Economics

[Toro]

... Central banks have been built on financial crises, with each major tremor expanding their role. And today's economic convulsions foreshadow more changes to come at the Fed.

If it wasn't for crises, central banks might not exist. In Britain, after years of civil war and the ouster of King James by William III in 1688, the country's public finances were in tatters, with tax collection falling short of what the government needed to pay its bills and lenders unsure about the stability of the government. The Bank of England, one of the first central banks and for centuries the most important one, was founded in 1694 to purchase government debt and curtail the funding crisis.

The establishment of the Bank of England came at the beginning of a great societal shift, when new ideas were challenging old doctrines, and rising world trade was giving new power to merchant classes. But the expansion in commerce and banking also made financial crises more prevalent. Speculative bubbles led to spectacular market crashes.

"The Bank of England received heavy criticism in many of the crises of the 19th century when it didn't act fast enough," says Rutgers University economic historian Michael Bordo. "It learned to be lender of last resort." ...

But for much of the 19th century and into the 20th, the U.S. had no central bank. Many Americans feared that nothing good could come from one bank wielding so much power. In 1816, a central bank to help fund government finances that had been badly depleted by the War of 1812 was established. In his 1832 veto of the extension of the bank's charter, President Andrew Jackson wrote that "Great evils...flow from such a concentration of power in the hands of a few men irresponsible to the people."

While financial crises in England diminished through the 19th century, they were a regular feature of American life.

"Crises are much more frequent when we don't have a central bank," says New York University Stern School economic historian Richard Sylla. With nobody willing to step into the fray when borrowers ran into trouble, small credit-market problems could easily spin into major ones.

The turning point came in 1907. The availability of credit was tight throughout the world that year, and that October, a speculative attempt to corner the stock of United Copper Co. failed. That sparked a run on the deposits of Knickerbocker Trust Co., which had helped fund the scheme, eventually leading to the firm's collapse. John Pierpont Morgan, the giant of American finance, took on the role of lender of last resort.

Struggling with a bad cold, sleep-deprived and sustaining himself with little more than cigars, Morgan put up millions of his firm's money to avert the crisis and cajoled other bankers into doing the same. In a famous incident, Morgan gathered a throng of bankers and trust executives in his library on the evening of Nov. 3, locking the doors and not opening them until 4:45 the next morning, after the men had agreed to take part in a $25 million loan.

The Panic of 1907 helped push aside longstanding worries over the economic power concentrated in an American central bank, and in 1913 the Federal Reserve Act was passed....

Central Banks Are Creatures of Financial Crises - WSJ.com

 

[Kimura]

I don't know too much about Kyle Bass, but I follow Peter Schiff pretty close and I know he has said the same thing that I have said. Hyperinflation is a worse case scenario. It's a pretty recent interview, so maybe he has changed his tune a couple of times.


I never put a timeline on it. I know what is going to happen, I cannot tell you when it is going to happen and I never claim to know exactly when we will have hyperinflation. But I also say that hyperinflation is not guaranteed, it is a worse-case scenario. I say that if we keep doing what we are doing, we will eventually have hyperinflation. But I have also said that I do not think we are going to keep doing what we are doing. I think the spectre of hyperinflation once it looms large enough will force central banks to reverse policy.

His predictions about the price of Gold are not as accurate as we both would have liked, but we are generally on the same page here. As for 'idiots,' that's debatable. He has been pretty spot on about his booms and bust forecast during the Dot Com Bubble and Housing Bubble. I can't really say that about most economist or financial pundits so he deserves some credit here.

Hyperinflation isn't a possibility in the United States, barring having our industrial capacity wiped out, massive civil war and/or corruption, and most importantly, having debts denominated in another currency other than the dollar. If, for example, our "public debt" was denominated in Euros or Yen, that would be a problem.

He wasn't the only person prognosticating about the real estate bubble. I was concerned at the same time as Peter Schiff, other economists were ringing alarm bells as well. His investment advice was based on his ignorance of monetary operations and macroeconomics. I'm being fair, idiotic was a bit too strong.

What people have to understand is we're no longer on a gold standard. We still behave as if we are which I'll get into. We no longer need to tax and borrow under a fiat system. US public debt cannot become a burden for the federal government, since federal spending is essentially costless for the US government. When Peter Schiff say things like the government is going broke, I can't take him seriously, since it's operationally impossible for the the US government to default or go bankrupt.

Well, you don't believe the Big Mac index is great, and I don't believe the CPI is great. As long as we can both take either with a grain of salt and not herald one over the other as a 'be-all-end-all' metric, that is fine. The Big Mac index used some of the same methodology the Consumer Price Index used to measure prices across the world. The only problem is that the CPI changed.

As you can see, prices were in perfectly alignment with the CPI, until the mid-2000's. I believe the CPI has been changed to understate it's inflation and should be taken with a grain of salt.

Fair enough. I think I articulated some of the problems with the CPI. Aggregate econ data such as GDP or CPI aren't exact measurements. As an undergraduate, back in the day, this was a shock to me being a numbers guy. They're basically estimates, which are aggregated for some type of consistency. They're constructed, revised, and have a statistical bias built into them, so they do balance out if that makes sense. I've also come to realize correlation coefficients are not reliable with CPI.

At work, I use e-Singals, but at home I use MultiCharts. e-Singals performs much better but they wanted to charge me an extra $1,500 just so I can use my brokerage account on a second computer and I'm not doing that. Especially since it's illegal for me to work from home.

The charts you've seen were the MultiCharts platform. It's free to try for a month or so. Works in real-time data as well. Really good stuff on there.

Cool. So you're a currency trader? I work on the bond side of things. I'm getting really, really bored, though.

Things are getting cheaper in terms of the cost to make goods and services at the average industrial wage. When the industrial wage is low, it takes more labour hours to purchase something than if the industrial wage is high. The CPI has a metric which is similar to this called Hedonic Adjustments, which determines inflation based on the quality of a good or service, rather than the nominal price increase of the item.

But I believe these are mitigating factors which mask certain cost involved which have increased

According to the BLS report in January, Gasoline fell by 3.0%; however, this was the time where the national average for gasoline was rising and prices increased by 1.0%. Discrepancies I generally look out for when I look at CPI reports, because according to the CPI this surge in gas prices was all in everyone's head.

Are you implying that the purchasing power of wages and profits are beside the point?

The problem is maintaining zero inflation would tilt the US the economy towards a situation where it could tip into deflation in an easy manner. The FED would then have to target a higher rate of inflation as a buffer mechanism. Some inflation is part of a healthy economy since it discourages people from hoarding money so they'll use it instead. This will increase consumption and investments and overall supply and demand. We've seen tremendous growth since 1913, orders of magnitude more than the cost of inflation.

By the way, I looked up some numbers from 1900-2006. The average cost of a good/service that cost $1 in 2006, was roughly priced at 4.9 cents in 1913. We've had an average price increase of 1930% from 1913. This sounds horrendous, right? However, the average earned income has increased by 6560% during the exact same time period. We had average earned income go from $740/year (1913) to $49,300/year (2006). If we adjust for inflation, $740 per year in 1913 is $15,000 per year in 2006 dollars. This means average income has beat price inflation by 230%.

I don't believe trade deficits are bad. Just the size of the Trade Deficit to the extent that the United States has is bad. It devalues the strength of the US Dollar and makes exports more expensive for the United States. Foreign economies need to devalue their currencies just to keep their exports stable.

The day of reckoning is generally when the investors stop buying US debt. Interest rates are already starting to rise much sooner surprisingly, and through no fault of the Federal Reserve. So I wouldn't count Peter Schiff out just yet.

Not necessarily. The trade balance only shows one side of the capital in/outflows of the country. The other side of the capital flows are from the Capital Account. When economist compute the current account (trade balance), they don't include the sale of financial assets (the capital account).

Using today's example, the United States imports more goods and services than it exports, creating a current account surplus. However, more foreign Investors tend spend money on Americans than America spends on foreign investors. This creates a capital account deficit. The capital account is counterbalanced by the current account. Having assets backed in gold makes investing in the country more attractive to foreign investors. This counteraction in the Balance of Payments accounting would stabalise any trade deficit/surplus , but it wouldn't make the imbalance disappear.

