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Guest Post: How Hyperinflation Will Happen
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Submitted by Gonzalo Lira
How Hyperinflation Will Happen
Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.
To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.
But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.
For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.
The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.
But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.
Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.
Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?
Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.
Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.
A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.
This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.
But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.
Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.
Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.
Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.
This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.
But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)
It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—
—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.
In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.
So this is how hyperinflation will happen:
One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.
This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.
It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.
The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.
However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.
The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.
But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.
So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.
Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.
Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.
So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”
Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.
Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.
The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?
Commodities.
By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?
Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.
It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)
Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.
If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?
So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.
If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.
When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.
So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.
This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.
This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.
Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).
Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?
Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.
Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?
In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .
(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)
In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.
“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”
That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.
That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.
The question for us now—ad portas to this hyperinflationary event—is, what to do?
Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.
The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.
Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.
Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.
I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.
What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.
I think we’re going to have hyperinflation. I hope I have managed to explain why.
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Wow, and you call him a troll...
He made valid arguments. What did you do? Insult him?
I don't get how somebody that makes an actual argument can be a troll in your eyes, when you just show up every now and then to insult people, and never make arguments on your own behalf.
You can't refute what he, or anybody else says. You just insult them, and think that insulting other people makes THEM trolls.
He, like you, refuses to learn. Even a simple lesson, like "where the money to pay interest comes from" escapes him (the answer, under an honest money system, is consumer spending, otherwise, it is government spending+consumer spending).
Saying the same thing over and over in the face of very simple refutations that are logical, combined with insults and obstinate failure to address valid criticisms does, in fact, make you a troll, troll.
How are you going to teach something if you don't know anything?
"where the money to pay interest comes from"
It's called INFLATION. Companies raise their prices, which increases their revenues. As their revenues increase, they have the money to offset interest payments. It doesn't matter where the money comes from. It can come from the consumer, it can come from the government, or it can come from straight money printing.
That's why you can't say that we'll EVER default on any debt. We can tap a keyboard and make a trillion dollars tomorrow.
Seriously. Why do you even think that it's your job to teach anybody, when you obviously do not know what you are talking about?
What are your qualifications to teach? Three hours of internet posting a day?
You think that you're going to teach people things, but you don't even know what you're talking about.
You're right. None of us know what we are talking about. Our minds are welded closed, and we will never learn. So why stick around. Just get out. Nothing is holding you here. Go.
"where the money to pay interest comes from"
The money to pay back principle + interest comes from (ever) increasing levels of debt. This is the fatal flaw in our monetary system.. the reason that deflation is so dreaded by our monetary masters... If you look at, for instance, Denninger's stacked chart of total debt, and see how it headed up steadily since the early 1950's, only to roll over in the last two years (even with all the printed from thin air debt money)... you see the sickness in our monetary system quite clearly.
How will this resolve itself is the question?
A quote from the great work by Reinhart and Rogoff (This Time is Different) ;
" Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provoke a crisis of confidence that pushes it off."
I think author's hypothetical HI scenario is fairly convincing. I, like some of the other posters, question the degree to which the TBTF banks would actually turn on master by dumping Gov't debt... but I know for sure that Bill Gross would do it in a second, so I am not so sure the details matter.
What does Tyler say? Oh yeah: "WITHOUT COMMENT"
http://www.youtube.com/watch?v=VLnWf1sQkjY
That comment may be in regards to repeated references to body bags.
He is not talking wrinkles and creme. And Mako always says its over. Rare he mentions more than that. Each time i see the name MAKO" i see coffins and burning paper money in my imagination. I fail to be afraid and am not certain if my survival instinct died without me
or i fail to be afraid because i am prepared. Food ,Friends, silver etc.
No problem, with the ability to monetize all outstanding obligation of the US gov't, the Fed just prints and buys.
Flawed assumption...
Oh Really? How so?...
Wake up call..they have already have begun. Did you like the recent rally in the T curve? How do you think it happened...with China a net seller.
This is a game that has been played out over history time and agian. Do a little research - look up "Green back" and "Continental".
Thank you... clear, sound, thoughful... refreshing change from the typical miasma...
Re Do a little research
Part is not all Bliss.
Last thing Fed owners want is hyperinflation or default.
Lots of mortgages and treasuries still on Fed Bank books as debt assets after GSE taxpayer agencies and securitization into global pension plans tapped out.
BTW, ATG post two down re Greenbacks and Continentals.
Condescension does not become you...
The author also indicates how abrupt the change becomes when it occurs. Notice in the described scenario how deflation leads to hyper inflation that leads to deflation in a very short time span. No one thinks deflation or inflation when the treasury market crashes! What traders consult economists when the FED becomes the buyer of last and only resort?
