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Gonzalo Lira's Redux On Signs Of An Upcoming Hyperinflation
- Ben Bernanke
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Submitted by Gonzalo Lira
Signs Hyperinflation Is Arriving
This post is gonna be short and sweet—and scary:
Back in late August, I argued that hyperinflation would be triggered by a run on Treasury bonds. I described how such a run might happen, and argued that if Treasuries were no longer considered safe, then commodities would become the store of value.
Such a run on commodities, I further argued, would inevitably lead to price increases and a rise in the Consumer Price Index, which would initially be interpreted by the Federal Reserve, the Federal government, as well as the commentariat, as a good thing: A sign that “the economy is recovering”, a sign that “normalcy” was returning.
I argued that—far from being “a sign of recovery”—rising CPI would be the sign that things were about to get ugly.
I concluded that, like the stagflation of ‘79, inflation would rise to the double digits relatively quickly. However, unlike in 1980, when Paul Volcker raised interest rates severely in order to halt inflation, in today’s weakened macro-economic environment, that remedy is simply not available to Ben Bernanke.
Therefore, I predicted that inflation would spiral out of control, and turn into hyperinflation of the U.S. dollar.
A lot of people claimed I was on drugs when I wrote this.
Now? Not so much.
In my initial argument, I was sure that there would come a moment when Treasury bond holders would realize that they are the New & Improved Toxic Asset—as everyone knows, there is no way the U.S. Federal government can pay the outstanding debt it has: It’s simply too big.
So I assumed that, when the market collectively realized this, there would be a panic in Treasuries. This panic, of course, would lead to the spike in commodities.
However, I am no longer certain if there will ever be such a panic in Treasuries. Backstop Benny has been so adroit at propping up Treasuries and keeping their yields low, the Stealth Monetization has been so effective, the TBTF banks’ arbitrage trade between the Fed’s liquidity windows and Treasury bond yields has been so lucrative, and the bond market itself is so aware that Bernanke will do anything to protect and backstop Treasuries, that I no longer think that there will necessarily be such a panic.
But that doesn’t mean that the second part of my thesis—commodities rising, which will trigger inflation, which will devolve into hyperinflation—will not occur.
In fact, it is occurring.
The two key commodities that have been rising as of late are oil and grains, specifically wheat, corn and livestock feed. The BLS report on Producer Price Index of commodities is here.
Grains as a class have risen over 33% year-over-year. Refined oil products have risen just shy of 13%, with home heating oil rising 18% year-over-year. In other words: Food, gasoline and heating oil have risen by double digits since 2009. And the 2010-‘11 winter in the northern hemisphere is approaching.
A friend of mine, SB, a commodities trader, pointed out to me that big producers are hedged against rising commodities prices. As he put it to me in a private e-mail, “We sometimes forget that the commodity markets aren’t solely speculative. Most futures contracts are bought by companies who use those commodities in their products, and are thus hedging their costs to produce those products.”
Very true: But SB also pointed out that, hedged or not, the lag time between agricultural commodities and the markets is about six-to-nine months, on average. So he thought that the rise in grains, which really took off in June–July, would hit the supermarket shelves in January–March.
He also pointed out that, with higher commodity costs and lower consumption, companies are going to be between the Devil and the deep blue sea. My own take is, if you can’t get more customers, then you’re just gonna have to charge more from the ones you got.
Coupled to these price increases is the ongoing Currency War: The U.S.—contrary to Secretary Timothy Geithner’s statements—is trying to debase the dollar, so as to make U.S. exports more attractive to foreign consumers. This has created strains with China, Europe and the emerging markets.
A beggar-thy-neighbor monetary policy works for small countries getting out of a hole of their own making: It doesn’t work for the world’s largest single economy with the world’s reserve currency, in the middle of a Global Depression.
On the contrary, it creates a backlash; the ongoing tiff over rare-earth minerals with China is just the beginning. This could easily be exacerbated by clumsy politicking, and turn into a full-on trade war.