The trade deficit doesn't devalue the dollar, nor can there be a day of reckoning. By the way, since you're a fan of the gold standard, you should realize Treasuries are basically a vestigial leftover from the days of the gold standard. They are no longer operationally necessary; they are legally required because the whole process has been hijacked by politicians. They've become a place where the foreign sector can park their financial assets in a risk-free fashion and earn a little interest. It beats reserve accounts.

For example, let's say I decide to purchase an Italian automobile. I pay cash and my checking account is debited in my US bank and the Italian automaker's account is then credited, which increases the total net amount of US financial assets. The total net amount of deposits in the US banking system remain the same.

If I decide to take out a loan to purchase my Alpha Romeo, the bank will grant me a loan, which will create an asset on the bank's balance sheet and a deposit on the liability side of things. After I pay off that note, Alpha Romeo has a new bank deposit. My borrowing added to the total amount of bank deposits and funded savings in US dollars in the foreign sector.

This is the same the thing as the finances regarding the trade deficit. We have the foreign sector (rest of the the world: national governments, households and firms) that simply desire to net save in US financial assets and they sell us real goods and services to obtain these financial assets.

If my example was a transaction of someone in the foreign sector as a holder of US dollar bank deposits, they may decide to buy US Treasuries. At the point of purchasing the security, the seller of the security becomes a holder of a new bank deposit, and the foreigner has a new Treasury.

This is what drives me up a wall about guys like Peter Schiff, Jim Rogers, Kyle Bass, Steve Forbes, Ron Paul and his idiot son, etc. These guys really don't understand operationally what transpires. They'll get red in the face going on and on about how the US is in debt to foreign creditors, how the US is a debtor nation, etc.

While those statements are technically true, we have to look past this ignorant rhetoric and see what's going on under the hood over at the FED. What does Uncle Same owe the holder of a Treasury security? The US government basically promises that foreigners' savings account (US Treasury securities) over at the FED will be debited, and their checking accounts (reserve accounts) at the FED will be credited whatever balance is due.

At the end of the day, Uncle Sam's promise is that a reserve account balance (non-interest bearing) will be swapped out for a Treasury security (interest bearing). This can never be a problem for the US government, it's a matter of shifting funds between accounts. It's impossible for any type of financial stress to occur. Ever.

By the way, I forget to mention, bonds basically serve to add or subtract reserves from the banking system. It's basically a way to drain any excess reserves from the banking system. This is their primary function under a fiat system.

Only if you are giving gold in exchange.

I'll stick with cash and equities.

I still have your other posts saved. I'm going to break up my posts so I don't hit any type of character limit.

Oh yeah, Happy 4th!

 

[EdwardBaiamonte]

You happen not to be so ignorant but you are ascribing beliefs to Keynes that he NEVER held as

He didn't really hold economic beliefs. That's your first mistake. What he did think is that government could control a capitalist economy with many many kinds of central government interventions. If you read the General Theory you see that it is indeed a very general theory and so not specific at all. We have no idea how he would see today's economy and what specifics he would apply against it, if any.
All we know is that if he had the same attitude as he had in the 30's he would propose big spending programs.

But, we also assume that as a very bright guy with the benefit of 80 years experience he would have learned that government stimulus programs whether soviet, French, North Korean, East German or American, in the end, merely result in mal-investment bubbles that do great harm and so propose capitalism rather than liberalism for today's recession.

 

[AmazonTania]

... Central banks have been built on financial crises, with each major tremor expanding their role. And today's economic convulsions foreshadow more changes to come at the Fed.

If it wasn't for crises, central banks might not exist. In Britain, after years of civil war and the ouster of King James by William III in 1688, the country's public finances were in tatters, with tax collection falling short of what the government needed to pay its bills and lenders unsure about the stability of the government. The Bank of England, one of the first central banks and for centuries the most important one, was founded in 1694 to purchase government debt and curtail the funding crisis.

The establishment of the Bank of England came at the beginning of a great societal shift, when new ideas were challenging old doctrines, and rising world trade was giving new power to merchant classes. But the expansion in commerce and banking also made financial crises more prevalent. Speculative bubbles led to spectacular market crashes.

"The Bank of England received heavy criticism in many of the crises of the 19th century when it didn't act fast enough," says Rutgers University economic historian Michael Bordo. "It learned to be lender of last resort." ...

But for much of the 19th century and into the 20th, the U.S. had no central bank. Many Americans feared that nothing good could come from one bank wielding so much power. In 1816, a central bank to help fund government finances that had been badly depleted by the War of 1812 was established. In his 1832 veto of the extension of the bank's charter, President Andrew Jackson wrote that "Great evils...flow from such a concentration of power in the hands of a few men irresponsible to the people."

While financial crises in England diminished through the 19th century, they were a regular feature of American life.

"Crises are much more frequent when we don't have a central bank," says New York University Stern School economic historian Richard Sylla. With nobody willing to step into the fray when borrowers ran into trouble, small credit-market problems could easily spin into major ones.

The turning point came in 1907. The availability of credit was tight throughout the world that year, and that October, a speculative attempt to corner the stock of United Copper Co. failed. That sparked a run on the deposits of Knickerbocker Trust Co., which had helped fund the scheme, eventually leading to the firm's collapse. John Pierpont Morgan, the giant of American finance, took on the role of lender of last resort.

Struggling with a bad cold, sleep-deprived and sustaining himself with little more than cigars, Morgan put up millions of his firm's money to avert the crisis and cajoled other bankers into doing the same. In a famous incident, Morgan gathered a throng of bankers and trust executives in his library on the evening of Nov. 3, locking the doors and not opening them until 4:45 the next morning, after the men had agreed to take part in a $25 million loan.

The Panic of 1907 helped push aside longstanding worries over the economic power concentrated in an American central bank, and in 1913 the Federal Reserve Act was passed....

Central Banks Are Creatures of Financial Crises - WSJ.com

I can only assume that this is directed towards me, but only due to the fact that you enjoy singling me out.

As for Richard Sylla, that is his personal opinion I believe. Up until 1913, the United States has been off and on a Central Banking system and there have been crises on and off. I try to use international examples in my economical standpoints.

 

[EdwardBaiamonte]

Up until 1913, the United States has been off and on a Central Banking system and there have been crises on and off. I try to use international examples in my economical standpoints.

Interesting point! A central banking system can be used to control a gold standard, a fiat standard, or a mixed standard. All can work. The fiat standard gives you the most flexibility so probably is best but in the end all depend equally on what economic wisdom central bankers bring to the job. Under a fiat system if you want stable money, for example, you can merely make inflation and deflation illegal. Under other systems it becomes much harder especially in the short run. A gold standard probably just implies you want the same thing, namely, no inflation so whether you use gold or fiat it makes no difference in the end.

No central bank implies many systems and great inefficiency.

 

[AmazonTania]

Hyperinflation isn't a possibility in the United States, barring having our industrial capacity wiped out, massive civil war and/or corruption, and most importantly, having debts denominated in another currency other than the dollar. If, for example, our "public debt" was denominated in Euros or Yen, that would be a problem.

It might be a problem if it were the Yen. Not really so much regarding the Euro. The Euro is still trading near all-time highs against the Dollar. For what reason, I don't know, but mostly due to the monetary policy the ECB has decided to pursue, or rather, not pursue. Aside from this, there really isn't much of a demand for Euros and the economic strength of the Euro-Zone is still relatively weak. Despite this, the Euro-Zone is one of the few economies committed to a strong currency.

Aside from this, the United States has already experienced hyperinflation once. Certainly can be a possible scenario in the future but I believe Stagflation is more likely to happen.

He wasn't the only person prognosticating about the real estate bubble. I was concerned at the same time as Peter Schiff, other economists were ringing alarm bells as well. His investment advice was based on his ignorance of monetary operations and macroeconomics. I'm being fair, idiotic was a bit too strong.