The events or transactions GL describes are more fundamental as well as "actual", than the never ending and always backward looking definitional refinement of inflation or deflation. The definitional debates regarding these definitions actually obfuscates rather than elucidate economics and hides what will be trading phenomena, a system reset and a complete revaluation of risk.
Trust it to the more dogmatic and bellicose among the ZH community to jump on those words rather than the flow of events. In fact I think those words, at the present time are counter productive to understanding economics.
In the current environment, the riskless does not take on risk in increments, it does not "accrue" or grow, when it turns it does so with all the force that formerly validated its riskless character.
I think that is the real point.
Well done GL
Actually, Continentals and Greenbacks were redeemed in full by legal tender, including, gold, silver, and dollars at taxpayer expense for Treasury Secretary cronies who scooped them up at pennies on the dollar, resulting in the Hamilton Whiskey Tax Rebellion, which tax was repealed by Jefferson. There are people still waiting for Uncle Sam to redeem their Gold Certificates in legal tender species, since FDR packed the Supreme Court and violated the Constitution gold and silver legal contract and tender provisions...
http://en.wikipedia.org/wiki/Early_American_currency
http://www.answers.com/topic/hamilton-s-economic-policies
http://en.wikipedia.org/wiki/Whiskey_Rebellion
http://en.wikipedia.org/wiki/United_States_Note
http://en.wikipedia.org/wiki/Gold_certificate
THIS is a post! Reference historical precedence, backed with detailed links (albeit Wikipedia, but letting that go), and you didn't call anyone an ignorant slut! Mako and JB could stand a semester of study at ATG University.
+1 Gigawatt
Thanks Bro.
Also enjoy AEP in your neck of the woods.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/
"Hyperinflation is the rapid increase of the money supply."
What do you call a situation where people lose confidence in your currency and start to dump it in order to buy real assets?
You seem rigidly glued to the definitions in your second sentence which though true are only basic first meanings of the words. You're stuck in an intellectual rut and it's not even deep.
There is no rigid definition, either it's the definition or it's not.... you can call a cat a dog all you want, a dog is still a dog and a cat is a cat. I am sorry but those are clearly NOT the definition of inflation nor deflation.
"What do you call a situation where people lose confidence in your currency and start to dump it in order to buy real assets?"
Lose of credit quality, but it has nothing to do with an increase in the supply... the supply is in fact going down and the system can't run on a decreasing money supply. It's game over.
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4] -wiki
And you were saying?
You must have taken an Econ class at some point, so obviously you know everything as it was properly fed to you...
Open your eyes for once and think outside the box, Mako is absolutely correct.
Inflation is an increase in the money supply, deflation is a decrease in the money supply. Nothing else.
Maybe you should not assume things about people and make yourself look like an ass. I referenced wikipedia, and although it is not the highest authority on what is what it is peer reviewed more than any other source. But I digress, inflation is an increase of the money supply, however its effects are always an increase in prices. You are concentrating on the definition of the what, while the OP is talking about the how. To say that inflation is not coupled with in increase in prices is asinine.
Further more i highly suspect your ability to even comprehend how prices rise, I very much doubt you could give me more than two reasons why prices rise.
Here we go again.
Another poster makes an argument that is different than yours.
The reply?
"You're an ass because I read something different than you! You're too dumb to comprehend anything, because I read wikipedia!"
If you can't understand that the what is connected to the how, then there's no point in even arguing with you.
I should just say "you're an ass, and I'm right." There. I just made the best argument on this site today from you, akak, colonel sanders, and that taraxias douche.
You fail at reading.
http://www.youtube.com/watch?v=VLnWf1sQkjY
If we're all douches, why do you insist in rolling around with us? You're getting douchwater on your face, JB. Might want to go wash up. Once you're done, just never return, and you'll never have to see me again.
Master Bater's playing hero again....
Lose of credit quality, but it has nothing to do with an increase in the supply...
I know you're going by everything based on the money supply but it's the whether the prices of necessities inflate or deflate is what really matters. When loss of credit quality leads to paying double the price for gas and food are you still going to call it deflation if the money supply is shrinking or stagnant?
That's his whole point. Money is getting destroyed and in short supply. Dollar is getting more valuable. Why would something in short supply loses credit quality?
Money is not getting destroyed, it is piling up in the treasury market. And when the money piles out of it, there will be a realized increase in supply and the treasury will lose all credit quality.
Oh yes it is. What do you think happens when the banks foreclose on a house? What do you think happens when a house goes under water? A very large amount of money got destroyed and a very large amount is following it.
Mojo, That guy is an all time idiot, he has no idea how "money" comes into existence in the system that exist today.
All he had to do is read "Modern Money Mechanics" by the Federal Reserve instead he is down to stupid Peter Schiffism that has not a clue as to how money gets created or destroyed.
