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SPDR Gold Shares Message Board

  • batshwing batshwing Oct 20, 2009 12:06 PM Flag

    Krugman's latest: Right or Wrong?

    "But now ask the question: what would the effect be if China decided to sell a chunk of its Treasury bill holdings and put them in other currencies? The answer is that China would, in effect, be engaging in quantitative easing on behalf of the Fed. The Chinese would be doing us a favor! (And doing the Europeans and Japanese a lot of harm.)"

    http://krugman.blogs.nytimes.com/2009/10/19/americas-chinese-disease-not-quite-what-you-think/

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    • "say someting useful"

      By the way, is "useful" to you a prediction or forecast of future events? If that's what you consider as being useful than you haven't learned from five thousand years of history. Let me boil down all of history to one major lesson:

      Everything important was a surprise to people at the time.

      Modeling the future with mathematics based on past data is bound to fail. Economists do it anyway because the nice numbers that come out of their models sooth them into believing they understand and can measure something they can't, which is basically the same impulse that drives religion and superstition. This is why economists like Krugman are useless and why I won't waste my time listening to them anymore than I'd waste my time getting my palms read or my tea leaves analyzed.

    • "My perception of you is that you prefer to learn from people who agree with you than from people who do not."

      Incorrect. I prefer to learn from people who have not already proven themselves to be of zero use, like our good friend Krugman. I've read his articles before and he spouts nonsense.

      Fundamentally he claims to be able to forecast things that are unpredictable. He has not learned from his own lack of ability to predict the most important events - like the housing crisis and Lehman collapse. Yet he claims to tell us what the effect of the Chinese making a dramatic action would be.

      What the fuck should I care what his evaluation is of a situation he's already proven that he is not capable of understanding?

    • Yeah I guess we don't disagree all that much.

    • You have to look at the yield spread between TIPS and fixed rate Treasuries of equal tenor to gauge inflation expectations. The Fed uses this as one signal.

      I am sure you can guess what that spread is right now without looking it up

      In my personal valuation model, gold is discounting inflation by floating up to that Dollar price necessary to make up for any outright owned asset devaluation on the Fed's book backing base money.

      Remember that the Fed is LIABLE for cash and reserve money issued and released into circulation. The Fed has "only" $60 Billion capital in its accumulated equity account. For every tic the Dollar goes down, the Fed's fixed income assets get a haircut. Multiply this haircut by $1.7 Trillion in base money and you understand why gold MUST go up to back up the Dollar in compensation.

    • Bats,
      At what point do Tips actually work to defend against these risks vs gold? Deep

    • Greenspan complained in the past that the Chinese were controlling the long end keeping long-term mortgage rates low
      --

      I think that was bunk. Did the Chinese also control the long end of the curve in the UK, Spain and Australia etc where low long term rates led to housing bubbles?

      ---

      So I did not really understand the chinese had moved from long to short, although it makes emminent sense. IS there quant to back that up?

      I don't think deflation is that natural order of things. I think it happened in the US in the depression when we made bad moves and money was backed by gold. I think it happned in Japan because the Japanese do no behave ratonally e.g., how many companies run on 2% ROE. It is not gonna happen here. No way. That is why the next bubble is gonna be the biggest, and why I have moved over to the gold side by default. If you are a seller of paper you must be a buyer of real wealth. The only thing is this has been the right move my whole life...

    • You make an interesting stance here. You think that the Fed is controlling the short end, while Krugman (and many gold bugs in fact) are saying it's the Chinese.

      Greenspan complained in the past that the Chinese were controlling the long end keeping long-term mortgage rates low. That made it harder for the Fed to pierce the housing bubble. I posted a counter to that in the WSJ basically arguing that the Fed was accumulating Treasuries even though it was on a hiking campaign between 2003 and 2006. Plus sub-prime rates and HELOC's are more closely tied to short-term rates, so the whole blame game kind of falls right back onto the Fed.

      Now Krugman (and Bernanke) are blaming the Chinese for keeping the Fed from fighting the liquidity trap by recycling Dollars back to the US into short-term Treasuries. Why did the Chinese shift from long-term to short-term debt? Because they are worried about the Dollar and that means they are worried about tying up principal in long-term Treasuries and agency debt. They want to be able to earn interest on US paper but have an escape hatch to roll-over principal quickly at the same rate as the Dollar devalues. T-bills allow you to do that, notes and bonds do not.

      Back to your point. As long as the Chinese can roll-over their T-bills and make a return on the short-end they will continue to do so. Meanwhile, the Fed will have to buy medium to long-term Tresuries to fill up its cashe of better quality securities for future sanitized purchases of lower quality securities when the next mortgage default wave hits and the black hole opens up again.

      This is how people Krugman look at the world. They are Keynesians. To them, deflation is the worse enemy and it must be fought at all cost by inflating the supply of bank reserves and monetizing government debt if necessary to counteract a savings glut, debt cancellation and debt default.

    • My perception of you is that you prefer to learn from people who agree with you than from people who do not.

      Whether or not you come around and say someting useful after all is totally irrelevant to me until you actually post something useful.

    • We've been arguing about very little. My argument has been that, since the crash, pysical gold has been overvalued vs

      1) most other commodites: oil, platinum etc
      2) precious metal and oil stocks
      3) stocks in general (S&P with pricing power, forien stocks)

      IT was never GDX vs. VGPMX but GDX vs physical gold. OR physical gold vs other stocks/commodities when other things were trading at generational lows due to forced liquidations.

      I based this on historically long standing ratios e.g., XAU/Gold price etc. 1&2&S have outperformed gold year to date, and ridicuous since march. following the outperformance I am more netural across the asset classes. I am very underweight physical so now i can trim 1/2/3/ at more attractive price and get more oz if i choose.

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