10 year breakeven inflation rate @ 2.64%

[corn18]

Quote:

Originally Posted by Magus No, the treasury emits credit/debt aka US Treasury Bills and bonds. The Fed prints money and buys the debt. They've also bought mortgage debt and other bonds as well in the last 20 months. Otherwise where would the Fed come up with $4 trillion in 2 months to buy everything it bought?

Their balance sheet.

[Magus]

Quote:

Originally Posted by Montecfo Weimar republic? That's really out there. If you look (and at great risk of over summarizing), Germany was saddled with massive war debt that it could not pay, went off gold standard to massively print money, currency plummeted, hyperinflation ensued (1000 percent), fortunes lost (and some made) and they needed a new asset-backed currency. Fast forward to US today. US dollar is world's reserve currency, dollar rising. Inflation skyrocketing to....5.6 percent post the start of a worldwide pandemic. And the FED has announced plans to REDUCE the supply of money sharply and at a relatively quick pace. I enjoy a good discussion, but not mixing facts with hyperbole. And I look forward to you making a fact based case that we are anything close to "Weimar Republic risk" as you charge.

I didn't say we were close to Weimar risk. I said they are making a risk towards that end and they are - a 34% increase in the money supply in 20 months is very commonly seen in the early days of hyperinflation (or super elevated if you want less charged)- it's not like people in Germany in 1920 saw it coming either. The inflation genie is hard to get back into the bottle at times as we saw in 70s-80s - took interest rates over 10% and a large recession - and Fed Gov debt to GDP level is 4x today what it was then. If interest rates rise 3%, it would add $14 trillion to the debt level in 10 years. You think the gov can afford that?

Second, the 5.6% inflation is ~3% understated at a minimum due to the stupid way the BLS calculates CPI using Owner Equivalent rent rather than home purchase price or actual rents. There is also the of hedonic adjustments and assumptions around consumers shifting products as prices rise. In short, the same 100 item basket last year and this year would already be north of 10% without those 3 items.

Third, that is not what the Fed is doing. They are going to start modestly pulling back on how quickly they emit new $. They won't actually reduce the money supply likely ever.

We have not had a left tail event in the US in a long time - but to pretend we can't have one, especially when the Gov and Fed Res are doing things that could definitely cause that risk - is silly. But you do you.

[Magus]

Quote:

Originally Posted by corn18 Their balance sheet.

LOL Where did this $4 trillion arrive on their balance sheet from? (Hint: they 'printed' it). The US Government is emitting credit. The Fed reserve is monetizing it.

Here is the definition of QE

What Is Quantitative Easing (QE)?
Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to *increase the money supply* and encourage lending and investment. *Buying these securities adds new money to the economy*, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank's balance sheet.

When short-term interest rates are either at or approaching zero, the normal open market operations of a central bank, which target interest rates, are no longer effective. Instead, a central bank can target specified amounts of assets to purchase. *Quantitative easing increases the money supply by purchasing assets with newly-created bank reserves in order to provide banks with more liquidity*

[Montecfo]

Quote:

Originally Posted by Magus I didn't say we were close to Weimar risk. I said they are making a risk towards that end and they are - a 34% increase in the money supply in 20 months is very commonly seen in the early days of hyperinflation (or super elevated if you want less charged)- it's not like people in Germany in 1920 saw it coming either. The inflation genie is hard to get back into the bottle at times as we saw in 70s-80s - took interest rates over 10% and a large recession - and Fed Gov debt to GDP level is 4x today what it was then. If interest rates rise 3%, it would add $14 trillion to the debt level in 10 years. You think the gov can afford that? Second, the 5.6% inflation is ~3% understated at a minimum due to the stupid way the BLS calculates CPI using Owner Equivalent rent rather than home purchase price or actual rents. There is also the of hedonic adjustments and assumptions around consumers shifting products as prices rise. In short, the same 100 item basket last year and this year would already be north of 10% without those 3 items. Third, that is not what the Fed is doing. They are going to start modestly pulling back on how quickly they emit new $. They won't actually reduce the money supply likely ever. We have not had a left tail event in the US in a long time - but to pretend we can't have one, especially when the Gov and Fed Res are doing things that could definitely cause that risk - is silly. But you do you.