What’s so bad with a trade war, you ask? Why nothing, not a thing—if you want to pay through the nose for imported goods. If you enjoy paying 10, 20, 30% more for imported goods—then hey, let’s just stick it to them China-men! They’re still Commies, after all!
Furthermore, as regards the Federal Reserve policy, the upcoming Quantitative Easing 2, and the actions of its chairman, Ben Bernanke: There is an increasing sense in the financial markets that Backstop Benny and his Lollipop Gang don’t have the foggiest clue about what they’re doing.
Consider:
Bruce Krasting just yesterday wrote a very on-the-money précis of the trial balloons the Fed is floating, as regards to QE2: Basically, Bernanke through his WSJ mouthpiece said that the Fed was going to go for a cautious, incrementalist approach, vis-à-vis QE2: “A couple of hundred billion at a time”. You know: “Just the tip—just to see how it feels.”
But then on the other hand, also just yesterday, Tyler Durden at Zero Hedge had a justifiable freak-out over the NY Fed asking Primary Dealers for their thoughts on the size of QE2. According to Bloomberg, the NY Fed was asking the dealers how big they thought QE2 would be, and how big they thought it ought be: $250 billion? $500 billion? A trillion? A trillion every six months? (Or as Tyler pointed out, $2 trillion for 2011.)
That’s like asking a bunch of junkies how much smack they want for the upcoming year—half a kilo? A full kilo? Two kilos?
What the hell you think the junkies are gonna say?
Between BK’s clear reading of the tea leaves coming from the Wall Street Journal, and TD’s also very clear reading of the tea leaves by way of Bloomberg, you’re getting a seriously contradictory message: The Fed is going to lightly tap-tap-tap liquidity into the markets—just a little—just a few hundred billion dollars at a time—
—while at the same time, the Fed is saying to the Primary Dealers, “We’re gonna make you guys happy-happy-happy with a righteously sized QE2!”
The contradictory messages don’t pacify the financial markets—on the contrary, they make the markets simultaneously contemptuous of Bernanke and the Fed, while very frightened as to what they will ultimately do.
What happens when the financial markets don’t really know what the central bank is going to do, and suspect that the central bankers themselves aren’t too clear either?
Guess.
So to sum up, we have:
• Rising commodity prices, the effects of which (because of hedging) will be felt most severely in the period January–March of 2011.
• A beggar-thy-neighbor race-to-the-bottom Currency War, that might well devolve into a Trade War, which would force up prices on imported goods.
• A Federal Reserve that does not seem to know what it is doing, as regards another round of Quantitative Easing, which is making the financial markets very nervous—nervous about the Fed’s ultimate responsibility, which is safeguarding the U.S. dollar.
• A U.S. economy that is weak to the point of collapse, where not even 0.25% interest rates are sparking investment and growth—and which therefore prohibits the Fed from raising interest rates, if need be.
• A U.S. fiscal deficit which is close to 10% of GDP annually, and which is therefore unsustainable—especially considering that the total U.S. fiscal debt is well over 100% of GDP.
These factors all point to one and the same thing:
An imminent currency collapse.
Therefore, I am confident in predicting the following sequence of events:
• By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%.
• By July of 2011, annualized CPI will be no less than 8% annualized.
• By October of 2011, annualized CPI will have crossed 10%.
• By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%.
After that, CPI will rapidly increase, much like it did in 1980.
What the mainstream commentariat will make of all this will be really something: When CPI reaches 5% by the winter of 2011, pundits and economists and the Fed and the Obama administration will all say the same thing: “Happy days are here again! People are spending! The economy is back on track!”
However, by the late spring, early summer of 2011, people will realize what’s going on—and the Federal Reserve will initially be unwilling to drastically raise interest rates so as to quell inflation.
