View Full Version : Is hyperinflation possible?
http://www.itulip.com/images/dollarpaper.jpgIs Hyperinflation Possible?
We have since 1999 believed that the US was destined to inflate its way out of excessive debt, both public and private. The logic of our conclusion is simple. The government can never pay off its debts to foreign governments or to itself – not enough national income. US households can't pay their debts either for lack of opportunities to increase income to cover debts. The Fed has the option to inflate in any economic or financial system crisis that might precipitate a debt crisis because the US is not on a gold standard as it was in the early 1930s when the US suffered a monetary deflation as a result of the last debt crisis. And, finally, monetary inflation is politically expedient because it cannot be readily blamed on one political party, arising as it does from the bipartisan Fed, whereas taxes – the honest means for paying public debts – is political death for the party that chooses it.
In any case, increasing taxes during the kind of economic contraction that typically leads to debt crisis is, as economists say, counter cyclical, like asking your wife if it's okay if you go play cards and drink beer with your friends right after you've finished apologizing for forgetting her birthday, again.
Our expectation was for an inflation to culminate in a 100% rise over a period of five or six years, a major inflation such as occurred in Mexico and Russia in the 1990s, but not hyperinflation as occurred in the Wiemar Republic in the 1920s or Zimbabwe today. We recently read a report by a credible source that makes an extensive case for an American hyperinflation.
When we read John William's recent report on hyperinflation Hyperinflation Special Report (http://www.shadowstats.com/article/292) it struck us as extreme. He suggests a scenario that, unlike ours, says the Fed has no choice but to cause a hyperinflation in order to avert a collapse of the financial system.
To re-calibrate ourselves to analyze William's report we returned to the St. Louis Fed's web site to see how the charts are doing that we first reviewed in January 2008 that show how much the Federal Reserve System member banks, and we suppose now investment and other banks that are not officially part of the Federal Reserve system, are borrowing from the system as the financial crisis that started in June last year continues. Keep in mind that a few "the worst is over" articles came out last week from Sir Warren Buffett and Hank Paulson. Here's what we found.
http://www.itulip.com/images/BOGNONBR_Max_630_378.gif
This chart shows how much money was left in the Federal Reserve Banking System
reserve accounts in aggregate across the Federal Reserve system when member banks
drained funds from reserve accounts during previous crises versus this one.
The little blip you see around the time of 911 is the Greenspan Fed expanding reserves in a bid to prevent exactly the kind of event that is happening now. He was afraid that a panic would set off a rush for cash and he wanted to make sure the banks had enough.
http://www.itulip.com/images/BORROW_Max_630_378.gif
This chart shows how much money was borrowed from Federal Reserve Banking System
reserve accounts in aggregate when member banks drained reserves from the
Fed system during previous crises versus this one.
We are in the midst of a financial crisis completely without precedent. An analysis by economist John Atlee at Harvard in 2001 (http://www.iea-macro-economics.org/flyblind.html) shows, "...bank reserve balances at the Fed -- the only reserves the Fed actually controls by its open market operations -- are now only about $7 billion. That's a miniscule 1.3% of checking accounts (not the official 10%), resulting in... extreme leverages." At the time he wrote that report in 2001, total borrowings had never in the Fed's entire history exceed a few billion in a crisis. Atlee, by the way, is in favor of a 100% reserve requirement.
What does it mean? Again, as this circumstance is unprecedented no one knows, but John Williams' hyperinflation scenario is no longer out of the question. Why? Because the only obvious way out is to monetize debt far in excess of reserves that the Fed controls via open market operations. Once printed the Fed has no control over where the money thus created goes, and thus it goes into everything. Oil prices rise. Food prices rise. Stock prices rise. Purchasing power declines.
When we showed these charts previously, when the crisis first started, we received nasty emails from readers who were convinced we'd made these scary charts ourselves and distorted the data to create a dramatic appearance. They are freely available at the St. Louis Fed's web site here (http://research.stlouisfed.org/fred2/series/BOGNONBR) and here (http://research.stlouisfed.org/fred2/series/BORROW).
The official iTulip position on hyperinflation:
Warning about a dollar hyperinflation makes good theater but has little value from an investment perspective. As we've pointed out many times and most recently here in How to make $301% in six years with low volatility (http://www.itulip.com/forums/showthread.php?p=23397#post23397), dollar hyperinflation is not in the cards.
For a nation to experience a hyperinflation, all four of the following conditions need to be met:
Large and growing external debt as a percentage of GDP with falling GDP (Yes, like the US.)
Politically and economically isolated and irrelevant (Not like the US. Think: Zimbabwe.)
No external demand for the currency (Not like the US dollar. Think: Iraqi Dinar.)
Political chaos (i.e., tanks rolling down the street, not like the US.)The US meets only the first condition. The US is certainly more politically isolated than in the past but as the world's largest economy is hardly irrelevant. The dollar is still a reserve currency so hardly meets the third criteria. The US is arguably one of the most politically stable on earth so the 4th condition is out.
Hardly the stuff of hyperinflation. That said, the value of a common share of USA, Inc. (http://www.google.com/url?sa=t&ct=res&cd=1&url=http%3A%2F%2Fwww.itulip.com%2Fforums%2Fshowthr ead.php%3Ft%3D936&ei=yAmZR9yNF5ucerit5bAP&usg=AFQjCNHFkSskaNCs3-LZLoVbdcwlZZeojA&sig2=mnU4er5M7n934OcSkWHbNA)–the US dollar–will continue to come under pressure.
As for the charts above, some say that the sudden surge in reserve borrowing is a technical anomaly, due to a change in the way the Fed accounts for new more creative forms of discount window borrowing. That's true except that the Fed should have taken steps to avoid the distortion the added lending created to the long term borrowed reserves data set and instead created a new one, and at some point the Fed runs out of ways to lend without expanding its balance sheet. Then the William's scenario starts to look possible, but not before a lot of other events occur first.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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babbittd
05-10-08, 05:16 PM
Caroline Baum (http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=a7EAJelhvLh0) in Bloomberg (I think this one was posted here) says you're a tinfoil hat wearer if you worry about non-borrowed reserves. She says it's all about the TAF.
The WSJ with a similar explanation (http://http//blogs.wsj.com/economics/2008/02/08/non-borrowed-reserves-false-alarm/) (re: TAF) "What, me worry?"
williams' scenario is based on the idea that the u.s. dollar becomes repulsive enough that only the fed will buy the debt produced by the deficit-laden medicare and social security paying u.s. gov't. i still wonder if the fed can make the dollar more attractive by RAISING short term rates while conducting open-market purchases of long-dated paper. [long-rates would have presumably risen sharply prior to reaching the point at which this intervention was implemented.]
the higher short-term rates would undercut dollar-based carry trades which depend on short-term borrowings and thus create a technically based flow towards the dollar which would reinforce any hot money return-seeking flows. a few points at the low duration end would suffice to make dollar returns internationally competitive.
meanwhile purchases at the long end would cause a short-covering bond rally, and make long bonds look attractive to trend followers.
bernanke explicitly discussed buying long bonds in his "keeping 'it' from happening here" paper.
would such an intervention pattern moderate the underlying inflationary trend enough to produce merely high inflation, instead of hyperinflation? the more i think about this scenario, the more plausible it seems to me. holes in my thinking here?
metalman
05-10-08, 06:33 PM
williams' scenario is based on the idea that the u.s. dollar becomes repulsive enough that only the fed will buy the debt produced by the deficit-laden medicare and social security paying u.s. gov't. i still wonder if the fed can make the dollar more attractive by RAISING short term rates while conducting open-market purchases of long-dated paper. [long-rates would have presumably risen sharply prior to reaching the point at which this intervention was implemented.]
the higher short-term rates would undercut dollar-based carry trades which depend on short-term borrowings and thus create a technically based flow towards the dollar which would reinforce any hot money return-seeking flows. a few points at the low duration end would suffice to make dollar returns internationally competitive.
meanwhile purchases at the long end would cause a short-covering bond rally, and make long bonds look attractive to trend followers.
bernanke explicitly discussed buying long bonds in his "keeping 'it' from happening here" paper.
would such an intervention pattern moderate the underlying inflationary trend enough to produce merely high inflation, instead of hyperinflation? the more i think about this scenario, the more plausible it seems to me. holes in my thinking here?
have to dig around but somewhere on this forum is a more detailed explanation of why itulip thinks a runaway hyperinflation can't happen... as i recall it's along the lines of what you're saying here... one of the conditions is a total repudiation of the currency by foreign lenders. the hyperinflating country is literally on its own. one way the usa avoids that is to sell bonds but at a lower price, as you say. keeps demand for dollars up. but... as someone pointed out elsewhere you posted this that spells bad news for the economy and that's dollar negative, too. that's the trap that argentina et al fell into, or rather, were shoved into by the imf. looks like the ol' usa has set this trap for itself. that's the "poom" cycle as i understand it.
Caroline Baum (http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=a7EAJelhvLh0) in Bloomberg (I think this one was posted here) says you're a tinfoil hat wearer if you worry about non-borrowed reserves. She says it's all about the TAF.
The WSJ with a similar explanation (http://http//blogs.wsj.com/economics/2008/02/08/non-borrowed-reserves-false-alarm/) (re: TAF) "What, me worry?"
I'm not sure, but I think Bart has weighed in on this question previously as well.
And, if memory serves, Caroline Baum is actually someone EJ and/or the Freds have credited with being very savvy in the past.
have to dig around but somewhere on this forum is a more detailed explanation of why itulip thinks a runaway hyperinflation can't happen... as i recall it's along the lines of what you're saying here... one of the conditions is a total repudiation of the currency by foreign lenders. the hyperinflating country is literally on its own. one way the usa avoids that is to sell bonds but at a lower price, as you say. keeps demand for dollars up. but... as someone pointed out elsewhere you posted this that spells bad news for the economy and that's dollar negative, too.
long bond prices go lower [rates go up] at some point, but then bonds bounce when the fed starts buying them, capping the move. that's my theory, anyway. the fed can just say that they'll buy any t-bonds of over 10 years duration which pay more than x% this kind of intervention, in fact, is explicitly described in the bernanke paper i keep referencing. this would trigger the mother of all short covering rallies in the bond market. simultaneously raise the fed funds rate and you've got both long- and short-term money heading for the u.s., supporting the dollar even as the fed injects money via its bond purchases.
edit- the fed can't do this until wages have inflated enough to allow consumers to carry their debt burden. but wage push will not be a major contributor to inflation; it will lag. this inflation stems from dollar weakness and will be capped by interventions aimed at stemming dollar weakness, not aimed at reducing demand. demand for non-necessities will already have been crowded out by food and fuel inflation.
santafe2
05-11-08, 02:24 AM
long bond prices go lower [rates go up] at some point, but then bonds bounce when the fed starts buying them, capping the move. that's my theory, anyway. the fed can just say that they'll buy any t-bonds of over 10 years duration which pay more than x% this kind of intervention, in fact, is explicitly described in the bernanke paper i keep referencing. this would trigger the mother of all short covering rallies in the bond market. simultaneously raise the fed funds rate and you've got both long- and short-term money heading for the u.s., supporting the dollar even as the fed injects money via its bond purchases.
edit- the fed can't do this until wages have inflated enough to allow consumers to carry their debt burden. but wage push will not be a major contributor to inflation; it will lag. this inflation stems from dollar weakness and will be capped by interventions aimed at stemming dollar weakness, not aimed at reducing demand. demand for non-necessities will already have been crowded out by food and fuel inflation.
jk - Through what device will wages inflate on a nominal basis? I don't see how this will happen in the US. Wage earners have almost no power to drive their earnings above inflation and surely no benevolent employer group is going to shine the pre-1980 light of wage growth on US employees.
What movement will drive wage inflation? Most people have debt profiles that keep them from sleeping well at night much less joining a movement that will result in real wage gains.
demand for non-necessities will already have been crowded out by food and fuel inflation.
I think this is correct. Went to my favorite high-end audio action site (www.audiogon.com) and the deals just keep getting better and better. Most people cite "change of plans". I'm thinking change in the economy.
Being liquid right now is good, till the equation changes. Of course "Hard" liquidity would seem to be the best source of liquidity in this environment.
I think that the disconnect between used goods for sale and raw material/energy and food prices is most interesting. On the one hand cash is king, on the other, cash is trash. Anyone else noticing this? Anyone care to comment on what they think this means?
