding the dependant classes, not bowing to the riots, doing a major real asset sale or something. Do you think the humans who comprise the government are capable of such action? Why would they take the pain of losing their office which every incumbant would rather than just try to prolong it with more printing?

If the FED forces their hand and stops supporting and rates rise so does the deficit. They have to print more and more.

You talk about 50 some trillion. Do you know what the federal budget is projected to be in 10 years? Imagine what it will be if rates ever rise to normal 7, 8, 9%? They will need trillions just to pay interest!!!!!

They can't stop expanding the money supply for more than a very short period without crashing everything and they know it. At some point the choice will be extremely high inflation wiping out bond returns or an outright default. They are not going to be able to keep rates low and slow down monetary expansion while maintaing their debt service. The government is beyond bankrupt. Except for it's printing press.

Clipping your bond coupons will be very little solace if everything is exploding in price around you.

They will print until it's clear the market will not bear it anymore and they can't prolong the pain. Then they have to default because where will they get the trillions to pay in a crashed economy.

Pointedstick wrote:

Kshartle wrote: Do you think they can pay you back with enough interest to make up for the devaluation if the answer to question one in no?

Possibly, but maybe not.

I think the maybe not is overkill.

"Do you think it will rain tomorrow"?

Possilby, but maybe not.

Do you see this is avoiding the question.

This is why it's so frusrating. You guys will just continue to dance and change the subject or create strawman arguments.

Pointedstick wrote:
The reason why I began making arguments for the return possibility of bonds is not because I have a ton of faith that their coupon payments are going to beat inflation or that interest rates can fall forever, but because you asked me to:

I asked if you can make a case for them beating inflation.

Gumby wrote:
Fair enough. Though, we could also say the same thing about people who complain about the market being "irrational".

If you mean me then please point out where I've complained about the market being irrational. Pointing it out is not the same as complaining about. Saying I'm complaining about it is trying to discredit the argument by claiming it's emotion-driven. It's an obvious tactic to aviod discussion of the points raised.

Kshartle wrote: "Do you think it will rain tomorrow"?

Possibly, but maybe not.

Do you see this is avoiding the question.

What's so frustrating about me saying I don't know if it will rain tomorrow? I don't! If the weather forecast says it will, in my experience growing up in a fairly rainy place, that doesn't generally mean squat. I can give you a prediction, but it almost seems silly to do so.

If you really want, I will admit that I don't believe that the interest payments on 30-year bonds will generate a real return much beyond 0%. But at the same time, I have to acknowledge that it's just my opinion, and that I could very well be wrong.

It seems like you're trying to get me to make a concrete prediction and then say, "aha! So if you don't actually have any faith in bonds, then why don't you dump them while you still can?"

And the answer to that is that I have even less faith in my ability to predict what bonds are going to do over the coming decades.

Kshartle wrote:

Pointedstick wrote:
The reason why I began making arguments for the return possibility of bonds is not because I have a ton of faith that their coupon payments are going to beat inflation or that interest rates can fall forever, but because you asked me to:

I asked if you can make a case for them beating inflation.

I'm sorry if I misread your question. As I believe I've said a few times now, I have little faith in the ability of the interest payments of government bonds to produce a real return. As for the capital value, in some years they will, and in some years they won't: same as any volatile asset.

But I believe I've also said that I--like other PP owners--don't hold bonds with the expectation that their coupon payments or capital value will beat inflation, so that doesn't matter to me. I hold gold to provide a real return in the face of high inflation. Bonds are to dampen overall portfolio volatility by providing another volatile asset to harvest--a purpose I believe you've said was a legitimate one several times.

Pointedstick wrote: If you really want, I will admit that I don't believe that the interest payments on 30-year bonds will generate a real return much beyond 0%. But at the same time, I have to acknowledge that it's just my opinion, and that I could very well be wrong.

It seems like you're trying to get me to make a concrete prediction and then say, "aha! So if you don't actually have any faith in bonds, then why don't you dump them while you still can?"

No I just want to hear if anybody can come up with a credible way you can get a real return in 30 year bonds at current rates.

Almost everyone here is holding them. I'm just wondering if anyone can come up with a credible argument for how someone buying a 30 year T-bond is gonna make a real return in the next 30 years with it. I realize there are other reasons you might own it. We don't need to talk about those other reasons anymore there are hundreds of threads on them.

