What do MMM folks think about hyperinflation?

[Playing with Fire UK]

Also, remember that paper banknotes can and do get replaced, and if you don't surrender them for new notes at the time of replacement they become worthless. 'Old £20' are now only worth the paper they are printed on. £5 notes are being replaced in September. I have a feeling this doesn't happen often in the US (as the design has never really changed in all the years I've been visiting, though maybe I just haven't noticed) so this may not be something people are widely aware of. Holding actual physical cash has its own risks.

You can always exchange BOE bank notes at Threadneedle St. http://www.bankofengland.co.uk/banknotes/Pages/about/exchanges.aspx

[dmd149]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

It is not speculation or market timing. You are not trying to trade the currencies based on short term fluctuations. It is an insurance/hedge strategy to preserve wealth. There is no "profit" trying to be generated, just an avoidance of huge losses.

Here is an article on keeping swiss francs in safety deposit box written by the author of the hyperinflation book i mentioned earlier:

http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65776963-swiss-francs-in-an-outside-the-u-s-safe-deposit-box

No one here has to do what I recommend (obviously), but I am taking the foreign currency hedge step and personally feel it is worthwhile. I have nothing to gain by anyone following my advice here. Just wanetd to provide a different view from what had been posted on the thread.

I guess I don't see any difference in what you recommend compared to buying gold as an inflation hedge, which I would consider speculation.  There's no free lunch here, so while I agree that you're hedging a risk, what you're doing is not risk-free.

Obviously, nothing is riskless. We could be hit by an asteroid.

The forex strategy is simply a hedge against what I consider to be a likely event. I also diversify the risk by buying multiple currencies.

Gold is a hyperinflation edge, but not a good one. Currently overpriced compared to historical values. Plus, it doesn't come in useful denominations. You'll end up trading like $10k worth of gold for a sandwich or something.

There are other strategies you can take that I mentioned above (buying a home with fixed rate mortgage and 2 years worth of living supplies). Two years worth of living supplies pose virtually no risk (maybe food going bad if you don't have a good system to go through the food) and buying a home with mortage poses the normal risks of buying a home.

Anyway, that John T Reed guy had a good way of putting it: "Low probability is not a risk management technique."

[mak1277]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

It is not speculation or market timing. You are not trying to trade the currencies based on short term fluctuations. It is an insurance/hedge strategy to preserve wealth. There is no "profit" trying to be generated, just an avoidance of huge losses.

Here is an article on keeping swiss francs in safety deposit box written by the author of the hyperinflation book i mentioned earlier:

http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65776963-swiss-francs-in-an-outside-the-u-s-safe-deposit-box

No one here has to do what I recommend (obviously), but I am taking the foreign currency hedge step and personally feel it is worthwhile. I have nothing to gain by anyone following my advice here. Just wanetd to provide a different view from what had been posted on the thread.

I guess I don't see any difference in what you recommend compared to buying gold as an inflation hedge, which I would consider speculation.  There's no free lunch here, so while I agree that you're hedging a risk, what you're doing is not risk-free.

Obviously, nothing is riskless. We could be hit by an asteroid.

The forex strategy is simply a hedge against what I consider to be a likely event. I also diversify the risk by buying multiple currencies.

Gold is a hyperinflation edge, but not a good one. Currently overpriced compared to historical values. Plus, it doesn't come in useful denominations. You'll end up trading like $10k worth of gold for a sandwich or something.

There are other strategies you can take that I mentioned above (buying a home with fixed rate mortgage and 2 years worth of living supplies). Two years worth of living supplies pose virtually no risk (maybe food going bad if you don't have a good system to go through the food) and buying a home with mortage poses the normal risks of buying a home.

Anyway, that John T Reed guy had a good way of putting it: "Low probability is not a risk management technique."

If you truly believe that US hyperinflation is "a likely event" then I completely agree with a hedging strategy.  But just because it's a hedge doesn't mean it's not speculation...you're making a financial decision to avoid losing purchasing power in a given situation, and that's no different than making a decision that would gain you purchasing power (e.g., taking that money and investing it in the market with the hopes of real growth) under a different set of circumstances.

[dmd149]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

It is not speculation or market timing. You are not trying to trade the currencies based on short term fluctuations. It is an insurance/hedge strategy to preserve wealth. There is no "profit" trying to be generated, just an avoidance of huge losses.

Here is an article on keeping swiss francs in safety deposit box written by the author of the hyperinflation book i mentioned earlier:

http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65776963-swiss-francs-in-an-outside-the-u-s-safe-deposit-box

No one here has to do what I recommend (obviously), but I am taking the foreign currency hedge step and personally feel it is worthwhile. I have nothing to gain by anyone following my advice here. Just wanetd to provide a different view from what had been posted on the thread.

I guess I don't see any difference in what you recommend compared to buying gold as an inflation hedge, which I would consider speculation.  There's no free lunch here, so while I agree that you're hedging a risk, what you're doing is not risk-free.

Obviously, nothing is riskless. We could be hit by an asteroid.

The forex strategy is simply a hedge against what I consider to be a likely event. I also diversify the risk by buying multiple currencies.

Gold is a hyperinflation edge, but not a good one. Currently overpriced compared to historical values. Plus, it doesn't come in useful denominations. You'll end up trading like $10k worth of gold for a sandwich or something.

There are other strategies you can take that I mentioned above (buying a home with fixed rate mortgage and 2 years worth of living supplies). Two years worth of living supplies pose virtually no risk (maybe food going bad if you don't have a good system to go through the food) and buying a home with mortage poses the normal risks of buying a home.

Anyway, that John T Reed guy had a good way of putting it: "Low probability is not a risk management technique."

If you truly believe that US hyperinflation is "a likely event" then I completely agree with a hedging strategy.  But just because it's a hedge doesn't mean it's not speculation...you're making a financial decision to avoid losing purchasing power in a given situation, and that's no different than making a decision that would gain you purchasing power (e.g., taking that money and investing it in the market with the hopes of real growth) under a different set of circumstances.

Okay, your definition of speculation seems too broad to be useful then. Pretty much any investment/insurance strategy would be considered speculation then, including the example you gave (investing it in the market).

[mak1277]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

It is not speculation or market timing. You are not trying to trade the currencies based on short term fluctuations. It is an insurance/hedge strategy to preserve wealth. There is no "profit" trying to be generated, just an avoidance of huge losses.

Here is an article on keeping swiss francs in safety deposit box written by the author of the hyperinflation book i mentioned earlier:

http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65776963-swiss-francs-in-an-outside-the-u-s-safe-deposit-box

No one here has to do what I recommend (obviously), but I am taking the foreign currency hedge step and personally feel it is worthwhile. I have nothing to gain by anyone following my advice here. Just wanetd to provide a different view from what had been posted on the thread.

I guess I don't see any difference in what you recommend compared to buying gold as an inflation hedge, which I would consider speculation.  There's no free lunch here, so while I agree that you're hedging a risk, what you're doing is not risk-free.

Obviously, nothing is riskless. We could be hit by an asteroid.

The forex strategy is simply a hedge against what I consider to be a likely event. I also diversify the risk by buying multiple currencies.

Gold is a hyperinflation edge, but not a good one. Currently overpriced compared to historical values. Plus, it doesn't come in useful denominations. You'll end up trading like $10k worth of gold for a sandwich or something.

There are other strategies you can take that I mentioned above (buying a home with fixed rate mortgage and 2 years worth of living supplies). Two years worth of living supplies pose virtually no risk (maybe food going bad if you don't have a good system to go through the food) and buying a home with mortage poses the normal risks of buying a home.

Anyway, that John T Reed guy had a good way of putting it: "Low probability is not a risk management technique."

If you truly believe that US hyperinflation is "a likely event" then I completely agree with a hedging strategy.  But just because it's a hedge doesn't mean it's not speculation...you're making a financial decision to avoid losing purchasing power in a given situation, and that's no different than making a decision that would gain you purchasing power (e.g., taking that money and investing it in the market with the hopes of real growth) under a different set of circumstances.

Okay, your definition of speculation seems too broad to be useful then. Pretty much any investment/insurance strategy would be considered speculation then, including the example you gave (investing it in the market).

Of course investing in the market is speculation.

[theadvicist]

Yes I did read up on the need to exchange notes once new notes are issued. Just something to be mindful of.

I still don't understand your repatriation point. Why not just exchange the Swiss Franc at a bank in Canada (or Australia, or whatever). You lose the exchange fee, but there is no requirement to spend it in the respective country.

Duh, I didn't think of just changing into Candian dollars in Canada! Makes sense.

Glad you know about the note thing.

[elysianfields]

John T. Reed has some interesting and, at times, excellent advice about many topics, including real estate investing.

However, his right-wing political views lead him to blame the national debt and deficit solely on entitlement programs and to anticipate a risk of hyperinflation which is completely overblown.  Quoting Reed at http://johntreed.com/blogs/john-t-reed-s-news-blog/82791939-comments-on-the-movie-the-big-short, the coming troubles from too much entitlement spending and deficit spending and too much national debt have been called “the most advertised and warned-about financial crisis in history.”  I hesitate to continue criticizing Reed's politics further here, because this thread is about economics.

We're not seeing inflation because we're in a liquidity trap, where monetary policy has become ineffective, even with interest rates at 0%, because of the lack of aggregate demand.  As a result, the quantity of money in the economy doesn't matter.  Paul Krugman has written extensively on this, first using the example of Japan, which has been in a liquidity trap for 20 years now (cf. http://www.brookings.edu/~/media/projects/bpea/1998%202/1998b_bpea_krugman_dominquez_rogoff.pdf).   Europe, particularly countries in the Euro zone, are similarly stuck in a liquidity trap, only the German and French creditors keep forcing more austerity on Euro members, especially Greece, which is reinforcing the trap and putting/keeping millions of Greeks, Spaniards, and Portuguese out of work.

Unless the Federal government does something to stimulate more aggregate demand (e.g. through a big infrastructure investment program), the U. S. will probably stay in the trap for a while yet.  There's as yet little evidence of rising wages in the U. S., which, if and when it appears, would signal an end to the liquidity trap and a restart of inflation.  The Fed has been poised to raise rates for a while now, but the economy is still so weak that they risk stifling the recovery by raising rates too soon.  I'm confident that when inflation reappears, the Fed will raise rates and keep inflation controlled.

