Our short debt maturity

by on July 29, 2011 at 10:41 am in Uncategorized | Permalink

Looking only at debt-gdp ratios misses this point, from John Hussman:

Still, it’s precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can’t be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. At that point, any shortfall in GDP growth or government revenues would result in a rapid spike in debt-to-GDP (as Greece and other peripheral European nations are experiencing now). Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.

For the pointer I thank Andrew Sweeney.

Right Wing-nut July 29, 2011 at 10:52 am

And does away with inflation-protected bonds.

BUT… the government (well, the Fed) has ALREADY inflated the currency to an enormous degree. That’s what “Quantitative Easing” means–inflation. The fact that the demand hasn’t played along means that the inflation is sleeping, but it is very much there, and will very much be awake when something approximating a recovery begins.

John Thacker July 29, 2011 at 11:35 am

And does away with inflation-protected bonds.

Yes, inflation-protected bonds make it harder to inflate away the debt as well.

That’s what “Quantitative Easing” means–inflation

It means increasing the money supply. Inflation is an intersection of monetary supply and monetary demand, as you yourself seem to realize. If demand for money increases then, yes, there will be inflation if the Fed does not then decrease money supply, but that’s not a good argument to cause deflation and its related pain now.

Yancey Ward July 29, 2011 at 12:09 pm

I think you meant to write “if demand for money decreases”.

John Thacker July 29, 2011 at 12:27 pm

probably writing too fast.

Silas Barta July 29, 2011 at 12:40 pm

Fair enough. I’d put it this way: Quantitative Easing is like going to the showers of a high-security prision, and bending over and grabbing your ankles. Inflation is like when you are, um, violated.

Certainly, QE doesn’t *ensure* that there will be inflation, but you really don’t want to get your hopes up in that regard.

Right Wing-nut July 29, 2011 at 12:54 pm

If doing QE had negligible effect, then undoing it will have negligible effect so long as the surrounding situation has not substantially changed. To continue the prison analogy, I want to stand up & get out of there before something happens.

Mike July 29, 2011 at 1:35 pm

No, the price of money is the interest rate. When money demand increases, interest rates increase. When money supply increases, interest rates drop.

The equilibrium price level is determined where aggregate demand equals aggregate supply. When the Fed increase money supply, it lowers interest rates. This increases aggregate demand and puts upward pressure on the price level, I.e. Inflation. But lower interest rates also decrease aggregate supply (lower cost of investment) which puts downward pressure on prices.

There are many other determinants of AS and AD, so the net effect of a mish mash of policies and shocks on the price level is ambiguous. We don’t have wildcat inflation because the impact of lower interest rates on AD has been low, and the impact of fiscal policy on AD has been small. Loan growth is low, so the supply of money is lower than the Fed expected. When the economy starts really growing again, the risk is how well the Fed will be able to unwind all this QE and prevent other asset bubbles.

Bill July 29, 2011 at 1:31 pm

Right Wing:

Re your comment: “The fact that the demand hasn’t played along means that the inflation is sleeping, but it is very much there…”

That’s a very illogical statement. If there is no demand, there is no inflation.

Ever heard of MV=PQ? What do you think V and Q are at the moment?

Silas Barta July 29, 2011 at 1:44 pm

Let’s say we’re on a gold-money economy. I found out that some treasure hunter just hauled back a load of gold equal to about 10% of known reserves before the find. But this guy is eccentric and “plans to hold on to it for a while”.

What level of inflation should I predicate my future plans on? Should I be more concerned with how much people are acutally spending, or how much they *could* spend if they wanted to?

Bill July 29, 2011 at 2:56 pm

Silas,

Have you ever studied how the Fed can reduce or manipulate the supply of M to make it whatever it wants it to be?

Matthew C. July 29, 2011 at 3:50 pm

Yet somehow the supply of M keeps going up and up, especially when more M is needed to bail out the TBTF.

If you think this Fed can ever meaningfully tighten again, you’re completely missing the fiscal position the public and private sectors are in.

Bill July 29, 2011 at 3:54 pm

Matt, If you posit that the Fed will not be responsible, you can imagine anything.