There you go with your childish crush on Peter Schiff again. No-one even brought him up. You're like a third grader who insults some girl because he likes her. Can't deal with that latent homosexuality, or what?
I mean, you never insult Ludwig von Mises. I never hear about how stupid Hayak was. You never talk about how Menger was an idiot. Why? They are all cut from the same cloth. Why do you focus on Schiff so much?
They change the FASB rules, thats what happens.
JFC, you are ALL IDIOTS.
The money does not get destroyed.
The money already paid for the house and paid the builders and got redeposited elsewhere. What got destroyed was the value of the debt obligation in real assets.
THAT is inflation, actually. Debt loses its moneyness that way. Defaulted debts stop fetching as many real things as they used to.
Everyone who doesn't understand the mechanics of monetary creation and even what inflation or deflation are should STFU, seriously.
That includes Mako, who speaks as if monetarism is an axiom. IT'S NOT. in fact, the QTM is the most ridiculous piece of rubbish in history.
That's the internet for you. Imagine what it's going to be like in 5 years with folks not understanding the difference between opinion and facts that cannot be denied but routinely are?
One subject here has garnered 631 comments in a few hours. Who is going to read them all? I'm not certain that the ability to think superficially is anything but a de-evolutionary setback.
In short supply!? It's the world reserve currency - When confidence in it's lost and people start dumping it, it will all start to fly home, which is the fed's worst nightmare though just one of many.
We just went thru a credit bubble busting. When a loan default, dollars got wiped out. Therefore money supply is reduced. The demand for dollars/treasury is up, not down.
ok Mojo, lets say you borrow $400K from the bank to buy a house from me. Then you default on that mortgage. Bank forecloses, or writes off the loan. So you think "dollars got wiped out" in that scenerio?
Well, tell me this? What happened to that $400K you paid TO ME when you bought my house? Was it destroyed? Not a chance in hell. It's still in my greedly hands if I haven't already spent it.
For every buyer there is a seller, this MONEY IS DESTROYED is just a bunch of pretcherite-propaganda.
Most houses are not financed by cash. You get the money from a bank. Take your example of a $400K house, nothing down for sake of argument. You go to a bank. The bank take $40K from the reserve and create $360K from nothing for your loan. That's the fractional banking system.
Now your house is worth only $300K and bank foreclose. What happens? The bank has to eat $100K of lost. $40K off the reserve is gone. Then they have to come up with an extra $60K that they created from nothing to cover that total lost. That means $60K plus overhead is wiped out from the system.
The Fed saved the bank by giving them interest free loans which they then used to buy 9x the money of treasury. The bank then use the risk free interest to rebuild their lost reserve. They can't dump the treasury because the minute they dump the treasury, they are dead.
That's why the scenario outlined in this post for hyperinflation can't happen.
They don't create $360k from nothing. They securitize your promise to pay. Pay close attention to the order in which documents are signed.
The principal is not at issue. It is the voluntary agreed upon payment stream, i.e. your voluntary servitude.
A fractional reserve system founded in debt at the core has no interest in having the principal repaid. That retires the economy.
"They don't create $360k from nothing."
Of cause they do. That's how the system works. The securitisation comes afterward to spread the risk. And that spread the lost to everybody else and locked up the system up when the bubble bursted. What do you think happened in 2008?
The first (initial) security in the timeline is the "Promissory Note" that you put your signature on. The bankers privilege then assigns value to this note. But the 'note' lays the foundation. You just aren't paying attention to the minutia in the timeline at the closing table.
All the subsequent 'securitization' is a secondary event.
You enable the banker, by pushing your promise across the table before you get the 'money'
If bankers could create money from 'nothing', why would they need your pitiful signature?
Because they need to maintain the capital reserve ratio of say 6%. But of course FED can help theto maintain the reserves by monetizing Mortgage and giving high powered reserves to banks. The losses can be taken by Fannie/Govt.
The banks not only create money out of nothing, they also move loans off the books so they can leverage up to 40 to 1. When they foreclose, a huge amount of money is destroyed.
On top of that, they change the accounting rule from mark to market to mark to model. That allows the banks to hold off on foreclosure while keeping the bad non performing loans on the books without taking lost. That further takes more money off the market further reducing money available.
That's why m3 is way down. That's why credit is shut off. There is a reduction of dollar on the order of 10s of trillions of dollars.
gosh, this is just BAD.
Don't equate money and debt if you don't mean to.
A defaulted debt is worth less than a non-defaulted one.
The ONLY way for money to be destroyed is for loans to be repaid. THAT is what is occurring, a decrease in system leverage, or debt outstanding.
Interest cannibalizes the money supply and destroys money, default does not. WTF does it matter if the fucking bank's asset sheet goes to 0 when they conjured the money in the first place?
