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His economic outlook is bleak, perhaps even moreso than Gross. With so many commentators suggesting investors hide in the bullrushes, pile up cash, be very afraid, etc., maybe it's time to consider being more aggressive? I'm not saying there are not real concerns out there, but that just maybe a truly diversified portfolio could be an ok option. His political comments are "interesting" but not something we want to get into here. However, they obviously have a big impact on his economic outlook.
A brilliant and successful manager. While I like reading his and others comments, I refuse to be guided by what they say and do. I continue to stand by my allocation and make no changes.
Right, BobC. Like the man said: be greedy when others are fearful. But at this stage of the game (i.e., recently retired and working at a new thing now) I'm content to hold about half-and-half bonds and equities. I must agree with his very bleak outlook---bleak for an extended period--- as during the Great Depression, which lasted a number of years until war production pulled us out, even before the USA was officially in the war. (And guess what? My wife passed her citizenship test yesterday. Congratulations to HER!)
It's worth noting that Grantham is not saying to run from stock--GMO's asset allocation is still close to its benchmark of 60% equities. Their recommendation though is stick to quality large cap stocks around the world. It's bonds that they avoid like the plague.
I think it's not necessarily "fearful" as much as "reasoned negative" - you believe his reasoning or not. Trying to be contrarian (which seems to be the desire a lot more when people are negative - when everyone's positive, everyone's a lot more happy to not question a thing ... hmmmm) does not always work. I do not agree with everything he says and will not change based upon it, but I do think that there's a lot to take from and some good points throughout. I completely agree with the negativity on bonds.
In theory, I believe you're on the right track re: negativity about bonds, particularly USA gov't and other developed countries. Low, low, low yields. And yet, it's difficult for me to feel much regret these days, holding PREMX over 40% of portfolio. The share price is down SOME since I started to buy into it, yes. The reduction in the share price is not inconsequential. But the dividends are substantial and steady. I have been reminded in here at MFO already that there is no safe haven anymore: the whole world is a lot smaller than before and there's nowhere to hide when things go south. Yet I have no need to seel those bond shares these days; I'm reinvesting and buying MORE shares, since the price per share has been falling......If someone else chose to hold onto their own bond fund shares and use the monthly div. for income, would that be so bad? The "loss" would be hypothetical, really.
Reply to @MaxBialystock: There are certainly pockets of the fixed income market that have a positive outlook going forward, but I am definitely concerned about the mid-to-long-term outlook for a lot of fixed income sectors. Additionally, it feels like so many investors have rushed in looking for ANY sort of yield that I think some sectors seem crowded.
"Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal."
Max: Point well taken. There are apparently no safe harbors.
Scott: I'm totally puzzled by your comment that Japan had to "resort to giving out gold coins to investors in its bonds". Those words would seem to suggest that Japan couldn't find people who would buy the bonds in yen alone. With Japan paying interest rates close to 1%, are you saying that Japan has any trouble finding buyers? On the contrary, isn't the demand virtually unlimited, and isn't this little gold commemorative coin simply a 1/3 of 1% "thank you" for buying our bonds if you hold them for three years? Interested in your thoughts: I probably don't understand what you meant.
Reply to @Ginko: Countries should not have to resort to nearly thousand-dollar thank yous, especially countries with Japan's financial situation. It does not mean that Japan has "run out of buyers", but the idea is that it may be the start of a trend (maybe Greece can give an acre of land with every bond purchase?).
I really do not think that demand for any country's bonds is "virtually unlimited" and while demand can go on longer than fundamentals would indicate, proceeding with a mindset that the demand for the asset (or any financial asset for that matter) is "virtually unlimited" is concerning on a number of levels. Again, there are no "safe harbors" and I think that's an investing mindset that will be valuable in the next decade.
Your response above were focused on whether demand for Japanese bonds might be less at some point in the future. I don't pretend to know the answer to that. Who would have thought that a 200% bond-to-GDP ratio, like Japan's is, would ever be possible? Yet it certainly is, at least for now.
My comments were only were taking exception to your linked article's claim that the coin bonus was only offered because the government was "desperate", fearing that it will not be able to sell its bonds, and that it was engaging in "monetary debasement". Do such arguments jive with the facts? After all: Demand for JGB's has actually strengthened in recent months; and even with the gold incentive, the proposed yield on the bond is only 0.05%, and the latest inflation rate is -0.2%.
(Is it even helpful to think of JGBs as government "debt", when 95% of the bonds are effectively domestic savings certificates?)
There are people on the Web who have been beating the drum of disaster for years with regard to Japan being on the verge of hyperinflation. What's disturbing is that they refuse to allow evidence to inform their theories.
I fully agree with you that it's prudent to take the approach that "there are no safe harbors" for investors in the coming years. But it's precisely because of that belief that I think we should not promote those who preach the quasi-religious doctrine that there is one, and only one, such safe harbor: gold.
I'll continue to believe that governments should not *start* offering "thank you"s to bond buyers, whether it be out of desperation or otherwise or whatever one would like to believe about the state of the government's finances.
"But it's precisely because of that belief that I think we should not promote those who preach the quasi-religious doctrine that there is one, and only one, such safe harbor: gold."
Those who seem continually dismiss anything and everything related to gold as some sort of "wild conspiracy theory" and who stand on the opposite side of the fence seem awfully fanatical about their own beliefs in regards to monetary policy - so much so that I don't know why anyone should be worried, because from the sounds of it, these beliefs seem like foolproof solutions and our government is exceptional at effectively spending money in a manner that's productive and not at all waste or malinvestment or funneled to cronies or special interests. So, spend away. Extremely loose monetary policy for as far as the eye can see will not only get everything going again, but apparently has no negative consequences whatsoever (and has always, ALWAYS ended well in the past - right?)
I've discussed my philosophies regarding inflation and the belief that hard assets (not only gold, but also more importantly basic needs/strategic assets - energy, agriculture, even infrastructure) will do well over the coming 5-10 years.
I'm displeased with the views of some in regards to loose monetary policy and spending, but that's fine - that's their view and we can just keep passing the bill to future generations and kicking the can. Don't be surprised if the end result is still a decrease in the standard of living in this country.
A path that would appear unsustainable can go on for longer than anyone could possibly imagine, but continuing down an unsustainable path doesn't make it okay or acceptable - it often only makes the end result that much worse. As long as the situation proceeds along status quo in appearance, nothing is changed with a look towards long-term improvement and sustainability - if it doesn't appear broke now, why fix it?
I don't claim to know how long Japan's financial status can continue to go on at these levels, but I can know that I don't want to participate and/or time investing in an undesirable and unsustainable situation.
There's also the matter of faith in the asset, and there's no way to know how long confidence/faith in a particular asset will last - but if faith/confidence is ever lost, the effects can be rapid and and sudden. It could go on for 10 years, 5 years, 1 year, another month - but so what? Does the fact that the asset class continues to hold up make their financial situation somehow acceptable or any more sustainable over a longer term if it continues on the current path? The fact that there are buyers of JGBs does not make for a convincing/fundamental/etc argument to me that they are an asset to be invested in for the short or long-term or that Japan's finances are okay in the slightest.
"I fully agree with you that it's prudent to take the approach that "there are no safe harbors" for investors in the coming years."
I'm not sure that's the case (I tend to think that your views would lead you to believe that some assets are unquestionably safe harbors), but okay.
From the other thread: "The US government can spend any amount of money that it wants, in reality."
What a fun reality - why not just spend as much as we desire? I'll take a new high speed rail system across the country, why not throw in a new electric grid (and as I've said previously, investments in infrastructure should have happened years ago; now we've spent a fortune and still have substandard infrastructure in many areas of the country), new White House - heck, solve the housing problem by buying everyone houses.
It'll be like playing Sim City with unlimited money.
I forgot that we can simply spend ourselves into prosperity (what did Biden say again? "If we don't spend money, we're going to go bankrupt" - actually, that is what he said, and there are two sides - those who cheer that statement and those who are nauseated by it - I'll go with the latter.) Why be fiscally responsible ever when we can spend any amount of money we want? If we spend and spend, who's to say when to stop and who's to say we can get off that path? When does the saving for the next "bad period" occur? (Never.)