Actually, the Fed won’t be able to raise rates, at least not like Volcker did back in 1980: The U.S. economy will be too weak, and the Federal government’s balance sheet will be too distressed, with it’s $1.5 trillion deficit. So at first, the Fed will have to let the rising inflation rate slide, and keep trying hard to explain it away as “a sign of a recovering economy”.
Once the Fed realizes that the rising CPI is not a sign of a reignited economy, but rather a sign of the collapsing dollar, they will pursue a puerile “inflation fighting” scheme of incremental interest rate hikes—much like G. William Miller, the Chairman of the Fed from January of ‘78 to August of ‘79, pursued so unsuccessfully.
2012 will be the bad year: I predict that hyperinflation’s tipping point will be no later than the first quarter of 2012. From there, it will accelerate. By the end of 2012, I would not be surprised if the CPI for the year averaged 30%.
By that point, the rest of the economy—unemployment, GDP, all the rest of it—will be in the toilet. By that point, the rest of the economy will no longer matter: The collapsing dollar will make 2012 the really really bad year of our Global Depression—which is actually kind of funny.
It’s funny because, as you know, I am a conservative Catholic: I of course put absolutely no stock in the ridiculous notion that “The Mayans predicted our civilization’s collapse in 2012!”—that’s all rubbish, as far as I’m concerned.
It’s just one of those cosmic jokes that 2012 will turn out to be the year the dollar collapses, and the larger world economies go down the tubes.
As cosmic jokes go, all I’ve got to say is this:
Good one, God.
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meta-stable.
Very nice analogy.
ihate U
I like that you correctly bring thermodynamics into the equation but you must remember. Money itself is only a physical representation of the energy exchange within an economy. Each monetary units real value (purchasing power) is determined by the energy claim it represents (a share in the energy utilized in production at any given time within an economy) and the monetary units scarcity relative to this energy (both credit and base monetary units). It is in the production (and thus consumption) of goods and services that actually required the utilization of energy surplus to produce (have embodied energy value thus monetary value) that brings "heat" to the worker/consumer (real) economy.
Economics in a profit system of energy exchange involves two seperate bodies that are in contact and thus exchange work energy (heat). The worker/consumer body and the owner of the means of production body. The WC body sells its surplus energy (labor) to the owner of the means of production (OMP). For a monetary (energy) profit to be made by the OMP, the WC exchanges its labor/energy input at an NET ENERGY LOSS. The difference between the workers energy input (that is embodied into the goods/services manufactured) and the energy compensation they receive (monetary income) becomes an NET ENERGY GAIN (monetary profit) to the OMP.
And/or.
The WC body receives equal energy value exchange for its surplus energy input it embodied into the production of the goods/services but the goods/services produced are then sold on the market at an energy exchange rate (nominal) above the embodied energy. Again, resulting in a net energy gain (profit) by the OMP. When we exchange goods and services in escess of the energy embodied, we are in effect creating credit. Credit money being a false claimthe scarce real energy consumed by an economy at any one time. So as the worker is also the consumer this can only mean one thing.
THE SUM NOMINAL ENERGY VALUE OF ALL GOODS AND SERVICES AVAILABLE TO AN ECONOMY AT ANY TIME ALWAYS EXCEEDS THE SUM ENERGY INCOME OF THE WORKER/CONSUMER! Well, in a functioning (producing profit) economy anyway.
An energy profit is always extracted from the WC body (real economy). Thus, the WC body is always in a state of cooling as it transfers its wealth (heat/energy) to the OMP body. Thus this requires the constant steady flow of new energy into the WC body in order to maintain the state of dis equilibrium that must exist to produce a profit (an energy flow)
But fuck it, lets complicate this further.