I believe we live in a world of adults, sometimes.

Matthew C. July 29, 2011 at 8:43 pm

Bill,

Was it “responsible” for the Fed to hand over 16 trillion dollars in freshly created money to foreign TBTF banks since 2008? Do you think that MIGHT have something to do with the tripling of oil prices off the lows?

I prefer to trust in markets, not central planners.

Bill July 29, 2011 at 9:16 pm

Matt,

What has to do with an increase of oil prices from a recession low of in the $30 to 2007 levels has to do with the fact that 1) world demand increased; 2) Opec is a cartel; 3) Opec is a cartel that takes advantage of supply disruptions; and 4) Opec is a cartel.

And, Opec is a cartel.

Matthew C. July 29, 2011 at 10:39 pm

Bill,

So Bill it is your claim that vastly increasing the supply of currency units (dollars) will not affect the price level?

BTW, food is not produced by a cartel, and food prices are up through the roof since 2008.

J Thomas July 30, 2011 at 10:28 am

Matt, If you posit that the Fed will not be responsible, you can imagine anything.

I believe we live in a world of adults, sometimes.

Bill, the Fed has not been responsible since Volcker was chairman. Greenspan did all this “liberal” Fed stuff, and everybody said he was a genius. Then when it looked like bad times were coming, he cut and ran. And maybe a bunch of people thought, “Greenspan is a genius and he’s running away, maybe I should run away too.”.

And then when the new guy tries to do exactly the same thing Greenspan did, nobody thinks he’s a genius. But at this point, what else can he do? Greenspan didn’t leave him with a lot of wiggle-room.

Bill July 30, 2011 at 11:36 am

Yes, Matt, because V has declined and there is no demand for money. And, Q is low.

MV=PQ

Matthew C. July 30, 2011 at 12:19 pm

V will of course, turn on a dime once a waterfall cascade of the DXY occurs and gold, silver and oil go parabolic. . .

Bill July 29, 2011 at 3:12 pm

Oh, and Silas, you actually illustrate with your example what happens when you have a metal based monetary policy, and not a fiat currency that can be adjusted by someone like the Fed.

Do you recall what happened to Spain when gold was brought back from the New World? Gold was a form of currency, M increased, inflation ensued. Spain had no ability to control.

Now, imagine instead that Spain discovered gold in the new world and had instead fiat currency run by the Spanish Fed of 1600. Play a mind game and think about what happens to the “fiat” money supply and how inflation is controlled with the discovery of gold. Would inflation have been managed or not?

Mesopotamia based its currency on cylinder seals, while I prefer bottle caps.

Silas Barta July 29, 2011 at 5:48 pm

What does the Spain example have to do with my point. Even in that case, people should have predicated their plans on there being inflation equal to the % increase due to the new imports. In contrast, idiots like you would have reasoned that, “well, no one sure done spendin’ that new gold, so our inflation shore is tame here!”

Just like how you reason that inflation is tame “even with” high increases in M, never realizing the latent currency units waiting to spill onto the markets…

Silas Barta July 29, 2011 at 5:49 pm

Oh, and I prefer Bitcoin. Nice, predictable money supply. No morons to manipulate “monetary policy”.

Bill July 29, 2011 at 6:56 pm

Silas, I don’t understand you when you say: “What does the Spain example have to do with my point. Even in that case, people should have predicated their plans on there being inflation equal to the % increase due to the new imports.[of gold].

Obviously, you know what the Spain experience is because you identify the inflation in the next sentence.

But, more to the point, you say they should have predicted the effects.

So, what should they have done, relying on gold as their currency?

Bury the gold?

Bill July 29, 2011 at 6:58 pm

By the way, if you do say bury the gold, then all you are doing is having the government dictate the money supply, something you didn’t want it to do.

Am waiting your response.

Silas Barta July 29, 2011 at 8:27 pm

No, I’m saying that that regardless of whether people are spending the new gold *right now*, they should count on prices having a latent n% increase ready to reveal, and not act like inflation is tame simply because the new money hasn’t _yet_ circulated.

And of course people shouldn’t be forced to bury the gold, where do you get that?