There's the whole "old fashioned" notion of saving during good times in an attempt to be able to get through bad times. We've spent in good times and we've spent in bad times. There's this wonderful concept that apparently there's never any consequence for that because we can just spend more money and extend and pretend.
How about forcing seniors and those who rely on fixed income to take risks and having them look at CDs from their local bank and having them find that a 6month CD isn't even listed in promotional materials because the interest rate is so small. There's no guarantees? Sure, there's definitely no guarantees on what yield they'll get, and there's also no guarantees that you're going to - time and time again - drive them into risk assets, either - and they won't be spending as much because their fixed income income has dried up to a trickle.
I'm not going to go any deeper into the discussion because I've - not to sound harsh (or any harsher, at least) - gotten a little tired of discussions on how inflation that is worse than distributed figures and loose monetary policy for as far as the eye can see are apparently a "good thing" and that if we don't continue down that path, we will have a "super depression". (and others have covered with greater detail a lot of the same ground as my views in the other thread about the dollar.)
There are significant structural flaws with this economy, and what has been done is largely blowing air into a tire with a hole in it without patching the hole first.
Quoting: "There are significant structural flaws with this economy, and what has been done is largely blowing air into a tire with a hole in it without patching the hole first."
Exactly. Good image. I think of FDR's alphabet-soup programs. They ACCOMPLISHED stuff. Even artists were employed. Recent massive bond buying schemes and here-and-there road repair is going about the needed "fix" all wrong.
You’ve effectively initiated started several threads here, and I think they’re all really interesting topics.
Re investments: You say that diverse hard assets “not only gold, but also more importantly basic needs/strategic assets - energy, agriculture, even infrastructure) will do well over the coming 5-10 years”. I agree, or at least I hope that they will do well, too. And we appear to agree that gold is only one of any number of alternative investments for the coming years. (Though I’ll be casting my net more widely and including some bonds and equities as well.) Whew. Neither you nor I is a pro- or anti-gold fanatic! Like most regulars on the site, I’m looking to find a diversified array of investments and funds to meet those needs.
Re the Japanese gold coin: You say that you are opposed to the Japanese government offering a special commemorative gold coin (equal in value to a small fraction of 1% annual interest) to those who buy three-year tsunami-reconstruction bonds with a minimum of $120,000. Is that because you want a higher spread of yen interest rates to be the sole reward to investors who buy bonds with large denominations or for longer periods? When investors are offered bonds like this, isn’t it normal to offer them some kind of premium over smaller-value bonds? I guess I don’t understand why you think that offering a premium via a gold coin is essentially different from offering an interest-rate premium.
Re having confidence in Japanese bond interest rates: Japan’s interest rates have been extremely low and steady for years, and this is despite Japan’s government having a 200% bond/GDP ratio. I said that demand for JGB’s appears to be unlimited, i.e., on the part of the Japanese public that buys 95% of them and which see these bonds as being THE quintessential investment vehicle. I agree with you that this is an anomaly, however, though you are probably more skeptical than me about how long this will continue. This very high bond/GDP ratio is clearly uncharted territory for economic/finance theory. It will be interesting to watch what happens.
Re my statement that: "The US government can spend any amount of money that it wants, in reality." I’m not sure why you’re focusing on this. Isn’t this simply a fact? Since 1972, when we went off the gold standard and converted to having a fiat currency, the US government has been able to increase or decrease money supply at will. In doing so, however, it is guided by several legal objectives. These include: ensuring economic growth; full employment, and maintaining price stability. I’m not aware that any members of Congress, the Executive or the Federal Reserve have ever argued that government spending should be unlimited! Clearly, that would unleash rampant inflation and violate the legal objectives I mentioned. No one, as far as I know, argues that because the government CAN spend without restraint, it SHOULD.
Re seniors suffering due to negative real interest rates. This is most certainly unjust. The Fed has made it clear that it agrees, too! As it has said repeatedly, it is only keeping interest rates this low because Congress is not stepping up to the plate and providing the sufficient fiscal stimulus that is required for bringing the economy back to growth. (Again, there are legal mandates to ensure full employment and growth.) Do we agree that it’s a basic accounting identity that if consumer spending, investment and export sales are all lower, then GDP will fall unless government spending rises? [In economics, this is not an ideological issue. Conservative economists as well as liberal ones agree that this is an identity. Of course, they may disagree on WHERE the net government spending or tax cuts should be.]
I'll take exception to one of your comments: “There's the whole "old fashioned" notion of saving during good times in an attempt to be able to get through bad times.” If you mean that this notion should apply to the US government, then I heartily disagree. Even the most prudent monetarists like Milton Friedman prescribed that government spending/money creation MUST exceed government revenue in any healthily growing economy. His recommendation was that it had to expand spending by a rate that was at least equal to the long-term real growth rate of the economy (~3%), plus a prudent inflationary margin of safety (traditionally ~3% but debatable) in order to ensure that the economy never entered deflation, even during a slump. Your maxim might be appropriate for households, but it certainly is not appropriate for the national currency issuer.
Reply to @Ginko: I continue to have disagreements on monetary policy (I'll never agree with the idea that spending MUST exceed revenue) and I suppose a core aspect of that is the lack of confidence in government - and that's not a republican or democrat issue, but more the idea that there's a visible lack of accountability and focus in the spending that is being done more and more in recent years (and not just the current administration.)
This is also an engaging discussion of deflation (some history, some talk of hyperinflation, etc) that only runs a few minutes, and includes a mention by Fed president Bullard that deflation is not always a negative.
I don't believe that deflation is what is coming, but I also don't believe that the ability to control inflation is necessarily as orderly or easily specifically targeted as many state and while I'm not screaming hyperinflation, I do think that inflation will run at a higher rate than is desirable or publicly stated in coming years and has the possibility of getting disorderly.
Additionally, that an increasing amount of incomes of a large portion of the population will be taken up by daily needs/higher general cost of living (food/energy/medical/etc), leaving less for various other discretionary spending. Right now, you have a lot of money people aren't spending on their houses being channeled towards retail - which I don't think has positive long-term implications, either; people aren't spending money on houses in terms of decor and whatnot, but you're also seeing a considerable amount of money freed up from people staying for significant amounts of time without paying their mortgage.
As Max said regarding programs years ago, they "accomplished stuff". I don't have confidence in government to spend in a manner that pushes the country forward and keeps it competitive. I do have confidence in the government to spend in a way that enriches itself and all manner of special interests. I'm looking for tangibles - infrastructure and other asset investments that will keep us competitive, improve productivity, provide cost savings benefits and other positives. I'm looking for a direction and plan that pushes the country into the future in a positive, forward-thinking manner, and I'm not seeing it. What are our goals as a nation?
Spending to simply generate the appearance of economic activity is papering over (literally) real, underlying issues that need to be addressed to create a sustainable and positive future for the country - and that takes hard decisions.
It'll probably never happen with things the way they are. There was an interview with the transit secretary several months back where he said that we'd have high speed rail across the country in 25 years. 25 Years! Other countries have significant high-speed rail systems already, and in 25 years, where are other parts of the world going to be if we're just then getting the entire country going with high-speed rail? (Those new buses in China that go above car traffic are nifty.) I've gone into a number of rants on the age and state of much of our infrastructure, so I won't do that again here.
Still, I think it's a literal structural flaw with this economy, and needed to be the focus of spending years ago. This isn't even something I'd classify as "fiscal stimulus" - this is (admittedly not an apples-to-apples comparison) someone filling their house with things rather than spending money on a foundation problem.) We have foundation problems - infrastructure, education, any number of things. These go beyond mere stimulus and really require massive planning and the willingness to make difficult decisions (and a government that, I don't know, works together?), which seems to be beyond the current class of politicians. It's not writing checks. We have work to do in this country far beyond throwing money at problems willy-nilly.
