2007 Redeux?

[Brooke]

minimum wage was designed so a father could provide for his family.

Minimum wage, rent control, and policies like that sound like they would help.  But when you consider all economic consequences, they end up being harmful to the group of folks intended to help.  Reasons why and some case studies are described in books like Economics in One Lesson, by Hazlitt; Basic Economics, by Sowell; and Losing Ground: American Social Policy, 1950 - 1980, by Murray.  Minimum wage, for example results in higher wages for folks who are still employed (which is good for them), but puts some people out of work whose wages then are zero (so much worse for them).  Over the whole group, it is harmful.  Rent control leads to shortage of housing.  Great for the folks who are already in it; sucks for folks who aren't.  These are well-studied consequences that show detriment in aggregate.

as for the barter system that's what we had. I only wrote about it because I saw the signs when I was young.  the signs aren't here.

I recently had to do large amounts of work to get my house ready to sell.  Some is showing up.

I consider that a good sign.

If wages for everyone keep up with inflation, that is good, and the economy is functioning well.  But usually under inflation, they don't.  A Big Mac goes from $5 to $10, but while average person's wages go up, they don't double.  So, comparatively, average person is less well off.

Today, we have massive printing of money from the government.  It goes to a subset of people, who are way better off for it.  But the folks down the chain of that economic flow are not.  They get higher prices without the full measure of free money.

[DmonSlyr]

There is one simple solution to all of this, though it will never happen. In my dreams perhaps. It's why countries fail.

All they they have to do is lower the Income and property taxes by 30-40% and fire/remove many government programs/institutions, and people would automatically have an extra $150+ to spend a month while giving the government more cash to pay off debt/deficits. This would increase the people's spending capacity which the government would get back in some way. What I always see with failing countries is a very high tax rate that crushes consumer spending while the government grows its britches too big that it cannot compensate for a decline in consumer spending. Or the government takes over certain industries but cannot maintain them as well as a private Co, which leads to failure and collapse. I still believe that high taxes leads to high cost because all business must compensate for that tax lost, which forces your business to raise prizes to compensate for all of your suppliers raising prices.

Reduce the size of government and its spending and lower tax #s rates for all Americans. That is how you best this situation and bring GDP back to 5%.

[CptTrips]

Inflation means own gold, silver, a house, commodities -- but not cash.

Long term, yes.

But housing and commodities are also entrapped in the current EVERYTHING BUBBLE.  When things pop, those are getting their heads lopped off too, IMHO.

Precocious metals and gems have some usefulness to store value through the storm, but only if you are taking physical possession of the asset.  If you are paying for storage, you are losing purchasing power from the overhead. 

If you are nearing retirement, you want to store a $mil of Kugerrands in your attic?  Bury it in your back yard? 

The only other option is buying gold options, but then you are just back to a different kind of paper.  If I'm going to do that, then I prefer gold mining stock.  I don't have to risk storage or pay for secure storage.  The mining companies revenue would hopefully be very resilient as the thing they are generating revenue mining retains value.  In addition, they have significant physical assets like land, equipment, etc.  YMMV. 

Some people say crypto is the new gold.  I'm not buying it.  crypto seems more reliant on a constant stream of "Greater Fools" than most other investments.  Didn't we just have a bout of massive valuation swings?  20+ % over a weekend?  Does that sound like stable store of value?  Smells like Tulips to me.  https://en.wikipedia.org/wiki/Tulip_mania

IMHO, if I can't pay my Federal taxes with it, then it isn't a currency. <Shrug>

A friend is walking me through options.  Not something I want to dabble in, but might be worth a smallish side bet.  Might could make some inverse return from the market crashing, enough to offset the inflation cost of the rest sitting safely in cash during the upheaval.  I haven't decided.  But I'd do that before buying any crypto.

[Brooke]

But housing and commodities are also entrapped in the current EVERYTHING BUBBLE.  When things pop, those are getting their heads lopped off too, IMHO.

Absolutely.  That's the dilemma I see:  will we have crash then inflation, or no crash and then inflation?  Each one of those has a very different optimal investments.

Precocious metals and gems have some usefulness to store value through the storm, but only if you are taking physical possession of the asset.  If you are paying for storage, you are losing purchasing power from the overhead. 

Every way of owning precious metals has its set of advantages and disadvantages.  Vaulting isn't that expensive these days (like 0.5% per year) and still has some counterparty risk.  Storing in your house might need various security expenses or overhead.  Depends on a person's situation.

The only other option is buying gold options, but then you are just back to a different kind of paper. 

I think futures could definitely decouple from the physical asset, with the futures becoming worthless.

If I'm going to do that, then I prefer gold mining stock.

Can be good, but depends on what you are planning for.  If there is giant inflation, but the financial system still works, is probably good.  If it gets so bad that brokerages and markets start to fail, then physical assets are perhaps best.  Or can do a mix of those for diversity.

