Catalysts for a major correction

[wachtwoord]

Wachtwoord: the gold standard lasted LONG after gold ceased to be carried around in people's pockets, as I'm sure you know.  The gold was stored in vaults and little bits of paper that said "go to my banker and he will give you gold" were traded instead.

 

Why can that not be done digitally?

 

 

Because digitally you're only exchanging tokens which represent gold aka paper gold. You cannot be certain the gold is actually there. With Bitcoin you can transfer the actual asset digitally (instead of tokens).

 

Regarding the other critique by RichardGibbons. You're right, I responded too impatient, irritated and cynical. Luckyly for me Jurgis comes to the rescue to show why I'm getting tired of (what appeared to me) another person wroshipping Keynsianism blindly. Look at his post:

 

Politicians are happy. People are happy. And yet everyone is worse off for it.

 

Any proof for this?

 

Let's see: People are happy and yet somehow everyone is worse off for it?

 

And BTW before you go on your gold bug bandwagon, maybe you should explain why the last 50 years of fiat money was one of the best times of the history of our civilization. For businesses and entrepreneurism too. Or will you claim that it made everyone worse off and it would have been so much better on gold standard?

 

Edit: it's also rather funny seeing people railing for gold standard at the time when there is no inflation, no inflation on horizon and there might be deflation because of a number of reasons. So you want to go back to gold standard why?

 

BTW both gold standard and bitcoin are bad because they encourage spending resources on unproductive endeavors: gold mining and fruitless computations. There's already way more gold in the world than there's need for it. If you're so smart, at least tie your bitcoin computations to finding cure for cancer. I'd vote for "cancer-cure-coin" maybe.  ::)

 

Last 50 years the best? Wow amazing, after WW2 the world was shot to bits. We started from the bottom. Even a retarded methodology will lead to improvement. And the US? Any economy will do well if you win two world wars in a century.

 

Mostly your second statement: Fruitless computations? This is the most secure payment network ever devised by several orders of magnitude. That is what the computations are for, to solve the Byzantine Generals Problem (for which Satoshi Nakamoto should have received the Nobel prizes or math, economics and peace).

 

Then you end your statement by showing your complete and utter ignorance. The cure for cancer coin had nothing to do with crypto currency and was just a bunch of people trying to jump on the crypto band-wagon because it was getting media attention (good for them btw). It has absolutely nothing to do with the concepts behind crypto-currency.

 

I'm just so disappointed in (otherwise intelligent) people being so utterly ignorant about something but still pretending to be completely competent. There is zero logical reasoning behind the Keynsianism. Even Keynes knew that. It's not even internally consistent. It's not science, it's religion.

[Jurgis]

Last 50 years the best? Wow amazing, after WW2 the world was shot to bits. We started from the bottom. Even a retarded methodology will lead to improvement. And the US? Any economy will do well if you win two world wars in a century.

 

It's not really worth responding, but just in case: 2016 - 50 = 1966. Just FYI WW2 ended in 1945 and most of post WW2 rebuilding was done by the time US went off gold standard.

 

I guess it doesn't trouble you at all that a great economic activity can happen with fiat currency. And then you accuse me of religion.  ::)

 

Mostly your second statement: Fruitless computations? This is the most secure payment network ever devised by several orders of magnitude. That is what the computations are for, to solve the Byzantine Generals Problem (for which Satoshi Nakamoto should have received the Nobel prizes or math, economics and peace).

 

I am fully aware what Bitcoin computations are. Yes, they are there for reason. They are still fruitless in terms of results: their only reason is to solve hard problem for security, but the problem solution itself is worthless.

Once someone creates computations that are both useful and provide the security we could talk about Nobel prizes.

 

The rest is just a bunch of venting and personal attacks which is par for the author. Unfortunately, moderators do nothing about it in this forum.

[petec]

 

And BTW before you go on your gold bug bandwagon, maybe you should explain why the last 50 years of fiat money was one of the best times of the history of our civilization.

 

Because for most of that time we have been levering up like crazy, borrowing from the future.  As you will know if you've read my posts I am not a gold bug.  However, nor will I declare victory for fiat currency until we have been through a whole cycle.  We have been off the gold standard for 45 years.  The first 10 of those were hellish economically and since then it has taken 35 years to lever the world, which we may only have gotten away with because inflation was dampened (if indeed it was - see below) by a one-off influx of labour into the global marketplace and an incredible pace of innovation. 

 

If we can sustain this level of leverage without pain, or we can delever without pain, then fiat currency wins.  No question.  But finding that out might well take another 35 years.

