Our biggest problem is deflation - not inflation

[Toddsterpatriot]

If 1 $ of qe = $0.50 inflation. And 1 $ of helicopter money = $1.

Where did you see that 1 dollar of QE = $0.50 inflation?

 

[DarthTrader]

Where did you see that 1 dollar of QE = $0.50 inflation?

Your mom's vagina. It's really quite well documented. Perhaps start with the CATO document I sent you

 

[Toddsterpatriot]

It's really quite well documented. Perhaps start with the CATO document I sent you

Link it again.

 

[DarthTrader]

Link it again.

Reach for it with your tiny pecker. I'm at the gym

 

[Toro]

I have an Honours degree in economics and finance, and have been involved in the capital markets in various roles for nearly 30 years. I have an MBA and am a CFA. I have donated a wall of books on economics, finance and investments to my employer. I've lectured to Master's students and was offered a teaching position at a university.

I skimmed this branch. A few points

• Massive deficit spending is generally inflationary. Deficit spending increases both currency and demand so prices go up. That's a big reason why we have inflation now. Reducing deficit spending is not inflationary.
• Massive debt is generally deflationary. Too much debt limits growth, which limits price increases. Deficit spending increases the debt, so they are linked. But it is not necessarily the case that any year's deficit spending is deflationary.
• Fundamentally, deflation is a threat because of massive debt and also demographics. An older population is deflationary because they spend less and save more. But fiscal and monetary policy can overwhelm these fundamental issues.
• Deleveraging is deflationary, but America does not necessarily need to deleverage. We don't know what level of debt requires deleveraging. "Debt" includes not just government debt, but also corporate and consumer debt relative to GDP.
• What matters to currencies is not debt or deficits but interest rates. Interest rate differentials between countries drive relative currency values.
• It is true that the level of debt will have an effect on interest rates, but it's not necessarily true that high inflation means high interest rates. Today, the 10 year is at 2.9% and inflation is 8.5%. The last time inflation was at 8.5%, the 10 year was at 13%. What matters is inflation expectations.
• That 1987 GAO report is in the context of that time. It's not a general theory of inflation.
• Treasury bonds are currently considered the safest assets in markets. They are used as collateral in the repo markets, whose interest rates are used as benchmarks for all sorts of credit markets.
• Treasuries owned by the Federal Reserve are assets. They will not be falling by 90%. Nobody thinks this way. Or at least nobody who matter in markets.
• Gold does not matter as a monetary asset of the Federal Reserve. I've made $50 million for my employer trading gold. I love gold. But I'm not a gold bug. Gold is a commodity. It is not an ideology nor a religion. It was money up until the 1920s but it is no longer, and never will be again. Looking at the monetary system through a gold lens is so 100 years ago.
• Banks are not capitalized with gold, including the 12 Federal Reserve banks.
• The value of Treasuries would rise, not fall, if the US government balanced it's books. That's because investors would have more confidence in the creditworthiness of the US government, and bond prices would rally.
• The US Treasury does not give the Federal Reserve dollars. Dollars are created by the Federal Reserve.
• We are not on the edge of a depression. Growth remains strong.
• The US dollar is the global reserve currency because of the dynamism of the American economy, the transparency of the US banking system, the convertibility of the US dollar, the rule of law, and the American military. No economy on earth comes close to matching the US on all of these. Thus, the US dollar will continue to be the global reserve currency for a long time to come. However ...
• I am sympathetic to arguments that massive government deficits and massive Fed stimulus could create a currency crisis. That probability is still not likely, but it is a non-zero event, and much higher than it was three years ago.

 

[Toddsterpatriot]

Reach for it with your tiny pecker. I'm at the gym

Gonna take it up the ass in the locker room again?

 

[DarthTrader]

Gonna take it up the ass in the locker room again?

So now you hate gays? Lol

 

[Toddsterpatriot]

So now you hate gays? Lol

Nah, you're awesome!

Not very bright though.

 

[DarthTrader]

I have an Honours degree in economics and finance, and have been involved in the capital markets in various roles for nearly 30 years. I have an MBA and am a CFA. I have donated a wall of books on economics, finance and investments to my employer. I've lectured to Master's students and was offered a teaching position at a university.