Charles Mackay
05-11-08, 08:02 AM
“If I rob a bank, they throw me in jail. But if they rob me, then they say that's OK”, screamed a protester who had joined thousands of others outside the office of Argentina's President Eduardo Duhalde on January 11 to demand protection from the country's tumbling economy.
The protester was pointing to the institutionalized theft that the Argentinian people have been subjected to for decades. The beneficiaries are Argentina's big corporations and ruling class, as well as the top corporations and governments of the richest countries.
We might get more of a controlled hyperinflation like Argentina rather than a Weimar case like John Williams is looking for. Williams rightfully points out all the reasons why some type of hyperinflation will take place.
As Michael Hudson points out, the U.S. WANTS a disorderly collapse in the dollar. The Euro bottomed at .86 and has almost doubled to 1.60. That's fine and dandy but at some point TPTB know this will turn into a runaway collapse and then the "real" value of debt will be depreciated by 5 or 10. No policy has been put in place at the gov't or FED level so they are implicitly condoning this event. James Turk says he thinks it might happen this summer.
Maybe the hyperinflation in the Soviet Union in 1992 would be another good model for what ours might look like.
jk - Through what device will wages inflate on a nominal basis? I don't see how this will happen in the US. Wage earners have almost no power to drive their earnings above inflation and surely no benevolent employer group is going to shine the pre-1980 light of wage growth on US employees.
What movement will drive wage inflation? Most people have debt profiles that keep them from sleeping well at night much less joining a movement that will result in real wage gains.
wages tend to rise over time. i know that my back office and secreatarial employees expect, and get, small raises on an annual basis. [perhaps 2.5-4%] minimum wage legislation will likely be passed by a democratic legislature. if people stop spending more than they earn, and - imagine - start to pay down debt a bit, this adds up. as i said, i think wages will lag overall inflation; people will be falling behind on the cost of necessities. but as long as they don't add to their debt, they gradually improve their position. also some of the debt will be liquidated by default. so overall, the ratio of income to debt will improve.
Went to my favorite high-end audio action site (www.audiogon.com (http://www.audiogon.com/)) and the deals just keep getting better and better. Most people cite "change of plans". I'm thinking change in the economy.
Being liquid right now is good, till the equation changes. Of course "Hard" liquidity would seem to be the best source of liquidity in this environment.
I think that the disconnect between used goods for sale and raw material/energy and food prices is most interesting. On the one hand cash is king, on the other, cash is trash. Anyone else noticing this? Anyone care to comment on what they think this means?
the real cost of necessities is going up with increased global demand. the real cost of toys is going down with increased global production. it turns out that it's easier to ramp up the production of toys than to ramp up the production of necessities.
wages tend to rise over time. i know that my back office and secreatarial employees expect, and get, small raises on an annual basis. [perhaps 2.5-4%] minimum wage legislation will likely be passed by a democratic legislature. if people stop spending more than they earn, and - imagine - start to pay down debt a bit, this adds up. as i said, i think wages will lag overall inflation; people will be falling behind on the cost of necessities. but as long as they don't add to their debt, they gradually improve their position. also some of the debt will be liquidated by default. so overall, the ratio of income to debt will improve.
the real cost of necessities is going up with increased global demand. the real cost of toys is going down with increased global production. it turns out that it's easier to ramp up the production of toys than to ramp up the production of necessities.
The question of wage inflation needs to include the political question of "whose wage inflation?"
I address that in Dual Cycles of Demand Destruction and the Economic Face Plant (http://itulip.com/forums/showthread.php?t=3782&highlight=wage+inflation).
The relevant chart is this one:
http://www.itulip.com/images/incomegains2004-2005.gif
To santafe's point, the lower 90th percentile wage earners have not been able to increase wage rates. Historically, in time order, policies designed to reduce wage pricing power were 1) elimination of unions during the early 1980s recessions, 2) immigration policy, and 3) outsourcing along with the policies that resulted in increased overall indebtedness...
http://www.itulip.com/images/networkrec.gif
The impact of the inflation tax falls most heavily on the 90th percentile.
http://www.itulip.com/forums/photoplog/images/174/1_20080220wages600.gif
In my opinion, inflation was the primary cause of the current recession, as the chart above suggests, in combination with the loss of access to HELOC credit and negative wealth effects of the collapsing housing bubble. This brings us back to the dual cycles of demand destruction.
http://www.itulip.com/images/demanddestructionspirals.gif
As we discussed in the interview with Steve Keen (http://www.itulip.com/forums/showthread.php?p=31714#post31714), wage inflation can be achieved by reversing the policies which have prevented it: 1) strengthening of unions and other wage power collectives, 2) tightening immigration policy, and 3) restricting outsourcing via labor condition equalization provisions. As for a decrease in overall indebtedness that lowers the debt liabilities of wage earners and gives them greater capacity to bargain for higher wages, that is a more complex question that we will have to address later.
This is why we have for years suggested that if you want to see a proxy for future inflation, watch the rise in the size and power of unions and other wage power collectives, immigration and outsourcing policy.
jeffolie
05-11-08, 10:55 AM
I am long term bullish on precious metals, especially Silver coins.
I am of the opinion that for the next year or so that Stagflation will rule.
I predicted a year ago the Crisis in the Summer of 2008. And I foresee a modest rebound now through Xmas because of the stimulus checks and the cuts of the Fed funds rate.
I predict another crisis which I shall call The Crisis in the Fall of 2009.
The Crisis in the Fall of 2009 will be followed in 2010 by a low in housing prices and thus the end of Stagflation. What will follow will be inflation, very rapid inflation with rising interest rates. I have a wild ass guess that Silver will spike, go parabolic to $200. God only knows how high Gold will go.
I premise this wild inflation on Bart's M3 growth and an expectation that the Democrats will control the government. Another reason is that the Fed has booked half a Trillion in very low quaility securities onto its balance sheet. These dogs will have failed in undeniable defaults and the Fed will monitize them. The Democrats will promote and pass a massive bailout for The Crisis in the Fall of 2009.
By the Mayan calendar and prediction, 2012 will be the end of the world as we know it. The US will economically implode in the aftermath of fighting the very rapid inflation that will have started in 2010.
2012, the end of the world as we know it
JK,
Admittedly the US as the progenitor of its own currency, the dollar, has the option of buying back its own dollar debts.
The Fed can be the vehicle to play games with the financial markets.
But ultimately all purchasing must be backed by some type of productivity.
Why would anyone else in the world want to buy a US dollar security when the US government is itself creating money to prop up the prices of said securities?
Sure, if everyone else goes along with the fiction that dollars (credit or actual) are not being printed like mad, then it might work.
But why would they?
As for the question of military intervention - the collapse of the Soviet Union is a prime example.
Russia had all sorts of sovereignty: lots of nukes, lots of people, its own currency, etc.
Russia could easily have defaulted on all its external and internal debts, but did not because doing so would have resulted in widespread hunger in the population.
The US probably doesn't have the hunger factor, but I think people stranded in their suburban homes without jobs or gas would be equally bad.
Verrocchio
05-11-08, 12:23 PM
EJ, you acknowledged the plausibility of Williams' hyperinflation scenario...
[John Williams] suggests a scenario that, unlike ours, says the Fed has no choice but to cause a hyperinflation in order to avert a collapse of the financial system.
...and then juxtaposed it against the iTulip scenario of likely major -- but not hyper -- inflation. You restated the logic that you had set out earlier, listing four conditions that are required for the hyperinflation scenario:
For a nation to experience a hyperinflation, all four of the following conditions need to be met:
Large and growing external debt as a percentage of GDP with falling GDP (Yes, like the US.)
Politically and economically isolated and irrelevant (Not like the US. Think: Zimbabwe.)
No external demand for the currency (Not like the US dollar. Think: Iraqi Dinar.)
Political chaos (i.e., tanks rolling down the street, not like the US.)The US meets only the first condition. The US is certainly more politically isolated than in the past but as the world's largest economy is hardly irrelevant. The dollar is still a reserve currency so hardly meets the third criteria. The US is arguably one of the most politically stable on earth so the 4th condition is out.
Rejection of the Williams hyperinflation scenario apparently rests on the conclusion that it is highly improbable that the US will meet the four posited conditions.
http://upload.wikimedia.org/wikipedia/commons/c/ca/Inflation-1923.jpg
Inflation 1923-24: A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.
[The image and caption above are from the Wikipedia article on hyperinflation.]
Wikipedia offers two closely related models of hyperinflation: (1) the crisis of confidence (people begin to doubt that the issuing authority will remain solvent) model and (2) the monetary model (rapid increase in amount of cash in circulation). Neither of these models, however, stipulates any of the four conditions, although some are related.
How essential are these four conditions?
Let's see if I got this right.
Baum and Kasriel (whom she quotes, below) are saying it's a definitional thing of no real importance.
Reserves can be obtained three ways today:
- Open Market Operations ("non-borrowed")
- Discount Window ("Borrowed")
- TAF ("Borrowed")
"The minimum bid the Fed accepts [at the TAF} is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market."
Now, why all the fuss? asks Kasriel - there is a cheap deal on at the TAF and that's why the banks are going there rather than the non-borrowed route:
"``Suppose the Fed cut the discount rate so that it stood below the funds rate,'' Kasriel said. (He said this yesterday, not two decades ago.) ``Would these folks be upset if banks went to the discount window for funds? What's the difference? It's a difference without a distinction.''"
Hmmm. But surely, folks WOULD be upset if the amount money currently borrowed from the TAF were instead borrowed via the Discount Window, at a rate below Fed Funds. Borrowing the majority of reserves more cheaply than buying them at the Feds Fund rate - that's a bit odd isn't?
Wikipedia on the Discount Window:
"In recent years the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply, and is only taken advantage of at large volume during emergencies."
"during emergencies". Hmmm.
Note also that through the last crisis the Discount rate has remained above the Fed Funds rate.
Doesn't this mean that instead of an unseemly emergency rush to the discount window, the banks have been sent around the back of the building where the borrowing is large and perhaps a bit easier - 28 days and distressed collateral.
One last thing:
"The minimum bid the Fed accepts [at the TAF} is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market."
What happens when the futures market prices in rising interest rates?
Doesn't this mean that the Fed can't raise rates if they wish to keep the TAF in operation? Although I suppose it could still work for people who can't ante up any Treasuries and can only supply MBS et al.
As we discussed in the interview with Steve Keen, wage inflation can be achieved by reversing the policies which have prevented it: 1) strengthening of unions and other wage power collectives, 2) tightening immigration policy, and 3) restricting outsourcing via labor condition equalization provisions. As for a decrease in overall indebtedness that lowers the debt liabilities of wage earners and gives them greater capacity to bargain for higher wages, that is a more complex question that we will have to address later.
This is why we have for years suggested that if you want to see a proxy for future inflation, watch the rise in the size and power of unions and other wage power collectives, immigration and outsourcing policy.
Doesn't this suggest that whatever we're in for there's no avoiding through wage inflation? Those trends of EJ's are decades-long - and it's hard to see that they'd be reversed in ten years, let alone the two or three that seem to be the Poom/HyperI timeframes being discussed.
EJ, you acknowledged the plausibility of Williams' hyperinflation scenario...
...and then juxtaposed it against the iTulip scenario of likely major -- but not hyper -- inflation. You restated the logic that you had set out earlier, listing four conditions that are required for the hyperinflation scenario:
Rejection of the Williams hyperinflation scenario apparently rests on the conclusion that it is highly improbable that the US will meet the four posited conditions.
http://upload.wikimedia.org/wikipedia/commons/c/ca/Inflation-1923.jpg
Inflation 1923-24: A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.
[The image and caption above are from the Wikipedia article on hyperinflation.]
Wikipedia offers two closely related models of hyperinflation: (1) the crisis of confidence (people begin to doubt that the issuing authority will remain solvent) model and (2) the monetary model (rapid increase in amount of cash in circulation). Neither of these models, however, stipulates any of the four conditions, although some are related.
How essential are these four conditions?
A hyperinflation is the wholesale destruction of confidence in the purchasing power of a currency. That is as good a definition of the process and the result of the process as any. The issuing authority plays a major role as of course do the users of the currency. No hyperinflation process has occurred in history in the absence of the four conditions listed above, as far as we know.
