Financial topics

[Carl Lieberman]

I think that Carmen Reinhart's financial repression paper should be taken seriously. She and her husband, Vince are heavy hitters. Until the deregulation of the 70's, rates of return were capped by policy at a very low level. I believe that the Bernank is intending to have -4% real interest rates for years to come as the way of lowering our debt. Generational analysis is not part of their thinking. They are trying to recreate the real interest rate conditions of the 50's and 60's. After reading the Fourth Turning 15 years ago, I was persuaded to this cyclical view of history. There are too many "black swans" lurking about, to grant us the decades necessary for this strategy to work. In some eras, 6 sigma events really are 6 sigma events. In crisis periods of history, events that are thought to be 6 sigma, turn out to be much more common. Winter is coming. But that's not news to anyone on this site.

[vincecate]

I'm also surprised at your response since Reinhardt is essentially arguing for a long period of sustained moderate to high inflation to help monetize the federal debts. This strikes me as quite consistent with your forecasts for coming inflation and just adds further impetus for an unspoken determination on the part of policy makers to create substantial inflation along with a weak dollar policy . . .

You can have controlled inflation if the government has control of their budget. However, if the government deficit is out of control they can not control the money creation. The US is not in a position to get sustained moderate inflation. It is setup for hyperinflation.

You can not have a government this big that is printing about half the money it spends without getting inflation out of control. Just does not happen.

There is no way that China, Russia, etc keep buying bonds when there is a -4% real yield. In fact Russia has cut its holding substantially already. China is basically not buying more for a long time. After seeing the inflation of the 70s, investors are just not as naive about inflation as they were when we were still officially on a gold standard in the 50s and 60s.

When people stop buying/rolling-over bonds there will be about $7 trillion that come due within 12 months. They will be paid off with newly created money. This will not be "managed inflation".

The exposure that this paper gives to the idea of tricking investors with interest rates less than the inflation rate ensures that the trick can not work again.

[RDRUNR]

You can not have a government this big that is printing about half the money it spends without getting inflation out of control. Just does not happen.

Sure you can. If the money loss is larger than money being created you have deflation, which is obviously occurring in your country, the USA. How many trillions have been lost thus far in the RE market? More than tarp, QE and QE2 have created. Also I've heard on the news that QE hasn't even been 50% given out yet and almost nothing of QE2.

You may be seeing small things going up in price (like food and fuel) but big ticket items (cars, electronics, homes) are going down. You can't argue for inflation if you are telling me a $1 item goes up 50% to $1.50 (OMG hyper-inflatation time!!!!) vs a house going from $600,000 to $250,000. I'd rather pay $.50 more for bread than $350,000 more for a house, thank you.

I'll agree with John here. America is in a deflation period.

[vincecate]

You can not have a government this big that is printing about half the money it spends without getting inflation out of control. Just does not happen.

Sure you can. If the money loss is larger than money being created you have deflation, which is obviously occurring in your country, the USA. How many trillions have been lost thus far in the RE market?

I should have said "without getting out of control inflation eventually". Yes, for a time they can print half of what they spend and get away with it. But eventually it all falls apart.

[OLD1953]

So what if the market for bonds is less than the amount of inflation required to reinflate a bubble economy? The FED is not a free agent, they can't simply wave a wand and circulate (not create, circulate) ten trillion dollars. If they could do this, they'd have done so already. They've assumed trillions in risk, they've created money to the point of devaluing the dollar, and they still don't have the inflation they crave because the market for debt is smaller than the amount required to reinflate.

[John]

Dear Andrew,

> John - Can you share a quick recap of which
> industrialized/developing countries (non-3rd world) are either 1-2
> generations out from their last crisis? Put another way, which
> countries have a stable outlook from a Generational Dynamics
> perspective over the next 20-30 years? My thinking is that some of
> these countries may represent better markets for investment
> purposes.