The OMP body further reinvests its potenetial energy (money) into producing greater net energy profits. This is done via the utilization of technology/information to produce greater energy efficiency (thus greater monetary profit) in the production of goods and services (capitalism) above that of human labor. Now as the labor market is also the consumer of goods/services produced but its energy income is decreasing, well? Do i need say more? The profit system is and always has been a giant energy ponzi. As growth is dependent upon either consuming more energy or using each unit of energy with greater work efficiency (thus consuming more energy), the ponzi collapses. This is THE CRUX OF OUR GLOBAL ECONOMIC CRISIS TODAY. Unless we can produce surplus energy it ever increasing rates (higher net energy gains/EROEI lowers real market value), the WC body begins to cool (as it takes energy income to produce energy for market). And when the WC body cools, so doess the OMP.
Classic thermodynamics and its why falling rates of global (we live in a global economy, not national ones) net energy gains from the production of the resources we utilize to gain work energy surplus is death to the profit monetary system. Its happening today and cannot be stopped, entropy always wins.
Haha,So I'll get back to my original point. Unless mainstreet gets its hands on the flow of this new money (potential energy, it must first be spent on real goods that are consumed allowing new production and energy to be brought into the system), it is adding no energy to the system. Speculative investment into tangible assets by those that have access to the cash/credit spigot only drive price inflation IN EXCESS OF REAL MARKET DEMAND, and thus the real value, of such commodities higher and without a relative increase in the supply of monetary units to the end consumer, this reinforces the deflationary forces (WC body is cooling under the weight of higher non-discretionary prices). Economics 101. Real market values must always reflect an equilibrium between supply and demand. Price inflation is not demand pull monetary inflation. Such price increases only seek to slow demand for the end product, its is a complete contradiction of economics and is the definition of bubble economics. But thats how all speculative markets work, upon positive feedback. The "Prices are rising, must be inflation so I'll by in too" only seeks to self reinforce thispositive feedback loop all the way up to the point when final demand slows and the bubble pops (enter fear/contagion mode).
Unless real worker/consumer incomes are rising relative to real prices, hold onto that cash buddy, until cash begins falling from the sky anyway. What most people do not understand is that both deflation and inflation are a loss in real purchasing power (energy value represented). Its just that credit units are always destroyed first, thus as monetary units scarcity increases, credits energy claim is transferred upon base money. If all credit was destroyed but energy consumption within an economy continues to fall (via continued destruction of goods/service production), monetary units lose continue to lose their energy claim. This is the mechanism by which deflation becomes hyperinflation (a loss of trust in value as more monetary units are chasing fewer goods).
Our global economy is nothing but an extremely complicated (over)production machine and a very inefficient one at that. Just like internal combustion engines, our global production machine is more a giant heater than anything else (but we do not have a radiator to cool it!). A nations real monetary forex value reflects the energy consumption per capita. Of course, although other factors (such as energy efficiency) do contribute, the US dollar (minus credit) is by far the strongest currency and as the US ability to consume higher per capita energy will remain, I believe the dollar will remain king for some time yet. Its the Bankers monopoly money and its the only power they have, is it wise to believe they are really going to let that go? To confuse credit/debt with cash units is foolish, IMHO. If energy consumption is falling in any nation that exchanges goods of value via the profit system (that requires constant and infinite growth), it is deflating/cooling. Period ;-)
Oh, and remember. A national government defaulting upon its debt liabilities does not make its central bank liable for the creditors losses. A nation can fall to pieces but its central banking cartel can still remain and so, its base money remain as legal tender.
And not one 1 person in 1,000 will realise that the Fed is the cause of rising prices.
Sadly, a lady check out clerk at the market today said a lot of senior citizens are shoplifting food. Prices are blasting higher in staple foods. She said when its an able bodied person she stops the shop lifting but when its an elderly person she looks the other way...
I took a walk thru Costco yesterday, just to pass the time and witness the spectacle of mass consumption at its finest. Of course, being Saturday, they had a dozen or more sampling stations set up (and I visited all of 'em. Burp.) I was shocked by the age of the servers. Some had to be near 80! None were younger than 60. I thought it was a telling indication of the state of things here in the land of opportunity.