[dmd149]

John T. Reed has some interesting and, at times, excellent advice about many topics, including real estate investing.

However, his right-wing political views lead him to blame the national debt and deficit solely on entitlement programs and to anticipate a risk of hyperinflation which is completely overblown.  Quoting Reed at http://johntreed.com/blogs/john-t-reed-s-news-blog/82791939-comments-on-the-movie-the-big-short, the coming troubles from too much entitlement spending and deficit spending and too much national debt have been called “the most advertised and warned-about financial crisis in history.”  I hesitate to continue criticizing Reed's politics further here, because this thread is about economics.

We're not seeing inflation because we're in a liquidity trap, where monetary policy has become ineffective, even with interest rates at 0%, because of the lack of aggregate demand.  As a result, the quantity of money in the economy doesn't matter.  Paul Krugman has written extensively on this, first using the example of Japan, which has been in a liquidity trap for 20 years now (cf. http://www.brookings.edu/~/media/projects/bpea/1998%202/1998b_bpea_krugman_dominquez_rogoff.pdf).   Europe, particularly countries in the Euro zone, are similarly stuck in a liquidity trap, only the German and French creditors keep forcing more austerity on Euro members, especially Greece, which is reinforcing the trap and putting/keeping millions of Greeks, Spaniards, and Portuguese out of work.

Unless the Federal government does something to stimulate more aggregate demand (e.g. through a big infrastructure investment program), the U. S. will probably stay in the trap for a while yet.  There's as yet little evidence of rising wages in the U. S., which, if and when it appears, would signal an end to the liquidity trap and a restart of inflation.  The Fed has been poised to raise rates for a while now, but the economy is still so weak that they risk stifling the recovery by raising rates too soon.  I'm confident that when inflation reappears, the Fed will raise rates and keep inflation controlled.

I think John T Reed describes himself as libertarian, not right wing. Krugman, on the other hand, swings quite far the other way.

The liquidity trap ignores the root cause of hyperinflation, excessive debt fueled spending by the federal government. Yes, perhaps the liquidity trap can explain why quantitative easing did not result in significant inflation for now, but what happens if all of a sudden the US cannot get easy credit? It will then be forced to print dollars in far greater amounts than QE.

The Fed's mandate is to control inflation, but the Fed seems to operate according to the political atmosphere at the time, at least lately. Hardly as independent as they are supposed to be.

But anyway, I reiterate my previous point that a lot has to go right for hyperinflation not to happen. Too many dependencies (continued ability to borrow money at low interest rates, assumptions of high GDP growth, Federal Reserve intervention, etc.). On the other hand, any number of things can trigger hyperinflation. A large creditor decides to dump their US debt, another market crash, etc.

I also don't think a big infrastructure program is going to actualy lead to the big econmic gains that Keynesian economists would predict, or at least, it's risky bet, requiring huge costs with uncertain gains.

Anyway, I reiterate that hyperinflation protection is low cost, low risk insurance. Two years of living expenses in stable foreign currencies, a mortgage primary residence that you can afford and well wtihin your budget, and a few years of living supplies.

(To your point about austerity being forced on Greece, Greece's argument never made any sense to me. They effectively threatened "end austerity, or else......" Their only leverage was to assume enough economic turmoil would occur as a result of their default that the EU would be forced to bail it out. If they were denied a bailout, they would have austerity anyway. Anyway, the US is too large to bailout so if we get another recession there won't be anyone to help us.)

[elysianfields]

I think John T Reed describes himself as libertarian, not right wing. Krugman, on the other hand, swings quite far the other way.

Despite how you think he describes himself, blaming the budget deficit and debt on excess entitlement spending practically defines a right-wing world-view.  But again, I'll try to stick with economics.

The liquidity trap ignores the root cause of hyperinflation, excessive debt fueled spending by the federal government. Yes, perhaps the liquidity trap can explain why quantitative easing did not result in significant inflation for now, but what happens if all of a sudden the US cannot get easy credit? It will then be forced to print dollars in far greater amounts than QE.

Deficit spending, along with the Fed keeping the pedal to the metal, helped the U. S. economy exit the recession faster than it otherwise would have.  Automatic stabilizers in the way of increased unemployment insurance payments, food stamps, and welfare - those evil entitlements that Reed wishes to cut - increased naturally as they are supposed to during a recession.  Since 2008, the U. S. budget deficit has decreased each year as the economy strengthened.

Meanwhile, bond prices keep rising and yields keep dropping, with the 10-year T note trading at below 1.65%.  If creditors expected inflation or questioned U. S. creditworthiness, those yields would be rising.  Japanese yields are even lower, and Japan has a much higher debt/GDP ratio than the U. S.; if excessive debt on its own creates hyperinflation, why hasn't hyperinflation occurred in Japan?  Answer:  Because there's no rise in demand to fuel it - which is the essence of the liquidity trap.

The Fed's mandate is to control inflation, but the Fed seems to operate according to the political atmosphere at the time, at least lately. Hardly as independent as they are supposed to be.

Check your facts.  The Fed, by law, has not one, but three objectives:  maximizing employment, stabilizing prices, and moderating long-term interest rates (the first two are often called "The Fed's Dual Mandate").  Your interpretation of the Fed's actions has no impact on how they actually operate.

But anyway, I reiterate my previous point that a lot has to go right for hyperinflation not to happen. Too many dependencies (continued ability to borrow money at low interest rates, assumptions of high GDP growth, Federal Reserve intervention, etc.). On the other hand, any number of things can trigger hyperinflation. A large creditor decides to dump their US debt, another market crash, etc.

If too much has to go right to avoid hyperinflation, why are periods of hyperinflation notable?  Because they are the exception, not the rule.  Therefore, much of the time, things go right.

Predictions of GDP growth for the U. S., Canada, U. K., Europe, and Japan are quite low and the IMF recently reduced its growth forecasts for the immediate future.

30% of U. S. debt is owned by other U. S. government agencies, with the biggest portions owned by Social Security and retirement funds.  Of the publically-held debt, large amounts are held by the Fed, mutual funds, state & local retirement funds, banks, and insurance companies.  If the U. S. defaulted on its debt, the biggest losers would be our own retirees.

If another market crash happens, not only will the reduced aggregate demand starkly reduce the risk of any inflation, much less hyperinflation, but also more investors will want to buy U. S. bonds, making it even easier for the U. S. to borrow.

I also don't think a big infrastructure program is going to actualy lead to the big econmic gains that Keynesian economists would predict, or at least, it's risky bet, requiring huge costs with uncertain gains.

Your uninformed opinion has no impact on the fiscal multiplier.

Anyway, I reiterate that hyperinflation protection is low cost, low risk insurance. Two years of living expenses in stable foreign currencies, a mortgage primary residence that you can afford and well wtihin your budget, and a few years of living supplies.

Well since it's so cheap, and my family's current living annual living expenses are in the $40k range, I'll gladly accept your donation of $100,000 to help me fund this hyperinflation protection, along with the cost of travelling to these different countries to open holding accounts.

(To your point about austerity being forced on Greece, Greece's argument never made any sense to me. They effectively threatened "end austerity, or else......" Their only leverage was to assume enough economic turmoil would occur as a result of their default that the EU would be forced to bail it out. If they were denied a bailout, they would have austerity anyway. Anyway, the US is too large to bailout so if we get another recession there won't be anyone to help us.)

Wait, we're going to have another recession?  I thought you said we were headed for hyperinflation just around the corner!

[dmd149]

I think John T Reed describes himself as libertarian, not right wing. Krugman, on the other hand, swings quite far the other way.

Despite how you think he describes himself, blaming the budget deficit and debt on excess entitlement spending practically defines a right-wing world-view.  But again, I'll try to stick with economics.

The liquidity trap ignores the root cause of hyperinflation, excessive debt fueled spending by the federal government. Yes, perhaps the liquidity trap can explain why quantitative easing did not result in significant inflation for now, but what happens if all of a sudden the US cannot get easy credit? It will then be forced to print dollars in far greater amounts than QE.

Deficit spending, along with the Fed keeping the pedal to the metal, helped the U. S. economy exit the recession faster than it otherwise would have.  Automatic stabilizers in the way of increased unemployment insurance payments, food stamps, and welfare - those evil entitlements that Reed wishes to cut - increased naturally as they are supposed to during a recession.  Since 2008, the U. S. budget deficit has decreased each year as the economy strengthened.

Meanwhile, bond prices keep rising and yields keep dropping, with the 10-year T note trading at below 1.65%.  If creditors expected inflation or questioned U. S. creditworthiness, those yields would be rising.  Japanese yields are even lower, and Japan has a much higher debt/GDP ratio than the U. S.; if excessive debt on its own creates hyperinflation, why hasn't hyperinflation occurred in Japan?  Answer:  Because there's no rise in demand to fuel it - which is the essence of the liquidity trap.

The Fed's mandate is to control inflation, but the Fed seems to operate according to the political atmosphere at the time, at least lately. Hardly as independent as they are supposed to be.

Check your facts.  The Fed, by law, has not one, but three objectives:  maximizing employment, stabilizing prices, and moderating long-term interest rates (the first two are often called "The Fed's Dual Mandate").  Your interpretation of the Fed's actions has no impact on how they actually operate.

But anyway, I reiterate my previous point that a lot has to go right for hyperinflation not to happen. Too many dependencies (continued ability to borrow money at low interest rates, assumptions of high GDP growth, Federal Reserve intervention, etc.). On the other hand, any number of things can trigger hyperinflation. A large creditor decides to dump their US debt, another market crash, etc.

If too much has to go right to avoid hyperinflation, why are periods of hyperinflation notable?  Because they are the exception, not the rule.  Therefore, much of the time, things go right.

Predictions of GDP growth for the U. S., Canada, U. K., Europe, and Japan are quite low and the IMF recently reduced its growth forecasts for the immediate future.

30% of U. S. debt is owned by other U. S. government agencies, with the biggest portions owned by Social Security and retirement funds.  Of the publically-held debt, large amounts are held by the Fed, mutual funds, state & local retirement funds, banks, and insurance companies.  If the U. S. defaulted on its debt, the biggest losers would be our own retirees.

If another market crash happens, not only will the reduced aggregate demand starkly reduce the risk of any inflation, much less hyperinflation, but also more investors will want to buy U. S. bonds, making it even easier for the U. S. to borrow.