I skimmed this branch. A few points

• Massive deficit spending is generally inflationary. Deficit spending increases both currency and demand so prices go up. That's a big reason why we have inflation now. Reducing deficit spending is not inflationary.
• Massive debt is generally deflationary. Too much debt limits growth, which limits price increases. Deficit spending increases the debt, so they are linked. But it is not necessarily the case that any year's deficit spending is deflationary.
• Fundamentally, deflation is a threat because of massive debt and also demographics. An older population is deflationary because they spend less and save more. But fiscal and monetary policy can overwhelm these fundamental issues.
• Deleveraging is deflationary, but America does not necessarily need to deleverage. We don't know what level of debt requires deleveraging. "Debt" includes not just government debt, but also corporate and consumer debt relative to GDP.
• What matters to currencies is not debt or deficits but interest rates. Interest rate differentials between countries drive relative currency values.
• It is true that the level of debt will have an effect on interest rates, but it's not necessarily true that high inflation means high interest rates. Today, the 10 year is at 2.9% and inflation is 8.5%. The last time inflation was at 8.5%, the 10 year was at 13%. What matters is inflation expectations.
• That 1987 GAO report is in the context of that time. It's not a general theory of inflation.
• Treasury bonds are currently considered the safest assets in markets. They are used as collateral in the repo markets, whose interest rates are used as benchmarks for all sorts of credit markets.
• Treasuries owned by the Federal Reserve are assets. They will not be falling by 90%. Nobody thinks this way. Or at least nobody who matter in markets.
• Gold does not matter as a monetary asset of the Federal Reserve. I've made $50 million for my employer trading gold. I love gold. But I'm not a gold bug. Gold is a commodity. It is not an ideology nor a religion. It was money up until the 1920s but it is no longer, and never will be again. Looking at the monetary system through a gold lens is so 100 years ago.
• Banks are not capitalized with gold, including the 12 Federal Reserve banks.
• The value of Treasuries would rise, not fall, if the US government balanced it's books. That's because investors would have more confidence in the creditworthiness of the US government, and bond prices would rally.
• The US Treasury does not give the Federal Reserve dollars. Dollars are created by the Federal Reserve.
• We are not on the edge of a depression. Growth remains strong.
• The US dollar is the global reserve currency because of the dynamism of the American economy, the transparency of the US banking system, the convertibility of the US dollar, the rule of law, and the American military. No economy on earth comes close to matching the US on all of these. Thus, the US dollar will continue to be the global reserve currency for a long time to come. However ...
• I am sympathetic to arguments that massive government deficits and massive Fed stimulus could create a currency crisis. That probability is still not likely, but it is a non-zero event, and much higher than it was three years ago.

Toro I'm on my phone and can't reply to you properly but I can give you paper after paper from central bank after central bank that says you're wrong about gold being just a commodity.

It's an asset (regardless if it's a commodity) and the Federal Reserve owns theirs at about $42 bucks. Quite the capital gain.

The treasury if ever to take possession of the Fed reserve balance sheet would let gold rise against the federal reserve note

 

[Toro]

Toro I'm on my phone and can't reply to you properly but I can give you paper after paper from central bank after central bank that says you're wrong about gold being just a commodity.

It's an asset (regardless if it's a commodity) and the Federal Reserve owns theirs at about $42 bucks. Quite the capital gain.

The treasury if ever to take possession of the Fed reserve balance sheet would let gold rise against the federal reserve note

I am long and strong commodities right now, particularly oil. I also own copper, but am waiting for it to fall before loading up the boat again. I owned gold and silver until a few weeks ago.

But a commodity can still be an asset and still be a commodity.

The Treasury cannot take possession of the Federal Reserve's balance sheet by law. The Fed is a separate legal entity.

 

[DarthTrader]

I am long and strong commodities right now, particularly oil. I also own copper, but am waiting for it to fall before loading up the boat again. I owned gold and silver until a few weeks ago.

But a commodity can still be an asset and still be a commodity.

The Treasury cannot take possession of the Federal Reserve's balance sheet by law. The Fed is a separate legal entity.

I belive gold here is short term weak but medium term very very likely to 1.5x or 2x.

Look at the behavior in every other big liquidity draw down.

Ever read the paper "The behaviour of gold in deflation."?

Look it up. Gold does well when inflation accelerates. It pulls back at the peak. Then does even better in deflationary environs

 

[DarthTrader]

I am long and strong commodities right now, particularly oil. I also own copper, but am waiting for it to fall before loading up the boat again. I owned gold and silver until a few weeks ago.

But a commodity can still be an asset and still be a commodity.