I saw the same thing recently at my local Costco. At many of these stations, it seems that they ask the servers to repeat some kind of brief message concerning what it is they're serving, what the cost is and where you can find it in the store. One old biddy appeared to be suffering from early dementia and could barely mumble anything intelligible at all about what she was doing. She either couldn't keep it straight in her head, or was so exhausted from standing and serving that she couldn't focus. It was very, very sad, and not a little bit shocking.
I always enjoy Gonzolas posts, even if I don't 100% agree with them. He is clear and logical. I thought the phrase “Just the tip—just to see how it feels.” was particularly inspired.
I think the day of reckoning for Treasuries will come, but it may not come first in this shitstorm. I have been thinking lately about the flywheel effect of society - how quickly the machine can break down, and what things will keep going regardless. We are all guessing.
Saul, I like the flywheel analogy. Going fine until the first little wobble at 180,000 rpm.
Then, boooooom!
I think we will see the wheel fly apart. Best to stay out of the way.
ORI
http://aadivaahan.wordpress.com
May be your predictions are going to be correct ... What is already in hyperinflation mode is the use of the term. So, Gonzalo, how do you define hyperinflation ? Is it 30% per annum or more like 30% a DAY ?
Hm, as an Argie, if you tell me about a "conservative Catholic" from Chile I would think about a Pinochet Supporter (even the church asked for him to be released when caught in England), someone more or less aligned to the Chicago School (Chicago Boys where behind the Allende coup - aristochratic elitism), someone who sees the sickle and hammer even in the soup; and someone who even Catholic wouldn't bat an eye for the dissappearance of over 5000 people because of "terrorism" (during those days the keyword was "communists") charges.
Now I understand why that last Gonzalo Lira interview on Max Keiser's "On the Edge" sounded so weird...
Every cloud has a silver lining... thats what my sweet old granny used to tell me in days long gone. Never really took it seriously til I had an amazing epiphany: You guys are the ones who are gonna be completely fucked, not me :) I don't have to think about horse shit like buying bulk foods and weapons! HAHAHA! It's good not bein you!
However, for all of me new friends here at Zero Hedge, I have an offer for you, so we can both make a little scratch off your misfortune:
Rich Chinkies are crazy at the thought of fucking hot blond American chicks. Once the shit hits the fan, hows about we set up "massage parlors" all down the west coast. I can definately put together some sex tours, especially when the cost of eating a mediocre hotpot dinner, will probably be equivalent to 2 hrs. with some american hottie ;)
Granny was right! What a beautiful world!
My mistake- I wont even have to take rich Chinkies at that point... as even the most vile, dirty peasant will be like millionaires in comparison to americans. Happy days are truly on the way :)Some guy on Asia times wrote an article entitled: Its not the end of the, just the end of you
Too fucking clever! HAHAHA!!!! I get it now... I really get it!
I take back all the crass shit I've always written about american christians. Now, I'm a believer! Jesus truly loves me!!! :)
One of Gonzalo's most important contributions to the endless rant of the blog-o-sphere is to make it clear that inflation and hyper-inflation are totally different animals. Specifically, hyper inflation is not just inflation on steroids.
Basically, inflation happens when people borrow money to buy things. In this case they believe that paying the money back is 'no big deal', or that the thing they are buying can be sold at a higher price in the near future. The dot com and housing bubbles were exactly this kind of inflation, although the MSM doesn't describe it that way. In other words, inflation is usually is really about an increase in money and credit, which leads to an increase in prices.
During hyper-inflation things, especially credit, are different. While asset prices are going up, that's really because the value of money is going down. Hyper-inflation is a loss of confidence in the value of a currency. Instead of people borrowing money to buy stuff, they are getting rid of cash by buying valuable assets in an attempt to preserve their wealth. Of course, these value preserving assets immediately becomes scarce and start going up in price dramatically. Nobody can borrow money to do this; lenders are getting wiped out as debts get paid back in worthless currency. Besides, nobody wants money borrowed or otherwise, they want assets. The whole unfolds very quickly and leads to the issuance of a new currency.