I also don't think a big infrastructure program is going to actualy lead to the big econmic gains that Keynesian economists would predict, or at least, it's risky bet, requiring huge costs with uncertain gains.

Your uninformed opinion has no impact on the fiscal multiplier.

Anyway, I reiterate that hyperinflation protection is low cost, low risk insurance. Two years of living expenses in stable foreign currencies, a mortgage primary residence that you can afford and well wtihin your budget, and a few years of living supplies.

Well since it's so cheap, and my family's current living annual living expenses are in the $40k range, I'll gladly accept your donation of $100,000 to help me fund this hyperinflation protection, along with the cost of travelling to these different countries to open holding accounts.

(To your point about austerity being forced on Greece, Greece's argument never made any sense to me. They effectively threatened "end austerity, or else......" Their only leverage was to assume enough economic turmoil would occur as a result of their default that the EU would be forced to bail it out. If they were denied a bailout, they would have austerity anyway. Anyway, the US is too large to bailout so if we get another recession there won't be anyone to help us.)

Wait, we're going to have another recession?  I thought you said we were headed for hyperinflation just around the corner!

I need to figure out the line by line quoting thing...is there an easier way that manually tagging the sections?

1. Entitlement spending is over half the Federal Budget. Of course it is the prime contributor to the deficit. To ignore that fact is irresponsible.

2. Budget deficit spending rates decrease obfuscates the fact that that we still adding to our total debt, already at dangerously high levels. It's like saying, well, i have 10k in credit card debt, but over the next few months I will only add 1000 dollars, then 950 dollars, then 900 dollars.....etc. I've decreased the rate at which I'm adding to my debt so I'm in good shape! You say that because our interest rates are so low it's okay, that it's basically free money. It's not. even 1% interest rates add up when the debt is 16 trillion dollars. And this line of thinking only works if you assume deficits will continue to decrease, that we can grow our economy significantly, and that our creditors don't shut us off.

3. Just because creditors are buying US notes now, doesn't mean they will always do so. Everyone was buying subprime mortage debt until the crash. Creditors can be stupid. Depending on them to be stupid forever is risky.

4. Japan hardly seems the model for us to emulate. High spending on infrastructure projects and other "stimulus" and low GDP growth. Plus an aging populating which will decrease their tax base. It's a disaster waiting to happen.

5. I understand that the Fed has three goals. I only mentioned the one that was most relevant to the hyperinflation discussion.

6. Hyperinlation is notable because of how disastrous it is, not it's lack of frequency in modern times. Look at Venezuela. That is what hyperinflation looks like. You obviously believe it's low probability, but if a low probability event can kill you, don't you think you shoud do something to protect yourself?

7. I don't understand why defaulting on debt "owed to ourselves" is not disastrous. What does that matter in a hyperinflation context?

8. If a market crash and recession happens, US tax revenue plummets, while spending remains constant (even higher if entitlement spending increases at the time). We either cut spending, or borrow. Politicians face huge backlash if they cut, so they will try to borrow. If there's no one to borow from, then they will print money. You're counting on aggregate demand going down so that the velocity of the money supply doesn't increase, but the existing federal expense still have to be paid for, and that money does get circulated. If all that is additional printed money, that's a situation ripe for a hyperinflation scenario.

9. You can concurrently have a recession/depression and hyperinflation. The former can trigger the latter and the latter will exacerbate it.

10. Why would I pay for your insurance policy, even if it is cheap? Your attempt to mock my recommendations is non-sensical.

[aspiringnomad]

I was going to go through point-by-point, but I don't have much to add to what elysianfields has already said. There's nothing wrong with hedging against any risk, no matter how small the probability, but of course the costs of hedging need to weighed. Beyond doing what many here already do in the course of their FIRE plans by holding stocks and real estate, IMO there's nothing else folks in the US should do to hedge against hyperinflation. Holding a basket of currencies large enough to actually hedge against US dollar hyperinflation would be wildly expensive and almost certainly add risk to your portfolio. The US dollar has been a safe haven in turbulent times and will continue to be as long as it remains the world's reserve currency, a status it will enjoy so long as the US remains the world's largest economy that has relatively deep and transparent financial markets. If times are so turbulent that the dollar is in hyperinflation mode for the first time in its history, I would have very little confidence that my basket of currencies would serve as a proper hedge anyway.

Reading about hyperinflation from some author on the internet who has no economics training probably gives you just enough knowledge on the subject to be dangerous to your own portfolio...

dmd149 - I am really appreciating your analysis of things, and concrete suggestions for risk mitigation.  Obviously, I've heard of food storage and such, but the idea of holding the 2-years of foreign currency is a new one for me, and a very good one, I think!  As you say, low risk insurance.  Thanks!

...and apparently others'.

[elysianfields]

I need to figure out the line by line quoting thing...is there an easier way that manually tagging the sections?

1. Entitlement spending is over half the Federal Budget. Of course it is the prime contributor to the deficit. To ignore that fact is irresponsible.

While entitlement spending consumes most of the Federal budget, that doesn't necessarily make it the prime contributor to the deficit, particularly when much entitlement spending has a separate revenue source.

2. Budget deficit spending rates decrease obfuscates the fact that that we still adding to our total debt, already at dangerously high levels. It's like saying, well, i have 10k in credit card debt, but over the next few months I will only add 1000 dollars, then 950 dollars, then 900 dollars.....etc. I've decreased the rate at which I'm adding to my debt so I'm in good shape! You say that because our interest rates are so low it's okay, that it's basically free money. It's not. even 1% interest rates add up when the debt is 16 trillion dollars. And this line of thinking only works if you assume deficits will continue to decrease, that we can grow our economy significantly, and that our creditors don't shut us off.

What's a "dangerously high level" of the debt?  Compared to what?

Under what conditions should the government run a deficit?

Under what conditions will our creditors - most of whom are the government itself and the U. S. investing public - cut us off?

3. Just because creditors are buying US notes now, doesn't mean they will always do so. Everyone was buying subprime mortage debt until the crash. Creditors can be stupid. Depending on them to be stupid forever is risky.

Please demonstrate how subprime mortgage debt is similar to debts of the U. S. government.

Please substantiate your statement that "Everyone was buying subprime mortage (sic) debt until the crash", as I certainly didn't purchase any.

4. Japan hardly seems the model for us to emulate. High spending on infrastructure projects and other "stimulus" and low GDP growth. Plus an aging populating which will decrease their tax base. It's a disaster waiting to happen.

I never stated that Japan was a model to emulate, but rather an example of a high-debt country with very low inflation.  Show me what when debtors will stop purchasing Japanese debt and/or when the hyperinflation will start, which it hasn't in the 25 years since the Japanese slowdown began.

5. I understand that the Fed has three goals. I only mentioned the one that was most relevant to the hyperinflation discussion.

You questioned the Fed's job performance while oversimplifying its mandate.  If you're going to criticize the Fed and blame it for your imagined forthcoming hyperinflation, you need to take its entire mandate into account.

6. Hyperinlation is notable because of how disastrous it is, not it's lack of frequency in modern times. Look at Venezuela. That is what hyperinflation looks like. You obviously believe it's low probability, but if a low probability event can kill you, don't you think you shoud do something to protect yourself?

You stated "a lot has to go right for hyperinflation not to happen".  That sounds like you think it's a sure thing, rather than a low-probability occurrence.  I noted that historically, hyperinflation has only occurred exceptionally, rather than inevitably as you imply.

Show me how Venezuela's economy is relevant to the discussion of the U. S. economy, as I don't see the connection.

I'm entitled to decide what risks are relevant and need protection, and you haven't proven to me that U. S. hyperinflation is a risk I need to insure myself against.  MMM agrees that some risks do not merit insurance.

7. I don't understand why defaulting on debt "owed to ourselves" is not disastrous. What does that matter in a hyperinflation context?

You keep saying that our creditors will cut us off, and you haven't questioned my assertion that most federal debt is owned by the American people, who seem to continue to find the U. S. government creditworthy.  Who are the creditors who will cut us off, and under what circumstances?

8. If a market crash and recession happens, US tax revenue plummets, while spending remains constant (even higher if entitlement spending increases at the time). We either cut spending, or borrow. Politicians face huge backlash if they cut, so they will try to borrow. If there's no one to borow from, then they will print money. You're counting on aggregate demand going down so that the velocity of the money supply doesn't increase, but the existing federal expense still have to be paid for, and that money does get circulated. If all that is additional printed money, that's a situation ripe for a hyperinflation scenario.

Hmmmm we already did this 2008-present.  Again, where is your inflation?

9. You can concurrently have a recession/depression and hyperinflation. The former can trigger the latter and the latter will exacerbate it.

Please demonstrate how a recession will lead to hyperinflation, and/or show an example from history and how it is relevant to the U. S. economy in 2016.

10. Why would I pay for your insurance policy, even if it is cheap? Your attempt to mock my recommendations is non-sensical.

I quite succeeded in mocking your recommendation, because $100,000 is not cheap.  Alternatively, if you believe $100,000 to be cheap, then you should have no problem lending or giving it to me.

[aspiringnomad]

Btw, episodes of hyperinflation are notable not just for their severity, but because they are also exceedingly rare. According to this study, there have been just 56 worldwide dating back to the 1700s, many of which were triggered by the break up of the Soviet Union in the early 90s:

http://www.cato.org/publications/working-paper/world-hyperinflations

[Telecaster]

Anyway, I reiterate that hyperinflation protection is low cost, low risk insurance. Two years of living expenses in stable foreign currencies, a mortgage primary residence that you can afford and well wtihin your budget, and a few years of living supplies.

That's the thing though.   Your insurance is extremely high cost, to guard against an event that has near a zero chance of happening.   Just to pick a number, let's say two years of living expenses is $100,000 ($50k per year).   That how much it costs to self-insure against this event.   That's a lot of money!    And that's two years you don't get to be retired.  So it is a non-trivial commitment in that regard too.   And of course, that money isn't invested to there is a large lost opportunity cost too.   If you had put that same $100K in the stock market 20 years ago, you'd have $600,000 today.  That's what you might be leaving on the table.   