Bill July 29, 2011 at 9:08 pm

Silas, “Where I get that” is that in a metal monetarist regime you will have inflation–but, under that “paper currency” you abhor, the Fed either sells or buys currency to regulate the size of the money supply.

But, you didn’t answer my question: if you are on a metal standard, what does Spain do? I know, as do you I suspect, what they would do if they had fiat currency.

Not to make this too difficult, the lesson is that if your currency is a commodity that is subject to new discovery you lose control of your money supply; similarly, if your real economy grows faster than some artifical constraint of, say, the mined supply of a metal, you are similarly growth constrained over what you would be had you chosen some other “man made” currency.

I don’t remember the cross of gold speach too well, but you get the point. If you don’t, then, well, what can I say and we should leave it at that.

Matthew C. July 29, 2011 at 10:44 pm

The gold supply is increasing at approximately 2% per year. Given that is below economic growth levels, gold money means mild deflation, which discourages debt and encourages savings and capital formation.

The average fiat currency increases its supply about 10 times that level or more. Saving fiat currency units with that kind of money supply growth is for fools.

You keep talking about how wise the men with the printing presses are. But I see massive economic distortion — notice how all the good jobs created since 2008 are in Manhattan and inside the beltway. . .

J Thomas July 30, 2011 at 10:51 am

Bill, you are arguing with a gold money advocate.

The basic argument is that no matter how bad a result you get by letting the gold supply change your quantity of money at random, it’s worse to let human beings manipulate the money supply, because they will do worse than random.

Sometimes I think they’re right.

The argument generalizes. Like, if you let governments have armies, every now and then they will have wars. Better not.

And nukes are right out.

Some people want to be ready to stop asteroids from hitting the earth. But if they get that technology, what’s the probability that somebody will use it for war? We’re better off taking our chances with random asteroids.

It’s predictable that if you let police seize recreational drugs, they will not only use the drugs themselves but will sell them. Unless they collect enough to drive prices down….

In general, any power you let government have will be mis-used.

So once we get rid of the government, then there’s the problem that large private businesses will collect big quantities of gold, and will mis-use them. Any power you let big business have, will be mis-used.

The argument generalizes all the way. We are really all better off to be naked in the wilderness, at the mercy of the elements, because any power that any of us has will be mis-used. Better a random fate than ….

A lot of the time I can’t bring myself to believe this. ;)

Bill July 30, 2011 at 11:38 am

J Thomas, I can’t believe it either. I sometimes wonder how our education system has failed us and has been replaced by TV commentators who never took economics.

Matthew C. July 30, 2011 at 12:24 pm

Every fiat currency in history has been run into the ground via over-issuance. We just found out this week about 16 trillion dollars in secret issuance by the Fed to stupid European TBTF banks who bought bad debts. Sixteen Trillion dollars!!!

And you think this system is superior to gold-based money, which cannot be inflated at the whim of those who benefit from printing.

All I can say is, when this turkey of a financial system goes down, and people lose everything they thought they have in assets, they are going to be very, very angry at those who sold them a bill of goods.

J Thomas July 30, 2011 at 5:45 pm

Every fiat currency in history has been run into the ground via over-issuance.

Yes, that happens. Not every generation. And it used to happen with gold, too. Governments debased the currency, and people got confused because they weren’t sure which coins were the bad new ones versus the good old ones, and the good ones tended to go out of circulation. Extra costs on the whole economy dealing with the deception. It didn’t happen every generation back then, either.

And they did fractional-reserve banking with gold, too. People think their gold is safe in the bank, and then they hear a rumor and they go to withdraw it and it isn’t there after all.

There are a bunch of thieves who take your money. In government and out of government. Every few generations it gets really badly out of hand. I don’t know what to do about it.

TallDave July 29, 2011 at 10:52 am

Good point, I haven’t seen that one raised very often.

babar July 29, 2011 at 10:54 am

umm, the idea is that in any kind of growing economy % change in GDP > risk free interest rate….

Yancey Ward July 29, 2011 at 11:00 am

The solution to the maturity problem will be the forced allocation of retirement funds of all kinds into longer term government debt. It will be sold as protecting them from the market’s volatility, and people will walk into the shearing barn without a bleat.