There are those who have predicted a downturn, after the fact. And there are those who have predicted a recession, just a small slowdown. And there are those who just flat out denied it. I am aware there are those who have called it right, but I haven't seen to many who have called it the same way Schiff has down it.

And his investment strategy is almost identical to mine: Abroad diversification on foreign stocks, assets, ETF, currencies and commodities. By his own admission, during the financial crisis his portfolio has dropped over 50% during 2008. But if you look at some of assets on one of his former accounts, you would see that it would have done well today had this individual still was a client. It's very difficult to actually know how particular brokers are doing performance wise. It's against SEC regulations for us to discuss account performance.

What people have to understand is we're no longer on a gold standard. We still behave as if we are which I'll get into. We no longer need to tax and borrow under a fiat system. US public debt cannot become a burden for the federal government, since federal spending is essentially costless for the US government. When Peter Schiff say things like the government is going broke, I can't take him seriously, since it's operationally impossible for the the US government to default or go bankrupt.

That is very easy to say now. It know longer has to play by the same rules. Other modern economies do not have to play by the same rules. And when the US economy is forced to face reality, it bends the rules on it's own. Pretty soon, there is going to be an addition metric on how GDP is calculated all in the name of making the economy appear to be growing, when really it's not.

And I too believe that the government is going broke (not that it is not already broke). This is by the Government's own admission. Any neglect to actually raise the debt ceiling means that the largest economy in the world will default on a $3 million dollar treasury. I believe that the Government will default sooner or later. It can continue to lie to itself forever, but it can't distort financial markets forever.

Fair enough. I think I articulated some of the problems with the CPI. Aggregate econ data such as GDP or CPI aren't exact measurements. As an undergraduate, back in the day, this was a shock to me being a numbers guy. They're basically estimates, which are aggregated for some type of consistency. They're constructed, revised, and have a statistical bias built into them, so they do balance out if that makes sense. I've also come to realize correlation coefficients are not reliable with CPI.

During the 70's politicians were concerned that the inflation measurements was an 'overstatement.' So they took out housing prices and introduced it with rents, as rents tend to be more stable. During the 80's, a chain-weighted CPI was added to one of the metrics. And during the 90's, they introduced a metric called 'Hedonic Adjustments' and 'Substitutions.' The Fed is doing all the same things they've done in the past, and yet inflation can barely budge, which is very suspect. If I am right, real inflation is very close to where it was during the 1970's of 7 - 10%

Cool. So you're a currency trader? I work on the bond side of things. I'm getting really, really bored, though.

Forex is just one of the things I do, but I also work in the commodities and stock market with general exposure to Foreign and Emerging Markets. I don't have a license to issue securities. I don't see how that would be boring. Sounds like a fun gig to me. Easy sure, but fun.

Are you implying that the purchasing power of wages and profits are beside the point?

The problem is maintaining zero inflation would tilt the US the economy towards a situation where it could tip into deflation in an easy manner. The FED would then have to target a higher rate of inflation as a buffer mechanism. Some inflation is part of a healthy economy since it discourages people from hoarding money so they'll use it instead. This will increase consumption and investments and overall supply and demand. We've seen tremendous growth since 1913, orders of magnitude more than the cost of inflation.

If wages are rising faster than the cost of goods and services, there is really nothing wrong with that. Today, the cost of living is either rising by the same amount or is rising faster, and this is bad. Contrary to popular belief, lots of good things happen when deflation happens. Corporation empires were built on making sure goods and services were affordable to the common man, which means falling prices.

By the way, I looked up some numbers from 1900-2006. The average cost of a good/service that cost $1 in 2006, was roughly priced at 4.9 cents in 1913. We've had an average price increase of 1930% from 1913. This sounds horrendous, right? However, the average earned income has increased by 6560% during the exact same time period. We had average earned income go from $740/year (1913) to $49,300/year (2006). If we adjust for inflation, $740 per year in 1913 is $15,000 per year in 2006 dollars. This means average income has beat price inflation by 230%.

The average income earners are generally middle statistical category and if your middle class is growing then the median income will be higher in a future point in history, whether you adjust it for inflation or not. It's really not telling you much to be honest.

The trade deficit doesn't devalue the dollar, nor can there be a day of reckoning. By the way, since you're a fan of the gold standard, you should realize Treasuries are basically a vestigial leftover from the days of the gold standard. They are no longer operationally necessary; they are legally required because the whole process has been hijacked by politicians. They've become a place where the foreign sector can park their financial assets in a risk-free fashion and earn a little interest. It beats reserve accounts.

For example, let's say I decide to purchase an Italian automobile. I pay cash and my checking account is debited in my US bank and the Italian automaker's account is then credited, which increases the total net amount of US financial assets. The total net amount of deposits in the US banking system remain the same.

If I decide to take out a loan to purchase my Alpha Romeo, the bank will grant me a loan, which will create an asset on the bank's balance sheet and a deposit on the liability side of things. After I pay off that note, Alpha Romeo has a new bank deposit. My borrowing added to the total amount of bank deposits and funded savings in US dollars in the foreign sector.

This is the same the thing as the finances regarding the trade deficit. We have the foreign sector (rest of the the world: national governments, households and firms) that simply desire to net save in US financial assets and they sell us real goods and services to obtain these financial assets.

If my example was a transaction of someone in the foreign sector as a holder of US dollar bank deposits, they may decide to buy US Treasuries. At the point of purchasing the security, the seller of the security becomes a holder of a new bank deposit, and the foreigner has a new Treasury.

Trade deficit does devalue a nation's currency. You have also overlooked a few things, but to see this we must start with some basic ideas.

If a country whats what you produce, then it needs your currency. Exporting creates an international demand for your currency as well as the demand for the goods and services of the foreign businesses. If you are purchasing your foreign car from a local dealer, this means your car has already been exported. This contributes to the nation's current account deficit, as the product was exported to your country for final sale.

Contrast, if you are purchasing the foreign object from another country, it has yet to be delivered to you. If this asset requires shipping, this contributes to the nation's (your nation) capital account surplus. In a way you are essential participating in Forex or Currency Exchange. Engaging in a cross borders payment, you buy Euros in exchange for dollars (through a medium like paypal or something), you send Euros and they send the automobile that you want. The basic idea still applies. You want what another country has. The other country only accepts Euros. You purchase the Euros so you can purchase the automobile.

The things you are trying to describe are really different. Exporting creates an international demand for your currency. The more you export, the more people want and desire your currency. This essentially increases the value of your currency relative to other nations. This makes imports to their country more expensive, and exports to your country relatively cheap. As a result, they are forced to export more to keep the rate of exchange relatively stable.

So contrary, if no one wants what you sell, no one needs your currency. Your currency will remain relatively weak, and if you run a trade deficit it can potentially devalue your nation's current. Although, it doesn't mean that trade deficits are all bad, and vice versa for trade surpluses. It all varies from country to country. Economies like China and Japan rely very heavily on exporting, and this are forced to purchase US Treasuries in order to keep their currency relatively low. Strong Currencies like Australia, New Zealand, Singapore, and South Korea have to cut rates in order to keep the US Dollar strong relative to theirs. We've already seen record low rate cuts from three out of four of these nations just recently, as it is the only way they can keep selling exports.

Getting back to the Capital Account example, you are technically correct. Inflows in the country means that the a person has a bank deposit and that the investor has a Treasury (a financial asset, I guess). This increases your capital account surplus, but these are not to be confused with earnings. Inflows of the capital account could be transfers, debt forgiveness or in your case, borrowings. This doesn't take away from the fact that this money has to be paid back later in the future. These borrowings actually turn into earnings for the foreign investor.

As a result, this turns into actual earnings for the foreign investor, which gives the foreign country a legit capital account surplus. Capital flows out of the American economy, which gives america a capital account deficit, which is still harmful for our balance of payments and makes America the largest debtor nation in the world.

This is what drives me up a wall about guys like Peter Schiff, Jim Rogers, Kyle Bass, Steve Forbes, Ron Paul and his idiot son, etc. These guys really don't understand operationally what transpires. They'll get red in the face going on and on about how the US is in debt to foreign creditors, how the US is a debtor nation, etc.