I don't know is an acceptable answer. But then let's leave it at that. If you don't know of a way that's fine. Nothing wrong with that.

Kshartle wrote:At the present moment the government requires a trillion dollars of printing just to get by.

Yawn. $1 Trillion is barely anything compared to the size of the private credit market (~$56 Trillion). You are getting worked up over nothing.

Kshartle wrote:There is no end in sight to their expanding budgets. Any temporary credit contraction is only going to exacerbate their problems and require more and more printing.

Once again, that's the paradox of debt-based money. What do you want me to say?

Kshartle wrote:where will they get the money to pay the interest let alone anything else like ever expanding welfare/warfare state? They will have to print.

Exactly. So, long as the private sector remains productive enough, it makes no difference [right, Mdraf? ]

If the private sector doesn't remain productive enough, the government can just tax away the excess to prevent inflation. No big deal really.

Kshartle wrote:What credible way do you think you can get paid back on a bond you buy today over the next 30 years in real terms?

Meh. I don't plan on holding any single T-Bond more than 10 years anyway. That's the beauty of T-Bonds... they are transferrable on the secondary market. It's not like your locked in for 30 years or anything.

Kshartle wrote:How on Earth can the US government send you interest payments and a principle payment at current rates that beats inflation (let's call it M3 so it grabs everything) over 30 years?

Again. It all depends on private credit — private credit is a much, much bigger elephant than government spending. Until you start including the ~$56 Trillion private credit market in your models, you'll never see the big picture.

Kshartle wrote:If the FED forces their hand and stops supporting and rates rise so does the deficit. They have to print more and more.

Why would the Fed stop supporting rates? The Fed has a Congressional mandate to target/support rates.

Kshartle wrote:You talk about 50 some trillion. Do you know what the federal budget is projected to be in 10 years?

It will likely be nothing compared to the size of private credit. And if we all remain productive [right, Mdraf? ], everything will be just fine.

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Kshartle wrote:Imagine what it will be if rates ever rise to normal 7, 8, 9%? They will need trillions just to pay interest!!!!!

Since when is 7-9% normal?

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Kshartle wrote:At some point the choice will be extremely high inflation wiping out bond returns or an outright default.

Or not. Depends on private credit.

Kshartle wrote:They are not going to be able to keep rates low and slow down monetary expansion while maintaing their debt service. The government is beyond bankrupt. Except for it's printing press.

A fiat government can never be rich or bankrupt. Does a football stadium have a vault full of points? No. There is no vault full of fiat money. When the government taxes your money, it doesn't go into a vault. It gets ignited for all practical purposes. It just goes into a virtual spreadsheet, for show. Congress simply chooses how much to tax or spend and the spreadsheet is modified to make their spending/taxing wishes come true.

Kshartle wrote:Clipping your bond coupons will be very little solace if everything is exploding in price around you.

Owning LTTs is just a hedge. You get that, right? A hedge doesn't have to come true to be useful.

Kshartle wrote:They will print until it's clear the market will not bear it anymore and they can't prolong the pain. Then they have to default because where will they get the trillions to pay in a crashed economy.

Ever hear of taxes? If people have too much money from this tsunami of spending and interest payments you speak of, the government can just tax the excess back. If on the other hand, people are super productive, the excess money will just feed a larger economy without the need to raise taxes [right, Mdraf? ].

Pointedstick wrote:
But I believe I've also said that I--like other PP owners--don't hold bonds with the expectation that their coupon payments or capital value will beat inflation, so that doesn't matter to me. I hold gold to provide a real return in the face of high inflation. Bonds are to dampen overall portfolio volatility by providing another volatile asset to harvest--a purpose I believe you've said was a legitimate one several times.

We're really not disagreeing, not that I mind disagreement. I would be very interested if anyone wants to disagree and convince me otherwise. That would be an interesting discussion.

It's easy to make a case for the other 3 providing a real return.

Stocks are obvious, they're businesses trying to earn profit and over the long-run should do just that.

Gold (in my opinion) should have a real return because either the government prints and people flock in for safety or a deflationary crash causes other prices to fall much harder as the economy collapses. Even if the nominal price drops I think the purchasing power will go up a little so it's the safest long-term to me right now.

Cash.....well again, a deflationary crash probably will happen at some point though inflation might wipe out the value beforehand. At least there is a case here.

Bonds.....inflation wipes out the gain and sustained deflation makes repayment impossible. Unless you can come up with a way it won't.