To simplify our point, hyperinflation of a reserve currency is without precedent. Major inflations, on the other hand, of reserve currencies have occurred, such as happened to the dollar in the 1970s and during periods of war.
For the US dollar to experience a hyperinflation, first the dollar must lose reserve currency status.
skidder
05-11-08, 07:04 PM
With regard to world reserve currency status of the U.S, this is an excerpt from today's Privateer (apologies to the Captain for lifting such a large piece). He seems to think it is just a matter of time before this status is gone.
www.the-privateer.com (http://www.the-privateer.com)
"The Agents Of Change:
The rest of the world (to various degrees) have kept on buying and BUYING US Dollars and US Treasury
and Agency debt paper. All this buying has produced nothing but enormous losses on their balance
sheets. This cannot continue. Huge and fundamental worldwide changes are on the way. The latest
evidence for this came out of the recent ASEAN (plus three) conference. ASEAN “plus three” - China,
Japan and South Korea, have $US 3.4 TRILLION in foreign exchange reserves. Now, these 13 Asian
nations have agreed to create a pool of at least $US 80 Billion for addressing any short-term liquidity
difficulties between themselves and globally for them all.
With this, the Asian nations no longer “require” the IMF - they can look after themselves.
The ten nations in the Association of Southeast Asian Nations (ASEAN) are: Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The other three
are China, Japan and South Korea. They are creating an “AMF” - or ASIAN Monetary Fund.
Similar Developments Are Happening Everywhere:
A parallel development is now happening in Latin America where efforts are underfoot to establish a
LATIN AMERICAN Monetary Fund. Venezuela has been offering huge and long-term loans to other
Latin American countries so that they can pay off their loans to the IMF. Some Latin American nations
have even asked the IMF to close their offices and leave. Russia is a solo player here but it could not care
less in either economic or foreign exchange terms. Today, Russia is an energy superpower with the third
largest reserves in the world in terms of foreign currency - AND GOLD. The surge of capital inflow into
Russia has hit a new weekly high recently with official reserves up by $US 10.7 Billion to a record $US
529.5 Billion. Europe is the world’s economic superpower, its GDP being bigger than US GDP. Europe
also has its own reserve currency with a global reach, the Euro being a stark challenger to the US Dollar.
The Fragmenting Of “Money”:
The three global regions now veering away from the US and its Dollar are Europe’s Euro region, the
ASEAN 10 plus 3 monetary region, and the Latin American monetary region. All three are establishing
their own independent monetary cooperation zones which will leave the US on the outside looking in. On
April 30, a top Oil Ministry official stated that Iran has stopped conducting oil transactions in US Dollars.
From Guangzhou, China comes a report that facing the threat of a falling US Dollar and weakening
American demand, some Chinese exporters are starting to ask their European customers to pay in Euros.
In Brazil there is a public and political debate as to whether to impose a 1.5 percent tax on capital that
wants to enter the country. This is a version of Switzerland’s historically famous “negative interest rate”
which sought to block new funds seeking safety from entering Switzerland as the US Dollar crashed in
the late 1970. All over the world, more and more individuals, businesses and nations large and small are
veering away from the US Dollar. In geo-monetary terms, that means that the US Dollar is being
displaced with ever increasing speed from ever wider economic areas where it formerly ruled supreme as
a money. The US Dollar is rapidly losing real territory.
Globally, this means that the US Dollar is being left hanging in mid-air without visible means of support.
The Privateer - Number 603 Page 4
Monetary Nationalism:
Two monetary regions, the Euro one and the US area, already exist. The Euro is expanding its geomonetary
and geographical area while the US Dollar is losing its former global domination as a global
reserve currency. The US Dollar has already lost its status in Europe. But with the arrival of the Asian
and the Latin American currency blocks, the horizon for the US Dollar will contract even further as the
US currency loses more of its former global domination. This is now unstoppable.
When national currencies have nothing in common, when they share nothing tangible as a reserve behind
them, the main thing which convinces individuals, businesses and even central bankers to hold one rather
than another is their assessment of the quality of the currency. The global assessment of the “quality” of
the US Dollar is declining rapidly.
Even the Thai Baht, the ignition point of the Asian Crisis of the late 1990s, has climbed 18 percent
against the US Dollar over the past year. So have many other “third world” currencies. This feeds
monetary nationalism - the vicarious pride people take in their own nation’s money and its value.
The FOUR World Monetary Regions:
Across the world’s currency floors, the arrival of the Asian block of currencies will increasingly be seen
as a process by which Yen/Yuan exchange rates will start to stabilize. This is in the interest of both Japan
and China for bilateral trading purposes. The central banks of Japan and China have already had in place
a $US 6 Billion swap agreement for precisely that purpose. At the stroke of a pen, they can easily make it
into a $US 60 Billion or $US 600 Billion swap agreement. Fighting against such a weight of money will
be hard work for currency raiders. This bilateral Japan/China arrangement is now being expanded under
the auspices of the “ASEAN plus three” group agreement which will amount to an inter-regional currency
stabilisation act, acting to smooth out swings between all these Asian currencies.
Block To Block - Against The US Dollar:
Once this Asian currency block is established, it will start to interact across the currency floors with the
two other main players, the US Dollar region and the Euro zone. At that point, it will again be the US
Dollar losing because it will be de-facto displaced to an increasing degree from the internal trade and
investment flows inside the Asian block, as well as being increasingly displaced from the international
trade between the two. On top of that, the Euro/Yen and Euro/Yuan trade will be settled in these three
currencies without the intermediary step of using the US Dollar as the currency of final settlement.
The Latin American currency block will initially be the most fragile. But both Europe and China have
been investing in Latin America at increasing volume for years now. It is clear that they would want the
most stable currency arrangements between themselves and Latin America.
Across Asia and across Latin America, the US Dollar is now face to face with being displaced in the
sense that it will be used less and less by these areas as the currency in which they make final settlements.
As the US Dollar inexorably sheds its global “reserve” status, final settlement will take place instead in
their own currencies. At some point in this sequence will come the final break where the US Dollar loses
its reserve currency status altogether. That will be seen when sellers of goods and services to the US
demand that the US buyers make payment not in US Dollars but in Yen or Yuan or Euro. When that
happens, it will mean that as a buyer, the US will FIRST have to buy the currency of the nation offering
goods for sale before it can buy. No reserve currency nation has to do that."
Spartacus
05-11-08, 07:04 PM
I hope I don't sound like a broken record on this issue.
Williams' main argument is about the unfunded liabilities, but he seems to give all his attention to the government response to the boomers retiring, and no consideration to the other side - the actual behavior of the boomers in retirement
http://itulip.com/forums/showthread.php?t=2810&highlight=arnold
A hyperinflation is the wholesale destruction of confidence in the purchasing power of a currency. That is as good a definition of the process and the result of the process as any. The issuing authority plays a major role as of course do the users of the currency. No hyperinflation process has occurred in history in the absence of the four conditions listed above, as far as we know.
To simplify our point, hyperinflation of a reserve currency is without precedent. Major inflations, on the other hand, of reserve currencies have occurred, such as happened to the dollar in the 1970s and during periods of war.
For the US dollar to experience a hyperinflation, first the dollar must lose reserve currency status.
donalds
05-11-08, 08:23 PM
When it comes to the inflation out of debt theme, iTulip confuses symptom with cause. The crushing of the dollar as cause for inflation fails to understand that money is medium - and that both its exchange value as medium and the increase in quantity of money is the symptom of conditions that are exceedingly more complex than the mere price/quantity of money.
Pinning the donkey on the medium of exchange as the cause for inflation is simply chasing one's tail.
So . . . this takes us to the more meaningful question of wage increases necessary to support the inflation out of debt theme. Apparently, this increase in wages is to be expected as a result of the expansion of labor unions and tighter immigration controls. To support both of these assertions, an analysis should be provided to back up these suppositions critical to the inflation out of debt theme . . . to explain how it is the expansion of labor unions will materialize and what immigration policy would be effectively implemented.
Until that is forthcoming, it seems the inflation out of debt theme still rests on shaky legs.
metalman
05-12-08, 08:45 AM
When it comes to the inflation out of debt theme, iTulip confuses symptom with cause. The crushing of the dollar as cause for inflation fails to understand that money is medium - and that both its exchange value as medium and the increase in quantity of money is the symptom of conditions that are exceedingly more complex than the mere price/quantity of money.
Pinning the donkey on the medium of exchange as the cause for inflation is simply chasing one's tail.
So . . . this takes us to the more meaningful question of wage increases necessary to support the inflation out of debt theme. Apparently, this increase in wages is to be expected as a result of the expansion of labor unions and tighter immigration controls. To support both of these assertions, an analysis should be provided to back up these suppositions critical to the inflation out of debt theme . . . to explain how it is the expansion of labor unions will materialize and what immigration policy would be effectively implemented.
Until that is forthcoming, it seems the inflation out of debt theme still rests on shaky legs.
you may be over simplifying. i read many roads to inflation. one is the allowance of wage inflation to happen by a combination of labor collectives, tighter immigration controls and restrictions on outsourcing... imagine a tariff on labor from a country that does not meet international labor standards, for instance.
but then itulip has already torn apart the idea that an inflation spiral needs wage inflation to get going. a weak bonar and rising energy prices are doing it just fine. i've already read here that rising chinese import prices are on the way as china allows the yuan to float 'more' to combat domestic inflation. what if we get both wage inflation and inflation from chinese imports all on top of the imported oil and other commodity inflation coming from a weak dollar that the fed simply cannot print enough of?
then there's the new mil commitments coming up in the middle east as violence and insecurity increase there.
then there's the crapping out fire economy, the source of the income that was paying the debts.
it's not so complicated, is it? high debt/gdp + less income + less access to foreign money + recession = no choice but to inflate?
you may be over simplifying. i read many roads to inflation. one is the allowance of wage inflation to happen by a combination of labor collectives, tighter immigration controls and restrictions on outsourcing... imagine a tariff on labor from a country that does not meet international labor standards, for instance.
but then itulip has already torn apart the idea that an inflation spiral needs wage inflation to get going. a weak bonar and rising energy prices are doing it just fine. i've already read here that rising chinese import prices are on the way as china allows the yuan to float 'more' to combat domestic inflation. what if we get both wage inflation and inflation from chinese imports all on top of the imported oil and other commodity inflation coming from a weak dollar that the fed simply cannot print enough of?
then there's the new mil commitments coming up in the middle east as violence and insecurity increase there.
then there's the crapping out fire economy, the source of the income that was paying the debts.
it's not so complicated, is it? high debt/gdp + less income + less access to foreign money + recession = no choice but to inflate?
The implications are what is important. I think people are confuesing the message of this. If you think that stocks and housing will be increasing during this "inflation" I think you will be mistaken.
I think asset prices will decline in real and NOMINAL terms, as they are right now. I think food and energy will increase in real and nominal terms. And I think the currency will continue to be depreciated.
I think there is a clear way to determine when /if hyperinflation occurs:
"That would simply be all real goods and all asset class price inflation (excluding fixed income, of course). "
This is the "magic" test I've come up with looking at all hyper-inflations. They've all manifested this behavior.
If all goods and all assets aren't increasing in price level then you ain't in hyper-inflation land.
(That this has a significant impact on desireable asset allocation is putting it mildly.)
If you are betting on stocks and housing now, then you are betting on hyper-inflation in the future. Right now people are scrambling FOR CASH , not trying to dump it, so I can't see hyper-inflation in the pipline until/unless people are spending cash the second they get it, right now seems like people/banks are hoarding cash. People seem to be (from my anecdotal observations) shifting towards reducing consumption and cash outlays, and not BURNING through cash at all costs to buy stuff you don't need to protect themselves from inflation. People are selling their gold to get cash for god's sake! This doesn't scream hyper-inflation to me.
Am I missing something here?
I know this isn't forward looking, which is not good for what we want to do here so does anyone have an idea how to link my magic test with some forward indicator?
Thanks
metalman
05-12-08, 10:53 AM
The implications are what is important. I think people are confuesing the message of this. If you think that stocks and housing will be increasing during this "inflation" I think you will be mistaken.
I think asset prices will decline in real and NOMINAL terms, as they are right now. I think food and energy will increase in real and nominal terms. And I think the currency will continue to be depreciated.