Now, in theory, you can access that money if you want to/need to.  It still belongs to you.   But as soon as you do that, you are no longer insured.  So the insurance cost really is $100K.   But it actually even more than that.   Because while the chance of hyperinflation is very, very close to zero, the odds of regular inflation are close to 100%.   So those Swiss Francs in the safety deposit box are losing a little bit of value each year.   After say, 20 years, even at very modest inflation rates you no longer have two years living expenses, it is more like a year and two months.   To fully maintain your insurance, you would have to kick in another 2-3% every year.   That's a bundle of money as well.

If it makes you sleep better at night, then more power to you.  But Holy mackerel!  That strategy is a lot of things, but it is definitely not low cost! 

[dmd149]

I need to figure out the line by line quoting thing...is there an easier way that manually tagging the sections?

1. Entitlement spending is over half the Federal Budget. Of course it is the prime contributor to the deficit. To ignore that fact is irresponsible.

While entitlement spending consumes most of the Federal budget, that doesn't necessarily make it the prime contributor to the deficit, particularly when much entitlement spending has a separate revenue source.

While entitlement spending consumes most of the Federal budget, that doesn't necessarily make it the prime contributor to the deficit, particularly when much entitlement spending has a separate revenue source.

That is an accounting trick. While on your pay stub and on the government books it's marked as separate, it goes to the same federal government. Much of that intragovernmental debt you mentioned earlier was the non-social security part of the government borrowing money from the social security fund. No sense in splitting it out. It gets rolled up into government revenues and budgets the same as any other spending item

2. Budget deficit spending rates decrease obfuscates the fact that that we still adding to our total debt, already at dangerously high levels. It's like saying, well, i have 10k in credit card debt, but over the next few months I will only add 1000 dollars, then 950 dollars, then 900 dollars.....etc. I've decreased the rate at which I'm adding to my debt so I'm in good shape! You say that because our interest rates are so low it's okay, that it's basically free money. It's not. even 1% interest rates add up when the debt is 16 trillion dollars. And this line of thinking only works if you assume deficits will continue to decrease, that we can grow our economy significantly, and that our creditors don't shut us off.

What's a "dangerously high level" of the debt?  Compared to what?

Under what conditions should the government run a deficit?

Under what conditions will our creditors - most of whom are the government itself and the U. S. investing public - cut us off?

[/quote]

Dangerously high debt can be determined through multiple criteria, but the primary one is if the debt payments start cutting into our ability to pay for necessary government services.

I'd say the virtually never, and if we do, for very short periods. I don't believe "stimulating growth" is a good reason to.

Creditors will cut us off when they think the US won't be able to pay them back.
 -

3. Just because creditors are buying US notes now, doesn't mean they will always do so. Everyone was buying subprime mortage debt until the crash. Creditors can be stupid. Depending on them to be stupid forever is risky.

Please demonstrate how subprime mortgage debt is similar to debts of the U. S. government.

Please substantiate your statement that "Everyone was buying subprime mortage (sic) debt until the crash", as I certainly didn't purchase any.

I was criticizing your idea that just because creditors are currently purchase something at a low price, it reflects the underlying "safety" of that asset. That could change at any time, as purchasers of sub-prime debt found out.

I obviously exaggerate with everyone, but any institutions that invested in the big investment banks that bought them encompasses quite a bit of people, wheteher directly, or indirectly.

4. Japan hardly seems the model for us to emulate. High spending on infrastructure projects and other "stimulus" and low GDP growth. Plus an aging populating which will decrease their tax base. It's a disaster waiting to happen.

I never stated that Japan was a model to emulate, but rather an example of a high-debt country with very low inflation.  Show me what when debtors will stop purchasing Japanese debt and/or when the hyperinflation will start, which it hasn't in the 25 years since the Japanese slowdown began.

[/quote]
Same issue as above. I don't need to when Japan's creditors will stop buying their debt, I just know that if they do, Japan is screwed and will likely need to print money which will lead to hyperinflation. If there is a glass of water perched on the edge of a table, do I know when the next person will bump into it? No. But is it at risk of happening? Yes. Are the consequences severe? A glass of water falling, no. Hyperinflation? Yes.

5. I understand that the Fed has three goals. I only mentioned the one that was most relevant to the hyperinflation discussion.

You questioned the Fed's job performance while oversimplifying its mandate.  If you're going to criticize the Fed and blame it for your imagined forthcoming hyperinflation, you need to take its entire mandate into account.

I don't blame the Fed. I think the root problem is excessive spending. I don't think the Fed wil be able to do much about that.

6. Hyperinlation is notable because of how disastrous it is, not it's lack of frequency in modern times. Look at Venezuela. That is what hyperinflation looks like. You obviously believe it's low probability, but if a low probability event can kill you, don't you think you shoud do something to protect yourself?

You stated "a lot has to go right for hyperinflation not to happen".  That sounds like you think it's a sure thing, rather than a low-probability occurrence.  I noted that historically, hyperinflation has only occurred exceptionally, rather than inevitably as you imply.

Show me how Venezuela's economy is relevant to the discussion of the U. S. economy, as I don't see the connection.

I'm entitled to decide what risks are relevant and need protection, and you haven't proven to me that U. S. hyperinflation is a risk I need to insure myself against.  MMM agrees that some risks do not merit insurance.

I don't think it's a low probability occurence. The cases in which hyperinflation has occured have been due to government printing money due to excessive spending relative to its tax revenue. That looks a lot like the state of the US at the moment.

Venezuela is currently experiencing hyperinflation because they printed money to pay for excessive spending relative to its revenue, which collapsed along with oil prices. Fortunately, the US is not dependent solely on oil prices for revenue, however, it is still spending more than it has the ability to take in in tax revenues.

I realize I won't convince you, nor do I particularly care if anyone else does here. I am personaly doing it and I'm explaining why I'm doing it.

7. I don't understand why defaulting on debt "owed to ourselves" is not disastrous. What does that matter in a hyperinflation context?

You keep saying that our creditors will cut us off, and you haven't questioned my assertion that most federal debt is owned by the American people, who seem to continue to find the U. S. government creditworthy.  Who are the creditors who will cut us off, and under what circumstances?

Okay so US Banks, pension funds, retail investors, etc. are currently buying US Federal Debt. If they begin to lose faith in the US Government's ability to pay, they will stop doing so. Because the government is financing so much of its debt from these creditors, it will either be forced to default, or print money.

You seem to be counting on the American people being willing to continue to finance the debt-repayments to themselves with their own money. Sort of a self-induced Ponzi scheme. While that has been true so far, I don't want to count on that going indefinitely.

8. If a market crash and recession happens, US tax revenue plummets, while spending remains constant (even higher if entitlement spending increases at the time). We either cut spending, or borrow. Politicians face huge backlash if they cut, so they will try to borrow. If there's no one to borow from, then they will print money. You're counting on aggregate demand going down so that the velocity of the money supply doesn't increase, but the existing federal expense still have to be paid for, and that money does get circulated. If all that is additional printed money, that's a situation ripe for a hyperinflation scenario.

Hmmmm we already did this 2008-present.  Again, where is your inflation?

Honestly I am a bit puzzled at why it hasn't happened. I won't propose any theories here. However, the fact that it hasn't happened doesn't diminish the risk of it possibly happening. See earlier glass of water on edge of table analogy.

9. You can concurrently have a recession/depression and hyperinflation. The former can trigger the latter and the latter will exacerbate it.

Please demonstrate how a recession will lead to hyperinflation, and/or show an example from history and how it is relevant to the U. S. economy in 2016.

Recessions/depressions are typically a confidence game. If people think things are too bubbly, they get nervous. Institutional investors might start selling off assets, laying people of, etc. Recession happens, economic activity is low, and government tax revenues go down. Government response? Borrow and spend. In the absence of the ability to borrow, print and spend.

10. Why would I pay for your insurance policy, even if it is cheap? Your attempt to mock my recommendations is non-sensical.

I quite succeeded in mocking your recommendation, because $100,000 is not cheap.  Alternatively, if you believe $100,000 to be cheap, then you should have no problem lending or giving it to me.

Why is converting $100k of USD to a foreign currency expensive? There are transaction fees (exchange fees and any travel), but as a hedge in order to preserve value of your cash assets, pretty low cost.

You might argue about the opportunity costs, but someone on another thread had a good expression for that, "Picking up pennies in front a steamroller."

Obviously, if you think the steamroller doesn't exist, then you wouldn't worry about it. I think there is one, and that's why I'll let the pennies go on 2 years of expenses so I don't get crushed.


Anyway, for the rest of the people reading this thread, I hardly need to state that you can do what you'd like as far your risk mitigation strategies. The case presented by elysianfields is fundamentally about estimation of the likelihood of a hyperinflation event. He argues that the probability is so low, you don't need to wory about it. I'm skeptical about his arguments because for hyperinflation not to happen, current conditions need to either stay the same or improve.

I'm worried because many things can happen to disturb the current equilbrium. The economy could crash, creditors can get antsy, we could get into another expensive war, etc. Even if I'm wrong about the probability and hyperinflation never occurs, the worst case is I have exposed myself to some currency risk by buying foreign currencies and have an emergency fund that I can convert back to USD is necessary.

If elysianfields is wrong and hyperinflation does happen and you have a lot of USD, it will become worthless very quickly. If you're invested in the markets, that will be an uncertain return. Many companies go out of business during a hyperinflation scenario. It's a lottery. So if you have USD and Stocks, you could potentially be completely wiped out.

So do what you like.

[dmd149]

Anyway, I reiterate that hyperinflation protection is low cost, low risk insurance. Two years of living expenses in stable foreign currencies, a mortgage primary residence that you can afford and well wtihin your budget, and a few years of living supplies.

That's the thing though.   Your insurance is extremely high cost, to guard against an event that has near a zero chance of happening.   Just to pick a number, let's say two years of living expenses is $100,000 ($50k per year).   That how much it costs to self-insure against this event.   That's a lot of money!    And that's two years you don't get to be retired.  So it is a non-trivial commitment in that regard too.   And of course, that money isn't invested to there is a large lost opportunity cost too.   If you had put that same $100K in the stock market 20 years ago, you'd have $600,000 today.  That's what you might be leaving on the table.   

Now, in theory, you can access that money if you want to/need to.  It still belongs to you.   But as soon as you do that, you are no longer insured.  So the insurance cost really is $100K.   But it actually even more than that.   Because while the chance of hyperinflation is very, very close to zero, the odds of regular inflation are close to 100%.   So those Swiss Francs in the safety deposit box are losing a little bit of value each year.   After say, 20 years, even at very modest inflation rates you no longer have two years living expenses, it is more like a year and two months.   To fully maintain your insurance, you would have to kick in another 2-3% every year.   That's a bundle of money as well.