Bill July 29, 2011 at 3:52 pm

That’s what we do today, and we all benefit from financing the government debt obligations through SS. Your SS contribution is the equivalent of you financing a bond over your lifetime.

It is only when people take a surplus, waive their hands and give themselves tax cuts which THEY KNOW because CBO told them would lead to massive deficits after ten years that we have problems.

Its good when people are not sheep and stand up and say you should keep your hands off this money and pay your taxes instead for 2 wars, tax cuts and other deficit creating tactics..

K July 29, 2011 at 11:02 am

Well that’s just obviously patent nonsense. The Fed *creates* inflation by keeping the short rate below the natural rate. Then nominal GDP rises *faster* than compound interest. That’s Wicksell’s cumulative process. You let that go for awhile until you’ve achieved the desired cumulative inflation, and desired reduction in leverage and then you restore the interest rate to the level of natural rate. You will be at a higher equilibrium rate of inflation at that point but no big deal.  You can lower that in the long run if you are so inclined.

bbsmith July 29, 2011 at 5:57 pm

nominal GDP rises *faster* than compound interest.

An increasingly dubious axiom, given the TGS and the fact that innovation (e.g. the Internet) is very poorly monetized, and thus contributes little to GDP growth. Current growth rates are the new norm — expect 1%/year or less growth in real GDP over the next several decades.

K July 30, 2011 at 8:07 am

Ok, but I said *nominal* GDP, ie including inflation. If creation of inflation is dubious, then the Fed can safely floor it, ie crank up the QE.

T. Shaw July 29, 2011 at 11:09 am

This is additonal evidence that the cental planners running the nation are the best and brightest.

Give them more control.

B.B. July 29, 2011 at 11:35 am

US Treasuries serve a unique function in the global financial system because bills are ‘money like.’

Bills are in money market funds, back checking accounts, are collateral for repo, and temporary stores of liquidity, are used in swaps, futures, and options markets. Arguably, the world has far too few bills, which is why the bill rate is close to zero.

I would argue that the US and world would benefit from a federal SPV that funded itself massively with bills and invested in a higly diversified portfolio of illiquid private assets. This SPV would need to be backstopped by the Fed in case of a run. The federal government would, on average, make profits off of the liquidity premium and the term premium and the risk premium.

This is similar to the Milton Friedman (happy 99th birthday, Milton) argument that liquidity is a public good whose supply should be expanded to saturation. He argued for a zero short rate via deflation. I am arguing for an expansion of the supply of bills.

I also argue for 50 year TIPS for pensions. The government has a role at both ends of the yield curve.

Long term TIPS and lots of short bills should remove an temptation for the government to think it can deflate its explict debt away. Of course, it cannot ever inflate away its unfunded entitlement liabilities, which are implicitly or explicitly indexed.

Matthew C. July 29, 2011 at 10:52 pm

Sure they can BB. Hence the new “Chained CPI” where dog food is equal to filet minon when seniors can’t afford to buy steak anymore and switch to kibble.

Silas Barta July 29, 2011 at 11:55 am

Aw! How cute! Mainstream economists are now finally noticing *another* four-year-old Peter Schiff insight!

Slocum July 29, 2011 at 11:55 am

Jeez — I thought everybody knew that. Megan McArdle, for example, has been banging that drum for a while:

http://www.theatlantic.com/business/archive/2011/04/why-we-wont-inflate-away-the-debt/238080/

It’s a little scary to think there are a lot of people who believe inflating away the debt is available as a viable backup option.

“Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.”

But wouldn’t a big shift in the mix of securities being offered tend to give the game away and, as a result, bring about the debilitating increase in borrowing costs? Does anybody think the U.S. government could really sneak such a move by bond investors?

Tyler Cowen July 29, 2011 at 12:28 pm

I have been saying it for years too, but the point is not always heeded.

TallDave July 29, 2011 at 12:35 pm

Agreed, it does not get enough attention.

K July 29, 2011 at 1:14 pm

You are all still ignoring the fact that if you are creating inflation then the short rate (equal to the T-Bill rate) will be lower than the natural rate, so you can too inflate away T-Bill debt.