I think there is a clear way to determine when /if hyperinflation occurs:
"That would simply be all real goods and all asset class price inflation (excluding fixed income, of course). "
This is the "magic" test I've come up with looking at all hyper-inflations. They've all manifested this behavior.
If all goods and all assets aren't increasing in price level then you ain't in hyper-inflation land.
(That this has a significant impact on desireable asset allocation is putting it mildly.)
If you are betting on stocks and housing now, then you are betting on hyper-inflation in the future. Right now people are scrambling FOR CASH , not trying to dump it, so I can't see hyper-inflation in the pipline until/unless people are spending cash the second they get it, right now seems like people/banks are hoarding cash. People seem to be (from my anecdotal observations) shifting towards reducing consumption and cash outlays, and not BURNING through cash at all costs to buy stuff you don't need to protect themselves from inflation. People are selling their gold to get cash for god's sake! This doesn't scream hyper-inflation to me.
Am I missing something here?
I know this isn't forward looking, which is not good for what we want to do here so does anyone have an idea how to link my magic test with some forward indicator?
Thanks
the hyperinflation scenario was put to rest for me in Door Number Two (http://www.itulip.com/forums/showthread.php?p=26304#post26304).
then in this thread where it's said 'hyperinflations do not happen in reserve currencies. to hyperinflate, first the dollar has to lose reserve currency status.' bang!
nuff said. we have years and years to go (if ever) to get there.
touchring
05-12-08, 11:02 AM
If you are betting on stocks and housing now, then you are betting on hyper-inflation in the future. Right now people are scrambling FOR CASH , not trying to dump it, so I can't see hyper-inflation in the pipline until/unless people are spending cash the second they get it, right now seems like people/banks are hoarding cash. People seem to be (from my anecdotal observations) shifting towards reducing consumption and cash outlays, and not BURNING through cash at all costs to buy stuff you don't need to protect themselves from inflation. People are selling their gold to get cash for god's sake! This doesn't scream hyper-inflation to me.
Am I missing something here?
I know this isn't forward looking, which is not good for what we want to do here so does anyone have an idea how to link my magic test with some forward indicator?
Thanks
Zimbabwe had hyperinflation, stocks went up initially but crashed eventually. I doubt if we can earn by investing in Zimbabwean stocks.
The moment the dollar goes into hyperinflation, it loses its reserve status as no country will follow. Everyone will be using euro for commodities by then. When that comes, the US will be in a depression worst than the Great depression. Such a scenario is unthinkable, so i think will be most unlikely to happen.
metalman
05-12-08, 11:14 AM
Zimbabwe had hyperinflation, stocks went up initially but crashed eventually. I doubt if we can earn by investing in Zimbabwean stocks.
The moment the dollar goes into hyperinflation, it loses its reserve status as no country will follow. Everyone will be using euro for commodities by then. When that comes, the US will be in a depression worst than the Great depression. Such a scenario is unthinkable, so i think will be most unlikely to happen.
disagree. IF hyperinflation THEN first the dollar loses reserve status after foreign lending and investment dries up THEN the hyperinflation as usa gov't becomes the only buyer of debt printed to cover liabilities.
the order is important.
touchring
05-12-08, 11:34 AM
disagree. IF hyperinflation THEN first the dollar loses reserve status after foreign lending and investment dries up THEN the hyperinflation as usa gov't becomes the only buyer of debt printed to cover liabilities.
the order is important.
Ok, there will be serious inflation for sure, but the kind of hyperinflation that makes fixed assets appreciate significantly is unlikely.
If it comes to the stage that the US government chooses hyperinflation, maybe Alaska and Texas will want it out.
disagree. IF hyperinflation THEN first the dollar loses reserve status after foreign lending and investment dries up THEN the hyperinflation as usa gov't becomes the only buyer of debt printed to cover liabilities.
the order is important.
Concur! Causality is at play.
UNLESS...
UNLESS UNLESS UNLESS.... Dr. Hudson is correct and the US powers that be are bound and determined to crash the currency PREEMPTIVELY. BEFORE the rest of the world can react to our loss reserve currency. And that is possible, worked well in the Russian example.
(And would be EXTREEMLY BENIFICIAL to those in FINACIAL POWER)
One thing I've learned well about life, ANYTHING can happen.
Dr. Hudson and John Williams are talking from the same data: debt that is too large to repay.
If there is no hyper-inflation, how then can the soon to come boomer social needs be met?
The debt will continue to grow and consume more and more of all dollars earned.
This is the question I still do not have a satisfactory answer to - for even a 100% inflation in 5 or 6 years will less than halve the debt, and that is assuming the trade deficits don't continue (much less grow) and also assuming that interest rates don't rise to compensate.
BlackVoid
05-12-08, 02:14 PM
I am hardly an expert on monetary issues, but hyperinflation has occured in many countries where points 2, 3 and 4 were not valid. The most prominent example would be Germany during the Weimar republic.
Dr. Hudson and John Williams are talking from the same data: debt that is too large to repay.
If there is no hyper-inflation, how then can the soon to come boomer social needs be met?
The debt will continue to grow and consume more and more of all dollars earned.
This is the question I still do not have a satisfactory answer to - for even a 100% inflation in 5 or 6 years will less than halve the debt, and that is assuming the trade deficits don't continue (much less grow) and also assuming that interest rates don't rise to compensate.
True, but 100% inflation and a new bubble say 2x as large as the housing bubble over the same period of time would do it, don't you think?
JT,
If the housing bubble is around $10T, then a new bubble will need to be at least that $10T, likely larger.
First question: Where's the new credit to come from? We're talking about another $14T to $20T for bubble #2. And this is in present day dollars. If inflation does net 100%, then the new money needed will also rise since no one I know gets paid in past money.
Second question: As inflation rises, the net equivalent debt only shrinks in half. $30T is still a large pile of clams, and this is assuming the interest rate being charged doesn't closely follow the inflation. Historically interest rates lag slightly, but only fall behind once the inflation goes asymptotic.
So we'd still be paying on $30T, but at a higher interest rate. A 20% annual inflation rate would yield an interest rate in the same area; instead of the $1.8T to $2.5T (3% to 5% of $60T now) we'd be paying $6T interest on $30T in the future, in today's dollar terms.
Doesn't sound so fun to me either.
3 or 4 years of this and we'd be back to $60T in no time - and this is assuming the new bubble doesn't also create more debt.
ocelotl
05-12-08, 03:46 PM
http://www.itulip.com/images/dollarpaper.jpgIs Hyperinflation Possible?
We have since 1999 believed that the US was destined to inflate its way out of excessive debt, both public and private. The logic of our conclusion is simple. The government can never pay off its debts to foreign governments or to itself – not enough national income. US households can't pay their debts either for lack of opportunities to increase income to cover debts. The Fed has the option to inflate in any economic or financial system crisis that might precipitate a debt crisis because the US is not on a gold standard as it was in the early 1930s when the US suffered a monetary deflation as a result of the last debt crisis. And, finally, monetary inflation is politically expedient because it cannot be readily blamed on one political party, arising as it does from the bipartisan Fed, whereas taxes – the honest means for paying public debts – is political death for the party that chooses it.
In any case, increasing taxes during the kind of economic contraction that typically leads to debt crisis is, as economists say, counter cyclical, like asking your wife if it's okay if you go play cards and drink beer with your friends right after you've finished apologizing for forgetting her birthday, again.
Our expectation was for an inflation to culminate in a 100% rise over a period of five or six years, a major inflation such as occurred in Mexico and Russia in the 1990s, but not hyperinflation as occurred in the Wiemar Republic in the 1920s or Zimbabwe today. We recently read a report by a credible source that makes an extensive case for an American hyperinflation.
When we read John William's recent report on hyperinflation Hyperinflation Special Report (http://www.shadowstats.com/article/292) it struck us as extreme. He suggests a scenario that, unlike ours, says the Fed has no choice but to cause a hyperinflation in order to avert a collapse of the financial system.
To re-calibrate ourselves to analyze William's report we returned to the St. Louis Fed's web site to see how the charts are doing that we first reviewed in January 2008 that show how much the Federal Reserve System member banks, and we suppose now investment and other banks that are not officially part of the Federal Reserve system, are borrowing from the system as the financial crisis that started in June last year continues. Keep in mind that a few "the worst is over" articles came out last week from Sir Warren Buffett and Hank Paulson. Here's what we found.
http://www.itulip.com/images/BOGNONBR_Max_630_378.gif
This chart shows how much money was left in the Federal Reserve Banking System
reserve accounts in aggregate across the Federal Reserve system when member banks
drained funds from reserve accounts during previous crises versus this one.
The little blip you see around the time of 911 is the Greenspan Fed expanding reserves in a bid to prevent exactly the kind of event that is happening now. He was afraid that a panic would set off a rush for cash and he wanted to make sure the banks had enough.
http://www.itulip.com/images/BORROW_Max_630_378.gif
This chart shows how much money was borrowed from Federal Reserve Banking System
reserve accounts in aggregate when member banks drained reserves from the
Fed system during previous crises versus this one.
We are in the midst of a financial crisis completely without precedent. An analysis by economist John Atlee at Harvard in 2001 (http://www.iea-macro-economics.org/flyblind.html) shows, "...bank reserve balances at the Fed -- the only reserves the Fed actually controls by its open market operations -- are now only about $7 billion. That's a miniscule 1.3% of checking accounts (not the official 10%), resulting in... extreme leverages." At the time he wrote that report in 2001, total borrowings had never in the Fed's entire history exceed a few billion in a crisis. Atlee, by the way, is in favor of a 100% reserve requirement.
What does it mean? Again, as this circumstance is unprecedented no one knows, but John Williams' hyperinflation scenario is no longer out of the question. Why? Because the only obvious way out is to monetize debt far in excess of reserves that the Fed controls via open market operations. Once printed the Fed has no control over where the money thus created goes, and thus it goes into everything. Oil prices rise. Food prices rise. Stock prices rise. Purchasing power declines.
When we showed these charts previously, when the crisis first started, we received nasty emails from readers who were convinced we'd made these scary charts ourselves and distorted the data to create a dramatic appearance. They are freely available at the St. Louis Fed's web site here (http://research.stlouisfed.org/fred2/series/BOGNONBR) and here (http://research.stlouisfed.org/fred2/series/BORROW).
The official iTulip position on hyperinflation: Warning about a dollar hyperinflation makes good theater but has little value from an investment perspective. As we've pointed out many times and most recently here in How to make $301% in six years with low volatility (http://www.itulip.com/forums/showthread.php?p=23397#post23397), dollar hyperinflation is not in the cards.
For a nation to experience a hyperinflation, all four of the following conditions need to be met:
Large and growing external debt as a percentage of GDP with falling GDP (Yes, like the US.)
Politically and economically isolated and irrelevant (Not like the US. Think: Zimbabwe.)
No external demand for the currency (Not like the US dollar. Think: Iraqi Dinar.)
Political chaos (i.e., tanks rolling down the street, not like the US.)The US meets only the first condition. The US is certainly more politically isolated than in the past but as the world's largest economy is hardly irrelevant. The dollar is still a reserve currency so hardly meets the third criteria. The US is arguably one of the most politically stable on earth so the 4th condition is out.
Hardly the stuff of hyperinflation. That said, the value of a common share of USA, Inc. (http://www.google.com/url?sa=t&ct=res&cd=1&url=http%3A%2F%2Fwww.itulip.com%2Fforums%2Fshowthr ead.php%3Ft%3D936&ei=yAmZR9yNF5ucerit5bAP&usg=AFQjCNHFkSskaNCs3-LZLoVbdcwlZZeojA&sig2=mnU4er5M7n934OcSkWHbNA)–the US dollar–will continue to come under pressure.
As for the charts above, some say that the sudden surge in reserve borrowing is a technical anomaly, due to a change in the way the Fed accounts for new more creative forms of discount window borrowing. That's true except that the Fed should have taken steps to avoid the distortion the added lending created to the long term borrowed reserves data set and instead created a new one, and at some point the Fed runs out of ways to lend without expanding its balance sheet. Then the William's scenario starts to look possible, but not before a lot of other events occur first.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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While a "major inflation such as occurred in Mexico and Russia in the 1990's" is not a matter of it but when, The sum of internal issues may be enough that it does not only ends in a short timed spike but in an extended one like what happened in Mexico since the 1970's to 1990's. In my view, the inflation spike in Mexico on the 1990's was only the last part of the larger process that took place since the early 70's. The idea behind the bonds system that generated the 1994-5 spike was linking them to the USD Mexican government reserves. As documented in other threads in this forum, lack of reserves from Mexican federal government left too many bonds tied to too few USD, so the lack of confidence and the run our of money leading to the inflation spike of 1994-5 ran like a domino fall.