 

As for your other points:

 

- there is huge inflation in the world.  The cost of buying shelter (housing) and saving for retirement (assets) has exploded through the fiat leveraging cycle.  Inflation hasn't reached CPI, but that may at least partly be because CPI is understated (see www.shadowstats.com for excellent work on this).  I know I spend a LOT more to live than I did 15 years ago.

 

- I don't know if you've noticed, but there is a hell of a lot of mining for gold in this world today.  That's because, whether we like it or not, people know governments can't make more of it and therefore politicians can't erode its value.  The gold standard doesn't encourage mining gold but printing money sure does.

 

[Parsad]

<I>Regarding the other critique by RichardGibbons. You're right, I responded too impatient, irritated and cynical. Luckyly for me Jurgis comes to the rescue to show why I'm getting tired of (what appeared to me) another person wroshipping Keynsianism blindly. Look at his post:</I>

 

Guys, please stop with the posts specifically targeting any one individual.  Feel free to use their quote, but avoid personal attacks in your rebuttal.

 

Otherwise I have to start deleting posts and threads! 

 

Cheers!

[Jurgis]

Petec,

 

I disagree with most of what you write.

 

The "borrowing from the future" is incorrect mental model and IMO dangerous model to have. Economic activity and growth as early as possible is positive and should be encouraged. It compounds into the future. The fact that you build university, factory, bridge, etc. today rather than tomorrow means that it will have multiplicative effect for the future: its use and its products will allow you to build other needed things sooner than otherwise. Growth into productive fields such as infrastructure, tech, etc is especially beneficial. You are not borrowing from the future, you are actually enabling the future to be here sooner than later.

 

Sure, there is waste and mismanagement due to too much money available, but IMO austerity is never a solution, especially not global austerity. Now, I will say that unfortunately we do not have a good mechanism to produce growth without waste. Austerity isn't that mechanism though. Pretty much every country that may have had issues would be better of if their debts were forgiven and productive growth resumed instead of wallowing in recessions. Now, the issue is "moral hazard" and that is a real risk. But even with that I believe that growth is more important than the risk in a lot of cases.

 

I'll also say that we possibly don't have a great mechanism for global delevering without consequences. Debt cancellation has consequences and hasn't been tried on large scale. So you may be right that our societies may not figure out a painless way to delever and then we may have tough time in the future. IMO we don't have to have tough time, but we may have it because we don't have a mechanism to get rid of debt that is financial construct (and not something reflected in reality). My guess is that printing money is the best known mechanism for solving this, though I am open to others.

 

Anyway, I doubt we'll agree. :)

 

Good luck

[Guest Schwab711]

Wachtwoord: the gold standard lasted LONG after gold ceased to be carried around in people's pockets, as I'm sure you know.  The gold was stored in vaults and little bits of paper that said "go to my banker and he will give you gold" were traded instead.

 

Why can that not be done digitally?

 

 

Because digitally you're only exchanging tokens which represent gold aka paper gold. You cannot be certain the gold is actually there. With Bitcoin you can transfer the actual asset digitally (instead of tokens).

 

 

How do you know your Bitcoins will be there when you want to spend them?

[Guest Schwab711]

 

And BTW before you go on your gold bug bandwagon, maybe you should explain why the last 50 years of fiat money was one of the best times of the history of our civilization.

 

Because for most of that time we have been levering up like crazy, borrowing from the future.  As you will know if you've read my posts I am not a gold bug.  However, nor will I declare victory for fiat currency until we have been through a whole cycle.  We have been off the gold standard for 45 years.  The first 10 of those were hellish economically and since then it has taken 35 years to lever the world, which we may only have gotten away with because inflation was dampened (if indeed it was - see below) by a one-off influx of labour into the global marketplace and an incredible pace of innovation. 

 

If we can sustain this level of leverage without pain, or we can delever without pain, then fiat currency wins.  No question.  But finding that out might well take another 35 years.

 

As for your other points:

 

- there is huge inflation in the world.  The cost of buying shelter (housing) and saving for retirement (assets) has exploded through the fiat leveraging cycle.  Inflation hasn't reached CPI, but that may at least partly be because CPI is understated (see www.shadowstats.com for excellent work on this).  I know I spend a LOT more to live than I did 15 years ago.

 

- I don't know if you've noticed, but there is a hell of a lot of mining for gold in this world today.  That's because, whether we like it or not, people know governments can't make more of it and therefore politicians can't erode its value.  The gold standard doesn't encourage mining gold but printing money sure does.