Some people say crypto is the new gold.  I'm not buying it.  . . . . Smells like Tulips to me.

Same to me.  People think of Bitcoin as being unable to be diluted.  But you can easily make Bitcoin II, III, etc. -- just like Dogecoin.  It is dilutable by making additional currencies.

A friend is walking me through options.

I've done a lot of options trading.  My feeling is that they are, for most people, like gambling on a roulette wheel, but with worse odds than the roulette wheel.   But if you are the 1 in a million guy who can time things (like a crash), you could make a lot of money.

[Eagler]

I series savings bonds are paying over 7% until May 2022 where my guess is they go higher due to increased inflation

$10,000 limit per person per year has me investing $40k between now and next week 2022 for 2 for me and 2 for the wife

Not much but its its something and about as safe as it can be

Anyone still have a pension?

I recently discovered that one of mine that I thought was inclusive of another - buyout- was not and is actually a separate one

What are you thoughts on those? Take a lump sum if offered or take monthly payments?

Eagler

[CptTrips]

[Nevermind.  Was trying to fix a typo.]

[CptTrips]

I series savings bonds are paying over 7% until May 2022 where my guess is they go higher due to increased inflation

$10,000 limit per person per year has me investing $40k between now and next week 2022 for 2 for me and 2 for the wife

Not much but its its something and about as safe as it can be

I was looking at those.

Things to consider.  That money is locked up for at least a year.
If you don't keep it 5 years, you lose the last 3 months interest.  So if you cash it in in a year, your yield is more like 4%. 
Current inflation is going to end up around 5.9% for 2021.  Is inflation going up or down in 2022?  My guess is up.

Not terrible for low risk.  I personally don't know if I'm comfortable in having anything locked up for 12 months right now.  I prefer liquidity, but you have to weight based on your own risk tolerance.  I don't think there are any perfect investments right now.  Pick your poison.

Personally, I'm developing my own crypto currency (everybody is doing it), Tulipcoin.  I just need some celebrity to promote it on TV for me and get me some buzz.  Maybe Paris Hilton.   




 

[CptTrips]

I series savings bonds are paying over 7% until May 2022 where my guess is they go higher due to increased inflation

$10,000 limit per person per year has me investing $40k between now and next week 2022 for 2 for me and 2 for the wife

Not much but its its something and about as safe as it can be

Have you also evaluated TIPS?

[Brooke]

Jeez.  7% on I Bonds.  I know that there's inflation, but I didn't realize the official CPI was posted so high.  CPI was 1.68% as of February, 2021.  It is currently 6.8%.

My worry is that if there is a big enough crash, institutions that handle annuities or maybe pensions go belly up.  I don't know, though.  All money has to be put somewhere.  Government bonds seem pretty safe because I don't think the government would outright default on them -- just print more money to pay them.  But if there is huge inflation, they get eroded, even inflation-linked ones, as the government calculation of inflation is lower than real inflation.

I like this site for info on inflation:
http://www.shadowstats.com/alternate_data/inflation-charts

[CptTrips]

My worry is that if there is a big enough crash, institutions that handle annuities or maybe pensions go belly up.

Well, that is one of the more criminal side-effects of the Fed deranged Zero-Interest rate policy.

Older Retirees, institutions and pension funds that have fixed outlays they HAVE to cover, have been forced bit by bit into heavier weight of risk assets because they can't earn sufficient revenue in the old traditional safer fixed-income instruments.

If they get caught when the music stops holding a bunch of worthless stocks, they are toast.  Those kind of investors should NOT be holding lots of stocks, but many are because they had to to cover payouts.  The Fed had basically closed off other revenue sources.  TINA at work.

 

[hazmatt]

that's not gonna happen here.

semp

I'd like to know how you are so sure. I am not.

[hazmatt]

Let's hope you're right, but that sounds more like faith than analysis.

A lot of people seem to think the U.S.  has some magical properties that protect us from the negative economic outcomes other countries have suffered.  I don't think we do.   If we do the same kinds of things, I expect the same kinds of results.  We are bigger, so things might progress at a different pace, but that also means it harder to turn around from a bad trend.

We've gotten ourselves in a real pickle.  We have quite a bit of national debt that we can service with current revenue/spending because the interest load is so low.  We have massive corporate debt levels and margin trading at a historic high, because money is essentially being handed out for free.
We have been stacking up inflationary pressures since at least 2009 just waiting to get traction.  We have a stock market that is probably 70% over any sane valuation kept aloft almost purely by Fed money printing. 