Not really a Paul fan. I like his son more, but I think these people know more than you give them credit for. But I know Peter is always up for a challenge. Why don't you give him a call?

While those statements are technically true, we have to look past this ignorant rhetoric and see what's going on under the hood over at the FED. What does Uncle Same owe the holder of a Treasury security? The US government basically promises that foreigners' savings account (US Treasury securities) over at the FED will be debited, and their checking accounts (reserve accounts) at the FED will be credited whatever balance is due.

At the end of the day, Uncle Sam's promise is that a reserve account balance (non-interest bearing) will be swapped out for a Treasury security (interest bearing). This can never be a problem for the US government, it's a matter of shifting funds between accounts. It's impossible for any type of financial stress to occur. Ever.

By the way, I forget to mention, bonds basically serve to add or subtract reserves from the banking system. It's basically a way to drain any excess reserves from the banking system. This is their primary function under a fiat system.

That is if your investors are willing to take redemption in a currency that is worthless reserve notes. I do not believe they are. That is a current concern for everyone, even the head honchos at the Fed. Despite the fact that they are willing to cook the inflationary books.

I'll stick with cash and equities.

Suit yourself. I am anxious to see where Gold is going to go once the FED starts to taper, and Helicopter Ben realises that he is the cause of what he is trying to prevent.

Oh yeah, Happy 4th!

I am a Brit, so July of 4th is only an American phenomenon. But thank you all the same.

 

[Kimura]

It might be a problem if it were the Yen. Not really so much regarding the Euro. The Euro is still trading near all-time highs against the Dollar. For what reason, I don't know, but mostly due to the monetary policy the ECB has decided to pursue, or rather, not pursue. Aside from this, there really isn't much of a demand for Euros and the economic strength of the Euro-Zone is still relatively weak. Despite this, the Euro-Zone is one of the few economies committed to a strong currency.

It doesn't matter if US external debt was denominated in Euro, Yen, Swiss Francs or even Rubles. It would be a problem regardless. For example, the hard currency crowd constantly mentions Weimar Germany as some awesome example. Wiemar had their industrial capacity wiped out during the war which left their output controlled by other countries. Their debt was also denominated in Sterling. The more they printed, it wasn't being offset by an increase in the supply of real goods and services, thus resulting in hyperinflation.

Aside from this, the United States has already experienced hyperinflation once. Certainly can be a possible scenario in the future but I believe Stagflation is more likely to happen.

Never.going.to.happen. Hyperinflation is much more than a monetary phenomenon. It's a chaotic economic progression which leads to rejection of the sovereign currency.

There are those who have predicted a downturn, after the fact. And there are those who have predicted a recession, just a small slowdown. And there are those who just flat out denied it. I am aware there are those who have called it right, but I haven't seen to many who have called it the same way Schiff has down it.

And his investment strategy is almost identical to mine: Abroad diversification on foreign stocks, assets, ETF, currencies and commodities. By his own admission, during the financial crisis his portfolio has dropped over 50% during 2008. But if you look at some of assets on one of his former accounts, you would see that it would have done well today had this individual still was a client. It's very difficult to actually know how particular brokers are doing performance wise. It's against SEC regulations for us to discuss account performance.

He lost his clients a SHITLOAD of money. I wouldn't ask him for directions let alone investment advice. His ridiculous decoupling theories, his New Zealand and Chinese stock picks, etc. were a total bust. If you want to come out on the right side of a trade, just do the EXACT opposite of lunatics like Schiff and Bass. Seriously, I'm not joking.

That is very easy to say now. It know longer has to play by the same rules. Other modern economies do not have to play by the same rules. And when the US economy is forced to face reality, it bends the rules on it's own. Pretty soon, there is going to be an addition metric on how GDP is calculated all in the name of making the economy appear to be growing, when really it's not.

What reality?

And I too believe that the government is going broke (not that it is not already broke). This is by the Government's own admission. Any neglect to actually raise the debt ceiling means that the largest economy in the world will default on a $3 million dollar treasury. I believe that the Government will default sooner or later. It can continue to lie to itself forever, but it can't distort financial markets forever.

The debt ceiling is trivial. It's a political ploy by austerity ghouls and ideologues. There is zero correlation between debt-to-GDP ratios and growth.

A monetarily sovereign country like the US, the UK, Australia, Canada, Japan, etc. cannot go bankrupt or default. The only default would be a voluntary default, which is probably against the law and unconstitutional in the US at least.

As long as US debt is denominated is US dollars, the US will always to be able to pay and service its debts.The federal government cannot involuntarily run out of fiat money. It has the constitutional authority to create as much as it needs without limit. The restraints are imposed by Congress. The US government is the monopoly issuer of the dollar. There aren't a fixed amount of dollars in a vault somewhere or a Chinese dollar factory for that matter.

You have to realize that the federal government doesn't operate like household. A currency issuer is way different than a currency user. The Federal Government is not like a household; households can’t issue their own currency and make people use that said currency to pay taxes. This is critical. Our supply of dollars is always limited; the supply of federal government's dollars is a matter of policy.

During the 70's politicians were concerned that the inflation measurements was an 'overstatement.' So they took out housing prices and introduced it with rents, as rents tend to be more stable. During the 80's, a chain-weighted CPI was added to one of the metrics. And during the 90's, they introduced a metric called 'Hedonic Adjustments' and 'Substitutions.' The Fed is doing all the same things they've done in the past, and yet inflation can barely budge, which is very suspect. If I am right, real inflation is very close to where it was during the 1970's of 7 - 10%

I'm familiar with hedonic adjustments.

By the way, how do you define inflation? Inflation isn't measured as changes in expenditures.

The CPI doesn't really measure expenditures. That's a different deal. It measures average price changes. They update the basket to demonstrate any changes in expenditure metrics. The CPI aggregates the change in prices to measure up against the same standard of living. It's inconsequential whether or not American consumers can afford the new levels. In the event we can't afford it, we call that a declining standard of living.

Forex is just one of the things I do, but I also work in the commodities and stock market with general exposure to Foreign and Emerging Markets. I don't have a license to issue securities. I don't see how that would be boring. Sounds like a fun gig to me. Easy sure, but fun.

That's really cool. I always liked FOREX, but you can't half ass it. I have a few Slovakian friends who make their living on FOREX. These dudes work 16 hour days, constantly glued to the monitor, looking at Aussie dollars, selling Kronas, buying this or that currency for some client. It's insane.

Suit yourself. I am anxious to see where Gold is going to go once the FED starts to taper, and Helicopter Ben realises that he is the cause of what he is trying to prevent.

It depends. I've been like 75% accurate on my gold calls. I came in like $200 under what I thought the high would be a year or so ago. I think like all bubbles it will eventually pop. I trade gold through ETFs, I don't physically own any

I am a Brit, so July of 4th is only an American phenomenon. But thank you all the same.

England is a great country. I've been there like four times. In my opinion, and this may sound crazy, I don't particularly like London or the bigger cities. The real awesome places are the English countryside and the smaller cities. I like Newcastle and Stoke-on-Trent.

I didn't ignore the trade deficit post, it's going to require some thought before I go into one of my diatribes. I also drank one too many at a family BBQ. Irish whiskey, damn you to hell!

 

[Toro]

Kyle Bass has made his clients a lot of money.

 

[Toro]

... Central banks have been built on financial crises, with each major tremor expanding their role. And today's economic convulsions foreshadow more changes to come at the Fed.

If it wasn't for crises, central banks might not exist. In Britain, after years of civil war and the ouster of King James by William III in 1688, the country's public finances were in tatters, with tax collection falling short of what the government needed to pay its bills and lenders unsure about the stability of the government. The Bank of England, one of the first central banks and for centuries the most important one, was founded in 1694 to purchase government debt and curtail the funding crisis.

The establishment of the Bank of England came at the beginning of a great societal shift, when new ideas were challenging old doctrines, and rising world trade was giving new power to merchant classes. But the expansion in commerce and banking also made financial crises more prevalent. Speculative bubbles led to spectacular market crashes.