 

I'll throw out some alternative points:

1. The last 45 years are not the first experiment with fiat currency. Almost every society has experimented with various fiat currencies. It's hard to use the 'survival' of a currency choice as a basis for success/failure because societies fail for all sorts of reasons that may have nothing to do with their currency. The failure of the Aztec's had nothing to do with their choice of using gold vs. other coinage.

 

2. I actually think inflation is overstated, but that's what makes a market. I wonder how you incorporated the quality of your lifestyle today vs. 15 years ago in your personal inflation calculation. Just consider the iPhone 7 vs the mobile phone bricks from 2001. The Blackberry 5810 cost $500. The deflation we've experienced as a society is absolutely incredible (and difficult to measure). FFH should be (but never will be) paid for those deflation bets.

 

https://www.timetoast.com/timelines/history-of-cellphones-prices

 

3. It could be as simple as there exists a market for gold. If gold mining is profitable at market prices, folks will arbitrage it.

 

[wachtwoord]

Wachtwoord: the gold standard lasted LONG after gold ceased to be carried around in people's pockets, as I'm sure you know.  The gold was stored in vaults and little bits of paper that said "go to my banker and he will give you gold" were traded instead.

 

Why can that not be done digitally?

 

 

Because digitally you're only exchanging tokens which represent gold aka paper gold. You cannot be certain the gold is actually there. With Bitcoin you can transfer the actual asset digitally (instead of tokens).

 

 

How do you know your Bitcoins will be there when you want to spend them?

 

Because you're the only one with the private key and you made sure not to give this to anyone.

 

 

<I>Regarding the other critique by RichardGibbons. You're right, I responded too impatient, irritated and cynical. Luckyly for me Jurgis comes to the rescue to show why I'm getting tired of (what appeared to me) another person wroshipping Keynsianism blindly. Look at his post:</I>

 

Guys, please stop with the posts specifically targeting any one individual.  Feel free to use their quote, but avoid personal attacks in your rebuttal.

 

Otherwise I have to start deleting posts and threads! 

 

Cheers!

 

You're right. I apologize and will withdraw from this thread (and feel free to delete posts).

[petec]

 

The "borrowing from the future" is incorrect mental model and IMO dangerous model to have. Economic activity and growth as early as possible is positive and should be encouraged. It compounds into the future. The fact that you build university, factory, bridge, etc. today rather than tomorrow means that it will have multiplicative effect for the future: its use and its products will allow you to build other needed things sooner than otherwise. Growth into productive fields such as infrastructure, tech, etc is especially beneficial. You are not borrowing from the future, you are actually enabling the future to be here sooner than later.

 

 

This is 100% correct for productive investments.  It is not correct for unproductive investments or for consumption.  The acid test is whether activity expands as fast as debt does over the long term.  If not - if debt rises as a % of gdp - you are borrowing from the future.   

 

I'm not sure where the austerity comments come in.  I was debating gold vs. fiat, not alternative fiscal policy in a fiat regime.  I do actually agree with you that printing money is probably the least painful way out of the leverage we find ourselves in.  But it will be painful, because inflation always is (and without an inflation we will not delever).  My point was more that hard currency, as a rule, seems to promote more innovation, more discipline, and ultimately more wealth creation/progress.  That's because it forces you to work hard.  But people don't like that.

[petec]

 

I'll throw out some alternative points:

1. The last 45 years are not the first experiment with fiat currency. Almost every society has experimented with various fiat currencies. It's hard to use the 'survival' of a currency choice as a basis for success/failure because societies fail for all sorts of reasons that may have nothing to do with their currency. The failure of the Aztec's had nothing to do with their choice of using gold vs. other coinage.

 

 

I don't think I referred to the success or failure of societies.  I simply said that very few if any societies have ever stuck to a truly hard currency because the discipline required to do so seems beyond us, even if (and I do mean if) the overall impact is positive.

 

It seems to me societies start with hard currency, eventually succumb to the siren song of fiat currency, and then find that confidence is lost in the currency and go back to hard(er) currency.  That seems to be a natural cycle to me, explained more by human psychology than anything else.

 

The cheapness of smartphones, amazing as they are, is hardly a rebuttal of inflation.  My contention is that, like for like, the expenses that I consider critical for my life are much greater than they were.  Lucky you if this is not the case for you!

[Guest Schwab711]

Wachtwoord: the gold standard lasted LONG after gold ceased to be carried around in people's pockets, as I'm sure you know.  The gold was stored in vaults and little bits of paper that said "go to my banker and he will give you gold" were traded instead.

 

Why can that not be done digitally?

 

 

Because digitally you're only exchanging tokens which represent gold aka paper gold. You cannot be certain the gold is actually there. With Bitcoin you can transfer the actual asset digitally (instead of tokens).