If it makes you sleep better at night, then more power to you.  But Holy mackerel!  That strategy is a lot of things, but it is definitely not low cost!

Small point, Swiss Francs have actually had deflation this year, so in theory I made money (not enough to beat out the fees, but still).

I'll take the 2-3% addition kick every year and having to work another two years to not worry about hyperinflation, however low probability it is.

I also think betting on consistent average market returns of 5+% is risky as well. If you had invested that $100k at the top of the market in 2000, you'd only be up 10% or so in real terms today.

[Telecaster]

This point has already been responded to, but I'll add some additional clarification since I brought up the point originally:

7. I don't understand why defaulting on debt "owed to ourselves" is not disastrous. What does that matter in a hyperinflation context?

I said hyperflation was unlikely in the first place because we mostly owe money to ourselves.   

Quick but famous example:  In Wiemar Germany, the debts were denominated in foreign currency, the creditors did not accept marks.   Therefore, Germany was forced to exchange Marks for huge quantities of foreign currency.  This of course drove down the value of the mark, which made their debts even bigger.  Germany couldn't default or even renegotiate because France would invade (and in fact did militarily seize German assets when payment troubles started).   So Germany was forced to print more marks so they could buy more foreign currency, which drove the mark's value lower...

Point is, debt by itself is not a sufficient condition for hyperinflation (see also Japan).  There have to be other conditions too, none of which exist in the US today.  One condition can be trouble paying debts.  We don't have the trouble in the US.  We can easily afford debt service.   As I mentioned above, we're at about the post-WWII average right now and it has been much higher in the past.  That means it could go up, a lot, as we could still afford it.  And if we look at budget forecasts by the CBO or whomever, debt service never becomes a problem as far out as economists care to forecast.   

TL;DR We don't have to print money to pay our debts, we can afford to simply pay them.   

[samustache]

I don't worry about hyperinflation. If we were to have hyperinflation, the thing that caused it is the bigger worry. Contrary to some other posters here, high debt to GDP is not a cause of hyperinflation, unless it's the GDP part being absolutely crushed by losing a war or a way left wing government destroying businesses. Basically your country's ability to produce anything being eliminated and messing up your debt/ASSETS equation. While that might be worth insuring against in some countries, the people worried about hyperinflation in the US usually have the causation backwards.

[elysianfields]

I don't need to go through point-by-point this time, because you left us this gem:

Honestly I am a bit puzzled at why it hasn't happened. I won't propose any theories here.

Needless to say, I'm not going to take any action with my own portfolio based on your hunch.

Everyone's free to believe as they like, and given that you believe we currently have the right conditions for hyperinflation, have since 2008, and yet no inflation worth writing home about has appeared, I invite you to read more about the zero lower bound and the liquidity trap.  It's especially interesting because so many intuitive economic thinking gets flipped on its head.  Among the many extant examples, I'll name the paradox of thrift as one of the most interesting on an individual, mustachian level.

[elysianfields]

This point has already been responded to, but I'll add some additional clarification since I brought up the point originally:

7. I don't understand why defaulting on debt "owed to ourselves" is not disastrous. What does that matter in a hyperinflation context?

I said hyperflation was unlikely in the first place because we mostly owe money to ourselves.   

Quick but famous example:  In Wiemar Germany, the debts were denominated in foreign currency, the creditors did not accept marks.   Therefore, Germany was forced to exchange Marks for huge quantities of foreign currency.  This of course drove down the value of the mark, which made their debts even bigger.  Germany couldn't default or even renegotiate because France would invade (and in fact did militarily seize German assets when payment troubles started).   So Germany was forced to print more marks so they could buy more foreign currency, which drove the mark's value lower...

Point is, debt by itself is not a sufficient condition for hyperinflation (see also Japan).  There have to be other conditions too, none of which exist in the US today.  One condition can be trouble paying debts.  We don't have the trouble in the US.  We can easily afford debt service.   As I mentioned above, we're at about the post-WWII average right now and it has been much higher in the past.  That means it could go up, a lot, as we could still afford it.  And if we look at budget forecasts by the CBO or whomever, debt service never becomes a problem as far out as economists care to forecast.   

TL;DR We don't have to print money to pay our debts, we can afford to simply pay them.

Indeed, this is one of the big differences between the situation in the U. S. and Japan on the one hand, and Greece (and to an extent Venezuela) on the other.

The U. S. and Japan have the advantage of issuing debts in their own currencies.  Greece no longer can, and are in fact on a quasi-gold standard (one could argue a German Mark standard) as a result of leaving the drachma for the euro.  Greece never should have joined the euro, and I think they'd do well to leave it so that they can have their own currency to devalue and achieve a balance-of-payments equilibrium with northern Europe.  Of course, this means stiffing the German and French governments, so Greece would suffer some consequences from this course of action.  However, I think this is a classic case of: if you owe the bank $1000, they have you by the balls, but if you owe them $1,000,000,000, you have them by the balls.

WRT Venezuela, as mentioned above, their revenues are tied to oil, which is quoted in U. S. dollars.

If the U. S. or Japan get in trouble, they can always pay their debts, in their own currencies, by printing more yen or dollars.  Yes, there are consequences to that action, but default is not one of them.

[dmd149]

This point has already been responded to, but I'll add some additional clarification since I brought up the point originally:

7. I don't understand why defaulting on debt "owed to ourselves" is not disastrous. What does that matter in a hyperinflation context?

I said hyperflation was unlikely in the first place because we mostly owe money to ourselves.   

Quick but famous example:  In Wiemar Germany, the debts were denominated in foreign currency, the creditors did not accept marks.   Therefore, Germany was forced to exchange Marks for huge quantities of foreign currency.  This of course drove down the value of the mark, which made their debts even bigger.  Germany couldn't default or even renegotiate because France would invade (and in fact did militarily seize German assets when payment troubles started).   So Germany was forced to print more marks so they could buy more foreign currency, which drove the mark's value lower...

Point is, debt by itself is not a sufficient condition for hyperinflation (see also Japan).  There have to be other conditions too, none of which exist in the US today.  One condition can be trouble paying debts.  We don't have the trouble in the US.  We can easily afford debt service.   As I mentioned above, we're at about the post-WWII average right now and it has been much higher in the past.  That means it could go up, a lot, as we could still afford it.  And if we look at budget forecasts by the CBO or whomever, debt service never becomes a problem as far out as economists care to forecast.   

TL;DR We don't have to print money to pay our debts, we can afford to simply pay them.

Indeed, this is one of the big differences between the situation in the U. S. and Japan on the one hand, and Greece (and to an extent Venezuela) on the other.

The U. S. and Japan have the advantage of issuing debts in their own currencies.  Greece no longer can, and are in fact on a quasi-gold standard (one could argue a German Mark standard) as a result of leaving the drachma for the euro.  Greece never should have joined the euro, and I think they'd do well to leave it so that they can have their own currency to devalue and achieve a balance-of-payments equilibrium with northern Europe.  Of course, this means stiffing the German and French governments, so Greece would suffer some consequences from this course of action.  However, I think this is a classic case of: if you owe the bank $1000, they have you by the balls, but if you owe them $1,000,000,000, you have them by the balls.

WRT Venezuela, as mentioned above, their revenues are tied to oil, which is quoted in U. S. dollars.

If the U. S. or Japan get in trouble, they can always pay their debts, in their own currencies, by printing more yen or dollars.  Yes, there are consequences to that action, but default is not one of them.

The consequence of printing money to pay off the debt is hyperinflation.

But hey, if you're right about our debt and spending trajectory not being a problem, we should definitely advocate a new government fiscal plan:

Let's borrow 100% of our Federal budget and reduce taxes to zero across the board. Worst case, we'll just print money to pay off the debt!

[samustache]

The consequence of printing money to pay off the debt is hyperinflation.

Fortunately the Fed doesn't actually print money, when they buy debt they just replace one asset with another. The money was already there. If it were going to create hyperinflation it already would have.

[liberty53]

1. Buy small hard assets to include up to two years worth of food and supplies that you will need. Apparently this is not that expensive, a few thousand dollars at most. Just need a good system to rotate through the food and replacing it.

My plan is to buy CONDENSED food and add just add enough water so the food grows equal to the rate of inflation.

[ender]

Hyperinflation.... well I guess I don't think much about it. But we're buying a house so that's sort of insurance against it?

The consequence of printing money to pay off the debt is hyperinflation.

But hey, if you're right about our debt and spending trajectory not being a problem, we should definitely advocate a new government fiscal plan:

Let's borrow 100% of our Federal budget and reduce taxes to zero across the board. Worst case, we'll just print money to pay off the debt!

Hold up a sec.

It's not a binary relationship. Printing some money to pay some debt doesn't immediately cause hyperinflation.

And seriously, the US gov could raise taxes a fair bit and erase all these problems with deficit/debt trivially (look at past tax brackets).

[dmd149]

Hyperinflation.... well I guess I don't think much about it. But we're buying a house so that's sort of insurance against it?

The consequence of printing money to pay off the debt is hyperinflation.

But hey, if you're right about our debt and spending trajectory not being a problem, we should definitely advocate a new government fiscal plan:

Let's borrow 100% of our Federal budget and reduce taxes to zero across the board. Worst case, we'll just print money to pay off the debt!

Hold up a sec.

It's not a binary relationship. Printing some money to pay some debt doesn't immediately cause hyperinflation.

And seriously, the US gov could raise taxes a fair bit and erase all these problems with deficit/debt trivially (look at past tax brackets).

No, it might not cause it immediately, but it increases the risk. It also doesn't make sense as a backup plan when our debt is this high.

Here is a link to historical government tax revenues as a percent of GDP. It has never been above 20.5% of GDP (1944) regardless of what the tax brackets were.

http://www.taxpolicycenter.org/statistics/source-revenue-share-gdp

It estimates we are around 17-18% over the past few years, so best case, you might get a few more percent out of it. That's fine if deficits are 1-2%, but entitlement spending will dramatically increase over the next 10-20 years. Unless GDP grows dramatically, we are in trouble, since it's unlikely we can capture more than 20% of GDP as tax revenue.