In fact, what you end up with is UNBACKED NOTES in circulation, whereas they were formerly backed by a payment stream derived from real work or production.
For the life of me I do not understand why you guys see cascading default as deflationary. It's not, it never has been. Systemic default IS hyperinflation.
FRNs are only useful for repaying debts denominated in them, of which every single FRN came into existence as a result of. If a debt security no longer commands FRNs, it has no worth. you sure as shit ain't gonna get someone to trade gold for it.
This is precisely WHY we are seeing what appear to be BOTH inflation and deflation at the SAME TIME. WTF, do I have to write a treatise on this shit?
The bottom line is that mainstream economics, DOUCHINGER AND MISH too, are WRONG. They do not understand the fundamental nature of debt, the fiat notes conjured as a result of debt, and least of all how money is destroyed.
Fuck, if you can't get basic accounting right, and what is a liability and what is an asset, then how can you be expected to understand larger concepts?
If a bank lends $100, they have a note saying "IOU $100." The borrower has $100. There is not $200 in the system. There is $100. If the note is defaulted upon, the value of DEBT goes to 0. Insofar as money and debt are fungible, there are concomitant deflationary effects. But as this proceeds to a systemic level, debt starts to lose moneyness. When this occurs, the notes BASED on the debt whose purpose and existence depend upon the debt, begin to lose theirs too.
In 2008 the reality of exponential math functions, and the ability to support them struck home.
I really don't want to get embroiled in this discussion, but the banks actually do create debt first, then funds are created to offset that debt. I think the illustration may be further enhanced by pointing out that some money -- real money -- went to the seller of the house. A house is simply not exchanged for a note; a seller gets real dollars to do with as he wishes. That comes from someplace: It is created. This is not an opinion on my part. It is well established economic practice. Please don't argue the point with me as I will be moving along in the comments.
Move along, nothing to see here.
And a TWP is a township.
No 'real money' went to the seller. His electronic balance in a 'Ponzi' was energized. But that covers the appearance of continuity, and is well established economic practice.
No need to comment.
You mean like created out of nothing? Like, POOF, money!
Lemme make it real simple:
http://www.youtube.com/watch?v=oIo7IYVCIXM
Lemme make it real hard for you to understand.
Unless you ask for the loan, and obligate yourself, nothing is created.
What's so 'effing hard about that?
Bankers don't just drive down to their office in the morning, close the doors, create a bunch of 'money', divvy it up, quit early, and go out and spend it.
Understand your own part in the game. Sheesh.
But of course, the last time it happened in 2008, Banks just gave the assets to FED at Par and took on high powered reserves, which are waiting to fly.
this is because the Fed is desperate to preserve the moneyness of debt. USD debt is their only product.
This is rather inane but yes it can, emperical data will determine the evidence, but should demand decline more than the decline in supply, then, I would say yes.
My understanding is that credit money capacity is being retarded because there is a revaluation of risk, and since this is the method of creating what in the end is "main street" money, there is a very slow if not declining growth of the latter.
"start to dump it in order to buy real assets?"
And why would they buy these "real assets?"
To sell them later for currency?
LOL.
"I lost faith in the currency, but... gold bitchez, because I wan't more currency that I don't have faith in."
You always seem to go full retard. The answer is obvious but it would be completely lost on you as you never respond to a sound argument. But what the hey, ill waste my time with you as I always do, it would be to retain value, in what ever form that may be. I would much rather have a million dollar house than a million digits in my bank account.
Stating that he goes full retard would imply that his starting point is less than 100% retard. You can't go full retard when you are already 100% retard at inception.
In defense of poor Johnny, I would like to point out that they do not accept retards as paid disinfo agents. Just sayin'.
Johnny's preoccupied:
http://www.youtube.com/watch?v=VLnWf1sQkjY
And why would they buy these "real assets?" To sell them later for currency? LOL
Johnny, you just summed up how totally fucking naive you are those two sentences.
This shit is not a game - In a hyper-inflationary currency crisis people are worried about survival, not what the stock market is doing, or whats on tv, or if the fucking money supply is inflating or deflating. They're worried about not being able to feed themselves once the cupboards are empty because the whole system has broken down. They're worried that the bread they bought for $3 today will be $6 tomorrow or even by the afternoon. You still haven't looked into what happened in Wiemar or more recently Argentina.
Also, try to not be an asshole and post comments all over this thread.
Added: The problem is the factories close, so people are out of work - they have less money to spend. The currency is collapsing so it costs more and more to buy things. The banks might actualy be closed so they won't even be able to withdraw their money - so they have to sit there as it's purchasing power evaporates without being able to spend it.
For those who have no idea about what happened in Argentina I highly recommend "The Take", a documentary by one of my idols - Avi Lewis.
