Financial topics

[vincecate]

Is hyperinflationism a religion or a career choice?

Of course I think it is science, or at least good economics.

Can you see any flaws in my narrative above? Or at the URL? Can you see which part of my thinking is flawed (not just the end result is wrong, but where I go wrong)?

[Higgenbotham]

So I am this forums resident hyperinflationist. Every forum should have at least one.

I see you don't want to jeopardize your status by addressing the possibility of stagflation. I'd like to see another dyed in the wool hyperinflationist or deflationist here try to explain how there can be stagflation, but maybe it's too painful.

These various camps sometimes seem like political parties or addictions to me. Marc Faber said he used to be a deflationist and now he's a staunch hyperinflationist. I used to be a hyperinflationist, but then I spent 19 years in the growth camp before switching to the deflation camp in 2005.

[vincecate]

I see you don't want to jeopardize your status by addressing the possibility of stagflation. I'd like to see another dyed in the wool hyperinflationist or deflationist here try to explain how there can be stagflation, but maybe it's too painful.

Most Keynesians think that printing money causes job creation up till "full employment" and only after that does it cause inflation. The 1970s stagflation with high unemployment proves this theory wrong.

I think job creation comes when the government environment is such that people want to invest in that country/state/city. Inflation can sometimes lower real wages and make a country a better place to invest (which is what Keynes really says on page 6 of his book). But the existing and likely future tax and regulatory situation is really the dominant thing. How much the government will pay people not to work and minimum wage law both limit how cheap labor can be. High deficit spending makes employers worry about higher taxes down the road.

So starting from a stable situation if you then make things bad for employers and print money it is easy enough to get stagflation.

But I don't think the US is close to a stable situation any more. The debt and deficit are just too large. They either print money like crazy or drastically cut back the size of government. I don't think they can do the second option, so it looks like they are headed to hyperinflation.

[Higgenbotham]

I think job creation comes when the government environment is such that people want to invest in that country/state/city. Inflation can sometimes lower real wages and make a country a better place to invest (which is what Keynes really says on page 6 of his book). But the existing and likely future tax and regulatory situation is really the dominant thing. How much the government will pay people not to work and minimum wage law both limit how cheap labor can be. High deficit spending makes employers worry about higher taxes down the road.

That's about what I see. The cost structure in the US is too high for it to be competitive in most industries. Instead of taking measures to reduce the cost structure, the US used debt to fill the gap. That only increased costs because now there is a debt load to carry. The (incremental) debt is no longer buying enough (incremental) tax revenue to support the interest cost. At best, the government is presently trying to maintain the debt load and grow its way out. This is what I hear the "conservative" the politicians saying. Doing this will only cause more industrial base to leave the US and oil prices to rise (to lower peaks), maintaining a vicious boom/bust cycle that leads to the collapse of the US economy. In my opinion, the US has zero ability to grow its way out of this mess. Aging demographics, debt, declining oil production, average to low educational standards, and efficient competitors will make it impossible. The US economy was powerful but it was never efficient. Americans can't seem to comprehend the concepts of cost savings and efficiency. They think they understand these concepts but they don't at all.

[Higgenbotham]

The concept that I'm flirting with is that under today's rules, it's
not only true that hyperinflation WON'T occur, it's also true that
hyperinflation CAN'T occur. The reason that it CAN'T occur under
today's rules is that the money will always flow (like water) to the
best investment opportunities in the world, and will not and cannot
contribute to the local wage and price increases related to
hyperinflation.

John

I would say hyperinflation can't move across the whole economic spectrum. There are mechanisms which prevent that.

The way the system is set up, electronic money can funnel through some routes but it is not necessarily interchangeable. It's not the same thing as legal tender at all in an insolvent system. The only thing that closely resembles legal tender is a t-bill.