Previously, and until April 1994, the Bank of Mexico was not autonomous and served as the printing press of the Mexican Government, being used relentlessly during the populist periods of Echeverría and López Portillo. As it depended on the taxes entering federal government, those periods developed huge current account deficits, that were covered by external debt. Some professors told us when I was in secondary and high school that part of the revenue of Pemex was paid in advance by foreign costumers with debt certificates sustained on future prices of oil, so in the plunge of oil prices of 1981, the mexican governent was left with a debt that could not be serviced by Oil exportations at the low prices of the 1980s, thus emptying Bank of Mexico reserves in 1982.
I am hardly an expert on monetary issues, but hyperinflation has occured in many countries where points 2, 3 and 4 were not valid. The most prominent example would be Germany during the Weimar republic.
No. All three conditions preceded and all hyperinflations subsequently.
Dr. Hudson and John Williams are talking from the same data: debt that is too large to repay.
If there is no hyper-inflation, how then can the soon to come boomer social needs be met?
The debt will continue to grow and consume more and more of all dollars earned.
This is the question I still do not have a satisfactory answer to - for even a 100% inflation in 5 or 6 years will less than halve the debt, and that is assuming the trade deficits don't continue (much less grow) and also assuming that interest rates don't rise to compensate.
the "boomer social needs" are a series of promises made by the gov't. these promises will be broken, because they are impossible to fulfill. hyperinflation is just one way of breaking the promises. there are other, less destructive, ways of breaking the promises.
metalman
05-12-08, 08:38 PM
When it comes to the inflation out of debt theme, iTulip confuses symptom with cause. The crushing of the dollar as cause for inflation fails to understand that money is medium - and that both its exchange value as medium and the increase in quantity of money is the symptom of conditions that are exceedingly more complex than the mere price/quantity of money.
Pinning the donkey on the medium of exchange as the cause for inflation is simply chasing one's tail.
So . . . this takes us to the more meaningful question of wage increases necessary to support the inflation out of debt theme. Apparently, this increase in wages is to be expected as a result of the expansion of labor unions and tighter immigration controls. To support both of these assertions, an analysis should be provided to back up these suppositions critical to the inflation out of debt theme . . . to explain how it is the expansion of labor unions will materialize and what immigration policy would be effectively implemented.
Until that is forthcoming, it seems the inflation out of debt theme still rests on shaky legs.
this covers it!
from that other forum (http://www.tickerforum.org/cgi-ticker/akcs-www?post=44282) :D
You guys, IMHO, are the dense ones. It is a bond market failure that will cause a hyper-inflation, not the other way around.
I don't understand how you all cannot get it?
Once a sovereign nation looses the confidence of the creditor nations, no amount of increasing interest payment will cause money to return to the system. A bond market collapse then occurs.
Once it occurs, the only way for the victim country to pay it's entitlements and dometic spending promises is to create, by fiat, the dollars to pay those entitlements. Printing presses or binary digits, it doesn't matter. Creation of money out of thin air to pay moneys owed is what causes hyperinflation.
America runs a very high risk of seeing a buyers strike coupled with a dumping of dollar denominated treasuries. If this happens, we will see hyperinflation, and there isn't a mechanism in the world that can translate the ramifications to a deflationary hypothesis.
On the other hand, I have yet to read from any of you a precise mechanism of action of how a deflation event can occur from today's market dynamics.
If you think you can, I would be the first to acknowledge it.
touchring
05-12-08, 09:14 PM
True, but 100% inflation and a new bubble say 2x as large as the housing bubble over the same period of time would do it, don't you think?
It takes time for confidence to come back, so you can't have another housing bubble until at least 9-10 years later - 2017-18 at the earliest. And even that, it will be a small bubble. The europeans have got smarter, they are not going to buy mortgage backed securities.
JT,
If the housing bubble is around $10T, then a new bubble will need to be at least that $10T, likely larger.
First question: Where's the new credit to come from? We're talking about another $14T to $20T for bubble #2. And this is in present day dollars. If inflation does net 100%, then the new money needed will also rise since no one I know gets paid in past money.
Second question: As inflation rises, the net equivalent debt only shrinks in half. $30T is still a large pile of clams, and this is assuming the interest rate being charged doesn't closely follow the inflation. Historically interest rates lag slightly, but only fall behind once the inflation goes asymptotic.
So we'd still be paying on $30T, but at a higher interest rate. A 20% annual inflation rate would yield an interest rate in the same area; instead of the $1.8T to $2.5T (3% to 5% of $60T now) we'd be paying $6T interest on $30T in the future, in today's dollar terms.
Doesn't sound so fun to me either.
3 or 4 years of this and we'd be back to $60T in no time - and this is assuming the new bubble doesn't also create more debt.
I think the next bubble will have to use EITHER Self clearing debt OR actual CASH (EJ's SWF idea) OR MOST likely, the government (and I'm thinking OBAMA here) pulls a JFK. Remember his Silver backed currency? I think you get a new dollar or something like it and you can trade old dollars into new. Just think about the amount of FREE INCOME that could be devoted to a new bubble if the existing debt load, all of it,were surripticiously defaulted on (my term) or repaid at full face value (Gubment's Term). That's a shit load of newly available investment demand, no?
For the same reason I don't think that the EURO will implode, period. Here's why. When I was in europe and UK during high school, I found out that there was already a "Euro" it was called something like the Eurobank exchange something or another. Bottom line it was a common unit of exchange between countries to settle payments. Mind you at the time (pre-euro) all the countries still had their own individual currecies, but banking payment transactions were mostly done in this medium. I see no reason why all the currencies could not be re-instated but the euro remain as the inter-country transaction medium. Internally prices could be quoted in local currency and Euros. This would allow countries in the eurozone to maintain some flexiblity for internal monetary policy but still maintain a powerful common currency for external transactions and still remove onerous exchange controls/costs for european travlers. I think this is what asia and eventually the middle east will do as well. The Euro zone will not COLLAPSE, just devolve a little bit back to the way it was. It's the perfect policy tool for them. It gives them internal flexibility and external strength. I think if the Amero emerges, it will follow the same path.
I've seen too many things change and then return to the way they were to be oblivious to the possiblity, I think others should be aware as well.
It takes time for confidence to come back, so you can't have another housing bubble until at least 9-10 years later - 2017-18 at the earliest. And even that, it will be a small bubble. The europeans have got smarter, they are not going to buy mortgage backed securities.
Trust in the Old bubble yes, But greed always wins when a new bubble presents. (refer to dot-com implosion cum housing boom) ;)
BTW NASDAQ is looking might frothy these days, no?
The question of wage inflation needs to include the political question of "whose wage inflation?"...
...This is why we have for years suggested that if you want to see a proxy for future inflation, watch the rise in the size and power of unions and other wage power collectives, immigration and outsourcing policy.
In Canada the leading edge of this is already under way. The Canadian Auto workers are having little success maintaining their privileges as their decades long competitive advantage, a cheap Canadian dollar, has finally disappeared concurrent with the market for North American autos.
It's the public sector unions that will lead the wage spiral. Nurses, garbage collectors, utility workers, etc. Just as the price of "need to have" commodities is rising, the price of public monopoly provider "need to have" services is either going to skyrocket, or the service levels from disgruntled workers is going to plummet. Here's a recent example from Toronto:
Canwest News Service
Published: Saturday, April 26, 2008
TORONTO - The Ontario legislature will meet Sunday to debate and likely pass legislation to force 9,000 striking Toronto transit workers back on the job as soon as possible.
The strike began midnight Friday, with the union giving less than two hours' notice...
...Toronto Mayor David Miller blasted the union for its decision to strike without sufficient notice.
"The (union) has chosen to go on strike without providing the 48 hours' notice it promised," he told reporters. "That has put the city in an extremely difficult position. As a result, I've requested back-to-work legislation, and I am very pleased that the premier has agreed to act at his earliest opportunity."...
And here was the outcome. Shades of the future?:
Many Toronto transit users want the government to outlaw any future strikes
Apr 28, 2008
TORONTO — With Toronto transit workers legislated back to work and service restored for some 1.5 million commuters, talk turned Monday to making Canada's largest transit system an essential service.
Removing the transit workers' right to strike was on the lips of riders and politicians alike following a surprise weekend strike that idled the city's fleet of streetcars, subways and buses for about a day and a half...
...Transit workers deserve some way to preserve their right to fair wages and working conditions, but paralyzing the city with a strike should not be an option, said 22-year-old Heather Playford...
http://canadianpress.google.com/article/ALeqM5isXAGF69R6qQ3YYVdEkA3j8c-R2w
touchring
05-12-08, 10:43 PM
Trust in the Old bubble yes, But greed always wins when a new bubble presents. (refer to dot-com implosion cum housing boom) ;)
BTW NASDAQ is looking might frothy these days, no?
IT stocks are still posting revenue on projects planned last year before the credit crunch became severe. Major projects usually run for 2-3 years at least from planning to implementation. The shock from credit crunch is not as quick as consumer businesses.
But when it does come, it will be severe, like what happened in 2001 and 2002 after the dot com bubble burst in 2000.
IT stocks are still posting revenue on projects planned last year before the credit crunch became severe. Major projects usually run for 2-3 years at least from planning to implementation. The shock from credit crunch is not as quick as consumer businesses.
But when it does come, it will be severe, like what happened in 2001 and 2002 after the dot com bubble burst in 2000.
So you're thinking crash in '09? I would like that, you know the whole rymes with 1929 thing.
the "boomer social needs" are a series of promises made by the gov't. these promises will be broken, because they are impossible to fulfill. hyperinflation is just one way of breaking the promises. there are other, less destructive, ways of breaking the promises.<!-- / message -->
JK,
The existing debt is entirely separate from the boomer social needs; the point I was making is that the boomer social needs are en route.
As for government breaking its promises - the AARP and its ilk are working really hard to keep that from happening. It is certainly possible but I think politically difficult.
While there are many creative ways around these future obligations, the question is how to implement them with such a large and potentially activist demographic being affected.
Don't forget also that the politicians in office now are pretty much all boomers themselves. There are few people indeed strong enough to stand up against the collective displeasure of their entire generation.
JK,
The existing debt is entirely separate from the boomer social needs; the point I was making is that the boomer social needs are en route.
As for government breaking its promises - the AARP and its ilk are working really hard to keep that from happening. It is certainly possible but I think politically difficult.
While there are many creative ways around these future obligations, the question is how to implement them with such a large and potentially activist demographic being affected.
Don't forget also that the politicians in office now are pretty much all boomers themselves. There are few people indeed strong enough to stand up against the collective displeasure of their entire generation.
all your points are true. williams' hyperinflation piece assumes that the political problem will not, in fact, be addressed directly, and thus that all the future obligations will be paid for via monetization. if the crisis is bad enough, and obvious enough, however, perhaps it can be dealt with more rationally.
Let's see if I got this right.
Baum and Kasriel (whom she quotes, below) are saying it's a definitional thing of no real importance.
Reserves can be obtained three ways today:
- Open Market Operations ("non-borrowed")
- Discount Window ("Borrowed")
- TAF ("Borrowed")
"The minimum bid the Fed accepts [at the TAF} is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market."
Now, why all the fuss? asks Kasriel - there is a cheap deal on at the TAF and that's why the banks are going there rather than the non-borrowed route:
"``Suppose the Fed cut the discount rate so that it stood below the funds rate,'' Kasriel said. (He said this yesterday, not two decades ago.) ``Would these folks be upset if banks went to the discount window for funds? What's the difference? It's a difference without a distinction.''"
Hmmm. But surely, folks WOULD be upset if the amount money currently borrowed from the TAF were instead borrowed via the Discount Window, at a rate below Fed Funds. Borrowing the majority of reserves more cheaply than buying them at the Feds Fund rate - that's a bit odd isn't?
Wikipedia on the Discount Window:
"In recent years the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply, and is only taken advantage of at large volume during emergencies."
"during emergencies". Hmmm.