"In the wake of Argentina's dramatic economic collapse in 2001, Latin America's most prosperous middle class finds itself in a ghost town of abandoned factories and mass unemployment. The Forja auto plant lies dormant until its former employees take action. They're part of a daring new movement of workers who are occupying bankrupt businesses and creating jobs in the ruins of the failed system." - I doubt the ZH Team likes it much but I think it is great.
So if you're not going to sell it later for dollars, what are you going to do with it? Look at it? Make shiny jewelry?
You act like there is even a remote similarity between the United States and Argentina or Weimar. My family is from Weimar-era Germany, and I can guarantee you that as long as we have our military intact, that scenario will NEVER happen.
I don't see how ME posting is different than anybody else posting...
Like that colonel sanders guy posting youtube links 17 times. Fuck, at least I don't call every third poster an "asshole" like half the people on here.
Also, you contradict yourself.
"The problem is the factories close, so people are out of work - they have less money to spend. The currency is collapsing so it costs more and more to buy things. "
If there is less money to spend, prices deflate. This is happening in our economy now. Without QE, there'd be no inflation at all. Prices would be much lower than they currently are without the QE.
You can't have a currency collapse without either a dramatic shift in global policy (which won't happen without war) or without printing vast sums of dollars (which would give people money to spend).
You can't have both.
Also
http://www.youtube.com/watch?v=VLnWf1sQkjY
So if you're not going to sell it later for dollars, what are you going to do with it?
I am beginning to think you will never get that there are other currencies than paper.
Also, you contradict yourself.
"The problem is the factories close, so people are out of work - they have less money to spend. The currency is collapsing so it costs more and more to buy things. " If there is less money to spend, prices deflate. This is happening in our economy now.
I am not contradicting myself - you (and Mojo?) are totally missing that US dollars are used outside of the US! The currency's reduction in buying power will be because you have to deal with the external dumping of dollars - which will push up prices in US denominations. Just because the US citizens have less to spend doesn't mean the dollars dumped externally do not inflate the prices (in US dollars).
It's why the axis of evil countries are so damn evil - they don't/(didn't until they got the shit bombed out of them in an unjust war) want to sell oil for US dollars. Them stopping selling oil for US dollars devalues the dollar, because there is less demand for the dollars. You said "US dollars are backed by oil" somewhere in this thread - but the oil is not in the US so if they start selling it for other currencies where do you think those US dollars are going to go?
I said don't be an asshole because you routinely dominate threads with the exact same argument going on with 20 different people. You make the whole thread about you, not about whatever the topic is. You often (though not as much as when you first got here)totally destroy any meaningful debate. 25%+ of the comments are yours in a lot of 300 comment threads.
Hey, don't drag me into your cat fight. All I stated is that dollars are getting destroyed and in short supply which is a direct and ongoing result from the credit buddle bursting. And long story short, the hyperinflation scenario can't happen. And I explained myself.
I am not interested in name calling and insult. Leave me out of it.
Hey, don't drag me into your cat fight.
Are you serious? My comment above was to Johnny. Which if it wasn't obvious to you.... I don't even know what to say. I have called you no names. You initially responded to my reply to Mako. Your comment didn't even counter mine in any logical way so I didn't bother replying to you.
Leave me out of it. Happily, stop jumping in and try to keep track of who you are talking to.
edit: Damn, I did mention you in that comment, must have been on a subconscious level...
The general answer is "energy, potential or kinetic."
Physical or intellectual labor units, or the end result of said labor.
Stored energy, be it petrol, lubricants, mechanical, caloric or survivalists' blocks of magnesium.
the posts you made about real vs nominal value are lucid, now conceptualize a period where the concept of informed market arbitrage is discarded, and the question you asked above is a different answer for every sector of the scattered and fragmented marketplaces. I.e. Corn seed will be low priced in Iowa the first season, but petrol will be most valuable commodity around. In West Texas, unprocessed oil will be available, but processed petrol and foodstuffs will be scarce and only available from trade networks from Houston/Galveston.
You said the other day when the end game comes your gonna take other peoples Gold with your rifle.So you don,t mind stealing it,just don,t want to pay for it,eh ?
Lets say bread and gold both go up 10x in price because of hyperinflation. You think its better to still have cash earning 3% instead of gold. So you'd rather have $1200 + 3% than buy an ounce of gold for 1,200 and sell it for $12,000 since why would "I want more currency that I don't have faith in". I guess food purchases don't factor into your future plans. Understandable, since you probably have a pantry full of apple juice and animal crackers ready to go.
Well said. Mako is trying to argue with stink-eye rather than articulation.
So why not tell him where he is wrong instead of insulting him?