 

 

How do you know your Bitcoins will be there when you want to spend them?

 

Because you're the only one with the private key and you made sure not to give this to anyone.

 

Bitfinex

MtGox

 

Bitcoin is far from safe

[wachtwoord]

Apologies for responding but: if you hold on to your own Bitcoin there is no 3rd party risk. If you do there is, like with any asset in the world.

[TwoCitiesCapital]

Politicians are happy. People are happy. And yet everyone is worse off for it.

 

Any proof for this?

 

Let's see: People are happy and yet somehow everyone is worse off for it?

 

And BTW before you go on your gold bug bandwagon, maybe you should explain why the last 50 years of fiat money was one of the best times of the history of our civilization. For businesses and entrepreneurism too. Or will you claim that it made everyone worse off and it would have been so much better on gold standard?

 

Edit: it's also rather funny seeing people railing for gold standard at the time when there is no inflation, no inflation on horizon and there might be deflation because of a number of reasons. So you want to go back to gold standard why?

 

BTW both gold standard and bitcoin are bad because they encourage spending resources on unproductive endeavors: gold mining and fruitless computations. There's already way more gold in the world than there's need for it. If you're so smart, at least tie your bitcoin computations to finding cure for cancer. I'd vote for "cancer-cure-coin" maybe.  ::)

 

Ignorance is bliss. People are happy because no one is quantifying the losses. Just because they're ignorant to the losses doesn't mean that we should stick with the system.

 

The prosperity that has been achieved over the past few decades has been independent of the monetary system. It's a result of better education, better technology, and better productivity. This would have happened regardless of the monetary system in place. While I agree with you that borrowed money can contribute to society if invested in productive assets, it IS borrowing from the future and a detraction from future growth when that money is squandered or invested in unproductive assets.

 

Many consumers are still underwater on houses purchased prior to '08 because housing prices were inflated due to misallocations of capital and speculation. That is not productive.

Many consumers are in debt up to their eyeballs in consumer debt on credit cars. That is not productive.

Many students are in debt up to their eyeballs getting a degree that has inflated in value even as the wages that degree is likely to earn have stagnated for the past 10 years. This is likely not productive OR not anywhere near as productive as it once was.

Many corporations have borrowed a ton of money to repurchase their stock. This is not productive.

Trillions have been spent fighting foreign wars, paying current gov't bills, and paying interest on current debt. None of this is productive.

 

So when these tens of trillions of dollars in unproductive debt unwinds and negates from future GDP growth, the question will be have the last 30-40 years been anywhere nearly as good as you thought?

 

As mentioned, we are seeing deflationary forces now. These are a combination of

1) Relative competitiveness because Europe and Japan are in a far worse position than the United States (both dealing with debt/demographic driven deflation) and

2) The bad kind of debt driven inflation as consumers have been saving more, spending less, and generally deleveraging

 

As mentioned: the only time deflation is bad is when you have a ton of debt. U.S. tax payers currently own 100,000+ for their share of gov't debt. Add to that a car loan, a mortgage, some credit card debt, and student loans and you're talking about people who can't afford for wages to drop. This won't be a healthy deflationary cycle that ends well.

 

I don't own gold. I don't run around advising everyone else to own gold. But I do think Western monetary policies are irresponsible and don't make any reasonable sense. The general public doesn't pay attention to this stuff. Inflation is hard to measure and monitor in real time because people think in nominal terms - not real. Consumers will have a high tolerance for it until it becomes increasingly clear their quality of life has become obviously worse off than they once were. So far, what we've seen is real wages declining/stagnant for 16 years. If that trends continues, I imagine that we'll see people starting to wake up to that fact.

 

When that happens, the trust in the currency could disappear which is the only value the currency has.

 

This doesn't happen when currencies are backed by something fundamental because:

1) A fundamental backing enforces some measure of discipline on market participants AND

2) Even if the system does blow up, the fundamental backing retains some value

 

Anyhow, not really a gold bug. I think fiat currencies could work if people were responsible. We are not a responsible people. This is why gov't budgets are chronically underfunded and pensions too! This is why even when left up to the individual, people woefully undersave for retirement, expected health care costs, education, unexpected events, etc. etc. etc. No - we are a totally irresponsible people without the ability to look forward and plan for the future. Since that is clear, a fiat currency is totally unworkable because it requires a discipline and responsibility that we do not have (and it seems clear from history that most civilizations haven't).

 

In a perfect world, fiat would work. We're not in a perfect world so I'd prefer to opt for the currency that forces that discipline on it's users.