There is not enough time in the day to respond to the things you are saying. I posted a brief summary of what happened in the Weimar Republic. There is very little similarity to today. Mostly it could not be more different.

The rest of your argument seems to boil down to your belief the FED is lying about its plans and government inflation numbers are."wrong" and you have your own calculations you wish to substitute for the ones developed by hundreds of analysts abs data scientists at BLS. I think the FED is serious, and so do the markets . What they end up doing will depend on future events, of course. And inflation is a serious concern, and no one questions that.

And I never said hyperinflation could never happen as you suggested with your strawman argument. I just don't think we are on the verge of it, and that is based on a lot of evidence.

I am even more interested in how you are positioning your portfolio for the high to hyper inflation market conditions you expect?

[Magus]

Quote:

Originally Posted by Montecfo There is not enough time in the day to respond to the things you are saying. I posted a brief summary of what happened in the Weimar Republic. There is very little similarity to today. Mostly it could not be more different. The rest of your argument seems to boil down to your belief the FED is lying about its plans and government inflation numbers are."wrong" and you have your own calculations you wish to substitute for the ones developed by hundreds of analysts abs data scientists at BLS. I think the FED is serious, and so do the markets . What they end up doing will depend on future events, of course. And inflation is a serious concern, and no one questions that. And I never said hyperinflation could never happen as you suggested with your strawman argument. I just don't think we are on the verge of it, and that is based on a lot of evidence. I am even more interested in how you are positioning your portfolio for the high to hyper inflation market conditions you expect?

Sigh, I'm not going to bother talking about left tail hyperinflation whether Weimar, Zimbabwe, Argentina, etc because no one EVER expects them - but 30%+ increase in the money supply and massive government debt are always leading indicators. My "base case" is not hyperinflation but very elevated inflation ala 1970s/80s, but that left tail event probability has gone up massively in the last 20 months. Weimar was indeed stuck with massive debt, as were the other countries, and guess what? So does the USA (and most countries at this point, sigh).

As for CPI, just google Owners equivalent Rent, hedonic adjustments and substitutes and CPI if you don't want to take my word for it. The BLS calculates CPI for housing (25% of CPI) by asking clueless homeowners what they think their home would rent for - that is at 2.5%, despite the fact that rents are rising double digits nationally as are home prices. Hedonic adjustments and substitutes are well known and taught in economics classes. Those 3 combined right now are about 5% inflation adjustment downward. The last two are always present (usually 1-2%) in their calculations since the 1980s and 90s and usually the OER is not that different from rent, but homeowners are clueless that rents have gone up 15-20% in the last 20 months.

What am I investing in? Heavily in real estate. 65% of my marginal $ are going into real estate currently, 30% in stocks and 5% in alt investments (gold, silver, digital currencies, etc). Nothing in fixed income. I'm still sitting on $200k cash at the moment but hope to buy 3 more rentals in the next 4-5 months. Had a huge payout in June and Sept of this year and still working on putting the $ to work. I should get another ~$200k next year and likely will have a similar allocation, except will do the new I-bonds at $20k at 7.12%.

[yhoomajor]

Federal reserve "creates" funny money.
Treasury issues Debt

In old days (and still is), Treasury Dept was/is responsible for printing paper money and coins (addional task). But most money in circulation these days is e-digits in computers. Nor paper money or coins.

Federal reserve can enter 12 keystrokes in a computer.. and pronto you have Trillions of new money!! In fact.. that's what they have been doing. They use this funny money to buy debt that Treasury Dept is issuing.

[Running_Man]

https://tradingeconomics.com/spain/p...-prices-change


Spain PPI up 23% year over year, shows just how fast inflation can ramp up, last time Spain this high? 1981. The chart is annual rate of change month by month last 12 months

[Running_Man]

Here is Weimar republic PPI Index just before hyperinflation, the secret debt killer of inflation is once the inflation is started the only way to keep economy going is to increase inflation, until the inflation is unbearable and the wealth has already been destroyed. Then you can reset the economy for the working class, retiree class is out of luck. Does not have to be hyperinflation but the inflation of 1976-1981 made the debt of the US less of a problem going forward from 1981 and let economy grow, cutting debt from 42 percent of GDP to 30 percent of GDP. And as interest rates fell refinancing lowered deficit, the retiree class of the early 70's were the biggest losers unless they owned a house. But back then the interest rates were not being manipulated purposely well below inflation so the pain will be greater.