Note also that through the last crisis the Discount rate has remained above the Fed Funds rate.
Doesn't this mean that instead of an unseemly emergency rush to the discount window, the banks have been sent around the back of the building where the borrowing is large and perhaps a bit easier - 28 days and distressed collateral.
One last thing:
"The minimum bid the Fed accepts [at the TAF} is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market."
What happens when the futures market prices in rising interest rates?
Doesn't this mean that the Fed can't raise rates if they wish to keep the TAF in operation? Although I suppose it could still work for people who can't ante up any Treasuries and can only supply MBS et al.
The suggestion that the impact on Fed reserve accounts indicated in the chart going back 95 years to the start of the Fed in 1913 is a statistical anomaly is like saying that a heart attack is a health anomaly.
A heart attack is survivable, to be sure, but to describe The System's as a cold recalls TASS reporting a heart attack of a Soviet leader as a cold back during the Cold War. Now that we have a global command economy, with global central banks setting interest rates rather than market, inflation and other distortions popping up everywhere, the difficulties of power transfer that challenge the transparency of authoritarian regimes applies.
The big blip had to go somewhere. I suspect that when the decision was made to account for the TAF on reserve account no one considered how that might look on a chart of the data. On the other hand, the patient might already be dead and not know it. It is certainly not in anyone's interest to report the fact.
The suggestion that the impact on Fed reserve accounts indicated in the chart going back 95 years to the start of the Fed in 1913 is a statistical anomaly is like saying that a heart attack is a health anomaly.
A heart attack is survivable, to be sure, but to describe The System's as a cold recalls TASS reporting a heart attack of a Soviet leader as a cold back during the Cold War. Now that we have a global command economy, with global central banks setting interest rates rather than market, inflation and other distortions popping up everywhere, the difficulties of power transfer that challenge the transparency of authoritarian regimes applies.
The big blip had to go somewhere. I suspect that when the decision was made to account for the TAF on reserve account no one considered how that might look on a chart of the data. On the other hand, the patient might already be dead and not know it. It is certainly not in anyone's interest to report the fact.
Probably having less sense than I should, I'm going to point out something that no one has brought up on any forum or in any letter etc. in a clear way - bank reserves are currently and literally non existent.
Required reserves as per the Fed's H3 weekly publication ( http://www.federalreserve.gov/releases/h3/Current/ ) are around $45 billion, and borrowed reserves are about $90 billion. In plain English, the banks as a whole are actually borrowing their required reserves, and then some, from the Fed.
Another way to look at it is that fractional reserve expansion is currently literally without limit.
We are in a financial crisis, and have been in one since roughly last August.
In my opinion, anyone without "insurance" of some kind is being foolish... and that does not mean convert everything to gold now. It simply means what it says - cover your ass against black swans, etc. Some will be comfortable with 5% in tangible assets and some won't with over 50%.
metalman
05-13-08, 06:59 PM
Probably having less sense than I should, I'm going to point out something that no one has brought up on any forum or in any letter etc. in a clear way - bank reserves are currently and literally non existent.
Required reserves as per the Fed's H3 weekly publication ( http://www.federalreserve.gov/releases/h3/Current/ ) are around $45 billion, and borrowed reserves are about $90 billion. In plain English, the banks as a whole are actually borrowing their required reserves, and then some, from the Fed.
Another way to look at it is that fractional reserve expansion is currently literally without limit.
We are in a financial crisis, and have been in one since roughly last August.
In my opinion, anyone without "insurance" of some kind is being foolish... and that does not mean convert everything to gold now. It simply means what it says - cover your ass against black swans, etc. Some will be comfortable with 5% in tangible assets and some won't with over 50%.
the article that launched this thread references John Atlee at Harvard in 2001 (http://www.iea-macro-economics.org/flyblind.html) who i never heard of. points out that reserves are 1.3% of checking accounts. for all practical purposes... zero as you say.
there is no valid theory or science behind this, is there? atlee recommends 100% reserves! that's back in 2001.
grapejelly
05-13-08, 07:06 PM
Probably having less sense than I should, I'm going to point out something that no one has brought up on any forum or in any letter etc. in a clear way - bank reserves are currently and literally non existent.
...
In my opinion, anyone without "insurance" of some kind is being foolish... and that does not mean convert everything to gold now. It simply means what it says - cover your ass against black swans, etc. Some will be comfortable with 5% in tangible assets and some won't with over 50%.
The banks have no reserves whatever. Everything is borrowed. Does that escalate things to a whole new level, somehow? Is it just a missing $150 billion, not big in the scheme of things? Are we being a bit alarmist here?
the article that launched this thread references John Atlee at Harvard in 2001 (http://www.iea-macro-economics.org/flyblind.html) who i never heard of. points out that reserves are 1.3% of checking accounts. for all practical purposes... zero as you say.
there is no valid theory or science behind this, is there? atlee recommends 100% reserves! that's back in 2001.
Here's the actual data on reserve requirements:
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1
If we had 100% reserves, it wouldn't be fractional reserve banking. I'm not trying to avoid the "valid theory or science" area, other than to note that both economics is called by many a "dismal science" and that zero reserves is far from wise in my opinion... and I'm also trying to stick to facts as much as possible due to the potentially very high emotional content of my basic observation above.
metalman
05-13-08, 07:55 PM
Here's the actual data on reserve requirements:
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1
If we had 100% reserves, it wouldn't be fractional reserve banking. I'm not trying to avoid the "valid theory or science" area, other than to note that both economics is called by many a "dismal science" and that zero reserves is far from wise in my opinion... and I'm also trying to stick to facts as much as possible due to the potentially very high emotional content of my basic observation above.
agree zero is too low and 100% is too high. what's wrong with the old standards? what do other countries use?
The banks have no reserves whatever. Everything is borrowed. Does that escalate things to a whole new level, somehow? Is it just a missing $150 billion, not big in the scheme of things? Are we being a bit alarmist here?
As I just noted, I'm trying my best to avoid emotionalism in my answers or a panic effect reaction... while at the same time pointing out the bald and actual fact.
And yes, it is also as simple as a "missing" $135 billion (the $90 billion borrowed reserves plus the $45 billion required reserves) too.
And something similar even happened before too, in the period 1929-1933... and we did survive it, and Bernanke is well aware of the picture too. Bernanke catches a huge amount of undeserved flack - he's doing a pretty good job from where I sit.
I'm trying to walk a razor thin line here and not cause panic or very risky or stupid etc. behavior, while pointing out the actual fact of zero bank reserves (or if you prefer borrowed reserves)... and also point out that while its not an unprecedented circumstance, it's also certainly not all sweetness and light either (and I know you weren't saying that either).
I have little clue whether it indicates a short or intermediate or long term escalation either - all I can say is that I don't know and I'm watching it and other stats closely.
This is also not a new circumstance by far either - reserves have been being borrowed since January, and have been negative since March (per the actual facts in the Fed's H3 weekly report). The last 2-3 weeks have also shown definite improvements - it was -$141 billion week ending April 9th and is "only" -$127 billion now.
One last item - if I wanted to be alarmist, it would not be hard to paint a scary picture. It is not at all my intention to alarm, but rather to point out the actual facts and let the various iTulip denizens make their own calls.
agree zero is too low and 100% is too high. what's wrong with the old standards? what do other countries use?
The old standards were around 10%, but they're been dropping for decades... and an internet forum isn't very workable in my opinion to go into something as complex as "correct" reserve ratios.
10% reserve ratios allow a fractional reserve banking system to roughly loan 10 times their deposit base, although in practice its closer to 5 (per my limited data sets). 10% is fine if all bankers were ethical and really had a long term view and real understanding of consequences... and I'm not holding my breath.
Other countries vary from close to zero to at least 20%. China for example, just raised theirs another .5% recently - it's now 16.5%... and was 7.5% in March 2006. China's reserve requirements ratio is calculated differently from the US too, and I'm not certain enough of the differences to go public on it.
santafe2
05-14-08, 12:40 AM
wages tend to rise over time. i know that my back office and secreatarial employees expect, and get, small raises on an annual basis. [perhaps 2.5-4%] minimum wage legislation will likely be passed by a democratic legislature. if people stop spending more than they earn, and - imagine - start to pay down debt a bit, this adds up. as i said, i think wages will lag overall inflation; people will be falling behind on the cost of necessities. but as long as they don't add to their debt, they gradually improve their position. also some of the debt will be liquidated by default. so overall, the ratio of income to debt will improve.
After 28 years of wage stagflation I think it will require a 180 for Americans to disconnect with their debt alliance. Since I'm a complete convert to the buy local, no debt, low energy footprint idea, I get what your saying but I don't yet see a change in spending much less the capitulation required for a real change in direction. People are buying down to WMT and driving up their stock price, they aren't changing their approach to living standards.
Locally, we have as good a minimum wage law as any in the US at almost double the standard. I don't see it having any effect here unless one is working for minimum wage - then you have twice as much to spend. Without a strong social shift, more money will only provide more goods.
The old standards were around 10%, but they're been dropping for decades... and an internet forum isn't very workable in my opinion to go into something as complex as "correct" reserve ratios.
10% reserve ratios allow a fractional reserve banking system to roughly loan 10 times their deposit base, although in practice its closer to 5 (per my limited data sets). 10% is fine if all bankers were ethical and really had a long term view and real understanding of consequences... and I'm not holding my breath.
Other countries vary from close to zero to at least 20%. China for example, just raised theirs another .5% recently - it's now 16.5%... and was 7.5% in March 2006. China's reserve requirements ratio is calculated differently from the US too, and I'm not certain enough of the differences to go public on it.
Question?
Doesn't negative consumer savings rate AND 0% bank reserves indicate that the gas pedal is to the floor and the car is stuck in neutral (becaue the clutch is fried) and is about to roll down the hill unless you set the E-brake? I'm not sure if we are going up-hill or down-hill at the start of this analogy though.
Bart,
While there definitely was a low reserve/failed bank period in the Great Depression era, I have always thought that was a symptom of that era's FIRE economy (i.e. margin debt loans) rather than a cause.
More specifically, that banks were going under because the crash in consumption - due to savings having been evaporated by the stock market crash - crushed consumer spending, which in turn caused even perfectly good companies (and their relatively low amounts of debt) to go under.
Assuming my understanding is not totally flawed - what we have here is the reverse: A financial pyramid where the entire economy was driven by lax and overleveraged lending; the collapse of said lending pyramid then causing consumer consumption to fall (as much of this consumption was via borrowing).
The next step: collapsed consumption causing even good companies to fail - has yet to begin.
Down Under
05-15-08, 05:36 AM
[quote=skidder;35709]With regard to world reserve currency status of the U.S, this is an excerpt from today's Privateer (apologies to the Captain for lifting such a large piece). He seems to think it is just a matter of time before this status is gone.
www.the-privateer.com (http://www.the-privateer.com)
Good article; I think it is only a question of time before the US dollar loses it's reserve status.
touchring
05-15-08, 06:39 AM
If the us dollar loses its reserve status, the dollar will go into hyperinflation since people are not going to accept dollars for goods in exchange and the dollar will depreciate very quickly.
As for the rest of the world, they will just go along with the euro. Pricing in euro is not always a bad thing, a lot of people are already doing that.
Me thinks this scenario is unlikely in the near to medium term based on the current situation.
grapejelly
05-15-08, 09:49 AM
If the us dollar loses its reserve status, the dollar will go into hyperinflation since people are not going to accept dollars for goods in exchange and the dollar will depreciate very quickly.
As for the rest of the world, they will just go along with the euro.
no they won't. All currencies will be in severe depreciation, worse than they are now. Nobody can afford to lag behind the depreciation. Nobody. It's a race towards zero.
There will be a huge runup in tangibles like nothing yet seen. The move so far in commodities is related to currency depreciation and I argue has *nothing* to do with the commonly cited fundamentals. Evidence of a gradual shift away from paper, to become a rapid shift at some point in the future as fear of inflation takes hold.
We will be there in a year I think.
grapejelly
05-15-08, 09:54 AM
Bart,
While there definitely was a low reserve/failed bank period in the Great Depression era, I have always thought that was a symptom of that era's FIRE economy (i.e. margin debt loans) rather than a cause.
More specifically, that banks were going under because the crash in consumption - due to savings having been evaporated by the stock market crash - crushed consumer spending, which in turn caused even perfectly good companies (and their relatively low amounts of debt) to go under.