Gold/precious metals is an instance where I agree with the fundamental case that's being made, but again, I just believe that a primary focus of economies in Asia and elsewhere will be more day-to-day needs in order to ensure continued social order and as a more primary diversifier than precious metals. Precious metals will continue to play a larger role in the years ahead, but I continue to think that a main concern in many other nations will be more basic needs in order to ensure continued stability if times do get rough - and you saw that to some degree with Middle Eastern countries stockpiling grain and other food sources after instability in the region earlier in the year. Stability and social order is definitely more of a concern in other parts of the world, although I think it should be of greater concern in this country.
Reply to @scott: I can't seem to include the entire reply in one, so part two: That's not even taking into account what I believe are other issues with agriculture (less agricultural land available vs continually rising populations, etc.) I also believe in strategic/productive infrastructure to some degree. As I've noted in other threads, I'd like to see PPP (Public Private Partnership) investments as a bigger asset class in the US in a manner similar to the direct infrastructure investments available in other countries (see John Laing Infrastructure on the London Market which I think pays something on the order of 6%, and Brookfield Infrastructure in the US has a little of this - that pays 5.5% or so.)
"I said that demand for JGB’s appears to be unlimited, i.e., on the part of the Japanese public that buys 95% of them and which see these bonds as being THE quintessential investment vehicle."
First, I hate calling anything investment-wise a "quintessential" vehicle; that could last for years and change within a month. Again, I dislike coasting on a perception of safety (both from the standpoint of an investor and the actions of the entity itself), especially in this day and age.
I think it's an interesting study regarding the willingness of the Japanese to invest in their country; in a way, it's an impressive example of nationalistic pride. On the other hand, does it make Japan overly reliant upon a buyer that, through changes in demographics or any number of other issues, will not always be there to the necessary degree? I don't know, but I'll continue to say that both the situation does not appear sustainable and that it could go on longer than I could imagine but that doesn't make it right or sustainable or worth consideration as an investment. In terms of them offering a gold coin, I believe any added benefits to bond holders should not be tangible. Offering gifts sets a precedent.
"I’m not aware that any members of Congress, the Executive or the Federal Reserve have ever argued that government spending should be unlimited! Clearly, that would unleash rampant inflation and violate the legal objectives I mentioned. No one, as far as I know, argues that because the government CAN spend without restraint, it SHOULD."
There's degrees of lack of restraint - and again, I think you've seen a steady slide into spending with an increasing lack of accountability or focus in recent years. It's not spending without any restraint whatsoever, but it's a matter of spending with less and less in the way of checks and balances and diminishing results in terms of the nation's overall progress. I realize that this is entirely debatable, but it's the way that I see it: I continue to see the country spending money without a great deal of progress for the nation as a whole, and little in the way of tangible improvements.
"I’m not sure why you’re focusing on this. Isn’t this simply a fact? "
I suppose it's stating that without any statement of the potential consequence. Stating that the government "could spend any amount of money that it wants" without any sense of the consequences of that is concerning. In theory, it could, but the consequences could very well be a disaster. I think there's the concern regarding confidence in currency from a number of board members (which and in terms of M1, does this chart not at all seem concerning?
Again, unsustainable situations can go on longer than anyone can possibility believe (the market can be irrational longer than you can stay solvent, yadda yadda yadda), but while a logically unsustainable situation that continues to pile on further can go on for longer than anyone can believe, eventually it corrects and it tends to correct suddenly and rapidly and in a manner that isn't orderly. Confidence in a currency or other financial asset or institution can happen very suddenly and to deny the history - and not to learn those lessons - is unfortunate, and those incidents are going to play out again; it's very clearly evident to me that much of what caused 2008 really wasn't learned from or fixed, largely because rather than a gradual rehab (which isn't illogical after the worst financial crisis in decades), we wanted to reboot to a few years prior as fast as possible. The former would have lead to a more sustainable result, the latter was more popular and comfortable. Even governments can't continually avoid their problems by spending money - if they could, I tend to think history would be rather different.
"As you point out, the Fed must look at the relevant fundamentals when carrying out monetary policy."
I believe there's a lack of trust in the ability of the Fed to do that and/or whose interest they are acting in.
"Don't we need an objective criterion for judging what constitutes appropriate expansion? "
Okay. Whose criterion would you like to use?
"Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad."
You say it makes you mad, but your philosophies - in my opinion - are also in a way encouraging it to continue.
Maurice said: " . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield."
I don't know if there's any promises, but it's an unfortunate reality and really, only adds to problems with a portion of the population that is seeing higher expenses (especially medical.)
"(Fundamentals matter, both for fiscal and monetary policy.)"
In theory. In reality, I tend to think that it's increasingly less of a primary concern - or least the fundamentals of the broader economy are at least much less of a concern.
"Maurice said: For you and Washington to say that the US can expand the currency without regard to fundamentals (the result of inflation or even hyperinflation), is without precedent in the history of currency."
You may not have said that, but I think that's what some people are taking from some of your statements, which (again, my opinion) seem to take a very pro-spending, pro-aggressive monetary policy stance. Again, saying something like this: "The US government can spend any amount of money that it wants, in reality" while true in theory without a discussion of the realities that that could bring leads one to believe that you are favor of that reality, at least *to some degree*. Again, while maybe not true, that's how it comes off (to me, and maybe to others.)
"Considering how low interest rates are on US bonds, I guess I'm just amazed at how amazingly strong confidence is in the US dollar. "
Money slushing around has to go somewhere. I've said previously that the currency markets seem like a futile game of musical chairs; there's no long-term safe haven and while the dollar is currently less the focus of attention due to European issues, that could change next week.
You have a large portion of the population that has taken money out of stock mutual funds and run to what they believe is the safer harbor of fixed income funds. You have foreign fixed income markets that do not appear large enough to withstand demand (there was a great story about emerging market bond demand versus the size of the market earlier this year, and how that lead to trouble when the asset class started to sell off; I wish I could find that.) In present day, people run to the liquidity and size of the US treasury market. How much of this is confidence and how much of it is repetitive response to trouble? How much of this is any number of behind-the-scenes reasonings that none of us are aware of (including Rickards' theory that banks are now captive buyers, which, admittedly is just a theory, but an interesting one) or attempted financial repression? How much of it is an older generation not pleased with the economy and not willing to take the risks in retirement and moving - for better or worse - to fixed income rather than stocks? There's so many elements and varied reasoning.
I think there's a lot to more to it than, "well, there's still demand so everything must be okay." Additionally, that belief - if it ain't broke in outside appearance, don't fix it - is concerning on a number of levels. Coasting on what remains of faith in our economy and resting on the idea of "well, what else is there?" is a dangerous concept and heck, there probably won't be another option for a while, but rather than coast on the status quo, I'd rather see us be more of an example and set forth a sustainable path rather than push others to start seeking alternatives - which isn't going to happen overnight, but it is clearly the longer-term goal of some nations. If that becomes the desired end result, it isn't going to be announced in advance. I'm sure that some will dismiss the idea that there are attempts by some nations to seek alternatives (which again, goes on the idea that if the current status seems okay, why would anyone change?), and that would be to choose to ignore the evidence to the contrary, which is fine.
"The only way the US could ever default would be if Congress voted to stop honoring US bonds."
That would make for some interesting foreign relations.
Additionally, it's early, so there may be an incomplete thought or two here. I'll read over it again later.
I understand your visceral reaction against government deficits. We intuitively think that the federal government needs to follow the same sort of “common sense” principles as a responsible household. And some populists like to manipulate us by playing this card. Nevertheless, the reality is quite different. Without federal government deficits (and note that I am not referring to states here—they are not the issuers of the national currency), there can be no savings. This is not a matter of policy debate and this is not an ideological issue; it is inherent in the structure of national income accounting. Note, too, that this is not a big/small government issue: you can run big deficits and have small government and run a balanced budget and have big government. The size of the deficit is purely a function of how much government spending surpasses tax revenue.
