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The Great 'Flation Debate
We hosted an investor call last week, followed by our presentation at a Private Wealth Summit on The Great ‘flation Debate. Our slides can be accessed below. Bottom line:
QE2 will be successful, but not so much in generating employment or economic growth. Throw enough dollars at the problem, and The Ben Bernanke will eventually be wildly “successful” in crushing the dollar and sending commodity prices into the stratosphere. But like everything else in finance, it works until it doesn’t. And then . . . bad things happen. Bad things happen when a lower dollar fosters inflationary pressures. And as Quantitative Guessing is unlikely to generate economic growth, rising inflation and rising interest rates are likely to become a rally killer sometime next year. Ironically, cyclical Inflation is Deflationary, particularly asset price inflation within the context of an Extended Deleveraging Process. Any cyclical rise in interest rates and inflation is likely to choke off the global “recovery” providing us with another opportunity to position for lower rates in the years ahead. The logic is flawed. Global monetary policy may unleash a speculative dash into natural resources and emerging markets near term. Long term, they are set to slaughter them.
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Quantitatiive Guessing, indeed.
Let the banks fail and stop passing the bad debt to taxpayers and then lets' get on with it. End the Fed.
Print our own money. Iceland went bankrupt in 2008, they took their medicine, and they're coming back.
The Japanese experience is not directly relevant. Japan could afford its public deficit for decades by virtue of the fact that it is a net exporter and its citizens used to buy JGB's in preference to any other investment at arbitrarily low real interest rates.
The US, a net importer, is insolvent and cannot self-fund it's deficit through citizen's savings. We cannot follow the Japanese example. Our deficit can be further funded by either 1) foreign purchases of treasury debt, or 2) Federal reserve purchases (QE3, 4, 5...)
In fact we've done a 180. We're the model for the Japanese. Because of their population's age they will not be able to fund their deficit in 2011 despite a current account surplus. Now they must choose yen-printing or raising rates to attract foreign investors. I believe they'll follow our lead. If I were running the BOJ I would be printing yen and buying gold as quietly as I could.
Both countries are insolvent. The Japanese keep more on their books. We've been more Enron-like, pushing it into off balance sheet entities (FHA, Fannie, Freddie, Federally guaranteed pensions, state government deficits...). How do this insolvencies get resolved? Do they default or devalue the debt sufficiently to make it a reasonable fraction of the GDP? In both cases, having the ability to print their own currency, they will do the latter. In Ireland we see the obverse. Unfortunately they rescued their banks. Now they'll squeeze their citizens into hunger or default if they revolt, because they do not have their own currency. Finally, a use for that European Rapid Reaction Force...
I don't know if QE2 causes core CPI inflation, Chinese food price inflation, or Brazilian wage inflation. I do know that it doesn't matter, because the US will find a way to devalue the dollar to service our debt. If QE2 is not it - they'll find something else.
BINGO!
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by Anonymous
So ridiculously funny, you can’t even make this sh$t up!! Awesome video!
these things happen in cycles, it happened when jimmy carter was in office. it led to the election of ronald regan.
http://covert2.wordpress.com
With all due respect to Ronnie, an environment where:
1) Interest rates start falling from record highs
2) Prudhoe Bay and the North Sea coming on line while world oil demand is reduced thereby freeing up discretionary income
3) Full blown Keynsian stimulus masquerading as "supply side"
is sure to provide one hell of a boost to the economy. Even if Ronnies ghost was elected in 2008 there is little he *would* have or *could* have done to improve things.
1) is not possible
2) is all but unlikely since those oil fields had been known for 5-10 years and were being developed....
Not pissing on Ronnie, but lets agree what were the driving forces in his first term.
debtinputflation?
hyper-stagflation?
So much spilled ink. So little thoughtful analysis.
I would like to believe in inflation, and I will, as soon as someone can show me how middle class wages will begin to rise.
You are without clue. This may help.
http://fofoa.blogspot.com/
How did it happen in Argentina?
Or in Russia?
Or in Mexico?
Or in Brazil (THREE TIMES in the last half-century!)?
Or in Weimar Germany?
Or in Zimbabwe?
Or in the literally hundreds of other cases of runaway inflation?
Trying to claim that "inflation can't happen because wages can't rise" is flatly putting the cart before the horse. It happens, and has happened, anyway! And if you believe that rising wages are the root source of "inflation" (which should really be called "currency depreciation" instead), then you are stuck in the simplistic and stale, not to mention utterly discredited, Keynesian talking points of the 1970s.
I think you've got it, Akak. This 'flation conundrum has been messing with my head for months now but it's starting to clear up in just the fashion that you describe.
It will be 'inflation' but it will not be the same inflation as was experienced in the 1970s - this is not your father's inflation.
This inflation will not be produced by rising incomes, nor are rising incomes required. This inflation is all about currency debasement.
Tax cuts will be extended. Unemployment benefits will be extended. Entitlement programs will be expanded. Government budgets and deficits will be expanded. More treasuries will be issued by governments. More treasuries will be purchased by central banks to keep interest rates down.
These are the cobblestones that pave the road to currency debasement.
Jim Rogers is right: consumables necessary for survival become more valuable relative to the fiat currencies used to purchase them.
The USD, in its position as world reserve currency and currency of international trade, has the furthest to fall.
We are not liked in the international community. We have pushed our weight around for far too long. We have been arrogant and selfish. We are universally resented and will untimately find few friends out there.
Other currencies will be debased; the USD has the chance of being utterly debauched and repudiated when the Russians, Chinese and Central and South Americans figure out a way to live without us. And they will.
Long Agriculture. Long Precious Metals. Short USD.
I didn't say wages can't rise. I just don't see anything pushing in that direction... Quite the opposite to date in real terms, since the 1970s.
Amen! Sure the banks are flushing commodities....but outside of precious metals demand continues to collapse. Bubble or not remains to be seen....eventually supply/demand will hold sway.
Meanwhile houses in my neighborhood fell 5% last month....couple businesses closed up shop in our highrise building....unemployment "debt" keeps growing!
In reality, there is no honest or meaningful debate here. Chronically overspending governments, going into exponentially rising debt, issuing purely fiat currencies, have always, ALWAYS ended up debasing their currency --- always! All talk of putative "deflation" under the current fiat monetary regime is nothing but bluster and propaganda from a malevolent and increasingly sociopathic oligarchy and their dissembling, disingenuous and/or gullible lackies.
One can breezily and sloppily define a falling real estate or equities market as being in "deflation", but I am 100% certain (a la the Ben Bernank) that what the vast majority of people are going to experience in the years going forward, as indeed they are experiencing today, is a rising cost of living and a falling standard of living, NOT the opposite.
MERS = Death by 1,000 slashes. Banks should get ready for very fast mark-to-market short sales (i.e. 22 cents on the dollar) as lawsuits like these (link below) challenging MERS start to gain steam. The shit is hitting the wind-powered turbines as all the bailouts and quant easing are no match for true price discovery and the free capital markets.
http://www.scribd.com/doc/44670159/Motion-re-MERS-assignment-no-signing-authority
always another govt trick instead of the truth, always another deception just around the corner. the truth can't be suppressed forever.
http://covert2.wordpress.com
This presentation is a piece of shit cut and paste job, using everyone else's work. I didn't see a single original thought in the whole thing.
With respect to cut & past jobs though....I thought it was a pretty good collection that told the story!