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How to spot Crazy Talk from a Bond Vigilante: He opens his mouth and speaks

December 14, 2010

Check out this guy who has no idea what he is talking about.  He says the dollar is weaker against everything, and is factually wrong.   Who would let this guy run money, or be posted in a fancy blog?  But I will give him credit – he managed to put the 4 major ways the hard money guys (and they are guys) are wrong about the world into one short paragraph.

In this one paragraph, he is wrong is 4 gigantic and different ways.  He says:

“Whatever the deflationists may claim about the money supply, the objective indicators are not looking good for Uncle Sam. The dollar’s decline is abundantly evident when compared to gold, commodity prices, other currencies, real estate, and the list goes on. The national debt now stands at over $13.7 trillion, some 94% of GDP. Either due to an insolvent currency backed by a bankrupt nation or because of the Federal Reserve’s endless money printing, I have no doubt that the deflationists have it completely wrong.

No, you nearly completely wrong.  Not entirely, but very, very close to completely wrong. In general he makes 4 claims.

First, The USD is weaker against almost all asset classes, including currencies, the stock market and real estate.  The USD is stronger against real estate and the stock market, stronger against many currencies, and mixed against bonds.  It is weaker against commodities.

Second, a moderately large debt to GDP will cause the U.S. to crumble.  This ignores a simple fact, the greatest event in human history since the domestication of plants and animals happened in a country with debt to GDP far greater than the current US debt.

Third, money is created by the fed.  Money isn’t created by the Fed. It is created by government deficit spending.

Fourth, the objective data doesn’t look good for Uncle Sam, when the objective data is mixed.

So lets check real quick on those claims.

Is the USD really weaker against everything?  No – not even close.

Look at the major asset classes.

Real Estate: I think nearly everyone in the world knows this, but apparently this smarty pants missed the news, so I will fill him in: The U.S. housing market has experienced a severe price and volume crash. Housing prices are much, much lower than they were a few years ago.  That means you get more for your “buck” – or as we professionals might say, the USD went up in value against real estate.

Currencies: The USD is stronger against the Euro than it was before the crisis, and about the same against the Australian dollar, the Canadian Dollar.  It is a bit weaker against the Japanese Yen.  Dude – one of our major problems is that the USD is kept too strong by China!

Stock Market: The dollar is stonger against the stock market than it was a decade ago, if you look at the values of the stock market indexes.   The high close is 1500 or so, we are still 30% below that in notional terms, and much farther than that in real terms.

Commodites: You got me there, superman.  Dollar is weaker against commodities.   Watch out though, gold looks really toppy.  When they are selling it on Rush Limbaugh, be afraid for your asset class.

Bonds: Mixed at best – a called strike for you.  Check out this widely available chart of 10 year yields.  If you chop off the years of living dangerously, we look to be about where were were in non-terrifying years like 2004, 2005 and 2006.  That is dramatically weaker against this major asset class?  Please.

1 for 5 is .200, You’re on the cusp of being sent to the minors.

The second claim: the country will go bankrupt

Last I checked, we used U.S. Dollars – a sovereign fiat currency.  Dude, please check the meaning of the word fiat -“a command or act of will that creates something without or as if without further effort.” Because for anyone to be bankrupt, it requires not paying the bills.  If those bills can be paid in something you can create by a godlike act of will without any further effort, then going bankrupt would require some non-godlike stupidity.  As you yourself noted, the US can print more money.

Then he ignores the fact that the greatest even in human history since the domestication and plants and animals happened in a country with a debt to GDP greater than 150%.  I use these words to describe the industrial revolution, because they have a bit more punch, and most people don’t know what the industrial revolution was, or just how amazingly important it was to humankind.

Like your iPad?  We would still be eating out of wooden bowls with our hands, and not communicating through a magical network of light.  Time go milk the cows….

Third Claim:  The Fed is printing money

How about that last claim – that the fed is printing money?  Well, if you ever even thought about it for a few mintutes, you might question why we had this huge increase in the monetary base, and we are facing deflation right now. But this is tricky, and not widely known.   So if you believe simple stuff, like 2 + 2 must = 4, or a few centuries of double entry bookkeeping are still correct, you’ll be glad to know that money is created by the sovereign government running deficits.  MMT says that government deficits create net money, and have the accounting to back it up.  What does the conventional theory have?

But really, on the money base, How hard must reality hit you with a 2×4?  Inflation is the lowest in my or my fathers lifetime – most people born in the US have never experienced inflation at a lower level.  Even Ben finally admits that this is more about interest rates than about money printing.  I think the big guys really get MMT but are afraid to  recant decades of being wrong, even to the point of being held up to public ridicule and taking it.

The fourth claim: Uncle Sam is doing poorly

I will assume that by Uncle Sam, he means the U.S. economy.  I guess he doesn’t even bother to look at the data, because Uncle Sam has lots of objective data that shows he is doing ok.  I suggest you look at GDP, Rail Traffic, or tax collections.  Retail Sales came in nice today – and it is all over the news.

Conclusion: I just wanted to make sure you all know that I can get as angry as the crazy people, but at least I refer to ideas that actually manifest themselves in reality rather than the clouded minds of madmen.  This guy is like the bank robber who rubbed lemon juice on his face to make himself invisible to the camera – so incompetent he can’t tell tell reality from hilariously wrong claims.

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