 

[Jurgis]

TwoCitiesCapital and petec,

 

I disagree that "discipline" the way you mean it is a good thing. I talked about austerity because IMO this is the closest to "discipline" we have in fiat currency society.

 

I agree that there is a large amount of waste, especially trillions spent on wars. "Discipline" would be good if it cut the waste. But I doubt that the waste would somehow disappear under "discipline" of gold standard. IMO the productive parts would suffer, likely more than wasteful parts. And that's why I am against "discipline" as you define it.

 

If the goal is to reduce waste - and I think this is a real and good goal - then we should be talking about that. But solutions for that would likely be political and policy solutions rather than monetary ones.

 

And I still disagree with the whole "borrowing from the future" mental model even though I have a pretty good picture where you are coming from.

 

Anyway, we'll probably continue to disagree.

 

Good luck.

[Spekulatius]

Interesting argument--very different than what I've seen from mainstream economists, who mostly seem to vilify deflation as destroying the economy by reducing demand. On the other hand, building demand through constantly growing debt doesn't seem particularly sustainable either, but they seem enthusiastic about doing that recently.

 

Thanks petec.

 

Jim Rogers in Investment Biker makes the opposite argument.  He says that if governments persistently devalue to keep the economy competitive, companies don't innovate.  By contrast, governments that sustain a hard currency force their companies to innovate to compete, and by doing so create real wealth (as distinct from money).  Europe would appear to be an excellent example: every single one of the Eurozone currencies devalued against Germany in every single one of the five decades before the unified currency.  By contrast the mark was one of the hardest currencies in the world.  Which Eurozone country has the strongest companies, the most innovation, and is the wealthiest?

 

Inflation does not create wealth.

 

Mainstream economists hate deflation for three reasons:

1. They think it delays purchases.  TCC has rebutted this very well - I would just add that if the money in your pocket keeps getting more valuable, aren't you more likely to spend it because you find you can afford things you always wanted?  I know I would be.

2. They blame it for the Great Depression.

3. If they accepted hard currencies and market primacy they'd all be out of jobs in which they teach how clever macroeconomic management can prevent the terrible consequences of hard currencies and market primacy ;)

 

Concentrating on #2:

 

First, deflation can be caused by innovation in a hard currency environment or it can be created by a deleveraging event.  The first is not dangerous; the second can be.

 

Second, deflation was a symptom of the great depression, but not the cause.  Many people thought it was the cause then, and many still do, but if you understand that money is simply a way of measuring activity then you'll understand that price changes can't really be very causal in driving activity.  (Relative price changes do drive activity because they signal economic need and guide the allocation of capital, but general price changes don't.)

 

In the 1920s there was a huge credit expansion, meaning money got created through fractional reserve banking etc.  This drove prices up (more money chasing roughly the same amount of assets and produce).  Starting in 1929, this process went into reverse and prices started falling.  This process doesn't have to be harmful to most real activity.  What it does do is show who's been using debt to invest in bad projects, as so often happens in a credit boom.  And to the extent that those bad projects stop, there's a temporary impact on real activity.

 

Now, if you allow prices to fall in this situation you're ok: less money, broadly the same activity level, lower prices.  But you have to allow prices to fall.  If you organise labour to keep wages up, and organise pools to buy commodities to keep their prices up, you will cause chaos.  As prices of goods fall companies must be able to cut labour costs or go out of business.  As market prices of commodities fall, you need to get to the point where they are so cheap people want to buy them, but stockpiling prevents this by a) holding up the price and curbing demand, and b) causing a huge overhang which does cause people to delay purchases.

 

Hoover did everything he could to stop prices falling, because he believed that falling prices was the cause of the problem.  He organised labour and commodity pools.  Yet in fact, deleveraging and money destruction was the cause of the problem, and falling prices was a natural consequence of that - and a very healthy one, if left to operate properly.  A similarly rapid deflation fixed itself in 18 months in 1921, because nothing was done to interfere with markets clearing. 

 

It's important to understand that a deleveraging/deflation episode must come to a stop.  This is because while deleveraging can destroy all credit-created money, it can't destroy base money, so the amount of money in the system will never fall to zero.  If prices keep falling, they will eventually look so cheap that buyers will be motivated to buy, and prices will stop falling.  Credit deflations end themselves naturally if markets are allowed to clear.

 

The other alternative solution to excessive leverage is inflation to make the debt go away.  This involves price controls (like the minimum wage and inflation targeting, which I think is a really dangerous idea) and rapid creation of new fiat money to offset money destruction via deleverage.  This is politically popular - people don't like wage cuts or having to pay their debts by working hard - but as Rogers argues, it probably impairs innovation and wealth creation, and it also means ever-higher levels of debt.