Also you are missing the fact that they *haven’t* embarked on an inflationary course. What’s relevant is the expected path of the natural rate. And the course of last few years as well as the course that congress is currently embarking on is deeply contractionary. Which is why the short end of the curve is *exactly* where the treasury should have been issuing. By lengthening the maturity of the debt ahead of a major increase in expectations of easing (i.e. ahead of deteriorating economic expectations) treasury would effectively have taken a large loss on those positions as long bonds rally in response to the easing.  The bonds could be issued now at significantly lower rates than before if they so choose.  The 10-year is at 2.85 and *rallying* as default becomes more probable! The 1-year is at 19 bps, well within the Fed’s 0-25 range.  Where’s my credit spread?

The one thing that is certain, is that as long as the US government continues to commit to pay its debts (even if a bit late) bonds will yield the expected path of the fed funds target. And as long as things are going badly, that target will be zero. The treasury has done extraordinarily well moving to the short end of the curve (and the Fed, being *long* treasuries has done great moving out the curve).

How long are people going to persist in thinking it’s about
inflation/default when the yield of every bond outstanding is in our face telling us it is about demand and the expected path of the short rate?

Former Beltway Wonk July 29, 2011 at 5:26 pm

The 10-year is at 2.85 and *rallying* as default becomes more probable!

Gee, I guess I should skip paying my credit card bill in August so that the credit card company will _lower_ my interest rate.

Or perhaps you should stop using Beltway hysteria as an axiom. There is far more than enough revenue under the impromptu August balanced budget to service and roll over the debt (and pay many other things on top of that).

Floccina July 29, 2011 at 11:56 am

What about bracket creep? Doesn’t inflation with a progressive tax increase real revenues?

Rich Berger July 29, 2011 at 12:43 pm

No – brackets are indexed to inflation (thank you Ronald Reagan).

txslr July 29, 2011 at 3:54 pm

Although not the AMT.

Bill July 29, 2011 at 9:12 pm

Yeah, but the AMT fix is passed every year.

Dhanson July 29, 2011 at 12:55 pm

It seems to me that QE1 and QE2 increased the aggregate money supply, but velocity fell so no actual inflation has taken place. But all that money is sitting out there, waiting for the economy to pick up. Once it starts to move, inflation will follow.

It seems to me that the actions of the government have backed it into a ‘coffin corner’. A coffin corner is an aviation term for getting an airplane into a state where you can’t increase or decrease airspeed without something very bad happening. In the case of the economy, the situation is that if it improves, inflation follows. If it gets worse, the government is pretty much out of bullets. It can’t borrow more, and it has very few monetary tools left.

If inflation follows, then the government’s reliance on short-term debt to keep borrowing costs low will backfire, and debt servicing costs will skyrocket. That will force either tax increases or spending cuts, which will put a brake on the economy. If the government tries to use interest rates to shrink the money supply, it will blow up its debt service costs and also choke off the recovery. Given that deficit and debt predictions for the coming ten years are predicated on rather robust growth, that will also put pressure on the economy to a degree greater than anticipated.

In short, government policy – in an attempt to avoid the pain of a real structural re-alignment of the economy – has pushed the economy into a corner and erected barriers around it that will prevent a robust recovery. The U.S. is headed for a long period of very low growth, high unemployment, and increasing political dysfunction as politicians run out of ideas and partisans get louder.

Matthew C. July 29, 2011 at 3:55 pm

I wouldn’t count on them being able to keep the wheels on this bus for a lot longer. . .

Bill July 29, 2011 at 3:58 pm

Given the appetite for public debt, with interest so low, they should make more long term debt available. That it is demanded tells you something about alternatives, both in terms of risk and future performance. Taking money out of the economy is not a good idea at the present time, though, is it.

steve July 29, 2011 at 1:59 pm

Bracket creep is still real since the government inflation numbers keep getting lowered via government fiat. i.e. hedonic adjustments and maybe soon chained cpi.