"The Bank of England received heavy criticism in many of the crises of the 19th century when it didn't act fast enough," says Rutgers University economic historian Michael Bordo. "It learned to be lender of last resort." ...

But for much of the 19th century and into the 20th, the U.S. had no central bank. Many Americans feared that nothing good could come from one bank wielding so much power. In 1816, a central bank to help fund government finances that had been badly depleted by the War of 1812 was established. In his 1832 veto of the extension of the bank's charter, President Andrew Jackson wrote that "Great evils...flow from such a concentration of power in the hands of a few men irresponsible to the people."

While financial crises in England diminished through the 19th century, they were a regular feature of American life.

"Crises are much more frequent when we don't have a central bank," says New York University Stern School economic historian Richard Sylla. With nobody willing to step into the fray when borrowers ran into trouble, small credit-market problems could easily spin into major ones.

The turning point came in 1907. The availability of credit was tight throughout the world that year, and that October, a speculative attempt to corner the stock of United Copper Co. failed. That sparked a run on the deposits of Knickerbocker Trust Co., which had helped fund the scheme, eventually leading to the firm's collapse. John Pierpont Morgan, the giant of American finance, took on the role of lender of last resort.

Struggling with a bad cold, sleep-deprived and sustaining himself with little more than cigars, Morgan put up millions of his firm's money to avert the crisis and cajoled other bankers into doing the same. In a famous incident, Morgan gathered a throng of bankers and trust executives in his library on the evening of Nov. 3, locking the doors and not opening them until 4:45 the next morning, after the men had agreed to take part in a $25 million loan.

The Panic of 1907 helped push aside longstanding worries over the economic power concentrated in an American central bank, and in 1913 the Federal Reserve Act was passed....

Central Banks Are Creatures of Financial Crises - WSJ.com

I can only assume that this is directed towards me, but only due to the fact that you enjoy singling me out.

As for Richard Sylla, that is his personal opinion I believe. Up until 1913, the United States has been off and on a Central Banking system and there have been crises on and off. I try to use international examples in my economical standpoints.

You had asked about economic volatility.

I agree with Kimura on Schiff. I've made A LOT of money on the long side of gold for many years, and IMHO, gold bugs will slaughter you on the downside because to them, gold is a religion and an ideology. I don't know Schiff but its my impression he is just another run of the mill gold bug.

I think much higher of Bass. I think he is ultimately right on his yen trade.

FTR, IMHO the Fed has been screwing up the economy for 15+ years, going back at least to 1998 and the bailout of LTCM. So after the tech bubble then the housing debacle, there is another big leg down, driven probably by a currency crisis. However, I've been in markets too long to believe I have all the answers. And the way the market is acting - gold collapsing and stocks soaring - one can reasonably argue that Bernanke is right and I am wrong. That may ultimately be a head fake, but it may not. And if its not, then those who are long "hyperinflation" are going to get carried out.

 

[Kimura]

Trade deficit does devalue a nation's currency. You have also overlooked a few things, but to see this we must start with some basic ideas.

If a country whats what you produce, then it needs your currency. Exporting creates an international demand for your currency as well as the demand for the goods and services of the foreign businesses. If you are purchasing your foreign car from a local dealer, this means your car has already been exported. This contributes to the nation's current account deficit, as the product was exported to your country for final sale.

<snip>.....

Again, you're looking at this from a fixed exchange perspective in my opinion. We live in a world of floating exchange rates which is far superior. Any type of imbalances, which you articulated, are resolved through the overall price of the currency fluctuating. We use domestic policy strategies, such as fiscal policy and the FED, to target the domestic policy agenda knowing that any exchange rate issues with any and all currency imbalances as a manifestation of trade surpluses, trade deficits, etc. ad infinitum.

Any country which runs a trade surplus is running a risk inherent in accruing fiat foreign currency. When a country runs a trade surplus, real goods and services are leaving the country in return for a questionable ability to import in the future, and through an agreement to export down the road at prices which is acceptable to countries in the foreign sector holding its currency. If the US, for example, was to suddenly slap a tax on exports, the foreign sector's purchasing power would ultimately become reduced.

We're still act as if we're on a gold standard. This drives the me insane on a daily basis.

 

[Kimura]

Central Banks Are Creatures of Financial Crises - WSJ.com

I can only assume that this is directed towards me, but only due to the fact that you enjoy singling me out.

As for Richard Sylla, that is his personal opinion I believe. Up until 1913, the United States has been off and on a Central Banking system and there have been crises on and off. I try to use international examples in my economical standpoints.

You had asked about economic volatility.

I agree with Kimura on Schiff. I've made A LOT of money on the long side of gold for many years, and IMHO, gold bugs will slaughter you on the downside because to them, gold is a religion and an ideology. I don't know Schiff but its my impression he is just another run of the mill gold bug.

I think much higher of Bass. I think he is ultimately right on his yen trade.

FTR, IMHO the Fed has been screwing up the economy for 15+ years, going back at least to 1998 and the bailout of LTCM. So after the tech bubble then the housing debacle, there is another big leg down, driven probably by a currency crisis. However, I've been in markets too long to believe I have all the answers. And the way the market is acting - gold collapsing and stocks soaring - one can reasonably argue that Bernanke is right and I am wrong. That may ultimately be a head fake, but it may not. And if its not, then those who are long "hyperinflation" are going to get carried out.

I lumped Bass in with Schiff, Rogers, Forbes, etc. because of his kooky views on macro and monetary operations.

Last time I saw Bass on TV he was meandering on about the huge bust that's going to hit Japan, that they can't avoid a bond market crisis, hyperinflation, a default, etc..

People have been making the identical, misinformed, predictions about Japan for 20+ years, even though Japan's debt is 3X's that of US yields on 10yr Japanese Government Bonds. Even more damning, Japan's inflation rate is absolute ZERO, and the Yen has been so strong that the Japanese central bank had to intervene to lower it which has even worked out that well.

Japan, as a sovereign currency issuer, just like the US, can never default or become insolvent. They can always service debt by issuing Yen.

It never ceases to amaze me how guys like Bass and Schiff can con investors into handing over massive amounts of money for them to invest.

Yeah, I do agree, gold bugs will commit mass murder on the downside. It's like watching a train wreck in slow motion and cringing at the bodies being mangled.

 

[Toddsterpatriot]

Hyperinflation isn't a possibility in the United States, barring having our industrial capacity wiped out, massive civil war and/or corruption, and most importantly, having debts denominated in another currency other than the dollar. If, for example, our "public debt" was denominated in Euros or Yen, that would be a problem.

It might be a problem if it were the Yen. Not really so much regarding the Euro. The Euro is still trading near all-time highs against the Dollar. For what reason, I don't know, but mostly due to the monetary policy the ECB has decided to pursue, or rather, not pursue. Aside from this, there really isn't much of a demand for Euros and the economic strength of the Euro-Zone is still relatively weak. Despite this, the Euro-Zone is one of the few economies committed to a strong currency.

Aside from this, the United States has already experienced hyperinflation once. Certainly can be a possible scenario in the future but I believe Stagflation is more likely to happen.

He wasn't the only person prognosticating about the real estate bubble. I was concerned at the same time as Peter Schiff, other economists were ringing alarm bells as well. His investment advice was based on his ignorance of monetary operations and macroeconomics. I'm being fair, idiotic was a bit too strong.

There are those who have predicted a downturn, after the fact. And there are those who have predicted a recession, just a small slowdown. And there are those who just flat out denied it. I am aware there are those who have called it right, but I haven't seen to many who have called it the same way Schiff has down it.

And his investment strategy is almost identical to mine: Abroad diversification on foreign stocks, assets, ETF, currencies and commodities. By his own admission, during the financial crisis his portfolio has dropped over 50% during 2008. But if you look at some of assets on one of his former accounts, you would see that it would have done well today had this individual still was a client. It's very difficult to actually know how particular brokers are doing performance wise. It's against SEC regulations for us to discuss account performance.