Or don't you have an argument to counter?
http://www.youtube.com/watch?v=VLnWf1sQkjY
I don't agree with you on much, Mako. But I agree with you on this. The author is confused about the definition of inflation. It can be seen in trying to identify a difference between hyperinflation and inflation.
I will give my suggestion to author: attempt to apply your definitions of "inflation", "deflation", etc. in terms of purchasing power.
Confused is probably an understatement.
The author is the only person I know that believes when you get on a roller coaster you just continue to just go... oh, he/she believes the angle of your upward movement will change but you just go up forever.
They are in for a rude surprise at the end ot this hill.
Assets can only go in one direction, remember?
Pets.com was a prime example. So was the housing boom.
I'm so glad I bought pets.com in 2000, a mcmansion in 2006, and gold in 2010. (and tulips bulbs in 1700 or whatever)
http://www.youtube.com/watch?v=VLnWf1sQkjY
gold is at $1227. It still has value. Even a McMansion hasn't gone to 0 like pets.com or tulip bulbs or your IQ
And it will always go in one direction, right?
It could easily lose over half its value, like the McMansion did.
The only thing increasing the price of gold is speculation from people like you. Once that ends, watch the bottom fall out. Then where will you be?
You still don't get it, do you? You really don't realize that it is the dollar that is depreciating that causes the price of gold to rise.
You parroted this same retarded line the other day, I don't know who you got it from. Where is your evidence the "bottom will drop out" of the gold market? That would require the value of the US Dollar to suddenly explode. Based on what? If there was any spike in the value of USD it would be extremely short lived.
Jeepers, you don't think something that is vulnerable to dilution can do much of anything but go down?
I think there is a problem with your theory: http://www.aier.org/images/stories/charts_large/ppd_lg.png
Only one asset has gone in one direction, and that's the DOLLAR, you fucking moron.
How many pounds does it cost to buy a POUND STERLING now?
Britain had the reserve currency and the world's strongest military and was the largest empire the world had ever known.
Tell me how many pounds it takes to buy a pound.
Bravo , you come across as a whiner.
Your mama is a bit more of a squealer.
Yo wish you coud last that long. Bwahahaaha!
http://www.youtube.com/watch?v=VLnWf1sQkjY
He walked right into that one.
If only I could have thrown it out there for the first time on that one. It would have been freaking gold. Thing is, he's pulled enough of those lame comments I should have thought of it. Guess I :
http://www.youtube.com/watch?v=VLnWf1sQkjY
Thank you . Lol funny times.
and treasuries(that back the dollar) in 2010.
Fixed it.
Hyperinflation is loss of faith in the currency, and is not a monetary event per se. The author is correct on this point. It is also the end result of a deflation in a credit bubble, if attempts are made to keep reflating it (Bernanke, you asshole). As von Mises says (second time I have posted this in 2 days)...
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”
Well said
I would like to add that the loss of faith in a currency is in the end a loss in the faith of its functionality in a transaction. The dollar is a special case because it is not a store of value, however, it FUNCTIONS as if it has a store of value. It is backed not by a commodity, but by the function that currency serves in an economic transaction.
When and if the dollar's functionality as currency becomes impeded that is a loss faith. That loss of functionality will originated from the political sphere and not the economic and will have something to do with injustice.
Inflation means losing the fait in the paper promise of value.
Deflation means you're drunk and think you can still order 5 beers with a 1$ bill.
so far the one word missing in this conversation is lost entirely.
TRUST. Got some? Lol not me
I don't know if the author is an idiot, I'm unwilling to just resort to name-calling. I think I disagree only because if credit is money,I know for certain that outstanding credit has begun to fall from its peak--either through default or through being paid back (mostly through default, perhaps). So there's that. But then we have government printing massively into this credit deflation in an attempt to restore a positive trend to credit growth. That's the second fact. My observation after that is that the massive printing has had little to no effect--They're pumping water into the bathtub slower than the drain is letting it out. Thus, the tub will eventually empty. Sounds like deflation already has it.
I guess the government could make a last-ditch effort at hyper-printing, which would be an attempt to hyperinflate, but what good would it do? The money supply or available credit supply seems moot to me since it has nowhere to go. I'm still in the deflation camp for now, I guess I'll be taken by surprise. Part of me thinks neither scenario matters, my years of savings are toast either way, probably.
You are exactly right: The scenario you describe is where we are NOW.
I'm simply taking the next step: What happens if/when there's a run on Treasuries.
GL
@Gonzalo - nice piece of work, however;
The US will NOT allow a run on Treasuries!
When backed into a corner, TPTB will induce a pre-emptive black swan event to ensure a flight to safety (US Treasuries).
WAR! (big war).