AlanW July 29, 2011 at 2:06 pm

I have to confess I’m missing something here. I get that the Treasury may find refinancing the nation’s debt ever more expensive if inflation were to take hold, but it still seems like the Fed could take most or all of that debt off Treasury’s hands (at whatever interest rate, or in return for a few of those magic $1 trillion coins) and, woosh, it disappears. That’s inflationary by itself, and probably lousy economic policy, but it would take care of the actual debt, right? I don’t see how we can truly be locked in a corner when our debts are denominated in our own currency.

Former Beltway Wonk July 29, 2011 at 5:46 pm

You may be underestimating the positive feedback loop. Every time the Fed prints money to buy Treasuries that, all other things being equal (and velocity usually isn’t equal, but in the long run we can expect it to be), adds to inflation and thus to the nominal interest rates of Treasuries. That greatly increases the cost of servicing the debt and thus the deficit, which requires still more borrowing. Long before the Fed can buy up the debt, we have a hyperinflationary spiral. It’s a very common historical pattern, from Germany and many others in the 1920s to Zimbabwe most recently.

Bill July 29, 2011 at 8:27 pm

You are incorrect. Zimbabwe just kept printing money. It didn’t even try to manage its money supply.

I have some if you want it.

Guy in the Veal Calf Office July 29, 2011 at 2:55 pm

Inflating away the debt is the least best approach. You can improve the tax treatment, or redefine capital asset ratios in favor of, long term treasuries while doing the opposite for short term. Plus other things I’m not smart enough to understand. Europe has plenty of experience with these shenanigans and bought themselves lots of time by jamming crappy debt into their banks. Time’s up, though.

mulp July 29, 2011 at 5:06 pm

Actually, the problem in Europe is the reverse of what you describe.

The private banks invented all sorts of ways to justify crappy debt as sound in exchange for high short term profits, and then when the crappy debt was on the verge of default, government backed the highly short term crappy debt to prevent the bankers walking away rich while the depositors lost all their savings.

Governments didn’t even limit this action to their own banks:

European banks backed the savings in the Icelandic banks when Iceland refused to back the savings of foreign depositors, and then the European governments have been trying to force Icelanders to make whole the deposits of non Icelanders based on the argument the public is responsible for the private greed of Icelandic bankers, and the private greed of British and German depositors.

The US Treasury and Fed provided capital and negative interest credit to bailout European private banks that made short term profits making crappy loans in Spain and Greece which now threaten to destroy those banks, and thus some greedy private investments by US individuals and insurers providing private pensions.

A US investment bank created the illusion of safety in loaning the Greek government billions of Euros (which would have been Marks or Dollars if Germany wasn’t on the Euro, and would never have been in Drachma if Greece wasn’t on the Euro) so the Greek government wouldn’t have been forced to make taxes work in Greece to the suffering of rich Europeans and Americans, and now the US and Euro are trying to figure out who to shift the cost of the private greed to.

To argue the private banks can pay for the bad credit they did for short term profits is absurd – the depositors in the banks suffer the losses, not the banks – the banks are merely the conduit for money from depositors to borrowers. Bonds, after all, are just a different way to deposit money with a bank when one realizes bonds are bought by money market funds and by insurers to back up annuities.

If only Merkel would just force German bank customers to pay privately out of their own pockets for the private bad loans made for high profits by US bankers to Greece, the Greek debt crisis would be dealt with easily: the Greek debt is cut in half or to a quarter and the German people would see the bank accounts and annuities slashed to pay for solving the problem. (The same would happen everywhere else…) Instead, Merkel has had government take over the private debt problem from the private banks, and then tried to force the Greek government to squeeze blood from the Greek stone people.

Orange14 July 29, 2011 at 3:16 pm

Did anyone happen to really go to the website and look at the performance of Dr. Hussman’s equity fund? I thought not. He has a negative return over the past five years and only a marginal profit over 10. His bond fund is no great shakes either. Anyone professing to be a “rocket scientist” with that kind of performance ought not to be pontificating about the economy as he clearly hasn’t been able to make things work in his own line of business!

Bill July 29, 2011 at 3:55 pm

And, he’s an economist.

What does that tell you.