That is very easy to say now. It know longer has to play by the same rules. Other modern economies do not have to play by the same rules. And when the US economy is forced to face reality, it bends the rules on it's own. Pretty soon, there is going to be an addition metric on how GDP is calculated all in the name of making the economy appear to be growing, when really it's not.

And I too believe that the government is going broke (not that it is not already broke). This is by the Government's own admission. Any neglect to actually raise the debt ceiling means that the largest economy in the world will default on a $3 million dollar treasury. I believe that the Government will default sooner or later. It can continue to lie to itself forever, but it can't distort financial markets forever.



During the 70's politicians were concerned that the inflation measurements was an 'overstatement.' So they took out housing prices and introduced it with rents, as rents tend to be more stable. During the 80's, a chain-weighted CPI was added to one of the metrics. And during the 90's, they introduced a metric called 'Hedonic Adjustments' and 'Substitutions.' The Fed is doing all the same things they've done in the past, and yet inflation can barely budge, which is very suspect. If I am right, real inflation is very close to where it was during the 1970's of 7 - 10%



Forex is just one of the things I do, but I also work in the commodities and stock market with general exposure to Foreign and Emerging Markets. I don't have a license to issue securities. I don't see how that would be boring. Sounds like a fun gig to me. Easy sure, but fun.




If wages are rising faster than the cost of goods and services, there is really nothing wrong with that. Today, the cost of living is either rising by the same amount or is rising faster, and this is bad. Contrary to popular belief, lots of good things happen when deflation happens. Corporation empires were built on making sure goods and services were affordable to the common man, which means falling prices.



The average income earners are generally middle statistical category and if your middle class is growing then the median income will be higher in a future point in history, whether you adjust it for inflation or not. It's really not telling you much to be honest.



Trade deficit does devalue a nation's currency. You have also overlooked a few things, but to see this we must start with some basic ideas.

If a country whats what you produce, then it needs your currency. Exporting creates an international demand for your currency as well as the demand for the goods and services of the foreign businesses. If you are purchasing your foreign car from a local dealer, this means your car has already been exported. This contributes to the nation's current account deficit, as the product was exported to your country for final sale.

Contrast, if you are purchasing the foreign object from another country, it has yet to be delivered to you. If this asset requires shipping, this contributes to the nation's (your nation) capital account surplus. In a way you are essential participating in Forex or Currency Exchange. Engaging in a cross borders payment, you buy Euros in exchange for dollars (through a medium like paypal or something), you send Euros and they send the automobile that you want. The basic idea still applies. You want what another country has. The other country only accepts Euros. You purchase the Euros so you can purchase the automobile.

The things you are trying to describe are really different. Exporting creates an international demand for your currency. The more you export, the more people want and desire your currency. This essentially increases the value of your currency relative to other nations. This makes imports to their country more expensive, and exports to your country relatively cheap. As a result, they are forced to export more to keep the rate of exchange relatively stable.

So contrary, if no one wants what you sell, no one needs your currency. Your currency will remain relatively weak, and if you run a trade deficit it can potentially devalue your nation's current. Although, it doesn't mean that trade deficits are all bad, and vice versa for trade surpluses. It all varies from country to country. Economies like China and Japan rely very heavily on exporting, and this are forced to purchase US Treasuries in order to keep their currency relatively low. Strong Currencies like Australia, New Zealand, Singapore, and South Korea have to cut rates in order to keep the US Dollar strong relative to theirs. We've already seen record low rate cuts from three out of four of these nations just recently, as it is the only way they can keep selling exports.

Getting back to the Capital Account example, you are technically correct. Inflows in the country means that the a person has a bank deposit and that the investor has a Treasury (a financial asset, I guess). This increases your capital account surplus, but these are not to be confused with earnings. Inflows of the capital account could be transfers, debt forgiveness or in your case, borrowings. This doesn't take away from the fact that this money has to be paid back later in the future. These borrowings actually turn into earnings for the foreign investor.

As a result, this turns into actual earnings for the foreign investor, which gives the foreign country a legit capital account surplus. Capital flows out of the American economy, which gives america a capital account deficit, which is still harmful for our balance of payments and makes America the largest debtor nation in the world.



Not really a Paul fan. I like his son more, but I think these people know more than you give them credit for. But I know Peter is always up for a challenge. Why don't you give him a call?



That is if your investors are willing to take redemption in a currency that is worthless reserve notes. I do not believe they are. That is a current concern for everyone, even the head honchos at the Fed. Despite the fact that they are willing to cook the inflationary books.

I'll stick with cash and equities.

Suit yourself. I am anxious to see where Gold is going to go once the FED starts to taper, and Helicopter Ben realises that he is the cause of what he is trying to prevent.

Oh yeah, Happy 4th!

I am a Brit, so July of 4th is only an American phenomenon. But thank you all the same.

If I am right, real inflation is very close to where it was during the 1970's of 7 - 10%

Wow, what makes you feel it is 7-10%?

 

[Toro]

I can only assume that this is directed towards me, but only due to the fact that you enjoy singling me out.

As for Richard Sylla, that is his personal opinion I believe. Up until 1913, the United States has been off and on a Central Banking system and there have been crises on and off. I try to use international examples in my economical standpoints.

You had asked about economic volatility.

I agree with Kimura on Schiff. I've made A LOT of money on the long side of gold for many years, and IMHO, gold bugs will slaughter you on the downside because to them, gold is a religion and an ideology. I don't know Schiff but its my impression he is just another run of the mill gold bug.

I think much higher of Bass. I think he is ultimately right on his yen trade.

FTR, IMHO the Fed has been screwing up the economy for 15+ years, going back at least to 1998 and the bailout of LTCM. So after the tech bubble then the housing debacle, there is another big leg down, driven probably by a currency crisis. However, I've been in markets too long to believe I have all the answers. And the way the market is acting - gold collapsing and stocks soaring - one can reasonably argue that Bernanke is right and I am wrong. That may ultimately be a head fake, but it may not. And if its not, then those who are long "hyperinflation" are going to get carried out.

I lumped Bass in with Schiff, Rogers, Forbes, etc. because of his kooky views on macro and monetary operations.

Last time I saw Bass on TV he was meandering on about the huge bust that's going to hit Japan, that they can't avoid a bond market crisis, hyperinflation, a default, etc..

People have been making the identical, misinformed, predictions about Japan for 20+ years, even though Japan's debt is 3X's that of US yields on 10yr Japanese Government Bonds. Even more damning, Japan's inflation rate is absolute ZERO, and the Yen has been so strong that the Japanese central bank had to intervene to lower it which has even worked out that well.

Japan, as a sovereign currency issuer, just like the US, can never default or become insolvent. They can always service debt by issuing Yen.

It never ceases to amaze me how guys like Bass and Schiff can con investors into handing over massive amounts of money for them to invest.

Yeah, I do agree, gold bugs will commit mass murder on the downside. It's like watching a train wreck in slow motion and cringing at the bodies being mangled.

The reason why people hand their money over to Kyle Bass is because he's made them a lot of money over the years. He's been right on many things, not just gold. There's no doubt that Bass is very much in the bullish camp on gold, but there are also a lot of people on Wall Street who agree with him that inflation is probably the end game, if not hyperinflation.

I also agree with him on Japan, I just don't agree with him on his timing. The trade is short yen, short the long end of the JGB curve, and long long-dated JGB vol. That has been a very successful trade thus far. I think Japan is fucked without serious structural reform. Tax revenues cover social security payments, interest payments on the debt, and that's it. That doesn't mean Japan will formally default but it's not a happy cocktail when your population, your savings rate and your trade surplus are all declining. That people haven't made money on Japan over 20 years doesn't mean they won't in the next 10. I don't know how many times I heard "Housing hasn't gone down in 60 years" pre-2008. The convexity is, or at least was, absolutely enormous.

 

[Kimura]

You had asked about economic volatility.

I agree with Kimura on Schiff. I've made A LOT of money on the long side of gold for many years, and IMHO, gold bugs will slaughter you on the downside because to them, gold is a religion and an ideology. I don't know Schiff but its my impression he is just another run of the mill gold bug.