The Fed has traditionally pegged neutral interest rate at ~4-4.5%.  Below that you are applying inflationary pressure, above that you are cooling inflation.  We are currently at 0.25%.  It's going to be extremely hard for the Fed to get a handle on inflation if all that built up pressure is finally getting traction.  Even getting to back to neutral rates would be a Herculean effort that I don't see how it could be accomplished without extremely painful consequences elsewhere.  When the pain starts they will wince and try and stop and hope for the best and inflation will then continue spiraling upward.  I don't think our Fed or Gov have the pain tolerance that Volker had.  It's going to be a Hobbesian choice.  How long do you think it would take them to be able to get rates even back to neutral?  How much do you think inflation could have climbed by then?

I don't think there are any obvious good solutions.  We are in the torturers chair and he is asking if we'd like to have our nuggets cut off or would we prefer to have our fingers and toes smashed with ball-peen hammers. "Uhhhh.  Can I have some time to think that over?"

Pain has already been baked into the cake at this point.  If we are lucky, we might be able to choose how the pain is allocated.  It's possible we could go on pumping and avoid the pain a little longer, but that then has to trade-off of the eventual pain just being worse (but that doesn't mean that won't be what they choose).   That doesn't make it go away, it just hangs over your head getting bigger.

I'd prefer a market crash.  That's easier for me personally to dodge.  I can move to cash and take the 10% inflation hit over the next two years rather than a 60-80% hit in the market.  Endemic high inflation is much harder to hide from for everyone including average blue collar folks.  It infects every goods or service in your life.

But one way or the other, the piper will eventually be paid.   IMHO.

It doesn't make me happy to say that I agree with you.

[hazmatt]

 but that isnt the president's fault, not all of it. 


semp

Did I miss something? This is a hole that has taken a while to dig.

[hazmatt]

Today, the financial situation is not like the 1970's.

We had big inflation in the 1970's, but the amount of debt was drastically less than today.  So Volcker could quit printing money, jack up interest rates to the teens, and kill the inflation; and government could still pay its bills.

In 1970, national debt was $370 billion, which was 27% of GDP.  Today, the US national debt (what is owed on T notes, T bills, etc.) is 78 times bigger, $29 trillion, which is 127% of GDP. 

Today, the US spends $400 billion/year to service this debt with an average interest rate of 1.5%.  That's with interest rates at historical lows.  If interest rates go up even a little, you can't tax enough to pay it.  So, you have to keep interest rates at historical lows, which leads to inflation; or you have to print money to pay the debt, which leads to inflation.  Or you outright default on it, or restructure it (i.e., "I'll pay you less and/or later.")

Or, you grow your GDP enough so that the debt/GDP does down.  But as shown in "This Time Is Different: Eight Centuries of Financial Folly," by economists Reinhart and Rogoff, once you are above about 90% debt/GDP, nations haven't historically been able to grow their way out of debt -- leaving default, inflation, and restructuring as path forward.

None of this stuff is new.  I don't know if there has ever been a nation that didn't eventually wreck its currency through debasement/inflation.

Agree. Well said.

[CptTrips]

I'd like to know how you are so sure. I am not.

God Himself Could Not Sink This Ship

https://www.wired.com/2008/04/dayintech-0415/

 

It doesn't HAVE to happen.  We do know how to stop inflation.  In fact, I'd say that most of the Fed's real toolkit is oriented toward controlling inflation.  That doesn't mean it won't be painful.

The pain should have been slowly absorbed, bit by bit, since 2010, probably.  There would have been less pain debt built up, and longer to siphon it out of the system.  It would have been a not so fun period, but manageable.  Now, it could be cataclysmic. 

Or protect the stock market and allow inflation to run rampant. 


Or try and split the difference?  Not do enough tightening to really get control of inflation, but still enough to crash the market?  End up with 20% YoY inflation AND a 70% market drop.  I don't think the insanely distorted stock market will tolerate any real amount of tightening without unwinding.     

Beware of Recency Bias.  At the beginning of the Pandemic, I had been digging into stuff and I remember telling friends, "This could get bad.  It's possible  the death rate could climb as high as... maybe even 1,000 deaths a day in the U.S.  200,000 Americans could die from this before we get control of it."  They rolled their eyes and laughed in my face.  I didn't blame them.  I felt like an idiot saying that out-loud, but it is what the numbers were telling me could be possible.  It's hard for humans to accept anything cataclysmic could happen to them out of the blue.  Surely someone in charge will stop that from happening.  It could never get that bad.  "That's not going to happen here."  And yes, it sounded insane to say it at the time.


It's the same mentality that kept people from getting into the lifeboats on the Titanic until it was too late.  Many "smart" people thought it was all overblown hysteria.  "The engineers are working on it and will have the leak fixed soon.  No point in getting in crowded boats and freezing for hours for no reason.  Stay here in the bar and enjoy another cigar and glass of port and let others panic. If things get worse, we can always go and get into one of the boats later."