Reply to
@scott: I can't seem to include the entire reply in one, so part two:
That's not even taking into account what I believe are other issues with agriculture (less agricultural land available vs continually rising populations, etc.) I also believe in strategic/productive infrastructure to some degree. As I've noted in other threads, I'd like to see PPP (Public Private Partnership) investments as a bigger asset class in the US in a manner similar to the direct infrastructure investments available in other countries (see John Laing Infrastructure on the London Market which I think pays something on the order of 6%, and Brookfield Infrastructure in the US has a little of this - that pays 5.5% or so.)
"I said that demand for JGB’s appears to be unlimited, i.e., on the part of the Japanese public that buys 95% of them and which see these bonds as being THE quintessential investment vehicle."
First, I hate calling anything investment-wise a "quintessential" vehicle; that could last for years and change within a month. Again, I dislike coasting on a perception of safety (both from the standpoint of an investor and the actions of the entity itself), especially in this day and age.
I think it's an interesting study regarding the willingness of the Japanese to invest in their country; in a way, it's an impressive example of nationalistic pride. On the other hand, does it make Japan overly reliant upon a buyer that, through changes in demographics or any number of other issues, will not always be there to the necessary degree? I don't know, but I'll continue to say that both the situation does not appear sustainable and that it could go on longer than I could imagine but that doesn't make it right or sustainable or worth consideration as an investment. In terms of them offering a gold coin, I believe any added benefits to bond holders should not be tangible. Offering gifts sets a precedent.
"I’m not aware that any members of Congress, the Executive or the Federal Reserve have ever argued that government spending should be unlimited! Clearly, that would unleash rampant inflation and violate the legal objectives I mentioned. No one, as far as I know, argues that because the government CAN spend without restraint, it SHOULD."
There's degrees of lack of restraint - and again, I think you've seen a steady slide into spending with an increasing lack of accountability or focus in recent years. It's not spending without any restraint whatsoever, but it's a matter of spending with less and less in the way of checks and balances and diminishing results in terms of the nation's overall progress. I realize that this is entirely debatable, but it's the way that I see it: I continue to see the country spending money without a great deal of progress for the nation as a whole, and little in the way of tangible improvements.
"I’m not sure why you’re focusing on this. Isn’t this simply a fact? "
I suppose it's stating that without any statement of the potential consequence. Stating that the government "could spend any amount of money that it wants" without any sense of the consequences of that is concerning. In theory, it could, but the consequences could very well be a disaster. I think there's the concern regarding confidence in currency from a number of board members (which and in terms of M1, does this chart not at all seem concerning?
http://research.stlouisfed.org/fred2/series/M1Again, unsustainable situations can go on longer than anyone can possibility believe (the market can be irrational longer than you can stay solvent, yadda yadda yadda), but while a logically unsustainable situation that continues to pile on further can go on for longer than anyone can believe, eventually it corrects and it tends to correct suddenly and rapidly and in a manner that isn't orderly. Confidence in a currency or other financial asset or institution can happen very suddenly and to deny the history - and not to learn those lessons - is unfortunate, and those incidents are going to play out again; it's very clearly evident to me that much of what caused 2008 really wasn't learned from or fixed, largely because rather than a gradual rehab (which isn't illogical after the worst financial crisis in decades), we wanted to reboot to a few years prior as fast as possible. The former would have lead to a more sustainable result, the latter was more popular and comfortable. Even governments can't continually avoid their problems by spending money - if they could, I tend to think history would be rather different.
"As you point out, the Fed must look at the relevant fundamentals when carrying out monetary policy."
I believe there's a lack of trust in the ability of the Fed to do that and/or whose interest they are acting in.
"Don't we need an objective criterion for judging what constitutes appropriate expansion? "
Okay. Whose criterion would you like to use?
"Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad."
You say it makes you mad, but your philosophies - in my opinion - are also in a way encouraging it to continue.
Maurice said: " . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield."
I don't know if there's any promises, but it's an unfortunate reality and really, only adds to problems with a portion of the population that is seeing higher expenses (especially medical.)
"(Fundamentals matter, both for fiscal and monetary policy.)"
In theory. In reality, I tend to think that it's increasingly less of a primary concern - or least the fundamentals of the broader economy are at least much less of a concern.
"Maurice said: For you and Washington to say that the US can expand the currency without regard to fundamentals (the result of inflation or even hyperinflation), is without precedent in the history of currency."
You may not have said that, but I think that's what some people are taking from some of your statements, which (again, my opinion) seem to take a very pro-spending, pro-aggressive monetary policy stance. Again, saying something like this: "The US government can spend any amount of money that it wants, in reality" while true in theory without a discussion of the realities that that could bring leads one to believe that you are favor of that reality, at least *to some degree*. Again, while maybe not true, that's how it comes off (to me, and maybe to others.)
"Considering how low interest rates are on US bonds, I guess I'm just amazed at how amazingly strong confidence is in the US dollar. "
Money slushing around has to go somewhere. I've said previously that the currency markets seem like a futile game of musical chairs; there's no long-term safe haven and while the dollar is currently less the focus of attention due to European issues, that could change next week.
You have a large portion of the population that has taken money out of stock mutual funds and run to what they believe is the safer harbor of fixed income funds. You have foreign fixed income markets that do not appear large enough to withstand demand (there was a great story about emerging market bond demand versus the size of the market earlier this year, and how that lead to trouble when the asset class started to sell off; I wish I could find that.) In present day, people run to the liquidity and size of the US treasury market. How much of this is confidence and how much of it is repetitive response to trouble? How much of this is any number of behind-the-scenes reasonings that none of us are aware of (including Rickards' theory that banks are now captive buyers, which, admittedly is just a theory, but an interesting one) or attempted financial repression? How much of it is an older generation not pleased with the economy and not willing to take the risks in
retirement and moving - for better or worse - to fixed income rather than stocks? There's so many elements and varied reasoning.
I think there's a lot to more to it than, "well, there's still demand so everything must be okay." Additionally, that belief - if it ain't broke in outside appearance, don't fix it - is concerning on a number of levels. Coasting on what remains of faith in our economy and resting on the idea of "well, what else is there?" is a dangerous concept and heck, there probably won't be another option for a while, but rather than coast on the status quo, I'd rather see us be more of an example and set forth a sustainable path rather than push others to start seeking alternatives - which isn't going to happen overnight, but it is clearly the longer-term goal of some nations. If that becomes the desired end result, it isn't going to be announced in advance. I'm sure that some will dismiss the idea that there are attempts by some nations to seek alternatives (which again, goes on the idea that if the current status seems okay, why would anyone change?), and that would be to choose to ignore the evidence to the contrary, which is fine.
"The only way the US could ever default would be if Congress voted to stop honoring US bonds."
That would make for some interesting foreign relations.
Additionally, it's early, so there may be an incomplete thought or two here. I'll read over it again later.