Assuming my understanding is not totally flawed - what we have here is the reverse: A financial pyramid where the entire economy was driven by lax and overleveraged lending; the collapse of said lending pyramid then causing consumer consumption to fall (as much of this consumption was via borrowing).
The next step: collapsed consumption causing even good companies to fail - has yet to begin.
I don't think we have a reverse situation at all. There was a huge runup of inflaiton in the 1920s, caused as usual be enormous growth in credit. The underlying assets (stocks more than anything else) started to fall and that took the banking system with it, and it took wealthy investors with it, and then it took businesses with it, sound ones who couldn't refinance their debt.
What is different now? I can't think of anything fundamentally different. Except then we had a gold standard and confiscation of gold to hold up the US dollar. Steal gold from the citizens, give them paper, and maintain the value of the dollar internationally. That was a one-time thing.
Now we have nothing like that. Or do we...
Borrowers are tapped out. The last reservoir of borrowers is on the coals and burnt out.
What remains is the equivalent of confiscation in 1933: tapping people's retirement "funds". These claims on future productivity must be emptied out. That is next.
Bart,
While there definitely was a low reserve/failed bank period in the Great Depression era, I have always thought that was a symptom of that era's FIRE economy (i.e. margin debt loans) rather than a cause.
More specifically, that banks were going under because the crash in consumption - due to savings having been evaporated by the stock market crash - crushed consumer spending, which in turn caused even perfectly good companies (and their relatively low amounts of debt) to go under.
Assuming my understanding is not totally flawed - what we have here is the reverse: A financial pyramid where the entire economy was driven by lax and overleveraged lending; the collapse of said lending pyramid then causing consumer consumption to fall (as much of this consumption was via borrowing).
We differ here. The current picture is quite similar to me in FIRE-ville.
The '20s had some huge pyramids, including large growth in credit and monetary aggregates... and most especially stock margin as low as 5-10% and at low interest rates. There was also the Florida land/real estate boom/mania.
Only when call rates started to get up into the 12-20% range did it start to slow up the stock mania. The Fed delivered the coup de grace in Aug 1929 with the discount rate hike to 6%. The BoE had already reined in their market in early 1929.
Its certainly far from identical, but both periods had large credit excesses in common. There were even negative real interest rates in 1926 and prior years.
Bart,
I understand what you are saying, but my point was that the excess credit fueled a stock market boom. The ensuring firestorm brought in capital from all over the world - in turn creating more margin-ability.
The final collapse of the stock market, however, affected the economy more by evaporating stock market players cash.
This evaporated cash created the negative wealth effect; certainly once this occurred there were plenty of businesses who then failed due to lack of credit, but I don't think businesses were built on credit in the 1920's.
Thus while almost all of the happenings in the Great Depression have counterparts here, my (perhaps wrong) point is that the GD was about destroying a generation's savings and starting a negative economic spiral, while this (GDII?) is about putting a generation in debt and starting a negative economic spiral.
The effects at the beginning of these twin spirals are similar, but the end could be very different.
Bart,
I understand what you are saying, but my point was that the excess credit fueled a stock market boom. The ensuring firestorm brought in capital from all over the world - in turn creating more margin-ability.
The final collapse of the stock market, however, affected the economy more by evaporating stock market players cash.
This evaporated cash created the negative wealth effect; certainly once this occurred there were plenty of businesses who then failed due to lack of credit, but I don't think businesses were built on credit in the 1920's.
Thus while almost all of the happenings in the Great Depression have counterparts here, my (perhaps wrong) point is that the GD was about destroying a generation's savings and starting a negative economic spiral, while this (GDII?) is about putting a generation in debt and starting a negative economic spiral.
The effects at the beginning of these twin spirals are similar, but the end could be very different.
Fair enough, and pretty much agreed too except as noted below.
My current view is that the proper 1929 comparison is 2000. We didn't have another Great Depression after 2000 mostly due to all the pumping and printing by the various world central banks and various political actions too. When we account for actual purchasing power loss and actual net worth changes, we are far better off now than in 1937... and are also far further into the inflationary and potential hyperinflationary muck.
As far as credit in the '20s, here's a chart. The dotted line is bank credit only.
http://www.nowandfutures.com/download/m1m3_1920-1940.png
Fair enough, and pretty much agreed too except as noted below.
My current view is that the proper 1929 comparison is 2000. We didn't have another Great Depression after 2000 mostly due to all the pumping and printing by the various world central banks and various political actions too. When we account for actual purchasing power loss and actual net worth changes, we are far better off now than in 1937... and are also far further into the inflationary and potential hyperinflationary muck.
As far as credit in the '20s, here's a chart. The dotted line is bank credit only.
http://www.nowandfutures.com/download/m1m3_1920-1940.png
The iTulip editorial position since late 2006 is that 2007 marked the end of the post 2000 bubble reflation much as 1937 was the end of the post 1929 asset bubble. See In the Shadow of 1937 (Jan. 26, 2006) (http://itulip.com/forums/showthread.php?p=5505#post5505)
The engineering of the housing bubble 2002 - 2006 to reflate the economy is the asset deflation bookend of the all-goods price inflationary trend created more than 30 years of policy blunders that has left the US exporting $600B a year to pay for imported oil, 72% of imports.
How many mortgages are technically in default in Massachusetts where GDP growth was 3.6% in Q1 vs 0.6% for the US? Would you believe 57%?
"Share late payment in 12 mos. means the share of owner-occupied loans where at least one payment has been late over the past 12 months. Difficulties in paying on time often precede more serious defaults." - New York Fed (http://www.newyorkfed.org/regional/techappendix_spreadsheets.html)
http://www.itulip.com/images/MassRREMy2008.gif
"Although a borrower is technically in default when a single payment is missed or late, lenders usually wait a substantial period of time, typically more than 90 days, before attempting to take possession of the property."
Research Division
Federal Reserve Bank of St. Louis
Working Paper Series
The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing (pdf) (http://research.stlouisfed.org/wp/2006/2006-027.pdf)
Anthony Pennington-Cross
Working Paper 2006-027A
April 2006
FEDERAL RESERVE BANK OF ST. LOUIS
Technically, more than half of all homes in Massachusetts are in default and more than 10% are in foreclosure.
What happens when unemployment rises and defaults rise, too?
The iTulip editorial position since late 2006 is that 2007 marked the end of the post 2000 bubble reflation much as 1937 was the end of the post 1929 asset bubble. See In the Shadow of 1937 (Jan. 26, 2006) (http://itulip.com/forums/showthread.php?p=5505#post5505)
I abase myself in light of the wisdom of Fearless Leader.
I'd post my 1929 vs. 2000 chart to show how well the correlation is going, but the last time I did that the discussion degenerated into minutia about the chart design & presentation and I've learned my lesson (as in no attempted good deed goes unpunished).
Technically, more than half of all homes in Massachusetts are in default and more than 10% are in foreclosure.
What happens when unemployment rises and defaults rise, too?
The closest image I have for ka-poom, although too "intense":
http://www.nowandfutures.com/grins/boom_a-bomb_blimp_deflation.jpg
I abase myself in light of the wisdom of Fearless Leader.
I'd post my 1929 vs. 2000 chart to show how well the correlation is going, but the last time I did that the discussion degenerated into minutia about the chart design & presentation and I've learned my lesson (as in no attempted good deed goes unpunished).
The closest image I have for ka-poom, although too "intense":
http://www.nowandfutures.com/grins/boom_a-bomb_blimp_deflation.jpg
Oh, I wouldn't let the nit picking get to you. That's what happens when you get smart people together in a room. Soon turns into a who's smarter contest.
Your observation of the parallels between the 1937 post reflation period and the current one is a good one. We're also noting a trend where jobs recovery keeps getting weaker with each recession since the modern FIRE Economy was birthed in 1980; FIRE Economy recessions aren't like recessions in Production/Consumption economies. At the peak of the last cycle median duration of unemployment dipped to six weeks. This time it never go below eight weeks. In pre-FIRE Economy times, it typically declined to five weeks.
http://www.itulip.com/images/durationunemploymentMay2008.gif
In every respect, from household balance sheets to inflation to household debt to income ratios, the economy is heading into this recession from a very weak base.
Oh, I wouldn't let the nit picking get to you. That's what happens when you get smart people together in a room. Soon turns into a who's smarter contest.
No worries... I just take my amazing charts (that can leap tall buildings within a single x axis ) away... and practice noblesse oblige and let the hoi polloi play their sordid little games... ;)
I did finally get my comeuppance on linear charts.
Not only has the illustrious Finster gotten after me multiple times on linear charts over the years, but also within the last two weeks I've received emails from two "well known names" that have encouraged me to at least add some log scaled charts to my long term inflation page.
We're also noting a trend where jobs recovery keeps getting weaker with each recession since the modern FIRE Economy was birthed in 1980; FIRE Economy recessions aren't like recessions in Production/Consumption economies. At the peak of the last cycle 7 dipped to six weeks. This time it never go below eight weeks. In pre-FIRE Economy times, it typically declined to five weeks.
http://www.itulip.com/images/durationunemploymentMay2008.gif
In every respect, from household balance sheets to inflation to household debt to income ratios, the economy is heading into this recession from a very weak base.
Verily and indeed, and that lengthening of the median duration of unemployment sure doesn't augur well for what's ahead... although the Fed is also responding much quicker and with much bigger guns too.
A Fed Funds drop of over 3% faster than I ever recall it happening, over three times the size of the "helicopter drop" in the way of tax rebates than in 2003 and a much faster response too, and the Fed committing almost half their balance sheet value to "rescue" operations just to name a few.
It all reminds me in a rather distressing manner of a positive feedback loop. It sure isn't much fun being the bearer of bad tidings so much... and it would even be worse if I kept my mouth shut.
Down Under
05-16-08, 01:43 AM
Just saw this posted on jsmineset.com
Dear Jim,
I travel extensively throughout the world and just made a trip through Costa Rica, Panama, Columbia, Brazil and back into Mexico. The trip was made using a private aircraft I frequently have access to. One of the artifacts of traveling this way is that one must pay for fuel wherever one lands. In all of my many travels, US dollars have ALWAYS been the preferred method of payment by the locals. either cash US Dollars (preferred) or by credit card that will pay their account in dollars. Well this past two weeks, the local jet centers in each of the above countries refused US Dollars as payment. They wanted local currency only or a credit card that would deposit local currency into their accounts. This is a "sea change"... not just in one country, but in all countries on the list. US Dollars were no longer welcome. I was shocked yet not surprised being the prepared CIGA I am.
Chaos theory states that the wings of a butterfly can end up starting a hurricane. Well Jim, this CIGA believes he saw the wings of butterflies flapping in Central and South America these past weeks that shall lead to the Hurricane to be known as the "US dollar" or "useless dollar."
Thank you for everything!
CIGA John
Just saw this posted on jsmineset.com
Dear Jim,
I travel extensively throughout the world and just made a trip through Costa Rica, Panama, Columbia, Brazil and back into Mexico. The trip was made using a private aircraft I frequently have access to. One of the artifacts of traveling this way is that one must pay for fuel wherever one lands. In all of my many travels, US dollars have ALWAYS been the preferred method of payment by the locals. either cash US Dollars (preferred) or by credit card that will pay their account in dollars. Well this past two weeks, the local jet centers in each of the above countries refused US Dollars as payment. They wanted local currency only or a credit card that would deposit local currency into their accounts. This is a "sea change"... not just in one country, but in all countries on the list. US Dollars were no longer welcome. I was shocked yet not surprised being the prepared CIGA I am.
Chaos theory states that the wings of a butterfly can end up starting a hurricane. Well Jim, this CIGA believes he saw the wings of butterflies flapping in Central and South America these past weeks that shall lead to the Hurricane to be known as the "US dollar" or "useless dollar."
Thank you for everything!
CIGA John
there is [at least] one error in this post: panama's local currency IS the u.s. dollar, except for small change.
grapejelly
05-16-08, 11:03 AM
Stories like this are just plain silly.
FWIW, I traveled in Costa Rica about 6 weeks ago and no troubles with the US$ at all. They are readily liquid and the biggest market of the world still takes them. Sheesh. I believe the US$ is headed towards zero in value, but so are all the other fiat "currencies". Are Colons safer than US dollars?