USA is now at 130 percent so a greater inflation is needed to cure the problem, our debt to GDP is actually 35% higher than Spain's

Note in 2021 Germany's debt was 132 billion gold marks from the treaty of Versailles, and an internal debt of 55 billion against a GDP of 80 billion or a little more than 200% of GDP. The problem over 200 percent is a problem of math as the economy cannot even at low rates of interest create enough tax revenue to pay back. Now the Treaty of Versailles was noted in Gold Marks so there was no way out of that so total elimination of Germany's other debt would be absolutely essential to solve the debt problem and get Germany to about 150% debt to GDP with hope of growing economy to cut under 100%. Whether these were actual calculations by economists is irrelevant, the math causes that to be the solution. Increasing debt is only solution until inflation starts, otherwise economy collapses, eventually inflation takes hold to wipe out the debt. There is not another solution, either prices hold and debt continues to climb as long as market allows or inflation starts and is continued. That is the only similarity between Germany and US today. Whether Fed can continue this for another decade as they would have been able to without the pandemic seems less likely at this point due to inflation taking hold. Once started it is like snow at the top of a hill it will only increase in force.

[Montecfo]

Quote:

Originally Posted by Running_Man Here is Weimar republic PPI Index just before hyperinflation, the secret debt killer of inflation is once the inflation is started the only way to keep economy going is to increase inflation, until the inflation is unbearable and the wealth has already been destroyed. Then you can reset the economy for the working class, retiree class is out of luck. Does not have to be hyperinflation but the inflation of 1976-1981 made the debt of the US less of a problem going forward from 1981 and let economy grow, cutting debt from 42 percent of GDP to 30 percent of GDP. And as interest rates fell refinancing lowered deficit, the retiree class of the early 70's were the biggest losers unless they owned a house. But back then the interest rates were not being manipulated purposely well below inflation so the pain will be greater. USA is now at 130 percent so a greater inflation is needed to cure the problem, our debt to GDP is actually 35% higher than Spain's Note in 2021 Germany's debt was 132 billion gold marks from the treaty of Versailles, and an internal debt of 55 billion against a GDP of 80 billion or a little more than 200% of GDP. The problem over 200 percent is a problem of math as the economy cannot even at low rates of interest create enough tax revenue to pay back. Now the Treaty of Versailles was noted in Gold Marks so there was no way out of that so total elimination of Germany's other debt would be absolutely essential to solve the debt problem and get Germany to about 150% debt to GDP with hope of growing economy to cut under 100%. Whether these were actual calculations by economists is irrelevant, the math causes that to be the solution. Increasing debt is only solution until inflation starts, otherwise economy collapses, eventually inflation takes hold to wipe out the debt. There is not another solution, either prices hold and debt continues to climb as long as market allows or inflation starts and is continued. That is the only similarity between Germany and US today. Whether Fed can continue this for another decade as they would have been able to without the pandemic seems less likely at this point due to inflation taking hold. Once started it is like snow at the top of a hill it will only increase in force.

I agree with most of what you said. Our situation is like Weimar only on that we have debt and a rise in inflation. Nothing unique about that.

But I think your statement that inflation once it begins cannot be stopped has been proven to be false by our own history that you note earlier in your post.

Secondly, there are many times in our history where inflation has exceeded interest rates. And if our current bout of inflation continues, rates will continue to rise as they have been doing. That is not currently the market expectation.

On a long-term basis we definitely must stop deficit spending or some type of serious shock is inevitable in my view. If you can grow the economy while keeping debt static you can make steady progress.

However, as we break new ground on debt issuance (and other Western countries do also) it does make me wonder if we have bought more time as we remain the "cleanest dirty shirt". Were it up to me, I would not be testng the limits on this, but our government seems bent on so doing via massive deficit spending.

[corn18]

Uh oh, looks like Mr. Market did not like the inflation news today. 10 year breakeven now @ 2.7%.