Check out the slides that I used for the Generational Dynamics
briefing that I gave to the European military planners at Fort Devens
a couple of weeks ago:

** Generational Dynamics brief, June 4, 2011
** http://www.generationaldynamics.com/cgi ... 010.p.p604

In that presentation, I described each of America's eras since World
War II, and gave examples of countries that are in each of those eras
today.

John

[John]

Dear Vince,

> The other problem is that few people understood inflation in 1945
> and many more do today. It is much harder to find enough fools to
> buy bonds that pay an interest rate lower than the inflation rate
> today. There is just no way this could go on for 30 years now.

In 1945, the lesson of the Weimar inflation, where it took a barrelful
of money to buy a loaf of bread, was very widely understood. There
were plenty of fools who valued preservation of assets above the need
to get an extra percentage point of yield, and there are an increasing
number of such fools today, despite the sales pitches on CNBC.

John

[at99sy]

Forgive me for being naive, yet if "kicking the can" has been successful in postponing the inevitable crash then what is preventing a "can-kicking" marathon where it is kicked into "infinity and beyond?"

Since the only reason the governments around the world are participating in bailouts, rescues, TBTF etc..... is to preserve the banking, finance and insurance industries; couldn't they orchastrate a continuous rollover of debt?

It seems that this could play out forever as long as all the major players were on board. If we are all at risk of a "Greek" default, then permanent debt structuring would never fail. Setting a global inflation rate, global currency, global exchange rate etc. would appear to me to eliminate the eventual failure we are unable to avoid in the MSM.

When the governments are all barrowing and lending to themselves and each other, what would be the purpose in stopping this process?

just curious about you insights.

thanks
'sy

[vincecate]

Dear Vince,

> The other problem is that few people understood inflation in 1945
> and many more do today. It is much harder to find enough fools to
> buy bonds that pay an interest rate lower than the inflation rate
> today. There is just no way this could go on for 30 years now.

In 1945, the lesson of the Weimar inflation, where it took a barrelful
of money to buy a loaf of bread, was very widely understood. There
were plenty of fools who valued preservation of assets above the need
to get an extra percentage point of yield, and there are an increasing
number of such fools today, despite the sales pitches on CNBC.

John

In the 1950s and 1960s the US dollar was officially on gold standard. I think very few people then would have thought Germany's experience was relavent to the US. Even today, you don't really believe the US could get hyperinflation like Germany, so imagine back then when the dollar was backed by gold. Who would worry about inflation then? And the deflation of the early 1930s was much more recent then.

[Higgenbotham]

I see the discussion here (again) about whether people understand hyperinflation and deflation. Relatively speaking, I believe people do understand the various flations and they are very thoroughly debated.

It seems to me that people don't understand system dynamics (in the past John has shown in his blog that even MIT students are unable to solve basic system dynamics problems)

http://web.mit.edu/~jsterman/www/Cronin ... 061210.pdf

and the recent (more recent than Germany's hyperinflation because as just one example nuclear power plants weren't even operating then) advent of the far reaching consequences of unanticipated disruptions in complex systems. The earthquake in Japan is an example. Before that hit, I had looked at insurance company studies regarding the probability and consequences of large magnitude earthquakes in Japan. How many people have thought through what a repeat of the large magnitude 19th century earthquakes on the New Madrid fault line would look like today and the resulting consequences in our present complex economy? Compared to the din of the flation debates, a barely audible whisper! I'd guess Internet debates, like anything else, are determined by supply and demand. If people, even MIT students, can't understand system dynamics and it's relation to economics, then there can't be any debate!

In reading over the MIT study once more, it even seems that the majority of top graduate level students would be unable to distinguish between money inputs and money accumulation in our present complex economic system, which has implications for their ability to understand how historical hyperinflations will differ from what would be possible in today's monetary system. Maybe the understanding of the flations is only to the extent that, for example, if they know there is money flowing into the economy, then they believe there must be a maximum money supply when the money flowing into the economy is at its maximum, which isn't true at all. God Bless America. I wonder if Bernanke can solve that problem. Educating the population about system dynamics is what I mean; I'm pretty sure Bernank understands money flows and accumulation based on what I've read.