The iTulip editorial position since late 2006 is that 2007 marked the end of the post 2000 bubble reflation much as 1937 was the end of the post 1929 asset bubble. See In the Shadow of 1937 (Jan. 26, 2006) (http://itulip.com/forums/showthread.php?p=5505#post5505)
The engineering of the housing bubble 2002 - 2006 to reflate the economy is the asset deflation bookend of the all-goods price inflationary trend created more than 30 years of policy blunders that has left the US exporting $600B a year to pay for imported oil, 72% of imports.
How many mortgages are technically in default in Massachusetts where GDP growth was 3.6% in Q1 vs 0.6% for the US? Would you believe 57%?
"Share late payment in 12 mos. means the share of owner-occupied loans where at least one payment has been late over the past 12 months. Difficulties in paying on time often precede more serious defaults." - New York Fed (http://www.newyorkfed.org/regional/techappendix_spreadsheets.html)
Technically, more than half of all homes in Massachusetts are in default and more than 10% are in foreclosure.
What happens when unemployment rises and defaults rise, too?
I seem to recall from a recently posted iTulip bar chart on employment trends that the bouyant economic activity in Massachusetts is heavily concentrated in Boston/Cambridge area?
The rest of the state would appear to be emulating the rest of the country more or less...
Probably having less sense than I should, I'm going to point out something that no one has brought up on any forum or in any letter etc. in a clear way - bank reserves are currently and literally non existent...
Then the Fed won't actually have to pay out anything in this little scheme, eh?
Bernanke Requests Power to Pay Interest on Reserves
By Craig Torres and Scott Lanman
May 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke (http://search.bloomberg.com/search?q=Ben+S.%0ABernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) asked Congress to give the Fed immediate authority to pay interest on reserves deposited by commercial banks, seeking to streamline efforts aimed at alleviating credit strains.
The payments would help officials push money into the banking system without influencing the main policy rate, by giving lenders an incentive to leave funds with the Fed. Congress already passed a law giving the central bank the authority, starting in October 2011.
``We recommend that the date be changed to make the legislation effective immediately,'' Bernanke wrote in a May 13 letter to House Speaker Nancy Pelosi (http://search.bloomberg.com/search?q=Nancy+Pelosi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a California Democrat. ``Congress recognized that payment of interest on reserves would contribute to the efficiency of the financial system.'' ...
...Interest payments on reserves may give policy makers the ability ``to inject potentially vast sums of money into the system without having an impact on the federal funds rate'' said Tony Crescenzi (http://search.bloomberg.com/search?q=Tony+Crescenzi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chief bond market strategist at Miller Tabak & Co. It would also ``put a floor under'' the rate, he said.
Congress would need to approve the accelerated timetable for the payments, which would then require the president's signature.
Banks are required to hold a proportion of their customers' deposits in an account at the Fed. If the Fed paid interest on surplus reserves, banks would be less inclined to dump the funds into the money markets, pushing the federal funds rate lower...
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_ne91Qe_Pkw&refer=home
phirang
05-17-08, 09:58 AM
What I really see as a problem are the high variable costs for US exports resulting from energy inflation... I don't see the magical turnaround in exports than EJ does.
I have spoken to some OEM's who do export mainly to russia and europe, and they have told me they don't see the benefit for a weaker dollar: all their component costs increase. the chinese continue to source much of their equipment from germany for developing their coal mines.
I think it's important to differentiate between top-line and bottom-line results in an inflationary environment: perhaps you can export more, but to claim it's somehow accretive is intellectually dishonest when you earn less: exporting $1000 of stuff and earning 10% is no better than exporting $500 of stuff and earning 20%. maybe you could have higher employment exporting more stuff, but then the employees' earnings would have no purchasing power unless you- that's right- raised prices :D
Then the Fed won't actually have to pay out anything in this little scheme, eh?
Bernanke Requests Power to Pay Interest on Reserves
By Craig Torres and Scott Lanman
May 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke (http://search.bloomberg.com/search?q=Ben+S.%0ABernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) asked Congress to give the Fed immediate authority to pay interest on reserves deposited by commercial banks, seeking to streamline efforts aimed at alleviating credit strains.
The payments would help officials push money into the banking system without influencing the main policy rate, by giving lenders an incentive to leave funds with the Fed. Congress already passed a law giving the central bank the authority, starting in October 2011.
``We recommend that the date be changed to make the legislation effective immediately,'' Bernanke wrote in a May 13 letter to House Speaker Nancy Pelosi (http://search.bloomberg.com/search?q=Nancy+Pelosi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a California Democrat. ``Congress recognized that payment of interest on reserves would contribute to the efficiency of the financial system.'' ...
...Interest payments on reserves may give policy makers the ability ``to inject potentially vast sums of money into the system without having an impact on the federal funds rate'' said Tony Crescenzi (http://search.bloomberg.com/search?q=Tony+Crescenzi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chief bond market strategist at Miller Tabak & Co. It would also ``put a floor under'' the rate, he said.
Congress would need to approve the accelerated timetable for the payments, which would then require the president's signature.
Banks are required to hold a proportion of their customers' deposits in an account at the Fed. If the Fed paid interest on surplus reserves, banks would be less inclined to dump the funds into the money markets, pushing the federal funds rate lower...
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_ne91Qe_Pkw&refer=home
I give it at least one rimshot... or better yet, the old wah wah? ;)
http://www.nowandfutures.com/grins/sad_trombone.mp3
And on a more serious note, the interest paid is a power they already have. All they're doing is requesting an acceleration of the implementation timetable.
"The Chairman noted that the President had recently signed the Financial Services Regulatory Relief Act of 2006, which among its provisions gave the Federal Reserve discretion, beginning October 2011, both to pay interest on reserve balances and to reduce further or eliminate reserve requirements. The Act potentially has important implications for many aspects of the Federal Reserve's operations"
Source: Fed minutes from Oct 2006 (http://www.federalreserve.gov/FOMC/MINUTES/20061025.htm) (emphasis mine)
What I really see as a problem are the high variable costs for US exports resulting from energy inflation... I don't see the magical turnaround in exports than EJ does.
I have spoken to some OEM's who do export mainly to russia and europe, and they have told me they don't see the benefit for a weaker dollar: all their component costs increase. the chinese continue to source much of their equipment from germany for developing their coal mines.
I think it's important to differentiate between top-line and bottom-line results in an inflationary environment: perhaps you can export more, but to claim it's somehow accretive is intellectually dishonest when you earn less: exporting $1000 of stuff and earning 10% is no better than exporting $500 of stuff and earning 20%. maybe you could have higher employment exporting more stuff, but then the employees' earnings would have no purchasing power unless you- that's right- raised prices :D
EJ proposes no magical turnaround in exports, but rather blood, sweat, and tears. You must be thinking of the current administration, with its bogus assertions that a weak dollar is "good for the economy." The iTulip position has consistently been that a depreciating dollar (bonar) is net negative for the US, even for exporters long term. Early in a currency depreciation the policy appears to be net positive, when demand from importing trade partners rises but before the weak currency feeds back into the balance sheets of exporters as higher input costs. That nirvana lasts only a year or so. It is clearly over for a broad range of industries.
I give it at least one rimshot... or better yet, the old wah wah? ;)
http://www.nowandfutures.com/grins/sad_trombone.mp3
And on a more serious note, the interest paid is a power they already have. All they're doing is requesting an acceleration of the implementation timetable.
"The Chairman noted that the President had recently signed the Financial Services Regulatory Relief Act of 2006, which among its provisions gave the Federal Reserve discretion, beginning October 2011, both to pay interest on reserve balances and to reduce further or eliminate reserve requirements. The Act potentially has important implications for many aspects of the Federal Reserve's operations"
Source: Fed minutes from Oct 2006 (http://www.federalreserve.gov/FOMC/MINUTES/20061025.htm) (emphasis mine)
To which we can only respond with the words of Lord Acton...
"Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."
Then the Fed won't actually have to pay out anything in this little scheme, eh?
Bernanke Requests Power to Pay Interest on Reserves
By Craig Torres and Scott Lanman
May 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke (http://search.bloomberg.com/search?q=Ben+S.%0ABernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) asked Congress to give the Fed immediate authority to pay interest on reserves deposited by commercial banks, seeking to streamline efforts aimed at alleviating credit strains.
The payments would help officials push money into the banking system without influencing the main policy rate, by giving lenders an incentive to leave funds with the Fed. Congress already passed a law giving the central bank the authority, starting in October 2011.
``We recommend that the date be changed to make the legislation effective immediately,'' Bernanke wrote in a May 13 letter to House Speaker Nancy Pelosi (http://search.bloomberg.com/search?q=Nancy+Pelosi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a California Democrat. ``Congress recognized that payment of interest on reserves would contribute to the efficiency of the financial system.'' ...
...Interest payments on reserves may give policy makers the ability ``to inject potentially vast sums of money into the system without having an impact on the federal funds rate'' said Tony Crescenzi (http://search.bloomberg.com/search?q=Tony+Crescenzi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chief bond market strategist at Miller Tabak & Co. It would also ``put a floor under'' the rate, he said.
Congress would need to approve the accelerated timetable for the payments, which would then require the president's signature.
Banks are required to hold a proportion of their customers' deposits in an account at the Fed. If the Fed paid interest on surplus reserves, banks would be less inclined to dump the funds into the money markets, pushing the federal funds rate lower...
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_ne91Qe_Pkw&refer=home
my understanding is that this is aimed at doing away with the targeting of a fed funds rate. the fed will instead proclaim an interest rate corridor. there will be the bottom rate which the fed will offer lenders, and the top rate which the fed which the fed will offer borrowers. this will be the new mechanism for managing short rates.
phirang
05-17-08, 03:59 PM
EJ proposes no magical turnaround in exports, but rather blood, sweat, and tears. You must be thinking of the current administration, with its bogus assertions that a weak dollar is "good for the economy." The iTulip position has consistently been that a depreciating dollar (bonar) is net negative for the US, even for exporters long term. Early in a currency depreciation the policy appears to be net positive, when demand from importing trade partners rises but before the weak currency feeds back into the balance sheets of exporters as higher input costs. That nirvana lasts only a year or so. It is clearly over for a broad range of industries.
I guess what I fail to get is how can the US compete in an environment where even Japan is outsourcing engineering work to malaysia, india etc because engineering salaries have no purchasing power... (see this wknd's wsj)
There's often a claim that kids are lazy etc, and many are, but there's never a shortage of med school applications... guess it's harder to import deflation when your life is on the line :D
Phirang,
There's an easy way: its called a trade war.
I haven't beaten this drum much recently, but what has been happening with the 'developing' nations is their governments subsidizing industry and penalizing imports, while simultaneously the high tax/cost structures in the US are left as is.
Europe compensates via significant import taxes, but the 'free trade' US (or more importantly, the 'free trade' rentier beneficiaries) leaves its citizens without any governmental protections - unless you are a farmer or Boeing.
No. It is not possible.
Hyperinflation is a page from the old book. In the new book we will have price controls all over the place with all the related consequences (rationing, long lines etc.).
People, that count on PMs to preserve some value, will be disappointed, because any transaction in anything of value (gold, land, commodities) will be taxed at a draconian rate.
Obvious consequences of the higher tax rates and massive regulation :
1. Vastly increased black market in any valuable goods and services.
2. Widespread corruption in all the levels of society (now we mainly have it in political and corporate spheres ).
touchring
05-19-08, 02:43 AM
Phirang,
There's an easy way: its called a trade war.
I haven't beaten this drum much recently, but what has been happening with the 'developing' nations is their governments subsidizing industry and penalizing imports, while simultaneously the high tax/cost structures in the US are left as is.
Europe compensates via significant import taxes, but the 'free trade' US (or more importantly, the 'free trade' rentier beneficiaries) leaves its citizens without any governmental protections - unless you are a farmer or Boeing.
The first thing the US should do is to levy 30% tax on all oil products. Most developed countries except the US has already done that.
The prudential reserve Euro-dollar market compounds the problem with the current account deficit (the volume of FX reserves & the subsequent creation of new money & credit). Some degree of hyper-inflation is inevitable. Foreigners at some point will simply be sated with dollars. It's just a race as to whether the Federal Deficit is repudiated first or the exchange value of the dollar falls out of bed (or maybe both).
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