Re Triffin’s Dilemma: This dilemma was set forth at a time when all western currencies were pegged to the US dollar and when the US dollar was fixed to gold. As Triffin pointed out, if there was excessive deficit spending in the US, then effectively the US would be devaluing its dollar against gold and would some day run out of gold reserves. (The article doesn’t state this, but I assume that Triffin would have defined “excessive” as letting the US deficit grow at a faster rate than the combined rate of growth of real GDP + new world gold supplies + the commonly accepted rate of expected inflation, which may have been in the area of 2.5%.) In the end, because the US continued to expand its deficits beyond these reasonable limits, and was running out of gold reserves, it finally had to renounce any guaranteed dollar-gold link in 1972, thus making the USD (and all the other currencies linked to it) a fiat currency from then on. This also meant that the foreign exchange rate began to float from then on and the dollar would tend to rise and fall against every other currency depending on whether its inflation was higher or lower than each of those currencies.
Re Jim Rickards soundbites: I have never heard of this guy before and have no idea what he stands for, however, I think it’s fair to say that no reputable economist or historian, regardless of conservative or liberal inclinations, would ever spout the kinds of remarks that he did. He focused on the 1865-1900 period as if it was a sort of golden age, however, economic data or economic history in the US would, I believe, reveal his analysis of that era to be ill-informed. --Since the 1930’s, even the most conservative economists have recognized that deflation can be a vicious trap: if falling prices are foreseen, then consumers will spend less as they wait for goods to become cheaper. Their reduced spending means less demand and this falling demand leads firms to cut back on production and employment. Lower worker income leads to lower family income, less spending, more cash hoarding, and a further fall in prices. (A “deflationary spiral”.) Rickards claims that this is “great for workers”—well, it is . . . for those lucky enough to still have jobs, who have not yet had their wages cut, and who are not paying off mortgages on houses whose values are falling. We experienced this deflation most recently in the 1930’s, and no one wants to revisit that pain again. --He states that US economic growth of the late 19th century was considerable, and there’s no doubt about that. But I’ve never heard anyone suggest that it was due to deflation. Rather, it is largely attributed to tremendous technological innovations, especially in farm and factory technologies, coupled with a huge influx of poor but eager immigrant workers, coupled with a huge amount of free or near-free land, etc. It was a huge growth of productivity that fed US economic growth during that period. The economy grew despite periods of deflation—gold output rose and fell erratically during this period, putting the money supply on a roller coaster. This led to the worst period of sustained depression in US history, in the 1870s, and to a series of severe recessions. --Rickards argues that deflation helped the public but hurt the big banks. A dumbfounding contention! In that era of deflation, farmers and other mortgage-holders ended up paying more, in real terms, year after year to the banks, and the banks, in turn, earned a higher yield (after inflation) than they had ever hoped for. This was the key platform issue of William Jennings Bryan, who ran for president three times on this very issue in the late 19th century. The American public that held mortgages were being “crucified on a cross of gold”, Bryan famously said, while bankers earned every greater profits as the value of money deflated during that era. The reality was exactly the opposite of what Rickards contends. --I have never heard any economist or historian suggest that the Weimar hyperinflation was due to a 50% rise in German monetary volatility in the early 20’s, as he asserts. Contemporary economists agree, I believe, that its hyperinflation was caused by the German central bank increasing its money supply by 50% a year (in order to pay off the imposed WW I war reparations). His claim that the hyperinflation was caused by a leap in volatility, i.e., a sudden leap in spending by consumers and firms, rather than by the profligate printing of money by the central bank, is astounding. --And QE will lead to hyperinflation, he says? Perhaps we will let the data speak for themselves: QE 1 started in 2008 and after QE2 we’re now on the doorstep of 2012. Since we don’t see signs of inflation trending upwards, where is the cause and effect relationship?
Back to your points, Scott: --I agree that it would be undesirable if future inflation were to rise in a disorderly way. I don’t see how that can happen any time soon as households are mired in paying off debt, investment is very timid, and Congress is very reluctant to engage in stimulating spending. On top of that, banks are reluctant to lend out the reserves that they have. If inflation is caused by demand outstripping supply, then I don’t see where this excess demand is going to come from. --Agree completely with you that it would be absolutely great if we could focus on building up essential infrastructure during this period of high unemployment: roads, ports, schools, hospitals, and high speed rails! What a terrible waste for our country to be stuck paying people unemployment benefits for not producing. On top of that, there’s the effect on the unemployed themselves: As Max put it, people want to “accomplish stuff”.
Re Japanese government bonds: Japan’s very high bond/GDP ratio is a unique phenomenon. How high can this ratio go before it’s no longer “sustainable”? We just don’t know. I think you realize now that I don’t favor JGBs as investments unless you might want to speculate on the yen rising against the dollar. When I said that JGBs were the quintessential investment vehicle, I meant that from the perspective of Japanese citizens rather than myself.
Re whether US govt spending is productive: I fully share your doubts. Government taxation and spending decisions are so heavily swayed by lobbying and campaign-check writers toward non-productive outcomes.
Re whether US government spending is actually unconstrained: I understand, as you say, that people find it hard to accept this. We’re used to being told the metaphor that the federal government has to act just like a responsible household. Both the media and politicians of both parties continue to talk as if the US has to borrow in order to spend and that it has to “fund its debt”, or that somehow we can’t actually spend more than we take in via taxes. (As I said earlier, deficits have always existed and they are a prerequisite for national saving. As long as they stay close to the GDP growth rate, their effect is not only beneficial, it's essential.) Once people understand that federal expenditure is literally unconstrained, then we can then focus on the important issue: What are the costs and benefits of spending more or less at any particular time (for example, costs such as: potentially higher inflation, lost income, lower profits and growth, higher unemployment, a change in the exchange rate).
Re whether I’m concerned by the chart showing M1 growth: To answer your question: If M1 growth did correlate in any way with real GDP growth or with inflation, then I would be concerned by data like this. Back in gold standard days, there was a close link between growth in M1 on the one hand and the growth of nominal GDP (i.e., real GDP growth plus inflation rate). As a result, it actually was the key indicator used by the Fed in managing interest rates. By the 80’s, however, this relationship had broken down so much that M1 sometimes experienced strong growth even during times of recession and falling inflation. Why? Multiple causes, which included people stashing money in alternative forms: CDs, money market accounts, and stock and bond mutual funds. In addition, there have been massively growing amounts of US dollars held in overseas bank accounts. As a result, tracking M1 is recognized as being only a very marginally useful tool for revealing economic activity or for guiding monetary policy.
Finally, you asked me a whole lot of questions at the end . . . . I think I answered some of them above, but a couple of other short responses are: --Yes, I understand that there are people who don’t trust the Fed. I share some of their doubts about how the Fed has implemented policy over the past decades, most especially during the housing boom. However, we’re very fortunate that we have a central bank that is able to carry out monetary policy independently of the executive and legislative branches. At least we have a relatively coherent monetary policy, relative to our fiscal policy. --Agree with you and Maurice that low interest rates are hurting (effectively, actually taxing!) bondholders. We see different causes and remedies, however. We know that the Fed is keeping rates this low only because Congress is not providing the fiscal stimulus necessary to overcome the very weak consumer, investment and export demand.
It was really interesting reading your reactions to what I wrote. I’ve always liked this board because members are thoughtful and respectful. We’re all learning from each other.
Great discussion, Ginko and Scott and Max. I'd add a couple of things around the edges about fed budgeting:
1. A surplus/lower deficit in good times allows an uptick in spending support for the economy when it needs it the most, without building up huge levels of debt, which we then get politically tied in knots over. And that is precisely where we went wrong with the current deficit and debt, by squandering trillions in the fat years with tax cuts and unfunded wars. Here's the graph every citizen should understand, part way down the page here:
The three main sources of the debt built up since the recession began are the continuing drain of the Bush tax cuts, the two wars, and the income semi-stabilizers that kicked in with the recession. TARP, Fannie & Freddie, and the "stimulus" barely register when put up against the Big Three. Without the first two, the debt/deficit would be entirely manageable, even with the spike in stabilizer expenditures during the recession.