[steevven1]

Regarding holding foreign currencies as a hedge against a falling dollar, how is gold or silver not STRICTLY better?

1) You can directly "spend" neither Swiss Francs nor Krugerrands in the USA. Either one has to be sold or traded in the event that you want to use it, so the two are on equal footing in this way, but...

2) Over the very long run, paper currencies lose value on average, by design (normal, mild inflation). Gold and silver maintain approximately the same real value over long periods.

Doesn't this make holding currency over gold/silver strictly worse (especially when taking a long-run perspective)?

[Telecaster]

No, it might not cause it immediately, but it increases the risk.

You better hope to whatever god(s) you worship that isn't true.  Because while the Federal Reserve does indeed create money, the amount of money the Fed creates is absolutely minuscule compared to the amount private banks create.   

[The Happy Philosopher]

Hyperinflation does not even registrar in the top 1000 things that I worry about on a day to day basis. Hyperinflation and currency collapse happen in countries that are forced to issue debt in currencies other than their own. Hyperinflation in the United States would indicate something so terrible happened to the world economy that it is doubtful it could even be hedged against.

Deflation will be the likely theme of the future.

[dmd149]

Regarding holding foreign currencies as a hedge against a falling dollar, how is gold or silver not STRICTLY better?

1) You can directly "spend" neither Swiss Francs nor Krugerrands in the USA. Either one has to be sold or traded in the event that you want to use it, so the two are on equal footing in this way, but...

2) Over the very long run, paper currencies lose value on average, by design (normal, mild inflation). Gold and silver maintain approximately the same real value over long periods.

Doesn't this make holding currency over gold/silver strictly worse (especially when taking a long-run perspective)?

It might be illegal to hold foreign currencies in the US (or gold for that matter; in 1933 FDR signed an order focing people to turn in their gold at a below market exchange rate) so what may happen is you'd have to trade in "black market" foreign currencies. People will use whatever currency they trust.

However, it shouldn't be a problem if you can spend it outside the US. If you have an actual bank accuont, you can use your debit card like normal. If you have actual cash, you will likely need to exchange it.

The problem with gold is that the denominations aren't useful. Are you going to trade $1000 worth (at the time you bought it) for a toothbrush? Not a good trade. Plus, gold is expensive at the moment relative to its historical average.

To your point about losing value due to normal inflation, yes, that's true, but if you're weighing it against the risk of a USD hyperinflation, it is reasonable. Also, you can hold it in a foreign bank account which you might earn interest on. Also, in the case of deflation in those foreign currencies, physical cash would increase in value.

[ender]

Here is a link to historical government tax revenues as a percent of GDP. It has never been above 20.5% of GDP (1944) regardless of what the tax brackets were.

Of course, the economy now is a fair bit different than 1944 or prior, too, so realistically no one has any idea what an upper bound on government tax revenue is.

Nevermind that many countries in Europe have an insanely higher tax rate as a percentage of GDP.

[dmd149]

Hyperinflation does not even registrar in the top 1000 things that I worry about on a day to day basis. Hyperinflation and currency collapse happen in countries that are forced to issue debt in currencies other than their own. Hyperinflation in the United States would indicate something so terrible happened to the world economy that it is doubtful it could even be hedged against.

Deflation will be the likely theme of the future.

Implicit in your point that hyperinflation and currency collapse occurs because the debt is denominated in a foreign currency is that the benefit of having it denominated in the home currency is  the debtor country can simply print money to pay it off.

While technically avoiding a default, it devalues the currency. Printing too much and too fast will lead to hyperinflation.

I disagree that there is "nothing you can do." I agree the world economy would be dramatically impacted by US hyperinflation or a economic catastrophe, but that does not mean the value of certain foreign currencies would decreates.

Deflation is also a risk, but it's possible to hedge against both deflation and hyperinflation. I'm just more worried about the latter and my assets aren't structured where I'd be impacted by deflation.

[dmd149]

Here is a link to historical government tax revenues as a percent of GDP. It has never been above 20.5% of GDP (1944) regardless of what the tax brackets were.

Of course, the economy now is a fair bit different than 1944 or prior, too, so realistically no one has any idea what an upper bound on government tax revenue is.

Nevermind that many countries in Europe have an insanely higher tax rate as a percentage of GDP.

Seems risky to bet your life savings on something the US has never done before as a possible remedy to a debt/hyperinflation crisis.

Also, I think it's reasonable to say at if the governent tried to take 100% of GDP, everyone would stop working/evade taxes, so there's an upper bound.

This is the whole idea behind the Laffer curve.

https://en.wikipedia.org/wiki/Laffer_curve

Again, lots of things have to go right or continue as they are for hyperinflation to not be something to worry about. Huge debt loads make the US sensitive to random events that could throw the whole system off.

I recommend reading Nassim Taleb's Antifragile. The idea is that while it's impossible to predict "black swan" events, you can measure susceptibility or risk of black swan events. Things that have more to gain than lose from a random event are antifragile, things that have more to lose than gain are fragile. Things that are in between are robust.

https://www.amazon.com/Antifragile-Things-That-Disorder-Incerto/dp/0812979680

High debt loads are fundamentally fragilizing.

Here's a video interview where he speficially talks about debt.

http://www.bloomberg.com/news/videos/b/0cdd5ebc-01c6-4386-b30b-9127736c092e

[ender]

Seems risky to bet your life savings on something the US has never done before as a possible remedy to a debt/hyperinflation crisis.

You do realize that much of the Western world has tax as a percentage of GDP double digits higher than the USA, right?

I mean, I get that the USA is a special snowflake country which will implode if this happens but plenty of other countries are currently doing this.

And frankly the only reason I care is as a counter argument to the "hyperinflation if we exceed 20% of GDP!" argument you are making. I have no interest in seeing us with such a high tax burden, but if that is the "insurance" against hyperinflation, it seems like a bullet proof insurance.

[Syonyk]

The problem with gold is that the denominations aren't useful. Are you going to trade $1000 worth (at the time you bought it) for a toothbrush? Not a good trade. Plus, gold is expensive at the moment relative to its historical average.

Gold and silver. :p

I agree that either gold is overpriced relative to historical ratios, or silver is underpriced.  Historically, it's been around 1:15 gold/silver, and it's closer to 1:60 the last few decades.

Silver is also much more useful for "human-scale transactions" - 1oz being around $17 right now, and it being easy to find fractional silver (1/4oz, 0.1oz, etc).  Worth keeping around for local trade, and I generally do offer people the option of "gold/silver/bitcoin" for payments if they're interested.

"Paper gold" or "Paper silver" is worth absolutely as much as the paper it's printed on.

Seems risky to bet your life savings on something the US has never done before as a possible remedy to a debt/hyperinflation crisis.

I don't think anyone is talking about putting one's whole savings into (whatever).  But I think it's very, very reasonable to keep some fraction of one's savings (10-15%, perhaps?) in assorted hedges against unlikely-but-possible events.  Gold/silver, bitcoin, foreign currencies from countries not heavily tied to the US, barter items, etc.  There's a small opportunity cost, but living an efficient lifestyle that shouldn't matter much, they're still useful for local trade regardless, and it very well could put you in a much better position than a lot of other people should something go badly wrong.

[dmd149]

The problem with gold is that the denominations aren't useful. Are you going to trade $1000 worth (at the time you bought it) for a toothbrush? Not a good trade. Plus, gold is expensive at the moment relative to its historical average.

Gold and silver. :p

I agree that either gold is overpriced relative to historical ratios, or silver is underpriced.  Historically, it's been around 1:15 gold/silver, and it's closer to 1:60 the last few decades.

Silver is also much more useful for "human-scale transactions" - 1oz being around $17 right now, and it being easy to find fractional silver (1/4oz, 0.1oz, etc).  Worth keeping around for local trade, and I generally do offer people the option of "gold/silver/bitcoin" for payments if they're interested.

"Paper gold" or "Paper silver" is worth absolutely as much as the paper it's printed on.

Seems risky to bet your life savings on something the US has never done before as a possible remedy to a debt/hyperinflation crisis.

I don't think anyone is talking about putting one's whole savings into (whatever).  But I think it's very, very reasonable to keep some fraction of one's savings (10-15%, perhaps?) in assorted hedges against unlikely-but-possible events.  Gold/silver, bitcoin, foreign currencies from countries not heavily tied to the US, barter items, etc.  There's a small opportunity cost, but living an efficient lifestyle that shouldn't matter much, they're still useful for local trade regardless, and it very well could put you in a much better position than a lot of other people should something go badly wrong.

I think there is a better case for silver, but I think you can be diversified enough with several foreign currencies. Not sure about bitcoin. Don't know how widely that would be accepted in a hyperinflation scenario.

Other commodities that could be useful for barter are things like those travel-sized deodorants, toothpaste, etc. I think I read somewhere that in some African country packs of gum are used as small change.

[dmd149]

Seems risky to bet your life savings on something the US has never done before as a possible remedy to a debt/hyperinflation crisis.

You do realize that much of the Western world has tax as a percentage of GDP double digits higher than the USA, right?

I mean, I get that the USA is a special snowflake country which will implode if this happens but plenty of other countries are currently doing this.

And frankly the only reason I care is as a counter argument to the "hyperinflation if we exceed 20% of GDP!" argument you are making. I have no interest in seeing us with such a high tax burden, but if that is the "insurance" against hyperinflation, it seems like a bullet proof insurance.

Not sure if your US being a special snowflake comment was sarcastic, but one thing that is unique about the US is how massive our debt it in absolute terms. No one would be able to bail us out.

It also seems like you're counting on Congress to be politically willing to increase taxes in a crisis scenario rather than simply print money, even if it were possible to get 30% of GDP in tax revenue. We might be collecting at European levels if we include state taxes and such. I don't know enough to make a good apples to apples comparison. I'm just saying there is probably a limit to what the Federal government can collect and that it might not be enough to resolve a debt crisis.

I like my foreign currency strategy; I don't need to be dependent on the US government being able to increase tax revenues or being able to borrow from creditors or whatever. Protected regardless of what happens.

[The Happy Philosopher]

Hyperinflation does not even registrar in the top 1000 things that I worry about on a day to day basis. Hyperinflation and currency collapse happen in countries that are forced to issue debt in currencies other than their own. Hyperinflation in the United States would indicate something so terrible happened to the world economy that it is doubtful it could even be hedged against.