I think much higher of Bass. I think he is ultimately right on his yen trade.

FTR, IMHO the Fed has been screwing up the economy for 15+ years, going back at least to 1998 and the bailout of LTCM. So after the tech bubble then the housing debacle, there is another big leg down, driven probably by a currency crisis. However, I've been in markets too long to believe I have all the answers. And the way the market is acting - gold collapsing and stocks soaring - one can reasonably argue that Bernanke is right and I am wrong. That may ultimately be a head fake, but it may not. And if its not, then those who are long "hyperinflation" are going to get carried out.

I lumped Bass in with Schiff, Rogers, Forbes, etc. because of his kooky views on macro and monetary operations.

Last time I saw Bass on TV he was meandering on about the huge bust that's going to hit Japan, that they can't avoid a bond market crisis, hyperinflation, a default, etc..

People have been making the identical, misinformed, predictions about Japan for 20+ years, even though Japan's debt is 3X's that of US yields on 10yr Japanese Government Bonds. Even more damning, Japan's inflation rate is absolute ZERO, and the Yen has been so strong that the Japanese central bank had to intervene to lower it which has even worked out that well.

Japan, as a sovereign currency issuer, just like the US, can never default or become insolvent. They can always service debt by issuing Yen.

It never ceases to amaze me how guys like Bass and Schiff can con investors into handing over massive amounts of money for them to invest.

Yeah, I do agree, gold bugs will commit mass murder on the downside. It's like watching a train wreck in slow motion and cringing at the bodies being mangled.

The reason why people hand their money over to Kyle Bass is because he's made them a lot of money over the years. He's been right on many things, not just gold. There's no doubt that Bass is very much in the bullish camp on gold, but there are also a lot of people on Wall Street who agree with him that inflation is probably the end game, if not hyperinflation.

I also agree with him on Japan, I just don't agree with him on his timing. The trade is short yen, short the long end of the JGB curve, and long long-dated JGB vol. That has been a very successful trade thus far. I think Japan is fucked without serious structural reform. Tax revenues cover social security payments, interest payments on the debt, and that's it. That doesn't mean Japan will formally default but it's not a happy cocktail when your population, your savings rate and your trade surplus are all declining. That people haven't made money on Japan over 20 years doesn't mean they won't in the next 10. I don't know how many times I heard "Housing hasn't gone down in 60 years" pre-2008. The convexity is, or at least was, absolutely enormous.

Hyperinflation is much more than a monetary phenomenon. I see the potential for deflation in the US, especially if austerity is pursued. If we were at full employment and the the economy was at full capacity, then I'd worry about inflation. However, with this large output gap and all our excess capacity and labor, how can inflation even be a possibility?

Tax revenues aren't needed to finance federal expenditures, whether it's social security or interest on US debt. Operationally, taxes regulate aggregate demand and create demand for the national money of account. The government utilizes taxes to obtain resources needed by the government so to speak. At the end of the day, taxes are required to get the domestic private sector to trade its real goods and services for the national money of account (USD, Yen, etc.) needed to pay taxes. If we look at this from the government side of things, it boils down to price times quantity is equal to revenue.

Japan doesn't need structural reform. They'll be fine, contrary to Kyle's batshit theories. I personally think they should pursue full employment as a national policy as should the United States for starters. This using unemployment to control inflation insanity is running its course to a destabilizing end for society as a whole.

 

[Foxfyre]

Just as Ross Perot had some good ideas that got lost in the wake of his nutty side coming out, so Ron Paul has some good ideas that also get lost in the wake of his more eccentric side coming out. But Ron Paul's constant drum beat of ending the Fed is attracting more and more support as the monetary chaos we are currently experiencing can be placed squarely in the hands of a government that has attempted to micromanage the economy while turning the management of the currency over to the Fed and giving it 100% free rein to do whatever the hell it wants to do.

I have been reading the take of a Damon Vrabel who I am becoming increasingly impressed with. From a couple of years ago:

. . . .Some of the founders understood that without a controlled currency, private banking institutions could profit massively off whipsawing the people, which is why Article 1 Section 8 of the Constitution says the government should regulate the value of the currency. But of course we know this pro doesn&#8217;t apply to the Fed structure because the most extreme periods of economic turmoil have happened since it was created.
Central Banking vs. The Republic and the World

And as those chickens have now come home to roost (summarized from the same article):

1. Basing a currency on nothing but interest-bearing debt as the Fed system does creates the need for perpetual exponential growth Unfortunately exponential growth systems are doomed to crash as we have seen in Greece and other debt laden nations. The USA is at that critical tipping point now.

2. Oligarchic monetary systems tend toward a 2-tiered society, money pushing rulers vs. money using servants who scramble to pay the rulers back plus interest. The ruling financial class eventually takes over the productive economy and then parasitically destroys the host upon which it lives as gambling and speculation replace savings and production as the engine of growth.

3. A debt-based monetary system enshrines usury, i.e. living off the backs of others by doing nothing but subjugating a population to systemic interest-bearing debt.

4. and, an oligarchic monetary system forces the great mass of the population into servitude and erodes individual liberties and freedoms.

 

[Toro]

I lumped Bass in with Schiff, Rogers, Forbes, etc. because of his kooky views on macro and monetary operations.

Last time I saw Bass on TV he was meandering on about the huge bust that's going to hit Japan, that they can't avoid a bond market crisis, hyperinflation, a default, etc..

People have been making the identical, misinformed, predictions about Japan for 20+ years, even though Japan's debt is 3X's that of US yields on 10yr Japanese Government Bonds. Even more damning, Japan's inflation rate is absolute ZERO, and the Yen has been so strong that the Japanese central bank had to intervene to lower it which has even worked out that well.

Japan, as a sovereign currency issuer, just like the US, can never default or become insolvent. They can always service debt by issuing Yen.

It never ceases to amaze me how guys like Bass and Schiff can con investors into handing over massive amounts of money for them to invest.

Yeah, I do agree, gold bugs will commit mass murder on the downside. It's like watching a train wreck in slow motion and cringing at the bodies being mangled.

The reason why people hand their money over to Kyle Bass is because he's made them a lot of money over the years. He's been right on many things, not just gold. There's no doubt that Bass is very much in the bullish camp on gold, but there are also a lot of people on Wall Street who agree with him that inflation is probably the end game, if not hyperinflation.

I also agree with him on Japan, I just don't agree with him on his timing. The trade is short yen, short the long end of the JGB curve, and long long-dated JGB vol. That has been a very successful trade thus far. I think Japan is fucked without serious structural reform. Tax revenues cover social security payments, interest payments on the debt, and that's it. That doesn't mean Japan will formally default but it's not a happy cocktail when your population, your savings rate and your trade surplus are all declining. That people haven't made money on Japan over 20 years doesn't mean they won't in the next 10. I don't know how many times I heard "Housing hasn't gone down in 60 years" pre-2008. The convexity is, or at least was, absolutely enormous.

Hyperinflation is much more than a monetary phenomenon. I see the potential for deflation in the US, especially if austerity is pursued. If we were at full employment and the the economy was at full capacity, then I'd worry about inflation. However, with this large output gap and all our excess capacity and labor, how can inflation even be a possibility?

Tax revenues aren't needed to finance federal expenditures, whether it's social security or interest on US debt. Operationally, taxes regulate aggregate demand and create demand for the national money of account. The government utilizes taxes to obtain resources needed by the government so to speak. At the end of the day, taxes are required to get the domestic private sector to trade its real goods and services for the national money of account (USD, Yen, etc.) needed to pay taxes. If we look at this from the government side of things, it boils down to price times quantity is equal to revenue.

Japan doesn't need structural reform. They'll be fine, contrary to Kyle's batshit theories. I personally think they should pursue full employment as a national policy as should the United States for starters. This using unemployment to control inflation insanity is running its course to a destabilizing end for society as a whole.

Why are Bass's theories about Japan batshit?