 

In the next 20 or 30 years, we will find out whether fiat money and stunning debt levels are worse than hard money and less debt.

 

Sorry for the long and very off topic post!

 

 

 

When prices fall a lot, a disaster is not that far of. We are not talking about consumables here, if prices of houses for example fall by 50%, a lot of people owe more than their house is worse all of a sudden. We know how this is going to end, because that is what happens in CA for example from 2005-2010. lot's of people will default, banks will have to write of loans, some will go under as well. DOesn't sound to healthy to me. Now with widespread deflation, it's not just houses,  it will be commercial real estate, resources, land, etc. Lot's of loans will default, banks and is insurance companies, the bond market will crash.

 

No problem, I get paid half and my groceries cost half, so everything is the same, except - I may not have a job any more, I am underwater a few 100k on my house, my bank defaulted, the 401k is down 75%. Well it's great for the that stored their money under a mattress everyone else is going to be screwed.

[petec]

TwoCitiesCapital and petec,

 

I disagree that "discipline" the way you mean it is a good thing. I talked about austerity because IMO this is the closest to "discipline" we have in fiat currency society.

 

I agree that there is a large amount of waste, especially trillions spent on wars. "Discipline" would be good if it cut the waste. But I doubt that the waste would somehow disappear under "discipline" of gold standard. IMO the productive parts would suffer, likely more than wasteful parts. And that's why I am against "discipline" as you define it.

 

If the goal is to reduce waste - and I think this is a real and good goal - then we should be talking about that. But solutions for that would likely be political and policy solutions rather than monetary ones.

 

And I still disagree with the whole "borrowing from the future" mental model even though I have a pretty good picture where you are coming from.

 

Anyway, we'll probably continue to disagree.

 

Good luck.

 

Jurgis,

 

I never understand people who don't like austerity.  Austerity means saving.  Saving means investment.  Investment means more productive activity later on.  I am referring here to austerity in the gold standard sense (i.e., don't borrow much, live within your means, and save) not the current political sense which is related but different.

 

Waste does not entirely disappear under the gold standard.  No system is perfect because the humans running it are perfect.  But the gold standard does significantly reduce waste, because it significantly reduces the extent to which politician can spend without taxing.  That means they have to think much harder about what they spend, and spend less overall.  Less waste.

 

Could you please elaborate on why you don't like the "borrowing from the future" model?  It seems to me there are two types of borrowing, consumer and investment.

 

As a consumer, if you borrow to buy a TV, you can either pay it back later or default.  One is clearly borrowing from the future.  One destroys another man's asset in the future.  If each consumer is borrowing from the future, then clearly in aggregate they are doing so.  The same goes for government spending on consumption of all kinds.

 

Borrowing to invest can be productive (cash flows from the investment, whether produced directly in the form of profit to the owner, or indirectly in the form of higher GDP, will cover the debt repayment) or unproductive (cash flows won't).  Borrowing to invest in a productive asset is definitely not borrowing from the future.  I agree 100% there.  But if the investment is unproductive then either another source of cash has to be found in the future or the borrower defaults, and in both cases that is borrowing from the future. 

 

NB timing has a huge impact on whether investing is productive: building a five lane highway between two villages in rural China is unproductive, even if those villages grow to be big cities in 100 years.  Today, the villages need a single lane connection, and you can add lanes as and when you need them.  That maximises the return on investment and the likelihood that the investment can repay its debt.  It is therefore not accurate to say that overbuilding assets that will be productive in the future is necessarily productive investment now.

 

As I said, I think the acid test is the debt:gdp ratio over a long time span. 

 

Thanks for the debate!

 

Pete

[Jurgis]

Petec,

 

I think that the answer lies somewhere between two extremes. I think you are closer to one end and I am closer to another end, but neither of us are at extreme. How close we are is unclear. :)

 

I disagree that all consumption is borrowing from the future. Clearly at extreme if a person dies from hunger, they will not consume (or produce) anything in the future, so you'll have a better future (with more production and consumption) if they are fed now. Similar argument can be made about healthcare consumption, possibly shelter, etc. (I'll skip the argument that one person's consumption is also another person's production - it's there, but it might get hairy ;) ).

 

Now, you are right that at personal level if person has no money and has to eat, they can only borrow from the future, since that's how obtaining-money-when-you-have-none is structured. But I disagree that this is true at society level. Like you said, society can focus at productive vs. non-productive spending and it's likely that feeding the person is one of the most productive things society can do. Now, we are back to "moral hazard" issues and yeah, these are hard, but IMO these belong to another discussion.