2. The household-government-equivalent argument mostly follows an analogy to the effect of "households have to balance their budgets!" No, they don't. Very, very few of us would be homeowners if we had had to buy our homes with current-year earnings.
Hello, AndyJ. I agree 200%. I've returned here to Massachusetts, following my career--- to a slower, more relaxed style of living and working part-time ---kinda. Come to find out that my home State now has a "rainy day fund" to help the gov't through difficult times. We had an unexpected tax surplus over the summer, once the reckoning was completed. So instead of reducing the tax RATES or declaring a temporary payroll holiday, State gov't squandered the favorable situation this way:
A tax holiday on BIG purchases was declared for a specific week-end. It would not work if you bought $3,000 worth of loaves of bread. It would not work on a purchase of a bunch of winter overcoats for the family. Only big-ticket items like fancy damn televisions and washer-driers. This has been done in years prior, as well.
Idiotic, pus-slurping stuffed shirts! "WE know best how you should use the excess money we collected from you, and we've already decided that you should NOT save it, or buy what YOU decide you need. WE have made up our minds FOR you: You WILL spend the excess money we collected from you as part of the purchase price of an expensive item which you may or may not need right now. You really don't deserve to have it BACK."
Greasy, slimy, moronic bureaucrats, divorced from REAL life.
Comments
Their recommendation though is stick to quality large cap stocks around the world. It's bonds that they avoid like the plague.
Additionally, Japan has to resort to giving out gold coins to investors in its bonds (http://www.zerohedge.com/news/‘gold-bonds’-japan-bond-buyers-get-gold-coins-may-enhance-returns-59-times)
"Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal."
Scott: I'm totally puzzled by your comment that Japan had to "resort to giving out gold coins to investors in its bonds". Those words would seem to suggest that Japan couldn't find people who would buy the bonds in yen alone.
With Japan paying interest rates close to 1%, are you saying that Japan has any trouble finding buyers? On the contrary, isn't the demand virtually unlimited, and isn't this little gold commemorative coin simply a 1/3 of 1% "thank you" for buying our bonds if you hold them for three years?
Interested in your thoughts: I probably don't understand what you meant.
I think Japanese citizens and other internal entities have been the primary (well, majority) investors (around 95%) in Japanese bonds and you're likely going to find a point where the internal demand will weaken (aging population, a number of other factors). Then what? I don't think you're going to find the same demand externally and especially at these rates. Hence, an IMF warning the other day regarding Japanese debt (http://online.wsj.com/article/SB10001424052970204630904577057331784667886.html) and an excellent article detailing the situation (http://www.reuters.com/article/2011/11/29/us-column-markets-saft-idUSTRE7AS1ES20111129)
I really do not think that demand for any country's bonds is "virtually unlimited" and while demand can go on longer than fundamentals would indicate, proceeding with a mindset that the demand for the asset (or any financial asset for that matter) is "virtually unlimited" is concerning on a number of levels. Again, there are no "safe harbors" and I think that's an investing mindset that will be valuable in the next decade.
Scott,
Your response above were focused on whether demand for Japanese bonds might be less at some point in the future. I don't pretend to know the answer to that. Who would have thought that a 200% bond-to-GDP ratio, like Japan's is, would ever be possible? Yet it certainly is, at least for now.
My comments were only were taking exception to your linked article's claim that the coin bonus was only offered because the government was "desperate", fearing that it will not be able to sell its bonds, and that it was engaging in "monetary debasement". Do such arguments jive with the facts? After all: Demand for JGB's has actually strengthened in recent months; and even with the gold incentive, the proposed yield on the bond is only 0.05%, and the latest inflation rate is -0.2%.
(Is it even helpful to think of JGBs as government "debt", when 95% of the bonds are effectively domestic savings certificates?)
There are people on the Web who have been beating the drum of disaster for years with regard to Japan being on the verge of hyperinflation. What's disturbing is that they refuse to allow evidence to inform their theories.
I fully agree with you that it's prudent to take the approach that "there are no safe harbors" for investors in the coming years. But it's precisely because of that belief that I think we should not promote those who preach the quasi-religious doctrine that there is one, and only one, such safe harbor: gold.
Ginko
"But it's precisely because of that belief that I think we should not promote those who preach the quasi-religious doctrine that there is one, and only one, such safe harbor: gold."
Those who seem continually dismiss anything and everything related to gold as some sort of "wild conspiracy theory" and who stand on the opposite side of the fence seem awfully fanatical about their own beliefs in regards to monetary policy - so much so that I don't know why anyone should be worried, because from the sounds of it, these beliefs seem like foolproof solutions and our government is exceptional at effectively spending money in a manner that's productive and not at all waste or malinvestment or funneled to cronies or special interests. So, spend away. Extremely loose monetary policy for as far as the eye can see will not only get everything going again, but apparently has no negative consequences whatsoever (and has always, ALWAYS ended well in the past - right?)
I've discussed my philosophies regarding inflation and the belief that hard assets (not only gold, but also more importantly basic needs/strategic assets - energy, agriculture, even infrastructure) will do well over the coming 5-10 years.
I'm displeased with the views of some in regards to loose monetary policy and spending, but that's fine - that's their view and we can just keep passing the bill to future generations and kicking the can. Don't be surprised if the end result is still a decrease in the standard of living in this country.
A path that would appear unsustainable can go on for longer than anyone could possibly imagine, but continuing down an unsustainable path doesn't make it okay or acceptable - it often only makes the end result that much worse. As long as the situation proceeds along status quo in appearance, nothing is changed with a look towards long-term improvement and sustainability - if it doesn't appear broke now, why fix it?
Then it hits the wall and everyone hollers, "No one could have ever seen it coming!" (although the IMF/Japan articles are interesting reading - another: http://www.theaustralian.com.au/business/economics/japans-debt-a-rising-concern-imf-report-warns/story-e6frg926-1226205392344) The lack of much concern about fiscal sustainability is what I find disturbing, as is the encouragement by some to move yet further away from fiscal responsibility.
I don't claim to know how long Japan's financial status can continue to go on at these levels, but I can know that I don't want to participate and/or time investing in an undesirable and unsustainable situation.
There's also the matter of faith in the asset, and there's no way to know how long confidence/faith in a particular asset will last - but if faith/confidence is ever lost, the effects can be rapid and and sudden. It could go on for 10 years, 5 years, 1 year, another month - but so what? Does the fact that the asset class continues to hold up make their financial situation somehow acceptable or any more sustainable over a longer term if it continues on the current path? The fact that there are buyers of JGBs does not make for a convincing/fundamental/etc argument to me that they are an asset to be invested in for the short or long-term or that Japan's finances are okay in the slightest.
"I fully agree with you that it's prudent to take the approach that "there are no safe harbors" for investors in the coming years."
I'm not sure that's the case (I tend to think that your views would lead you to believe that some assets are unquestionably safe harbors), but okay.
From the other thread: "The US government can spend any amount of money that it wants, in reality."
What a fun reality - why not just spend as much as we desire? I'll take a new high speed rail system across the country, why not throw in a new electric grid (and as I've said previously, investments in infrastructure should have happened years ago; now we've spent a fortune and still have substandard infrastructure in many areas of the country), new White House - heck, solve the housing problem by buying everyone houses.
It'll be like playing Sim City with unlimited money.
I forgot that we can simply spend ourselves into prosperity (what did Biden say again? "If we don't spend money, we're going to go bankrupt" - actually, that is what he said, and there are two sides - those who cheer that statement and those who are nauseated by it - I'll go with the latter.) Why be fiscally responsible ever when we can spend any amount of money we want? If we spend and spend, who's to say when to stop and who's to say we can get off that path? When does the saving for the next "bad period" occur? (Never.)
There's the whole "old fashioned" notion of saving during good times in an attempt to be able to get through bad times. We've spent in good times and we've spent in bad times. There's this wonderful concept that apparently there's never any consequence for that because we can just spend more money and extend and pretend.