The Treasury cannot take possession of the Federal Reserve's balance sheet by law. The Fed is a separate legal entity.

The treasury would take possession of the Fed Balance sheet in the event that the Congress removed the Fed charter. I just don't enumerate every step.

I'm less interested in if that would ever happen (doubtful) and rather that it articulates what happens if it does. Because gold very much is still a kind of money at the national level.

 

[Toro]

I belive gold here is short term weak but medium term very very likely to 1.5x or 2x.

Look at the behavior in every other big liquidity draw down.

Ever read the paper "The behaviour of gold in deflation."?

Look it up. Gold does well when inflation accelerates. It pulls back at the peak. Then does even better in deflationary environs

The case for gold during deflation is based on the 1930s when we had deflation. But gold outperformed during that time because its price was pegged. It was not a free market.

During liquidity withdrawals, gold declines because all risk assets decline. During the Global Financial Crisis, gold fell 25% peak to trough. (Silver fell 60%.) It fell during the pandemic panic in the first quarter of 2020.

Gold does well not when inflation increases but when the change in real interest rates expectations decreases. Real interest rate expectations have been rising. That's why gold has struggled over the past year or so.

 

[DarthTrader]

The case for gold during deflation is based on the 1930s when we had deflation. But gold outperformed during that time because its price was pegged. It was not a free market.

During liquidity withdrawals, gold declines because all risk assets decline. During the Global Financial Crisis, gold fell 25% peak to trough. (Silver fell 60%.) It fell during the pandemic panic in the first quarter of 2020.

Gold does well not when inflation increases but when the change in real interest rates expectations decreases. Real interest rate expectations have been rising. That's why gold has struggled over the past year or so.

The paper I refer to studies deflation through out the 60s to 90s. Well past the decoupling of gold standards aka price controls.

It's easier to think of gold as not a standard, but as a price controlled substance in the old way and now a market valued substance today. A country could back their currency by gourds.

Only gold has no political or credit risk or risk of decay "depreciation".

So it has that tangible value.

I like your statement on change in real interest rate expectations.


But that's hard to measure. I use wage increases as the base measure for that..everything else is opinion and even wage increases are, too.


Even if measured. I would want to review that. Because I'd argue that gold only does modestly well in inflationary periods anyway.

Most of the gold price movement in 1970s was well after FED began tackling with rate increases, peaking in end of 1980 if I recall. Did rather poorly with declining inflation expectations.

 

[DarthTrader]

I'd actually argue there's a stronger correlation to rising interest rate and falling dollar if anything...those events are very rare and gold does well in them.

 

[DarthTrader]

The case for gold during deflation is based on the 1930s when we had deflation. But gold outperformed during that time because its price was pegged. It was not a free market.

During liquidity withdrawals, gold declines because all risk assets decline. During the Global Financial Crisis, gold fell 25% peak to trough. (Silver fell 60%.) It fell during the pandemic panic in the first quarter of 2020.

Gold does well not when inflation increases but when the change in real interest rates expectations decreases. Real interest rate expectations have been rising. That's why gold has struggled over the past year or so.

As for liquidity draw downs you're only correct for the initial draw down. In every instance from say...pre 1987 crash or in Dec 2007 to mid 2008 etc. It drew down. But after. Woah what a pop. And that's because the liquidity draw downs eventually illicit a recapitalization response.

I would argue that the central banks are the principal drivers of gold buying after those liquidity draw downs. Not people flying to asset preservation. Those people are already in.

So gold usually takes off well before an equity bottom.

Peak yield is different. See the dollar-yield comment above. There's other tells there about when gold starts to perform. Again because I'd argue it goes back to the central banks view of gold as capital

 

[DarthTrader]

So for instance banks capitalized for a few years especially after covid and we saw how gold performed.

Now there's been a general drawdown in gold. Until r3cently money flow was mostly in, so weak buyers but not a sell off per say.

But the big buyers, central banks, don't have to buy gold right now.

They are unwinding their balance sheets already. The FED for instance is about to with QT

China sold over $1 trillion in US treasuries..etc.

So when we hit a recession and the central banks are forced to recapitalize. We'll see another run on gold.

Other extraneous factors are preventing gold pulling back Harder in this equity/bond draw down.


But I'm still short calling my gold. Nothing only goes up.

I'm short called on my oil as well. Way too many shorts put on for mid June for my comfort. In the money short calls.

Oil stocks tend to pull back in summer and this summer driving numbers are dismal