The below is a clear discussion of what I've thrown out here and there lately. I've bolded one point that seems to elude me from time to time. In one post, I said inflation of commodities is occurring, then referred to that as artificial inflation. Technically, saying it's inflation as I did is not consistent with the backdrop I am describing otherwise. Saying it's artificial inflation is OK, but confusing. There was a discussion awhile back about what the rise in 30 year bond yields means. I said it means, along with other market movement, that the market is seeing deflation. Throwing out statements like that is confusing because markets operate in many layers of reality. For example, whether someone calls commodity price increases inflation or just price increases within a deflationary context affects the interpretation of that statement. It makes it impossible for anyone not thoroughly steeped in these matters to understand what is being said.

I went through the main articles on this web site once when Stoneleigh (Nicole Foss) was interviewed by Jim Puplava on Financial Sense News Hour. I'm finding out that it comes closer than any site I've seen to making the fundamental case for deflation in a manner consistent with my view.

http://theautomaticearth.blogspot.com/2 ... banks.html

One issue I left unaddressed before, of course, is that of commodity hoarding and money hoarding. Money hoarding is easy to see: bank reserves at the Fed have shot up with a vengeance. This is not because they’re afraid to lend, as we're told, but because they are aware of the losses that they haven't fessed up to, and that are just around the corner (Higgie here - agree, I've said this multiple times). Commodity hoarding is what takes place with gold, oil, food staples, anything investors feel can shield them from uncertainty and losses.

This may indeed lead to temporary price rises. But that's not inflation. It’s just rising prices. Inflation is the sum of money and credit supply multiplied by the velocity of money. And as we've just seen, that can't rise in times such as these. It can very much go down though, and that's what deflation means.

What can happen, and does, is that people choose to hold on to what they have, which lowers the velocity of money and temporarily raises -some- prices. This will end when they have to pay up their own debts.

And make no mistake: All that’s left is zombie money. The only "money" left is available solely because previously incurred debts haven't been paid off. That goes for all market participants: governments, companies, individuals.

Pension funds and other large investors wouldn’t have any money left to buy anything with, whether commodities, stocks or bonds, if the real estate related losses, including those on derivatives, were taken out of their deep dark moist and smelly hiding places. The only things that stand between banks, governments, large investors and oblivion are accounting gimmicks and perversely cheap credit provided at the behest of the taxpayer. Who, him/herself, need we extrapolate, only has plastic zombie "money" left as well.

But for now, sure, gold, stocks, bonds, everything that's not bolted down and then some, has this zombie money thrown at it.

Still, since this cheap credit is only possible at ultra-low interest rates, and these same interest rates in turn forbid any money-pumping from reaching the real economy, the Fed, and the American economy with it, is stuck in a dead-end street, with a steam roller heading its way.

[vincecate]

Money hoarding is easy to see: bank reserves at the Fed have shot up with a vengeance. This is not because they’re afraid to lend, as we're told, but because they are aware of the losses that they haven't fessed up to, and that are just around the corner (Higgie here - agree, I've said this multiple times).

The majority of the Fed is appointed by the government. The Fed has been given special powers to make money. The profits from the Fed are paid to the government. I think people should view the Fed as part of the government.

If you view the Fed as part of the government, then when the Fed pays banks interest on their "excess reserves" it is really the same as the banks loaning money to the government by buying government debt. The Fed paying interest is really the government paying interest because otherwise the Fed profits would be higher and they pay their profits to the government. The real point of the government borrowing money instead of just printing it is to keep it off the street so it does not cause inflation. The Fed paying interest has the same effect.

The real fun part is that these excess reserves don't get counted as government debt. So it is like the Treasury can spend much more without causing inflation because the Fed is borrowing for it. They are doing this out in the open but because it is new people don't really understand what it means yet.

[Higgenbotham]

Thought I'd post this response to one of Gonzalo Lira's articles. I know he's been mentioned here. I don't agree with every detail of this response, but it's good to see different minds comb over these issues in a similar manner.

http://theautomaticearth.blogspot.com/s ... -results=1

Another thing maybe worth bringing up again. Back in April, during the previous surge of optimism in the stock market, this same sort of discussion was going back and forth. One argument made was that increasing base money would increase stock prices proportionately. My counter was that keeping insolvent banks at the center of the system on lifelines with increased liquidity creates unrecognized black holes that suck money out of the periphery of the system, money that could be used in the real economy. This is how I put it back then in response to what the effects of base money would be, the exact day the stock market made its April high. Of course, I had no idea the market would make its high that day, but it's interesting to look back at this statement. There are some differences because by April QE1 had stopped, and QE2 is being used to purchase treasury notes. At the same time, the weight on the system seems to be greater.