Surprising Tyler hasn't posted this article,
http://www.hussmanfunds.com/wmc/wmc100823.htm
From the Hussman piece:
"One way to think about the price jump required by exchange rate overshooting is to think about a long-term bond. If a 10-year zero-coupon bond with a $100 face is priced to deliver 0% annually, it will have a price of $100. If investors suddenly demand the bond to be priced to deliver 2% annually, the bond must experience an immediate drop in price to $82. Once that price drop occurs, the selling pressure on the bond will abate, since it will now be expected to appreciate at a 2% annual rate."
And this is the next disaster that awaits "average investors". When bond prices inevitable collapse, the regular folks will panic when the see their "safe" bond fund NAVs drop 20-30%.
Back in 1994, I was a retail stock broker. There had been a rush of money into "safe" government bond funds in the early 90s. When rates backed up in 1994, "investors" panicked. A mutual fund company in the city where I worked actually had lines out the door and down the street of people attempting to liquidate the "safe" bond funds before they lost anymore money. The folks actually went to the funds offices to request liquidations because the regular phone lines were jammed. This scene will soon be repeated at a mutual fund company near you.
If you think the outflow from equity funds post May 6 is compelling, wait until you see the outflow from bond funds. Having lost money even in "safe" investments, regular investors will shun bond funds for years to come.
The public buying interest will have to be replaced by even more QE. Leading to more pressure on the $. Leading to more inflation. Leading to higher rates. Leading to more bond fund losses. Leading to more investors leaving bond funds. Leading to more QE...
But the bond wouldn't drop by the amount of expected future returns. The world doesn't work that way.
If people expected the bond to yield X%, it would make the value of the bond increase when sold near issuance.
It wouldn't decrease unless there was a high probability of default. People want their principal AND returns. It'd sell closer to face value, and then just yield the return it yielded. The only way the price would drop in value is if people didn't expect the bond to be paid back.
Johnny, you are hopelessly off base here. Let me explain...no, that would take too long...let me sum up.
Currently, a 10-year treasury bond would get issued at par with a coupon of 2.6%. If 10-year bonds are issued in 2011 with a coupon of 3.6%, the 2010s would subsequently drop in price to reach an equilibrium of a yield-to-maturity of 3.6%.
The drop in price of existing bonds will have a catastrophic effect of the NAVs of bond funds.
You don't have to believe me. Run your idea past one of your finance professors. I'm confident they'll be able to explain your errors to you.
Kids these days.
http://www.youtube.com/watch?v=VLnWf1sQkjY
That's fucking classic, Colonel. Which one of those guys is Johnny?
I kinda think the one at the market. I'm not gonna let that fuckstick piss me off anymore. I'm just gonna paste that link behind every goddamn comment he ever makes. It's no less intelligent, and a helluva lot more entertaining.
And each time you post it, I'm compelled to click through and watch it in its entirety. I'm having contractions now. I may have to rename this child after you.
Good luck in your labors. Just call him Coop.
Looks like you're the one giving birth! What the hell is that?
That my good Racoon, is a hemmorhoid. It is my rendition of the American populace, now that the likes of Barney Frank have had their turn at them.
BWAhahahaha!
I'm glad that is finally out of the bag. I was actually waiting for Johnny to figure it out but that just wasn't to be (the joke potential, well, you know, you posted it).
I'm just another asshole too. Peace, Colon-el Cooper.
thank you ms
i am slow but when i get it, it is funny to laugh @ myself.
BEHOLD THE FACE OF JOHNNYBRAVO!
Hey Johnny,
How's that "excel spreadsheet" helping you out now, eh?
Time to reread "excel spreadsheets for dumbasses" again.
Your are bearish on the economy right ?
The only income stream that pays bonds back is the US economy.
I think that is it!
I think value and price are the same to you?
Instead of SPRs replacing the Dollar, we will likely replace the paper currency with a new one backed by the Agricultural output of the US and what gold is left at Fort Knox. Similar to what Schacht did successfully with the Rentenmark.
The US produces approx $100 Billion a year in Agri output in today's dollars, this can be leveraged 10x plus the Gold of $173 Billion simlarly leveraged 10x gets you to $2.7 Trillion.
M1 today is approx $1.5 Trillion.
Here is your new "hard" money.
Or backed by real estate? Is that the reason the federal government is now the owner of 90%+ of the mortgages in the US? Planning for the future, perhaps?
The idea is not popular here but I wouldn't be surprised if carbon credits become the worldwide currency we're hearded into. Perpetual Peace and saving the planet - way easier to sell that idea rather than PM backed currencies and they would be able to tinker with the supply value as much as they wanted similar to fiat currencies.
Hadn't thought of that. I wouldn't put it past em.
