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  • very slowly, then all at once

    i would summarize the matter below, re argentina [posted by fred in another thread] by saying that disinflation/deflation happened very slowly, then inflation happened all at once.

    i sent the following in an email to some friends earlier in the week:

    my latest thinking, fwiw:
    there's a well known quote from a hemingway story about a man who said he went broke very slowly and then all at once. the current global political shift away from stimulus toward austerity will likely exacerbate deflationary forces, undermine the already weak global "recovery," increase and prolong unemployment, and INCREASE deficits in the oecd nations, because of their welfare states' automatic deficit-producing stabilizers. increased deficits will mean that accumulated sovereign debts will grow so that they compound faster than even potential - let alone actual- gdp growth. cb's will be forced to monetize the deficits in ever larger qe interventions. this will produce a sudden explosion of unmoored liquidity. so the mild deflation will be extended, but the new inflation will not be a repeat of the '70s, i.e. it will NOT be a prolonged period of ever escalating inflation with trailing ineffectual tightenings by the fed. instead it will be like what happened in argentina. a sudden, sharp spike up in rates accompanying a very rapid currency devaluation. very slowly, then all at once.

    implications- prepare early; you won't have time when you need it.



    fred's material from "is the u.s. argentina?" thread:




    Argentine Inflation 1995 - 2009


    In the year before the bond default in December 2001 and ending in late 2003, CPI inflation increased from -4% deflation to 120% inflation on an annual basis. Here at iTulip we call this process a “Ka-Poom” of deflation and inflation.

    The Argentine peso, un-pegged from the U.S. dollar, collapsed by 73% in a few months, and over the next two years inflation wiped out savings and erased all debts.
    Argentine Exchange Rates 1995 - 2009


    The bond market disintegrated.
    Argentine Bond Market 1995 - 2009


    A U.S. bond crisis will never get this bad, but then it doesn’t need to for bond holders to lose most of their money.

  • #2
    Re: very slowly, then all at once

    What actions do you recommend to your friends along with this warning? Switch any floating-rate mortgages to fixed at the best available rate, buy (more) gold, get out of bonds, buy dried pasta, guns and ammo.

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    • #3
      Re: very slowly, then all at once

      Originally posted by Chris View Post
      What actions do you recommend to your friends along with this warning? Switch any floating-rate mortgages to fixed at the best available rate, buy (more) gold, get out of bonds, buy dried pasta, guns and ammo.
      Scotch keeps well...
      ...and I'd a home brew kit.

      Comment


      • #4
        Re: very slowly, then all at once

        Originally posted by Chris View Post
        What actions do you recommend to your friends along with this warning? Switch any floating-rate mortgages to fixed at the best available rate, buy (more) gold, get out of bonds, buy dried pasta, guns and ammo.
        that's not a bad summary of implications, though i'm hoping the guns won't be necessary, and i'm eating low carb, so the pasta is out.

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        • #5
          Re: very slowly, then all at once

          what i'm really after is an answer to the question about fixing a mortgage. Some relations have a tracker mortgage on their home and they are keen not to sell and become renters. I suggested they fix at 5.5% given the potential for a sharp rise in interest rates (POOM) but when they are paying 1.5% the choice seems a non-brainer (without the schooling of an iTulip education).

          Their financial advisor has told them rates will stay low for a long time. They were happy with that advice.

          This is in the UK and I understand there are differences between the situation in the US and UK but a POOM event in the US is more likely to cause the same inflationary accident in a country which holds huge amounts of US bonds, no?

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          • #6
            Re: very slowly, then all at once

            I'm a bit confused.

            FRED:
            We do not expect the dollar to fall 73% in a few months. Isn't going to happen.
            FRED seems to believe the drop in the dollar and the increase in inflation will be considerably more gradual. Although he would define this as a currency "crises".

            You seem to disagree with this. Do you disagree with both the speed and degree of the currency caused spike in inflation?

            I'm concerned the global move to austerity could lead to a longer period of disinflation than we might expect. But according to EJ;

            The fact that the U.S. owes its foreign debt in dollars only limits the extent and speed of an Argentina type economic crisis for the U.S. Counter intuitively, if monetary and fiscal policy today allowed the money supply to fall, and demand and economic output to decline further, and CPI inflation to fall below 2% or so, a debt and currency crisis for the U.S. is virtually assured.
            Is our time to act getting short? Better hurry before Jay corners the market!

            Comment


            • #7
              Re: very slowly, then all at once

              Originally posted by jk
              implications- prepare early; you won't have time when you need it.
              Yep, hidey holes are already getting more difficult to prepare.

              Guns won't be necessary in wealthier areas - but a lot of areas thought wealthy will prove to be not so.

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              • #8
                Re: very slowly, then all at once

                Originally posted by we_are_toast View Post
                Is our time to act getting short? Better hurry before Jay corners the market!
                Homebrew is meant to be shared! And is at all times!

                Comment


                • #9
                  Re: very slowly, then all at once

                  Originally posted by chris
                  what i'm really after is an answer to the question about fixing a mortgage.
                  fwiw, I refinanced with a fixed rate CASH OUT mortgage at 4.375% about 1-2 years ago.

                  Originally posted by we_are_toast
                  FRED seems to believe the drop in the dollar and the increase in inflation will be considerably more gradual. Although he would define this as a currency "crises".

                  You seem to disagree with this. Do you disagree with both the speed and degree of the currency caused spike in inflation?

                  I'm concerned the global move to austerity could lead to a longer period of disinflation than we might expect. But according to EJ;

                  The fact that the U.S. owes its foreign debt in dollars only limits the extent and speed of an Argentina type economic crisis for the U.S. Counter intuitively, if monetary and fiscal policy today allowed the money supply to fall, and demand and economic output to decline further, and CPI inflation to fall below 2% or so, a debt and currency crisis for the U.S. is virtually assured.
                  Is our time to act getting short? Better hurry before Jay corners the market!
                  If the dollar’s purchasing power won’t collapse by 73% in a few months, but instead will be cut in half over a few years, you still want to act as quickly as possible when the process starts, and preferably before the process starts. Even if the dollar drop is as “mild” as predicted, it won’t be smooth and the initial phase, especially, is likely to be tumultous and chaotic. I think it will be a tough time to do anything because of the extreme emotions likely to be stirred up. every time i make an investment decision i feel slightly sick to my stomach.

                  As for getting short, I’m carrying about a 9% short position which I think of as a partial hedge against my 18% energy and 6% agriculture positions. I’ve had thoughts of increasing my shorts, but again the issue is right sizing positions with an eye toward managing risk and managing one’s own emotions.

                  Btw, I’m defining the dollar’s drop in terms of purchasing power, not the dollar index dxy, since I think other fiat currencies will suffer the same fate, albeit in varying degrees.

                  Comment

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