 

Going to society level, IMO you guys are making a mistake looking at country (society) as individual investor. For individual investor it is almost always true that saving is the way to go, but that's because of the way our society is structured. If person does not save, they won't have anything to live on when they are not productive anymore. It is also likely that individual investor does not have many productive uses of their money assuming they are fed, have shelter, healthcare, education and any professional needs. Although they can invest in businesses and I wonder if you count that as saving or as spending. I'd think it is not saving, but possibly this is OT.

 

This is quite different at country level: country will never go old and unproductive. Also the goal of a country is not to amass enormous fortune while its people are left at worse productivity level than they could be. So assuming country has productive uses of money, it should allocate it to those uses now. And when I say productive, I mean something that is either consumption or infrastructure but what enables better future production and consumption.

 

Now, I think your example of "building a five lane highway between two villages in rural China" is intentionally exaggerated to be wasteful (you say it's unproductive, I say it's productive but wasteful). However, building a road between these two villages, or paving an existing road is likely to be quite productive.

 

Now, we get to the question: what if country has a lot of productive uses of money, but it has no money? My argument is that it should borrow and spend and that this would still bring a better future than not borrowing. But, yeah, I see how this probably would be a point of contention between us. I think you'll have no issue if country borrows, spends money productively, then later when internal production/consumption rises, the debt is repaid. But what if the debt continues to grow. I say that assuming productive uses, this is still a "good thing". But I am aware that our society does not have a great way to delever that debt in the future. Money printing or default are two options. You don't like them, I don't particularly like them too although I find them somewhat acceptable. There likely should be a way to get rid of debt without the pain of two methods above, since debt is a financial construct (and not a real world construct), but I'll leave finding the solution to some Nobel winning economist. ;)

 

Anyway, everything above is for ideal world where unproductive-use-of-money does not exist. In real world, unproductive use of money exists in spades and moral hazard exists in spades. I am sure there are examples where even productive and useful money spent ends up not as productive as expected. So it's possible that something closer to your position is a good heuristic to ensure that countries and people don't overspend on unproductive uses and don't get rewarded for it. I still think that pretty large portion of spending is productive and therefore I still remain somewhere farther from your position on the line of how much to borrow and spend.

 

Hope this explains my position. Not sure if this is Keynesianism or some other -ism.

[petec]

Thanks for the considered reply.  For what it's worth:

 

- totally agree borrowing to eat would be productive but a) it's still borrowing from the future because you *do* have to repay with future earnings and b) it is not what is happening today, when people are buying TVs and cars etc.

 

- saving=investment by definition in the national accounting equations as I understand it.  Less technically, yes I would absolutely consider investing in businesses to be saving.  What I am getting at when I talk about saving is laying out money now in order to have more later, and under a hard currency that can only be done by investing in productive capacity, which has the side effect of growing the economy.

 

- I totally agree that building a single lane highway between the two villages would be productive.  But your distinction between wasteful and unproductive is, I think, false.  Waste is by definition unproductive. 

 

- It is impossible in a free market for a country to have lots of productive projects but little money for two key reasons.  One, money is attracted to its highest and best use.  And second, if there is little money you will get deflation until the money you do have is worth a huge amount.  Money is merely a tool of measurement.

 

- You're right that we agree that borrowing for productive uses (by my definition) is fine.  And I have no issue with debt continuing to grow in absolute terms.  I *do* have an issue with debt continuing to grow as a percentage of gdp.  This cannot continue forever without a collapse in confidence in the currency.  It also means, by definition, that the debt has not been put to productive use, because by definition productive investment will generate enough additional GDP to repay the debt.  A continually rising debt:GDP ratio is absolute proof of unproductive debt.

 

- I agree with you that *from this starting point* money printing is probably the best way forward.  I just don't think we would ever have got to this point if we had had better monetary policy.  Don't get me started on what inflation targeting has done to boost a credit bubble in an age when prices should have been deflating due to globalised labour and incredible technological advance. 

 

I hope you don't mind my replying in detail - I find these debates very useful for learning and for clarifying my understanding of my own position - so, thanks!

 

P

[Aberhound]

The challenge for determining the catalyst is that cause and effects require determining the root cause to the effect.

 

In 2008 for instance the cause was the bank's successfully taking control of the US political system and the effect was the US housing collapse leading to a collapse of the derivatives then the bank collapse then the stock market generally.