Matthew C. July 29, 2011 at 3:59 pm

And if his fund had just bought gold it would be up 6x over that period of time (10x for silver). Imagine that — buying stocks when the aggregate P/E ratio is at 50+ isn’t a good plan (nor at the current levels of 24+).

Andrew' July 29, 2011 at 4:31 pm

Seriously?

Matthew C. July 29, 2011 at 8:54 pm

Yes, buying stocks when the P/E ratio is at record highs is a terrible idea. Imagine that.

Andrew' July 30, 2011 at 5:55 am

That’s why Hussman is hedging. Which is why his short-term returns are about zero when others are mostly larger negative numbers. I don’t know if he can buy gold. It’s not what he does.

Bill July 29, 2011 at 5:14 pm

Matt, Please put all your money in gold right now. Tell your friends. This is an opportunity of a lifetime. It’s never been cheaper and it can only go up.

Matthew C. July 29, 2011 at 9:02 pm

It’s certainly been cheaper but given the Gideon Gono-like trajectory of central bankers it’s a great time to trade out of dollars into something that can’t be manufactured by a printing press. I’d certainly pick gold over equities in the current environment given the lofty valuations and the fact that we are heading into a double dip. If you stay in cash or bonds you’re going to be put on a platter and served for dinner.

Looking at a bigger picture, it seems quite likely that the current financial system is heading for collapse. Clearly the current trends in percentage of employed, borrowed money versus tax receipts, level of trust in government, oil and food inflation and similar measures tell us quite clearly that the current system is living on borrowed time. And the history of financial collapses of fiat systems informs us that they are hyperinflationary, not deflationary. So precious metals is the place to be in that environment.

Bill July 29, 2011 at 9:18 pm

Matt,

And, I felt a raindrop falling, said Chicken Little.

Matthew C. July 29, 2011 at 10:49 pm

In Bill’s world, ZIRP, perpetual TBTF, the complete nationalization of the mortgage market, 16 trillion in emergency loans and all the other disastrous trends I mention amount to a “raindrop”. Oh, and the zero growth for the first quarter we got revised to today (don’t worry, the revisions to 2Q 2011 will be down to negative growth shortly even given the governments lying CPI metrics). “Welcome to the recovery”, eh? Sounds a lot like “let them eat cake”. . .

J Thomas July 30, 2011 at 11:02 am

So precious metals is the place to be in that environment.

But make sure you take delivery. If you own gold in somebody else’s vault, you’re likely to suddenly find out that it’s counterfeit or gone, and you can take your choice about who to sue for it.

Or you can get it insured. The banks who survived CDS will be happy to insure that your gold is real and available to you.

Bill July 30, 2011 at 11:44 am

In Matts world, if it were a real world, interest rates would be more than 2.5%. If the markets aggregate information, place Matts observations against the price (risk premium) for long term debt.

Matthew C. July 30, 2011 at 12:28 pm

Who is claiming that markets have perfect foresight?

I knew the equity markets were going to implode due to the mortgage disaster and I sold everything in 2007. It took several months before the equity markets figured it out and sold off, and until 2008 until the selloff reached appropriate velocity.

But I’ll still take market pricing over Bernanke pricing.

kvm July 29, 2011 at 4:11 pm

His bond fund has actually been doing very well:

http://quote.morningstar.com/fund/f.aspx?t=hstrx
http://performance.morningstar.com/fund/ratings-risk.action?t=HSTRX&region=USA&culture=en-US

Note that both alpha and the sharpe ratio (yes I know take it with a grain of salt) are positive compared to morningstar’s conservative allocation index.

Even if he isn’t performing to your standards though, that still does not mean he is wrong about the debt to gdp ratio. That was a fine attempt at character assassination

John Hatchett July 29, 2011 at 5:13 pm

Actually, the best part of the John Hussman piece was the embedded link to Sheila Baird’s exit interview from the FDIC. She was a voice of common sense and champion of the taxpayer in the whole “too big to fail” fiasco.

Buster July 29, 2011 at 3:19 pm

Would such a switch in average maturity lengths go unnoticed? Would yields on long term debt not go up as the market absorbed the new information? Would this really be a panacea for that course of action?