Deflation will be the likely theme of the future.

Implicit in your point that hyperinflation and currency collapse occurs because the debt is denominated in a foreign currency is that the benefit of having it denominated in the home currency is  the debtor country can simply print money to pay it off.

While technically avoiding a default, it devalues the currency. Printing too much and too fast will lead to hyperinflation.

I disagree that there is "nothing you can do." I agree the world economy would be dramatically impacted by US hyperinflation or a economic catastrophe, but that does not mean the value of certain foreign currencies would decreates.

Deflation is also a risk, but it's possible to hedge against both deflation and hyperinflation. I'm just more worried about the latter and my assets aren't structured where I'd be impacted by deflation.

Yes, when your debt is issues in your own currency you have complete control over it. Previously issued debt is a complete known and is easily managed. Most of our 'debt' is in the form of future unfunded liabilities, not actual debt.

Realistically if there was massive inflation in the United States there would be massive world depression, and all countries would be debasing their currencies. When you hold cash in other currencies you are assuming massive risk of both inflation and currency exchange risk. In order for you to hedge this way in any meaningful way that would make a difference would require huge opportunity risk. This seems like a pretty solid way to lose money over the long term. I think a much better way to hedge against high inflation is with real estate financed with a fixed interest loan and a diversified basket of stocks such as a total market index fund.

I think buying commodities that you are going to use anyways is a decent plan, but it doesn't scale well and requires much maintenance and time. Years of food and toilet paper seems low yield to me.

[dmd149]

Hyperinflation does not even registrar in the top 1000 things that I worry about on a day to day basis. Hyperinflation and currency collapse happen in countries that are forced to issue debt in currencies other than their own. Hyperinflation in the United States would indicate something so terrible happened to the world economy that it is doubtful it could even be hedged against.

Deflation will be the likely theme of the future.

Implicit in your point that hyperinflation and currency collapse occurs because the debt is denominated in a foreign currency is that the benefit of having it denominated in the home currency is  the debtor country can simply print money to pay it off.

While technically avoiding a default, it devalues the currency. Printing too much and too fast will lead to hyperinflation.

I disagree that there is "nothing you can do." I agree the world economy would be dramatically impacted by US hyperinflation or a economic catastrophe, but that does not mean the value of certain foreign currencies would decreates.

Deflation is also a risk, but it's possible to hedge against both deflation and hyperinflation. I'm just more worried about the latter and my assets aren't structured where I'd be impacted by deflation.

Yes, when your debt is issues in your own currency you have complete control over it. Previously issued debt is a complete known and is easily managed. Most of our 'debt' is in the form of future unfunded liabilities, not actual debt.

Realistically if there was massive inflation in the United States there would be massive world depression, and all countries would be debasing their currencies. When you hold cash in other currencies you are assuming massive risk of both inflation and currency exchange risk. In order for you to hedge this way in any meaningful way that would make a difference would require huge opportunity risk. This seems like a pretty solid way to lose money over the long term. I think a much better way to hedge against high inflation is with real estate financed with a fixed interest loan and a diversified basket of stocks such as a total market index fund.

I think buying commodities that you are going to use anyways is a decent plan, but it doesn't scale well and requires much maintenance and time. Years of food and toilet paper seems low yield to me.

What you see as the backup plan or insurance plan of printing money is what I consider the problem.

A major worldwide depression does not means all currencies would be immediately devalued. In fact, countries with stable currencies and low debt levels might see their currencies appreciate, as people move away from USD to their currencies. Either way, the currencies I've selected are significantly lower risk than the USD. Yes, there will be normal inflation in their currencies, though you can also open up an interest bearing account to offset some of that. Deflation of those currencies are also possible, in which case, they gain in purchasing power.

Currency risk only matters if I plan on changing it back to USD. I don't unless some emergency requires it.

As far as opportunity cost, I'm willing to bear the opportunity cost of witholding two years of living expenses from other investments. The argument also goes the other way. I could potentially avoid a crash and buy when low.

Hedging with a home and fixed rate morgage is a smart idea. I'm prioritizing foreign curency stash first though.

Two years of commododities is not supposed to generate "yield" (don't know how you're defining it in this particular case). I haven't done it yet (small 1 BR apartment), but the total costs don't seem high, maybe at most $5k. You're right about the maintenance piece. Finding a reasonable way to rotate through the food seems a bit challenging, though not impossible.

Stocks are a bit of a crapshoot in a hyperinflation scenario. Even if you buy a market index fund, it's likely a good chunk of those go out of business.

[aspiringnomad]

To your point about losing value due to normal inflation, yes, that's true, but if you're weighing it against the risk of a USD hyperinflation, it is reasonable.

I disagree.

Also, I think it's reasonable to say at if the governent tried to take 100% of GDP, everyone would stop working/evade taxes, so there's an upper bound.

This is the whole idea behind the Laffer curve.

https://en.wikipedia.org/wiki/Laffer_curve

Again, lots of things have to go right or continue as they are for hyperinflation to not be something to worry about. Huge debt loads make the US sensitive to random events that could throw the whole system off.

I recommend reading Nassim Taleb's Antifragile. The idea is that while it's impossible to predict "black swan" events, you can measure susceptibility or risk of black swan events. Things that have more to gain than lose from a random event are antifragile, things that have more to lose than gain are fragile. Things that are in between are robust.

https://www.amazon.com/Antifragile-Things-That-Disorder-Incerto/dp/0812979680

Yeah, sure there's an upper bound somewhere, but how is throwing out 100% relevant to this discussion? What if revenue needs to be around, say, 22.8% of GDP, coupled with a slight raise to the retirement age? Is that a more likely resolution to possible future fiscal imbalances? I'd wager so.

Also, thanks for linking to the Laffer Curve Wikipedia article which reports that 71% of economists disagree that it actually applies in real life. This thread is kinda like arguing with someone who has just read from someone online about the evils of gluten and now swears they're an expert dietician and everyone should give up gluten because everything has to go right for anyone to eat gluten and not get terminally ill from it.

[YoungConsultant]

I'll just toss a random couple of my two cents into the discussion for a moment.

For one, whether or not hyperinflation will happen, I'm disappointed that there isn't much discussion about the fact that inflation is de facto a tax against the population.  Inflation by definition only happens when currency is printed and added to the money supply.  The government has a monopoly on this counterfeiting, therefore what makes it a tax is the fact that they get to spend free money out of thin air to get what they want and everyone else has to pay the price through the devaluation of their money.  Literally the same thing happens if a person prints off fake dollars in their basement and goes to the store to buy a TV with it. It's stealing. But it's legal to steal as long as you are a "government."

I also notice a few people who have bought into the Keynesian koolaid such as the government being able to spend an economy out of recession. Let's be perfectly clear, government does not generate wealth or prosperity. Government takes money from people and redistributes it, or prints money and calls it a "stimulus" as if inflation is magically the same thing as economic growth (which it is not).  The ultimate source of the prosperity of the USA is traceable to one thing: the amount of economic freedom we had/have in spite of the government getting in the way (such the fact that government itself is what causes recessions and depressions and prolongs them through it's attempts at "fixing" things). 

Taxation Is Theft, and inflation is a tax. 

You know, the funny thing about freedom is how it leads to prosperity, and prosperity reduces the need for a government because  the people can afford to take care of themselves.  This is a threat to the people in power, so they manufacture boogeymans to keep people scared and manufacture economic crises for the same reason, to give an excuse why people need government (instead of hiring private armed security in place of police forces, etc, etc.). It's like the arsonist getting a job as a firefighter.

Anyway, I'm starting to ramble so I'll just leave it at that. I guess you can tell I'm a libertarian and a big fan of Ron Paul.

[dmd149]

To your point about losing value due to normal inflation, yes, that's true, but if you're weighing it against the risk of a USD hyperinflation, it is reasonable.

I disagree.

Also, I think it's reasonable to say at if the governent tried to take 100% of GDP, everyone would stop working/evade taxes, so there's an upper bound.

This is the whole idea behind the Laffer curve.

https://en.wikipedia.org/wiki/Laffer_curve

Again, lots of things have to go right or continue as they are for hyperinflation to not be something to worry about. Huge debt loads make the US sensitive to random events that could throw the whole system off.

I recommend reading Nassim Taleb's Antifragile. The idea is that while it's impossible to predict "black swan" events, you can measure susceptibility or risk of black swan events. Things that have more to gain than lose from a random event are antifragile, things that have more to lose than gain are fragile. Things that are in between are robust.

https://www.amazon.com/Antifragile-Things-That-Disorder-Incerto/dp/0812979680

Yeah, sure there's an upper bound somewhere, but how is throwing out 100% relevant to this discussion? What if revenue needs to be around, say, 22.8% of GDP, coupled with a slight raise to the retirement age? Is that a more likely resolution to possible future fiscal imbalances? I'd wager so.

Also, thanks for linking to the Laffer Curve Wikipedia article which reports that 71% of economists disagree that it actually applies in real life. This thread is kinda like arguing with someone who has just read from someone online about the evils of gluten and now swears they're an expert dietician and everyone should give up gluten because everything has to go right for anyone to eat gluten and not get terminally ill from it.

I throw out the upper bound to point out that we don't know the upper bound, and to be dependent on some unknown upper bound as a solution to a debt crisis is incredibly risky.

I also think you are onverconfident in the US government's ability to turn on a switch and all of a sudden increase its tax revenue and raise the retirement age (not even sure that would cover the projected debt, will run the numbers sometime today). And, that rosy and unrealistically convenient solution would depend on GDP always growing, government spending remaining at projected levels (what if we get into another war? those are expensive), and political will to do the right thing (which I define as cutting and moderately raising taxes rather than printing money).

Let me ask you, is there any debt level (in terms of debt to GDP) you think we should be worried about? Or do you think it's unknown what that level is and therefore we shouldn't worry about it? Again, if you are that confident that debt isn't a problem, I suggest you back a plan in which we 100% finance our government spending with debt and lower taxes to zero.

Your internet gluten expert analogy makes no sense. How is recommending two years of forex, buying commodities you use anyway, and getting a house with fixed rate morgage anything like recommending to giving up gluten entirely? Many people buy a home, everyone buys food and toilet paper (just need to buy ahead in this case), and holding cash in a foreign currency is hardly an extreme recommendation.