 

This time I suspect a different cause because after 2008 a computer control system started after 9/11 was widely implemented. Now I think all markets are controlled by the central bank technicians guided by computer expert systems but imperfectly. This has allowed and caused crazy policies to be adopted while the digital currency is implemented to replace cash. Digital currency will make the job of the computer and technicians much easier. Bitcoin might be the digital currency as I think this is the only way to get its use across the S curve threshold of early majority adoption.

 

If correct, there won't be a collapse like 2008. Instead I suspect the catalyst will be a different part of the control system. Their top priority is maintaining control so I suspect the current set up is intended to put in place a tighter control system centered on the digital currency. I suspect this because it seems obvious that negative interest rates will collapse the banks.

 

I watch when the digital currency system is ready. When that occurs the bank system in Europe will be collapsed. That is where the psychopaths are in control as judged by their lack of care for the human costs to their policies. Once the digital currency system is in place most banks become unnecessary so it makes sense to do the collapse and the birth together from the point of view of the psychopath.

 

The weakness of the psychopaths is their brain imbalance. This causes them to choose a path that leads to chaos. Once visible their power evaporates. The best example of psychopathic power evaporating in fiction is the last book of Lord of the Rings where Gandalf leaves the returning hobbit to deal with the problems at the Shire. The problem at the Shire was that Saruman had set up a slave state. The heroes easily strip Saruman, the former great Wizard, from control by getting the little people to see the wrong, who then disarm or cause to flee the few bullies keeping Saruman in luxury. Saruman is revealed powerless himself when Frodo no longer believes or is tricked by Saruman's gossamer voice. Frodo plans to let Saruman go freely despite his crimes because he understands the nine laws (symbolized by the nine rings of man). Irish Brehon law ie the true common law, is based on the nine laws. The prevailing Roman laws, ie the slave system, stands in opposition. Saruman's chief slave Wormtongue kills Saruman when Saruman reveals to Frodo that Wormtongue murdered the mayor of Shire (which is how Saruman took power). Wizards like Saruman are rendered powerless as they know they must follow the nine laws or suffer the consequence ie bad Karma. They never murder, but instead trick others to do the evil deeds and suffer the bad karma instead. Accordingly wizards are powerless once their victims understand the nine laws and the trickery so choose to protect themselves from bad karma allowing their souls to progress to higher consciousness like Frodo, who at the end is allowed to depart to the land of the Elohim where their forefathers came from (which interestingly is America ie West of the sunken island given to the Numenor, or, according to Conquest of Man, The Marvelous Story of The Men Who Discovered And Explored The Lands and Seas of the World is Greater Ireland ie where the Irish and civilization presumably came from (otherwise it would be called "New Ireland"). As Tolkien was a Vatican librarian hopefully all will soon be revealed when we have a Snowden hero leak the hidden books of wisdom when that unknown hero gets tired of the chaos and seeks to fix the true cause ie the failure of the many to know and to understand the nine laws.

 

 

[Guest Schwab711]

Deutsche Bank and/or all Italian banks could be a catalyst to a correction.

 

http://www.ft.com/cms/s/0/fa7929fc-526c-11e6-befd-2fc0c26b3c60.html

[eclecticvalue]

I think it is very simple. Both the consumers and corporations are binging on debt. And it probably won't end well. Also Income stocks are overvalued. We pretty much have to wait.

[LC]

I think it is very simple. Both the consumers and corporations are binging on debt. And it probably won't end well. Also Income stocks are overvalued. We pretty much have to wait.

 

income stocks are probably very correlated with interest rates, right? at this point it makes sense to distribute most of earnings to shareholders and take on debt to fund anything else, i would think.

[John Hjorth]

Deutsche Bank and/or all Italian banks could be a catalyst to a correction.

 

http://www.ft.com/cms/s/0/fa7929fc-526c-11e6-befd-2fc0c26b3c60.html

 

Yes, this seems almost insurmountable. A short time ago I tried to get some kind of understanding of what's going on in the Italian banks. I ended up giving up trying to understand the situation. I mean: How do you value a bank based on its financials when you know that about 13 percent of the loan book is in default, and proper provisions for losses aren't made? [banca Monte dei Paschi di Siena]

[KinAlberta]

I think it is very simple. Both the consumers and corporations are binging on debt. And it probably won't end well. Also Income stocks are overvalued. We pretty much have to wait.

 

I have to agree, yet, this is so widely known and expected, I just can't see any small change doing anything to market valuations. I think noticeable sharp corrections tend to occur when something broadly unexpected happens.  After the fact the predictors of which are dug out of the woodwork and promoted in the media. Beforehand though, their warnings get ignored.