How about forcing seniors and those who rely on fixed income to take risks and having them look at CDs from their local bank and having them find that a 6month CD isn't even listed in promotional materials because the interest rate is so small. There's no guarantees? Sure, there's definitely no guarantees on what yield they'll get, and there's also no guarantees that you're going to - time and time again - drive them into risk assets, either - and they won't be spending as much because their fixed income income has dried up to a trickle.
I'm not going to go any deeper into the discussion because I've - not to sound harsh (or any harsher, at least) - gotten a little tired of discussions on how inflation that is worse than distributed figures and loose monetary policy for as far as the eye can see are apparently a "good thing" and that if we don't continue down that path, we will have a "super depression". (and others have covered with greater detail a lot of the same ground as my views in the other thread about the dollar.)
There are significant structural flaws with this economy, and what has been done is largely blowing air into a tire with a hole in it without patching the hole first.
Exactly. Good image. I think of FDR's alphabet-soup programs. They ACCOMPLISHED stuff. Even artists were employed. Recent massive bond buying schemes and here-and-there road repair is going about the needed "fix" all wrong.
Scott,
You’ve effectively initiated started several threads here, and I think they’re all really interesting topics.
Re investments:
You say that diverse hard assets “not only gold, but also more importantly basic needs/strategic assets - energy, agriculture, even infrastructure) will do well over the coming 5-10 years”.
I agree, or at least I hope that they will do well, too. And we appear to agree that gold is only one of any number of alternative investments for the coming years. (Though I’ll be casting my net more widely and including some bonds and equities as well.)
Whew. Neither you nor I is a pro- or anti-gold fanatic!
Like most regulars on the site, I’m looking to find a diversified array of investments and funds to meet those needs.
Re the Japanese gold coin:
You say that you are opposed to the Japanese government offering a special commemorative gold coin (equal in value to a small fraction of 1% annual interest) to those who buy three-year tsunami-reconstruction bonds with a minimum of $120,000. Is that because you want a higher spread of yen interest rates to be the sole reward to investors who buy bonds with large denominations or for longer periods? When investors are offered bonds like this, isn’t it normal to offer them some kind of premium over smaller-value bonds?
I guess I don’t understand why you think that offering a premium via a gold coin is essentially different from offering an interest-rate premium.
Re having confidence in Japanese bond interest rates:
Japan’s interest rates have been extremely low and steady for years, and this is despite Japan’s government having a 200% bond/GDP ratio.
I said that demand for JGB’s appears to be unlimited, i.e., on the part of the Japanese public that buys 95% of them and which see these bonds as being THE quintessential investment vehicle. I agree with you that this is an anomaly, however, though you are probably more skeptical than me about how long this will continue.
This very high bond/GDP ratio is clearly uncharted territory for economic/finance theory. It will be interesting to watch what happens.
Re my statement that: "The US government can spend any amount of money that it wants, in reality."
I’m not sure why you’re focusing on this. Isn’t this simply a fact?
Since 1972, when we went off the gold standard and converted to having a fiat currency, the US government has been able to increase or decrease money supply at will. In doing so, however, it is guided by several legal objectives. These include: ensuring economic growth; full employment, and maintaining price stability.
I’m not aware that any members of Congress, the Executive or the Federal Reserve have ever argued that government spending should be unlimited! Clearly, that would unleash rampant inflation and violate the legal objectives I mentioned. No one, as far as I know, argues that because the government CAN spend without restraint, it SHOULD.
Re seniors suffering due to negative real interest rates.
This is most certainly unjust. The Fed has made it clear that it agrees, too! As it has said repeatedly, it is only keeping interest rates this low because Congress is not stepping up to the plate and providing the sufficient fiscal stimulus that is required for bringing the economy back to growth. (Again, there are legal mandates to ensure full employment and growth.)
Do we agree that it’s a basic accounting identity that if consumer spending, investment and export sales are all lower, then GDP will fall unless government spending rises? [In economics, this is not an ideological issue. Conservative economists as well as liberal ones agree that this is an identity. Of course, they may disagree on WHERE the net government spending or tax cuts should be.]
I'll take exception to one of your comments: “There's the whole "old fashioned" notion of saving during good times in an attempt to be able to get through bad times.”
If you mean that this notion should apply to the US government, then I heartily disagree. Even the most prudent monetarists like Milton Friedman prescribed that government spending/money creation MUST exceed government revenue in any healthily growing economy. His recommendation was that it had to expand spending by a rate that was at least equal to the long-term real growth rate of the economy (~3%), plus a prudent inflationary margin of safety (traditionally ~3% but debatable) in order to ensure that the economy never entered deflation, even during a slump.
Your maxim might be appropriate for households, but it certainly is not appropriate for the national currency issuer.
Ginko
I'd be curious in your thoughts regarding Triffin's Dilemma (http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm).
This is also an engaging discussion of deflation (some history, some talk of hyperinflation, etc)
I don't believe that deflation is what is coming, but I also don't believe that the ability to control inflation is necessarily as orderly or easily specifically targeted as many state and while I'm not screaming hyperinflation, I do think that inflation will run at a higher rate than is desirable or publicly stated in coming years and has the possibility of getting disorderly.
Additionally, that an increasing amount of incomes of a large portion of the population will be taken up by daily needs/higher general cost of living (food/energy/medical/etc), leaving less for various other discretionary spending. Right now, you have a lot of money people aren't spending on their houses being channeled towards retail - which I don't think has positive long-term implications, either; people aren't spending money on houses in terms of decor and whatnot, but you're also seeing a considerable amount of money freed up from people staying for significant amounts of time without paying their mortgage.
As Max said regarding programs years ago, they "accomplished stuff". I don't have confidence in government to spend in a manner that pushes the country forward and keeps it competitive. I do have confidence in the government to spend in a way that enriches itself and all manner of special interests. I'm looking for tangibles - infrastructure and other asset investments that will keep us competitive, improve productivity, provide cost savings benefits and other positives. I'm looking for a direction and plan that pushes the country into the future in a positive, forward-thinking manner, and I'm not seeing it. What are our goals as a nation?
Spending to simply generate the appearance of economic activity is papering over (literally) real, underlying issues that need to be addressed to create a sustainable and positive future for the country - and that takes hard decisions.
It'll probably never happen with things the way they are. There was an interview with the transit secretary several months back where he said that we'd have high speed rail across the country in 25 years. 25 Years! Other countries have significant high-speed rail systems already, and in 25 years, where are other parts of the world going to be if we're just then getting the entire country going with high-speed rail? (Those new buses in China that go above car traffic are nifty.) I've gone into a number of rants on the age and state of much of our infrastructure, so I won't do that again here.
Still, I think it's a literal structural flaw with this economy, and needed to be the focus of spending years ago. This isn't even something I'd classify as "fiscal stimulus" - this is (admittedly not an apples-to-apples comparison) someone filling their house with things rather than spending money on a foundation problem.) We have foundation problems - infrastructure, education, any number of things. These go beyond mere stimulus and really require massive planning and the willingness to make difficult decisions (and a government that, I don't know, works together?), which seems to be beyond the current class of politicians. It's not writing checks. We have work to do in this country far beyond throwing money at problems willy-nilly.
Gold/precious metals is an instance where I agree with the fundamental case that's being made, but again, I just believe that a primary focus of economies in Asia and elsewhere will be more day-to-day needs in order to ensure continued social order and as a more primary diversifier than precious metals. Precious metals will continue to play a larger role in the years ahead, but I continue to think that a main concern in many other nations will be more basic needs in order to ensure continued stability if times do get rough - and you saw that to some degree with Middle Eastern countries stockpiling grain and other food sources after instability in the region earlier in the year. Stability and social order is definitely more of a concern in other parts of the world, although I think it should be of greater concern in this country.
That's not even taking into account what I believe are other issues with agriculture (less agricultural land available vs continually rising populations, etc.) I also believe in strategic/productive infrastructure to some degree. As I've noted in other threads, I'd like to see PPP (Public Private Partnership) investments as a bigger asset class in the US in a manner similar to the direct infrastructure investments available in other countries (see John Laing Infrastructure on the London Market which I think pays something on the order of 6%, and Brookfield Infrastructure in the US has a little of this - that pays 5.5% or so.)
