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Like most of us who have been reading Cullen’s pieces, I understand that the federal government cannot “run out of money” and that the risk is inflation. Every now and then I see an article that presents some numbers that give me pause and make me wonder how we will avoid harmful inflation. I know that past hyperinflations (since 1900) have always had some other severe, exogenous event going on, but wow, the numbers in this article from Reason seem scary. Of course, any projections by the CBO need to be taken with a grain of salt.

Here’s a couple of items from the article that jumped out at me: “in the next decade, net interest will go from $270 billion to $768 billion.”

“The CBO also reports that the share of the budget devoted to those payments is growing, from 7 percent today to 21 percent in 2047.”

Here’s a link to the article:

https://reason.com/archives/2017/04/06/is-the-sky-the-limit-for-the-debt-ceilin#comment

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Posted by Steve W
Posted on 04/06/2017 11:52 AM
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There’s a lot of factors here, but you have to ask yourself what will set the inflation in motion?

From a macro perspective I think there are 3 really powerful disinflationary trends going on:

1) demographics
2) technology
3) labor vs capital

All three of these battles have clear deflationary or disinflationary impacts.

Okay, but let’s say something weird happens and people start losing faith in the USD for some reason. Well, again, we have to ask why that would happen? I would argue that the labor vs capital dynamic means that the demand for USDs will remain strong because corporations are the big winners in the US economy. That is, the reward for productive output remains high. And that leaves the USD at the top of the reserve currency food chain. Those two factors alone mean that there is a small likelihood of the USD losing its value in any significant way. The govt can try all it wants to wreck the currency, but they won’t succeed as long as these big factors are in the way….

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Cullen Roche Posted by Cullen Roche
Answered on 04/11/2017 11:59 AM
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    I imagine it’s ironical we’ll stay at the top of the pyramid due to technological unemployment. OTOH, it will allow for a Citizen’s Dividend without inflationary consequences. I’d feel a lot more comfortable with the government following something like a “Taylor’s Rule” for determining a Citizen’s Dividend vs Inflation.

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    Posted by MachineGhost
    Answered on 04/11/2017 10:51 PM
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      The conventional concerns on this issue are on full display in today’s WSJ, page A2 under “Fiscal Plans Could Fuel Rate Surge”.

      Some selected excerpts: “More supply (U.S. Treasury securities) and less demand tends to mean lower prices, and with bonds, lower prices mean higher yields and interest rates.”….. The bond market is about to get hit all at once.” (said Stephen Stanley, chief economist of Amherst Pierpont Securities).

      This one made me smile: “Most forecasters have long expected rates to rise, and been embarrassed by those forecasts when interest rates stayed stuck in a rut.”

      I think “most” forecasters might want to pay more attention to Cullen’s insights on how our monetary system works, QE, and the history of modern hyperinflations.

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      Posted by Steve W
      Answered on 05/08/2017 10:38 AM
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        My base case is and has been for about a decade, lower inflation for longer. As I said before, those three trends are tremendous downward pressure son inflation. Hard to imagine how that changes in the coming years.

        There will be times when bonds are riskier than normal (and I’ve highlighted many of these times), but the long-term trend is clear in my opinion.

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        Cullen Roche Posted by Cullen Roche
        Answered on 05/08/2017 2:16 PM
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          I think it will be interesting to see if we can have stagflation 2.0 if wages ever start rising and corporate profit margins start shrinking as a result thereof. Yields don’t have to go up just because of higher economic growth expectations and that was arguably a pretty minimal effect on yield from 1980 to date.

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          Posted by MachineGhost
          Answered on 05/08/2017 5:13 PM
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            Higher wages don’t necessarily mean lower profits. If households earn more and net save less then profits will rise.

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            Cullen Roche Posted by Cullen Roche
            Answered on 05/08/2017 5:52 PM
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