The fact that the system was/is operating at a loss is (my guess anyway) what caused the lack of liquidity to surface back near the end of 2008. And fraud would be part of the equation too. Fraud also generates and hides losses. The situation that turned up near the end of 2008 is really what I'm referring to, not the current state of affairs. After that, the Fed/government flooded the center of the system with liquidity as you've shown and now there's a little sloshing out to the edges. Even some small businesses are getting a few extra orders because a big corporation or university got some stimulus money. But the way I see it is the losses haven't been addressed and the rate of loss is likely increasing, which will begin to eat up the excess liquidity and we'll eventually be right back at the Fall of 2008 (except the government will be at the debt saturation point).

I think the rest of what you're saying is possible but far more likely in my opinion is that the Fed has shored up the center of the system at the expense of the periphery and there is no way of handing money to every small entity that is on the verge of bankruptcy. Probably before the center can begin to inflate its way out, the periphery will begin to collapse and that will spread like dominoes to something that is too big to fail in the sense that panic will ensue once the failure becomes evident. As we've seen, Greece wasn't quite big enough to set that off, but it was close. Or it could be something else like an assassination or a terrorist attack, etc., and that would likely happen because there's been a hell of a lot of discontent generated by the unequal distribution of money. I see too many things that can go wrong in an environment like this before inflation can begin to take hold again. Of course, as I've posted, there are people like John Paulson who are controlling lots of money and who theoretically should know better than me who are now betting the other way. The interesting thing about that in my view is what happens now that most everyone is leaning in that direction if/when they find out that they are wrong.

Here, I said that Greece was not enough to tip the system over. In fact, it was. Could the same be said today about Europe or US muni bonds? By the way, I looked at my money market prospectus this morning to see how much of it is in muni bonds. It's 1.5%, but everyone should know that money market funds normally contain some portion of muni bonds.

[vincecate]

Hussman has a really good article on why he thinks stocks are richly valued at this point and could drop. John, Higgenbothem, and I all think a stock market drop has a much higher than normal chance at this point. Hussman is well worth reading.

http://www.hussmanfunds.com/wmc/wmc101220.htm

[John]

Dear Vince,

> Hussman has a really good article on why he thinks stocks are
> richly valued at this point and could drop. John, Higgenbotham,
> and I all think a stock market drop has a much higher than normal
> chance at this point. Hussman is well worth reading.

> http://www.hussmanfunds.com/wmc/wmc101220.htm

That's an interesting article. Thanks for pointing it out.

It's one of the most alarmist forecasts I've seen from a mainstream
analysts ... and yet he's a lot more optimistic than I am. In
particular, he seems to deny the possibility of a full scale
panic, which I consider to be a certainty.

John

[Higgenbotham]

Hussman has a really good article on why he thinks stocks are richly valued at this point and could drop. John, Higgenbothem, and I all think a stock market drop has a much higher than normal chance at this point. Hussman is well worth reading.

http://www.hussmanfunds.com/wmc/wmc101220.htm

Just 3 of the many great points in this article:

Rather, the collapse in the economy and the surge in unemployment were the direct result of a gaping hole in the U.S. regulatory structure that prevented the rapid restructuring of insolvent non-bank financials.

Instead, we've learned the dangerously misguided notion that some institutions are simply too big to fail. This inevitably creates a situation where reckless misallocation of capital continues to be subsidized at increasing public cost.

The system likely continues to operate at a loss. Americans have not a clue as to what it means to cut costs or operate institutions efficiently.

It will be harder to grow our way out of the Federal debt than investors seem to believe.

Near impossible I would say. Americans will believe the most ridiculous theories - as long as stock prices are going UP!