"I said that demand for JGB’s appears to be unlimited, i.e., on the part of the Japanese public that buys 95% of them and which see these bonds as being THE quintessential investment vehicle."
First, I hate calling anything investment-wise a "quintessential" vehicle; that could last for years and change within a month. Again, I dislike coasting on a perception of safety (both from the standpoint of an investor and the actions of the entity itself), especially in this day and age.
I think it's an interesting study regarding the willingness of the Japanese to invest in their country; in a way, it's an impressive example of nationalistic pride. On the other hand, does it make Japan overly reliant upon a buyer that, through changes in demographics or any number of other issues, will not always be there to the necessary degree? I don't know, but I'll continue to say that both the situation does not appear sustainable and that it could go on longer than I could imagine but that doesn't make it right or sustainable or worth consideration as an investment. In terms of them offering a gold coin, I believe any added benefits to bond holders should not be tangible. Offering gifts sets a precedent.
"I’m not aware that any members of Congress, the Executive or the Federal Reserve have ever argued that government spending should be unlimited! Clearly, that would unleash rampant inflation and violate the legal objectives I mentioned. No one, as far as I know, argues that because the government CAN spend without restraint, it SHOULD."
There's degrees of lack of restraint - and again, I think you've seen a steady slide into spending with an increasing lack of accountability or focus in recent years. It's not spending without any restraint whatsoever, but it's a matter of spending with less and less in the way of checks and balances and diminishing results in terms of the nation's overall progress. I realize that this is entirely debatable, but it's the way that I see it: I continue to see the country spending money without a great deal of progress for the nation as a whole, and little in the way of tangible improvements.
"I’m not sure why you’re focusing on this. Isn’t this simply a fact? "
I suppose it's stating that without any statement of the potential consequence. Stating that the government "could spend any amount of money that it wants" without any sense of the consequences of that is concerning. In theory, it could, but the consequences could very well be a disaster. I think there's the concern regarding confidence in currency from a number of board members (which and in terms of M1, does this chart not at all seem concerning?
http://research.stlouisfed.org/fred2/series/M1
Again, unsustainable situations can go on longer than anyone can possibility believe (the market can be irrational longer than you can stay solvent, yadda yadda yadda), but while a logically unsustainable situation that continues to pile on further can go on for longer than anyone can believe, eventually it corrects and it tends to correct suddenly and rapidly and in a manner that isn't orderly. Confidence in a currency or other financial asset or institution can happen very suddenly and to deny the history - and not to learn those lessons - is unfortunate, and those incidents are going to play out again; it's very clearly evident to me that much of what caused 2008 really wasn't learned from or fixed, largely because rather than a gradual rehab (which isn't illogical after the worst financial crisis in decades), we wanted to reboot to a few years prior as fast as possible. The former would have lead to a more sustainable result, the latter was more popular and comfortable. Even governments can't continually avoid their problems by spending money - if they could, I tend to think history would be rather different.
"As you point out, the Fed must look at the relevant fundamentals when carrying out monetary policy."
I believe there's a lack of trust in the ability of the Fed to do that and/or whose interest they are acting in.
"Don't we need an objective criterion for judging what constitutes appropriate expansion? "
Okay. Whose criterion would you like to use?
"Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad."
You say it makes you mad, but your philosophies - in my opinion - are also in a way encouraging it to continue.
Maurice said: " . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield."
I don't know if there's any promises, but it's an unfortunate reality and really, only adds to problems with a portion of the population that is seeing higher expenses (especially medical.)
"(Fundamentals matter, both for fiscal and monetary policy.)"
In theory. In reality, I tend to think that it's increasingly less of a primary concern - or least the fundamentals of the broader economy are at least much less of a concern.
"Maurice said: For you and Washington to say that the US can expand the currency without regard to fundamentals (the result of inflation or even hyperinflation), is without precedent in the history of currency."
You may not have said that, but I think that's what some people are taking from some of your statements, which (again, my opinion) seem to take a very pro-spending, pro-aggressive monetary policy stance. Again, saying something like this: "The US government can spend any amount of money that it wants, in reality" while true in theory without a discussion of the realities that that could bring leads one to believe that you are favor of that reality, at least *to some degree*. Again, while maybe not true, that's how it comes off (to me, and maybe to others.)
"Considering how low interest rates are on US bonds, I guess I'm just amazed at how amazingly strong confidence is in the US dollar. "
Money slushing around has to go somewhere. I've said previously that the currency markets seem like a futile game of musical chairs; there's no long-term safe haven and while the dollar is currently less the focus of attention due to European issues, that could change next week.
You have a large portion of the population that has taken money out of stock mutual funds and run to what they believe is the safer harbor of fixed income funds. You have foreign fixed income markets that do not appear large enough to withstand demand (there was a great story about emerging market bond demand versus the size of the market earlier this year, and how that lead to trouble when the asset class started to sell off; I wish I could find that.) In present day, people run to the liquidity and size of the US treasury market. How much of this is confidence and how much of it is repetitive response to trouble? How much of this is any number of behind-the-scenes reasonings that none of us are aware of (including Rickards' theory that banks are now captive buyers, which, admittedly is just a theory, but an interesting one) or attempted financial repression? How much of it is an older generation not pleased with the economy and not willing to take the risks in retirement and moving - for better or worse - to fixed income rather than stocks? There's so many elements and varied reasoning.
I think there's a lot to more to it than, "well, there's still demand so everything must be okay." Additionally, that belief - if it ain't broke in outside appearance, don't fix it - is concerning on a number of levels. Coasting on what remains of faith in our economy and resting on the idea of "well, what else is there?" is a dangerous concept and heck, there probably won't be another option for a while, but rather than coast on the status quo, I'd rather see us be more of an example and set forth a sustainable path rather than push others to start seeking alternatives - which isn't going to happen overnight, but it is clearly the longer-term goal of some nations. If that becomes the desired end result, it isn't going to be announced in advance. I'm sure that some will dismiss the idea that there are attempts by some nations to seek alternatives (which again, goes on the idea that if the current status seems okay, why would anyone change?), and that would be to choose to ignore the evidence to the contrary, which is fine.
"The only way the US could ever default would be if Congress voted to stop honoring US bonds."
That would make for some interesting foreign relations.
Additionally, it's early, so there may be an incomplete thought or two here. I'll read over it again later.
First part--
I understand your visceral reaction against government deficits. We intuitively think that the federal government needs to follow the same sort of “common sense” principles as a responsible household. And some populists like to manipulate us by playing this card. Nevertheless, the reality is quite different.
Without federal government deficits (and note that I am not referring to states here—they are not the issuers of the national currency), there can be no savings. This is not a matter of policy debate and this is not an ideological issue; it is inherent in the structure of national income accounting.
Note, too, that this is not a big/small government issue: you can run big deficits and have small government and run a balanced budget and have big government. The size of the deficit is purely a function of how much government spending surpasses tax revenue.
Re Triffin’s Dilemma:
This dilemma was set forth at a time when all western currencies were pegged to the US dollar and when the US dollar was fixed to gold. As Triffin pointed out, if there was excessive deficit spending in the US, then effectively the US would be devaluing its dollar against gold and would some day run out of gold reserves.
(The article doesn’t state this, but I assume that Triffin would have defined “excessive” as letting the US deficit grow at a faster rate than the combined rate of growth of real GDP + new world gold supplies + the commonly accepted rate of expected inflation, which may have been in the area of 2.5%.) In the end, because the US continued to expand its deficits beyond these reasonable limits, and was running out of gold reserves, it finally had to renounce any guaranteed dollar-gold link in 1972, thus making the USD (and all the other currencies linked to it) a fiat currency from then on. This also meant that the foreign exchange rate began to float from then on and the dollar would tend to rise and fall against every other currency depending on whether its inflation was higher or lower than each of those currencies.