- Tax revenue accounts for (IIRC) less than 50% of total expenditures
- Tax revenues cover social security payments and interest payments, or near to it. Everything else is funded by borrowing or selling assets
- The savings rate has declined from 20% to 2-3%
- The trade balance has been deteriorating
- The working population is declining. The total population will soon start declining if it hasn't already. Immigration is minimal.
- Japanese government pensions need higher returns. They are ~75% invested in JGBs.

Japan doesn't have to blow up for a short yen/short JGBs/long vol trade to pay off, given how cheap options were across the surface. The best case and most likely way out of that vice is ¥125-¥150. That still works as a trade.

 

[Kimura]

The reason why people hand their money over to Kyle Bass is because he's made them a lot of money over the years. He's been right on many things, not just gold. There's no doubt that Bass is very much in the bullish camp on gold, but there are also a lot of people on Wall Street who agree with him that inflation is probably the end game, if not hyperinflation.

I also agree with him on Japan, I just don't agree with him on his timing. The trade is short yen, short the long end of the JGB curve, and long long-dated JGB vol. That has been a very successful trade thus far. I think Japan is fucked without serious structural reform. Tax revenues cover social security payments, interest payments on the debt, and that's it. That doesn't mean Japan will formally default but it's not a happy cocktail when your population, your savings rate and your trade surplus are all declining. That people haven't made money on Japan over 20 years doesn't mean they won't in the next 10. I don't know how many times I heard "Housing hasn't gone down in 60 years" pre-2008. The convexity is, or at least was, absolutely enormous.

Hyperinflation is much more than a monetary phenomenon. I see the potential for deflation in the US, especially if austerity is pursued. If we were at full employment and the the economy was at full capacity, then I'd worry about inflation. However, with this large output gap and all our excess capacity and labor, how can inflation even be a possibility?

Tax revenues aren't needed to finance federal expenditures, whether it's social security or interest on US debt. Operationally, taxes regulate aggregate demand and create demand for the national money of account. The government utilizes taxes to obtain resources needed by the government so to speak. At the end of the day, taxes are required to get the domestic private sector to trade its real goods and services for the national money of account (USD, Yen, etc.) needed to pay taxes. If we look at this from the government side of things, it boils down to price times quantity is equal to revenue.

Japan doesn't need structural reform. They'll be fine, contrary to Kyle's batshit theories. I personally think they should pursue full employment as a national policy as should the United States for starters. This using unemployment to control inflation insanity is running its course to a destabilizing end for society as a whole.

Why are Bass's theories about Japan batshit?

Japan cannot go bankrupt or default. It's operationally impossible. As long as Japanese debt is denominated in Yen, Japan can service and pay its debt. It can issue as many Yen as it needs to meet obligations.

- Tax revenue accounts for (IIRC) less than 50% of total expenditures
- Tax revenues cover social security payments and interest payments, or near to it.

And? Japan issues the Yen. It doesn't need to collect back that which it freely issues to fund its expenditures. If governments kept adding massive amounts of spending without taxation we'd see inflation down the road.

Everything else is funded by borrowing or selling assets
- The savings rate has declined from 20% to 2-3%
- The trade balance has been deteriorating
- The working population is declining. The total population will soon start declining if it hasn't already. Immigration is minimal.
- Japanese government pensions need higher returns. They are ~75% invested in JGBs.

Japan doesn't have to blow up for a short yen/short JGBs/long vol trade to pay off, given how cheap options were across the surface. The best case and most likely way out of that vice is ¥125-¥150. That still works as a trade.

When you think about bonds, whether Japanese, US, UK, Canada, <insert>monetarily sovereign country</quote> we should view them as nothing more then an interest rate management tool.

Japan doesn't borrow, nor does the US. For example, let's say the Chinese decides to purchase US Treasuries. Where do the US dollars come from? At some point, the US government had the spend them into existence for the Chinese to even have them in a reserve account at the FED. The same holds true for Japanese bonds. The require Yen spent into existence by the Japanese government at some point.

Foreign ownership of debt doesn't mean a country has to act like a global pauper looking for investors. It boils down to trade. When a country runs a trade deficit, for example, it's spending more money on real goods and services from the foreign sector than the foreign sector is spending on real goods and services from that particular country.

At the end of the day, Japan&#8217;s spending must wind up in JGBs or as yen-denominated savings.

Sovereign government don't operate like households which is why Kyle Bass is dead wrong. His Japanese trades will NEVER pay off for him.

 

[oldfart]

I never put a timeline on it. I know what is going to happen, I cannot tell you when it is going to happen and I never claim to know exactly when we will have hyperinflation. But I also say that hyperinflation is not guaranteed, it is a worse-case scenario. I say that if we keep doing what we are doing, we will eventually have hyperinflation. But I have also said that I do not think we are going to keep doing what we are doing. I think the spectre of hyperinflation once it looms large enough will force central banks to reverse policy.

OK, I admit to almost pulling the trigger here on my pre-packaged rant on hyperinflation predictions, but you clearly haven't drunk the Kool-Aid. Hyperinflation is a pretty rare phenomena, economic historians only agreeing on three clear cases in the last century (Germany 1923, Hungary 1946, Zimbabwe recently). As you put it, it is a "worse case scenario". I agree with Kimura's' "trifecta" that the pe-conditions make it impossible for to experience it in the foreseeable future. But high inflation short of hyperinflation could be devastating to the American economy, and that is very much possible. I don't want to quibble over words when I think we are in agreement on the substance.

The Big Mac index isn't such a great metric. There's some PPP issues there, but I digress.

Well, you don't believe the Big Mac index is great, and I don't believe the CPI is great. As long as we can both take either with a grain of salt and not herald one over the other as a 'be-all-end-all' metric, that is fine....As you can see, prices were in perfectly alignment with the CPI, until the mid-2000's. I believe the CPI has been changed to understate it's inflation and should be taken with a grain of salt.

I think we all are on regarding measuring inflation, I just note that independent efforts, like the Billion Price Index track CPI very closely and that for all the nitpicking, no alternative to CPI has eally emerged.

The day of reckoning is generally when the investors stop buying US debt. Interest rates are already starting to rise much sooner surprisingly, and through no fault of the Federal Reserve. So I wouldn't count Peter Schiff out just yet.

I'm puzzled by the comment on recent interest rates. There was a clear selloff after the Fed comments on QE, Where else do you see rising interest rates?

 

[Toro]

[Japan cannot go bankrupt or default. It's operationally impossible. As long as Japanese debt is denominated in Yen, Japan can service and pay its debt. It can issue as many Yen as it needs to meet obligations.

Of course Japan can default. They decide one day that they don't want to pay back their debt, and voila! they've defaulted. It's very simple. Whether or not they want to is another question.

Sovereign government don't operate like households which is why Kyle Bass is dead wrong. His Japanese trades will NEVER pay off for him.

His trades already are paying for him. I thought I read somewhere that you were in the bond market. If you are, sell long-dated JGB interest rate swaptions then. How can you go wrong?

 

[Kimura]

[Japan cannot go bankrupt or default. It's operationally impossible. As long as Japanese debt is denominated in Yen, Japan can service and pay its debt. It can issue as many Yen as it needs to meet obligations.

Of course Japan can default. They decide one day that they don't want to pay back their debt, and voila! they've defaulted. It's very simple. Whether or not they want to is another question.

Why would they do that? They're not Greece or Spain where they ceded monetary sovereignty to the ECB. They have a central and a treasury, they can issue as much Yen as they need. Any default would have to be voluntary which is what I think you're suggesting.

His trades already are paying for him. I thought I read somewhere that you were in the bond market. If you are, sell long-dated JGB interest rate swaptions then. How can you go wrong?

Um, last time I checked, back in April, Bass bet big against JGBs (he probably chucked his clients money into that trade). JGBs have risen, with the yield collapsing on the 10Yr JGB down to 0.5% in April. Ouch. This is also a country with debt that's at 300% of GDP.

If he's shorting JGBs then he's a douche bag, and he's misleading investors. His entire thesis is based around a delusional debt collapse. That means an implosion in JGBs.

Yes, I'm a bond trader for UniCredit.