It may be a necessary step, but I don’t think it sufficient.

tenthring July 29, 2011 at 4:15 pm

When I’m worried about a bond defaulting I bid the yield up 15bp in a day on its 10 year debt.

Face it, this debt ceiling stuff doesn’t matter.

mulp July 29, 2011 at 4:27 pm

Let’s look to the real villain in all this: Milton Friedman.

Friedman called for floating exchange rates, which prevented Greece from doing what FDR did, reduce the value of debt, no matter who held it, by fiat, and thus the labor required to repay the debt.

Friedman called for indexed debt instruments and indexed wages and prices, which prevents reducing savings, wages, and prices by inflation.

Friedman called for indexing tax tables so taxes on the lightly taxed middle class, (who paid taxes because they were small out of unfounded fear of the tax collector), could not be gradually hiked so slowly they wouldn’t really notice.

Friedman focused everyone on the idea that the quantity of money didn’t matter, but instead the value was the key, and constant slightly falling real monetary value based on broad aggregate output was the important rule, thus creating the odd tension of massive increases in money supply by the Fed based on the collapse of the shadow money supply, that does nothing to spur buying to stock up to protect against price hikes (one thing that drove the economy in the 70s) offset by the classic fears of runaway inflation due to money supply expansion. Inflation in the US and almost all the world by monetary policy is no longer possible.

Damn you Milton Friedman.

Tom July 30, 2011 at 12:26 pm

I assume this is satire, even from Mulp

Kevin July 29, 2011 at 4:32 pm

1) Don’t we want inflation? Isn’t this what Sumner has been telling us? It seems like short-maturity debt may be an advantage if it helps us more easily spur inflation.

2) This is a little scare-mongering. There is no sense of magnitude- if we inflate away part of our debts, how do we know that this would make interest payments ‘intolerable.’ We need a little more rigor before talking about ‘enormous,’ ‘intolerable,’ ‘Greece-like,’ or ‘spikes.’

Surely maturity is important for default-risk, but it is more a liquidity rather than a solvency issue. Nobody seems to be talking about inflating away all our debts all at once, so it is not clear how this discussion is relevant.

8 July 29, 2011 at 11:28 pm

If the government shifted from short to long maturity bonds, the very act would trigger inflation. Rising interest rates correlate with inflation, especially when they rise due to a lack in confidence, rather than a positive demand from other sectors of the economy. The move would lay bare the market’s true assessment of USD’s value and ability to repay debt.

a July 30, 2011 at 2:01 am

IMHO the conclusion doesn’t follow.

First, the average duration of US government debt is about 5 years. 8% inflation per year reduces the value of the debt by half. That’s not too bad. It doesn’t make it disappear, but it goes a long way to helping. Even 4% yearly inflation reduces it significantly.

Secondly, I’d take issue with “In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields.” At the moment, inflation is positive but short-term rates are 0; we already have negative real rates. If there’s more inflation, short-term rates may still stay at 0, and real rates may just become more negative.

Bill July 30, 2011 at 11:53 am

Agreed. Negative real rates raise the price of assets (stocks, real estate), giving you a wealth effect to motivate your consumption. The alternative, though, is deflation, which has its own problems.

The real issue will be gradually raising interest rates as the economy grows. In the interim, we may have angry trading partners who would like the dollar higher for their own reasons.

TallDave July 30, 2011 at 1:14 pm

On the first, I think the problem with that is the interest payments could grow so enormously we would start to look like the PIIGS, or perhaps even pre-default Argentina.

The latter is definitely an interesting point, though. How strong are those deflationary pressures?

I’ve been wondering lately whether there is a causative correlation between a country’s debt load and deflationary pressure. Bondholders certainly want deflation — it’s always fun to get paid back in dollars that are worth more — though I’m not sure by what mechanism a debt load would create it.

Bill July 30, 2011 at 5:36 pm

Re: “Bondholders certainly want deflation — it’s always fun to get paid back in dollars that are worth more

True: ONLY IF you get paid back.

Anotherphil July 31, 2011 at 12:43 pm

Inflation: A default by any other name…

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