Re Jim Rickards soundbites:
I have never heard of this guy before and have no idea what he stands for, however, I think it’s fair to say that no reputable economist or historian, regardless of conservative or liberal inclinations, would ever spout the kinds of remarks that he did. He focused on the 1865-1900 period as if it was a sort of golden age, however, economic data or economic history in the US would, I believe, reveal his analysis of that era to be ill-informed.
--Since the 1930’s, even the most conservative economists have recognized that deflation can be a vicious trap: if falling prices are foreseen, then consumers will spend less as they wait for goods to become cheaper. Their reduced spending means less demand and this falling demand leads firms to cut back on production and employment. Lower worker income leads to lower family income, less spending, more cash hoarding, and a further fall in prices. (A “deflationary spiral”.) Rickards claims that this is “great for workers”—well, it is . . . for those lucky enough to still have jobs, who have not yet had their wages cut, and who are not paying off mortgages on houses whose values are falling.
We experienced this deflation most recently in the 1930’s, and no one wants to revisit that pain again.
--He states that US economic growth of the late 19th century was considerable, and there’s no doubt about that. But I’ve never heard anyone suggest that it was due to deflation. Rather, it is largely attributed to tremendous technological innovations, especially in farm and factory technologies, coupled with a huge influx of poor but eager immigrant workers, coupled with a huge amount of free or near-free land, etc. It was a huge growth of productivity that fed US economic growth during that period. The economy grew despite periods of deflation—gold output rose and fell erratically during this period, putting the money supply on a roller coaster. This led to the worst period of sustained depression in US history, in the 1870s, and to a series of severe recessions.
--Rickards argues that deflation helped the public but hurt the big banks. A dumbfounding contention! In that era of deflation, farmers and other mortgage-holders ended up paying more, in real terms, year after year to the banks, and the banks, in turn, earned a higher yield (after inflation) than they had ever hoped for. This was the key platform issue of William Jennings Bryan, who ran for president three times on this very issue in the late 19th century. The American public that held mortgages were being “crucified on a cross of gold”, Bryan famously said, while bankers earned every greater profits as the value of money deflated during that era. The reality was exactly the opposite of what Rickards contends.
--I have never heard any economist or historian suggest that the Weimar hyperinflation was due to a 50% rise in German monetary volatility in the early 20’s, as he asserts. Contemporary economists agree, I believe, that its hyperinflation was caused by the German central bank increasing its money supply by 50% a year (in order to pay off the imposed WW I war reparations). His claim that the hyperinflation was caused by a leap in volatility, i.e., a sudden leap in spending by consumers and firms, rather than by the profligate printing of money by the central bank, is astounding.
--And QE will lead to hyperinflation, he says? Perhaps we will let the data speak for themselves: QE 1 started in 2008 and after QE2 we’re now on the doorstep of 2012. Since we don’t see signs of inflation trending upwards, where is the cause and effect relationship?
Back to your points, Scott:
--I agree that it would be undesirable if future inflation were to rise in a disorderly way. I don’t see how that can happen any time soon as households are mired in paying off debt, investment is very timid, and Congress is very reluctant to engage in stimulating spending. On top of that, banks are reluctant to lend out the reserves that they have. If inflation is caused by demand outstripping supply, then I don’t see where this excess demand is going to come from.
--Agree completely with you that it would be absolutely great if we could focus on building up essential infrastructure during this period of high unemployment: roads, ports, schools, hospitals, and high speed rails! What a terrible waste for our country to be stuck paying people unemployment benefits for not producing. On top of that, there’s the effect on the unemployed themselves: As Max put it, people want to “accomplish stuff”.
Response to your second part--
Re Japanese government bonds:
Japan’s very high bond/GDP ratio is a unique phenomenon. How high can this ratio go before it’s no longer “sustainable”? We just don’t know.
I think you realize now that I don’t favor JGBs as investments unless you might want to speculate on the yen rising against the dollar.
When I said that JGBs were the quintessential investment vehicle, I meant that from the perspective of Japanese citizens rather than myself.
Re whether US govt spending is productive:
I fully share your doubts. Government taxation and spending decisions are so heavily swayed by lobbying and campaign-check writers toward non-productive outcomes.
Re whether US government spending is actually unconstrained:
I understand, as you say, that people find it hard to accept this. We’re used to being told the metaphor that the federal government has to act just like a responsible household.
Both the media and politicians of both parties continue to talk as if the US has to borrow in order to spend and that it has to “fund its debt”, or that somehow we can’t actually spend more than we take in via taxes. (As I said earlier, deficits have always existed and they are a prerequisite for national saving. As long as they stay close to the GDP growth rate, their effect is not only beneficial, it's essential.)
Once people understand that federal expenditure is literally unconstrained, then we can then focus on the important issue: What are the costs and benefits of spending more or less at any particular time (for example, costs such as: potentially higher inflation, lost income, lower profits and growth, higher unemployment, a change in the exchange rate).
Re whether I’m concerned by the chart showing M1 growth:
To answer your question: If M1 growth did correlate in any way with real GDP growth or with inflation, then I would be concerned by data like this.
Back in gold standard days, there was a close link between growth in M1 on the one hand and the growth of nominal GDP (i.e., real GDP growth plus inflation rate). As a result, it actually was the key indicator used by the Fed in managing interest rates. By the 80’s, however, this relationship had broken down so much that M1 sometimes experienced strong growth even during times of recession and falling inflation. Why? Multiple causes, which included people stashing money in alternative forms: CDs, money market accounts, and stock and bond mutual funds. In addition, there have been massively growing amounts of US dollars held in overseas bank accounts.
As a result, tracking M1 is recognized as being only a very marginally useful tool for revealing economic activity or for guiding monetary policy.
Finally, you asked me a whole lot of questions at the end . . . . I think I answered some of them above, but a couple of other short responses are:
--Yes, I understand that there are people who don’t trust the Fed. I share some of their doubts about how the Fed has implemented policy over the past decades, most especially during the housing boom. However, we’re very fortunate that we have a central bank that is able to carry out monetary policy independently of the executive and legislative branches. At least we have a relatively coherent monetary policy, relative to our fiscal policy.
--Agree with you and Maurice that low interest rates are hurting (effectively, actually taxing!) bondholders. We see different causes and remedies, however. We know that the Fed is keeping rates this low only because Congress is not providing the fiscal stimulus necessary to overcome the very weak consumer, investment and export demand.
It was really interesting reading your reactions to what I wrote. I’ve always liked this board because members are thoughtful and respectful.
We’re all learning from each other.
1. A surplus/lower deficit in good times allows an uptick in spending support for the economy when it needs it the most, without building up huge levels of debt, which we then get politically tied in knots over. And that is precisely where we went wrong with the current deficit and debt, by squandering trillions in the fat years with tax cuts and unfunded wars. Here's the graph every citizen should understand, part way down the page here:
http://www.cbpp.org/cms/?fa=view&id=3490
The three main sources of the debt built up since the recession began are the continuing drain of the Bush tax cuts, the two wars, and the income semi-stabilizers that kicked in with the recession. TARP, Fannie & Freddie, and the "stimulus" barely register when put up against the Big Three. Without the first two, the debt/deficit would be entirely manageable, even with the spike in stabilizer expenditures during the recession.
2. The household-government-equivalent argument mostly follows an analogy to the effect of "households have to balance their budgets!" No, they don't. Very, very few of us would be homeowners if we had had to buy our homes with current-year earnings.
A tax holiday on BIG purchases was declared for a specific week-end. It would not work if you bought $3,000 worth of loaves of bread. It would not work on a purchase of a bunch of winter overcoats for the family. Only big-ticket items like fancy damn televisions and washer-driers. This has been done in years prior, as well.
Idiotic, pus-slurping stuffed shirts! "WE know best how you should use the excess money we collected from you, and we've already decided that you should NOT save it, or buy what YOU decide you need. WE have made up our minds FOR you: You WILL spend the excess money we collected from you as part of the purchase price of an expensive item which you may or may not need right now. You really don't deserve to have it BACK."
Greasy, slimy, moronic bureaucrats, divorced from REAL life.