Indeed, your recommendations are more like that of a 1950s tobacco executive who says there is no evidence of smoking causing any harm, therefore we should keep smoking until there is proof.

[ender]

Strawman hyperbole aren't going to help make your case for you.

Are you arguing that the government should have $0 worth of debt at all times because any government debt causes hyperinflation? Because clearly governmental debt is bad - seems like we should make it so that the government has absolutely no debt at all. No you aren't, which is why it's annoying when your response suggests the opposite is clearly what people discussing this with you.

[Telecaster]

Let me ask you, is there any debt level (in terms of debt to GDP) you think we should be worried about? Or do you think it's unknown what that level is and therefore we shouldn't worry about it? Again, if you are that confident that debt isn't a problem, I suggest you back a plan in which we 100% finance our government spending with debt and lower taxes to zero.

[/quote]

Wrong to frame the problem.  Debt to GDP by itself, tells us almost nothing.  Debts crisis in general, and hyperinflation specifically happen when the government cannot meet its financial obligations.  That's the question you need to ask.   Right now, and into the future, the federal government can easily meet its financial obligations even if nothing changes.   

However, things will change.  Taxes will be cut or lowered, changes to entitlements and other spending will be made, etc.  How do I know this?  Because taxes have been raised and cut, and spending priorities have been changed virtually constantly throughout our history.   Ronald Reagan is remembered as a tax cutter, but what many people forget is that he signed into a law a huge payroll tax increase for the purpose of saving social security and Medicare.  He also increased the capital gains tax rate to 28%, and raised the age for full SS benefits from 65 to 67.   If it happened before, it can happen again.   In Congress the political mood currently is no new taxes, but the majority of Americans support at least some new taxes.  I find it unlikely Congress can buck the will of the people forever. 

Back to your original question, At the end of WWII, the debt held by the public to GDP ratio was around 105%.  Right now, it is around 75%.  Somehow the number actually got lower over the last 70 years, despite the government running a deficit almost every single year.  In fact, there have only been six periods since the 1790s that the government didn't run a deficit.  Even if you look at straight debt to gdp, it has still been higher in the past.   Hyperinflation never occurred.    Recall that when deficits exploded in the 1980s tripling the national debt, inflation dropped like a rock.   Even in the latest crisis in 2008, deficits and debt exploded.   The Fed injected trillions into the economy in the form of QE, and the result was inflation that was and is below the Fed's target.  Other nations have implemented QE as well, like the ECB and Bank of England.  Result?  No inflation.   

Another example.  Japan's debt to GDP ratio is well over 200%.   They have had no inflation bordering on deflation for decades, and poor GDP growth as well.  If Japan can have a debt to GDP ratio of over 200% and no inflation, then assuming your theory is correct,  we in the USA have a long, long, long way to go before we have to worry, right? 

Next look at what the bond markets are doing.  Bonds are tradeable financial instruments, and bond traders are betting inflation will be close to zero as far as the eye can see.  It could be you know something they don't know.  But maybe, just maybe, they know something you don't know.   Food for thought. 

Your internet gluten expert analogy makes no sense. How is recommending two years of forex, buying commodities you use anyway, and getting a house with fixed rate morgage anything like recommending to giving up gluten entirely? Many people buy a home, everyone buys food and toilet paper (just need to buy ahead in this case), and holding cash in a foreign currency is hardly an extreme recommendation.

It is extreme though.   Two years of living expenses is a lot of dough.   And in say, 20 years that two years living expenses should grow to something like eight years expenses.  Eight years or even two years of you life's energy is huge expense.  I have no problem with planning for unlikely events, but you are making an enormous bet on a premise that doesn't even make sense as far as I can tell.   

Anyone who has made an enormous financial commitment like you have obviously believes what they are saying.  I'm not posting to change your mind.  But maybe those reading along can gain some perspectives. 

 

[mousebandit]

I'm still trying to learn enough to even understand most of the debate here, lol.  But, here's what I'm starting to grasp.  So, we have a national debt of $18 trillion dollars?   And we are not paying down this debt at all.  And, we are adding $500 billion dollars per year to that debt? 

And, we are borrowing money just to pay the interest on this debt?  Is that the $500 billion per year, or is that actually more new debt on top of the $500B?

Before I ask any more questions, I want to make sure I've got this part straight. 

MouseBandit

[Telecaster]

And, we are borrowing money just to pay the interest on this debt?  Is that the $500 billion per year, or is that actually more new debt on top of the $500B?

$500B is the amount borrowed to pay all the bills, including interest. 

[projekt]

Yes, but you also need to put it in perspective of GDP. Looking at the raw number makes it difficult to put it in perspective. If you heard that company A had $6M debt and B had $1M debt, you would need to know operating margin and interest rate to determine which one is more solvent.

[mousebandit]

Let me preface with - I'm sure noob, and just learning about how all this fits together.  :-)  I have a good grasp of business finances, so I'm going to try and make comparisons to that, to see if I'm getting this right. 

How does GDP (that's Gross Domestic Production, right?  The monetary value of everything we manufacture, produce, and provide as services here inside the US?) impact our evaluation of how the entity is doing financially?  Or is GDP the profit amounts of our production?  So that would be comparable to the profit side of a profit/loss statement for a business?   Or is it more like the total volume, gross sales, of our nation? 

How much do we net from taxes annually?  I will probably look this one up, too.  Is that the primary source of funding we have to fund our annual budget, and pay back these national debts?  Now I'm thinking this would be more like our annual profit if we looked at the nation as a business entity (excluding, of course, the budget deficit, LOL). 

Thanks!  I'm not bent on contradicting anyone who says things are fine, I'm just trying to figure out why some think it is and why some think it's not, and be able to go back and better follow the discussion on this thread.  :-)  I've heard these terms forever but never really paid attention or tried to grasp what they actually mean or how they fit together.  :-)

Thank you all for the help! 
MouseBandit aka Noob in Training

[projekt]

Krugman views the current USG as an insurance fund with an army and a few small side businesses. The vast majority of public spending is on social security, Medicare, and defense, as well as interest on the debt. In that sense, much of the revenue is being immediately spent on insurance payouts and interest. The military can be viewed as a cooperative, perhaps.

To put it in a business metaphor, since the GDP represents the sum of economic activity in the country, it is a good proxy for the "total gross revenue". Since each of us gets a piece of that, we can view the government as our fixed costs. In a business you can optimize these costs somewhat but you can't get rid of them even when revenue falls. If you did drop some of these costs, you'd probably end up paying somewhere else. Think of our disposable income as net profit.

A business may add to its debt if the markets allow it. This can.allow more cash flow in a given year. As the business grows, it may never need to retire that debt. For example, a $10,000 loan might be a lot for Apple in 1977, but by 1980 they wouldn't even notice it getting rolled over into another bond.

[Yaeger]

Krugman views the current USG as an insurance fund with an army and a few small side businesses. The vast majority of public spending is on social security, Medicare, and defense, as well as interest on the debt. In that sense, much of the revenue is being immediately spent on insurance payouts and interest. The military can be viewed as a cooperative, perhaps.

To put it in a business metaphor, since the GDP represents the sum of economic activity in the country, it is a good proxy for the "total gross revenue". Since each of us gets a piece of that, we can view the government as our fixed costs. In a business you can optimize these costs somewhat but you can't get rid of them even when revenue falls. If you did drop some of these costs, you'd probably end up paying somewhere else. Think of our disposable income as net profit.

A business may add to its debt if the markets allow it. This can.allow more cash flow in a given year. As the business grows, it may never need to retire that debt. For example, a $10,000 loan might be a lot for Apple in 1977, but by 1980 they wouldn't even notice it getting rolled over into another bond.

I disagree with this analogy and with Krugman on the fact that the government is an insurance company with an Army, and even Krugman should decry comparing the government to a household or business, which he does. We're a Welfare state with most of our spending going towards to omnipresent poor and elderly. It's not insurance, unless you can say that we're paying insurance in case of being poor, which is bad policy because after 50 years of Great Society programs we haven't meaningfully impacted poverty.

http://krugman.blogs.nytimes.com/2013/03/14/running-government-like-a-business-or-family/

I'm more worried about the debt burden a company has in relation to it's amount of assets within the industry, the solvency. I disagree with Krugman, again (I think he's a worthless economist), and say that accumulating debt with no future plans on repayment is bad policy for ANY entity. From the government's perspective you can either 1) cut spending, 2) print off money and devalue the currency, effectively steal everyone's savings, or 3) Somehow hope that revenue growth (economic growth) can outpace spending growth long term.

I'm not a big fan of hoping for a solution, or stealing money from the people through currency devaluation, so I'd support major cuts to the big 5 - well maybe not interest on the debt, soo.. the big 4.

[beltim]

Let me preface with - I'm sure noob, and just learning about how all this fits together.  :-)  I have a good grasp of business finances, so I'm going to try and make comparisons to that, to see if I'm getting this right. 

How does GDP (that's Gross Domestic Production, right?  The monetary value of everything we manufacture, produce, and provide as services here inside the US?) impact our evaluation of how the entity is doing financially?  Or is GDP the profit amounts of our production?  So that would be comparable to the profit side of a profit/loss statement for a business?   Or is it more like the total volume, gross sales, of our nation? 

How much do we net from taxes annually?  I will probably look this one up, too.  Is that the primary source of funding we have to fund our annual budget, and pay back these national debts?  Now I'm thinking this would be more like our annual profit if we looked at the nation as a business entity (excluding, of course, the budget deficit, LOL). 

Thanks!  I'm not bent on contradicting anyone who says things are fine, I'm just trying to figure out why some think it is and why some think it's not, and be able to go back and better follow the discussion on this thread.  :-)  I've heard these terms forever but never really paid attention or tried to grasp what they actually mean or how they fit together.  :-)

Thank you all for the help! 
MouseBandit aka Noob in Training

The US government collects about $3.2 trillion in revenue.  About half of this is federal income tax, about a third is from Social Security and other payroll taxes, about 10% from corporate income tax, and the rest comes from a motley assortment of programs.

If you think of the government as a business, then the tax collected corresponds to the revenue.  There isn't a great analogy for what GDP is.  I think the best is probably total market size, because then you can draw an analogy between taxes as a percentage of GDP and the market share of a company.  It's not perfect because you neither can nor would want the government to take 100% of GDP, but then monopolies in business aren't good for consumers either.