There are numerous examples of hyper-inflation: Argentina, Weimar, Zimbabwe etc. But they all are one currency collapsing in a world of stable ones. I fear what we are heading for will be very different. We are talking about the dollar, the world's reserve currency, collapsing. This will be global in scale.
The reserve currency works like this: when Bolivia needs to buy rice from Vietnam, they pay in dollars. Typically every foreign bank has a dollar account in a US bank where the transfer actually takes place. For businessmen without a US bank account, they simply have their bank do the conversion and transfer for them. The kicker is that oil is always purchased with dollars. Nearly every oil importing country in the world needs more oil than they can trade for. So they all need dollars to buy oil. But what happens to that oil? It gets burned up, it's gone. And since next month you need more oil, you'll also need more dollars. Oil exporters spend some of their dollars, but a lot end up sitting in savings accounts in US banks. So we need a constant stream of new dollars pumped into the international system to keep the oil flowing. My point is that for over 40 years the world has been going through oil and dollars, creating an ever greater pile of dollars. The pile is getting pretty big.
Now consider what happens when BMW sells 10,000 cars in the USA. They get paid in dollars which they put into an American bank account. They can convert some of it to Euros, but most of it stays here. So when they need money back home, they put their dollar denominated assets up as collateral, and borrow Euros to buy stuff in Germany. You see that for every foreign held dollar, there is some amount of foreign money "mirroring" the dollars. And since dollars a required for all trade, not just with the United States, there is an enormous amount of dollar denominated claims. Worse, they are multiple claims on a single real asset. This suggests the entire system is held up by dollar denominated claims. Finally, when international bankers start writing derivatives of these claims, it goes into over-drive, creating untold numbers of dollar denominated claims. As FOFOA says, the hyper-inflation has already occurred, far too many dollars have been borrowed or conjured into existence, and we're all just waiting for the rush to the exits. The problem is there is no door.
My guess is if the dollar collapses, the entire global financial system will come down with it. Unlike other occurrences of hyper-inflation where there was a healthy world to trade with, a safe haven to run to, this time there will be nothing. Everybody is in the same boat. One of the odd things is that all currencies will hyper-inflate, so it will be hard to tell what's happening. Your clue will be value preserving assets going up in all currencies, and that's where gold becomes the ultimate barometer of what's going on. If you can grow your own food, you'll be less wealthy, but probably be fine. But if you can't grow your own food, whether you're a country or an individual, gold might be the only money that will still purchase food.
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Gonzalo, in less than three months you discredited yourself by calling commentors assholes and dicks, flip flopping on bond bubbles, going into the fortune-telling business and showing a general lack of economic or financial understanding of the macro trend as well as the micro trade, saying you had friends in the business
Chile's hyperinflation had less to do with America's economic outlook and possibly more to do with Marxist Allende Obamanomics and General Pinochet Bush war crimes supported by Operation Condor that you downplayed. Privatization by the Chicago Boys gave Chile a better pension system than the US, one based on the NYSE
Why TD repeatedly published drivel like yours, Leo's and MHFT's on ZH is beyond me
Maybe some personal or Company IOUs
Maybe the drive for content exceeded quality
Maybe some people think bad news sells more eyeballs
Maybe ZH a disinformation site to keep people on the wrong side of markets
GL, in any event, good luck with your movie and novel career
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Hey Gonzalo,
"My objection to this, in just plain ol’ regular words? I think this MMT theory is full of shit, propagated by fucking idiots. ... (I’m going to write a detailed take-down of these MMT fools in a couple of weeks. But for now, let me limit myself to just a couple of paragraphs.) These irresponsible peddlers of MMT claptrap—because that’s what they are, irresponsible buffoons for peddling such irresponsible, arrogant bullshit—simply do not understand what money is: It is a medium of exchange. "
- Source: Guest Post: A Termite-Riddled House: Treasury Bonds - Sept 1 2010
It's 9 weeks later, did you forget this?