Carbon credits are THE goal to back worldwide fiat. We need a new pseudo commodity to back fiat given the lack of trust moving forward (and limited resources). However, climategate stepped in and that whole plan blew up in their faces. The U.S. has been left to introspection, the door to expand via the IMF no longer available.
Further, carbon credits are destined to fail in our credit collapse. Our military will be reined in and isolationism will increase. Simply put, we would run out of gas before we could bomb the insolent emerging countries into compliance with less pollution. Hence, china flipping us the bird... we have no clothes.
Some people think the cold war only included the soviets and the u.s.... and that was the case, for a long period, but it wasn't ever solely about that... it was also about developed vs. undeveloped and that battle took center stage after the soviet collapse. I suppose we can still colonize parts of africa for growth... but that is a limited fix... nobody wants to face the concept of limited growth potential. Welcome to credit collapse.
I say that, but the gulf spill will be utilized as a rally cry for the second push... the need to "apportion the TRUE cost of pollution". But, I think the conclusion is the same... no likelihood of succeeding.
No it'll be Food, Gold and Guns for a while till things get straighten out. The average person will be pissing their pants, the last thing they'll be worried about is the climate in 30 years.
There's a reason why the entire world went off the gold standard, and the world isn't going back to a gold standard. Currencies might be backed by another commodity, but it sure won't be gold again.
Right now, the USD is on an oil standard.
http://www.youtube.com/watch?v=VLnWf1sQkjY
I agree with you Johnny Bravo! We will not go back to a gold standard, even gold standard currencies have ALWAYS failed in the past.
I do not know if the "next" currency would be backed by anything.
Your comment re the US$ being more or less on an oil standard is one thing FOFOA says.
Good observation JB.
I guess that's why no-one ever tries to pull up gold and silver from sunken treasure ships. Those doubloons are worthless! The Spanish gold standard collapsed, so their currency must be worthless, right?
....right?
tmosley, I am WAY on our side re gold. I think it is very undervalued. I own a nice pile, costs basis approx. $1000 / oz. Been buying for decades, longer than JB has been alive probably!
I just happen to think that JB got it right that a Gold Standard currency will not work. .gov will always find a way to fiat / partial reserve / etc. to do what they want to do:
Spend, spend, spend.
Just making a point :)
No gold standard has ever failed. It has only become a fiat standard due to government overspending, and THEN failed. Of course, no simple gold coin system has ever failed.
The real change that is needed is for the US to get down to about 2-3% of GDP for its total expenditure. Then, the form of the money wouldn't matter.
Hey, Mr. T. Don't get too excited about the gold/oil/dollar thing.
DCRB was making the point that Johnny stumbled on a basic truth -- totally ignorant of the full ramifications. We all agree on the use and abuse of gold.
Here is what DCRB was pointing to:
http://fofoa.blogspot.com/2009/07/gold-oil-and-money-in-free-market.html
The "world" may have gone off the gold standard, but central banks did not.
JB, please tell me why central banks keep/hoard gold? If gold is NOT money, why would central banks keep sooooooo much of it?
*The sound you just heard was JB's entire worldview and "education" exploding into a trillion pieces*
The entire Financial World won,t go back on the Gold Standard but the people of the world will because they don,t trust the Financial World anymore.
No we are a net importer of oil. Actually the a large part of what is backing the dollar is our huge Military. The world figures if we get into a pinch we'll just grab resources. Do you think we are in the Middle East as "Nation" builders?
What happens everytime there is a major world military conflict? The Dollar rallies, as least it has.
It's like this Economic Reality is governed by Political Reality, Political Reality is governed by Military Reality. It just the way the world has always worked. The British used to call it "Gun Boat" diplomacy.
A one world currency doesn't need anything backing it, does it? It is the only mechanism wherein the ponsi scheme can continue uninterrupted forever.
I think once the "let it be so" currencies fail you better have a better argument/justification for the new ones.
This is the exact process that I have been saying since Jan. of this year will happen. The time is ever approaching. Its a matter of when the first crook turns on the other crooks. Then it begins.
Its a matter of when the first crook turns on the other crooks. Then it begins.
Yeah - this whole Treasury/Fed/TBTF triumvirate does have more than a hint of Prisoner's Dilemma to it, no?
You speak of deflation as if it's a bad thing. Since when is getting a discount considered something to be avoided? I have cash, and think everything should trade at its cash price. I bought houses fro $15,000 in Portland,OR 20 years ago, and still think that's the right price for a home. I've never paid more than 80x the monthly rent for property - we still aren't cheap enough, but we'll ge there.
In an over-leveraged environment, which this is, deflation is your worst enemy. Existing debt loads, which many American households amassed in the form of mortgages that they couldn't afford, is magnified in a deflationary environment.
For the people that didn't make irrational choices because of greed, deflation is our best friend.
Personally, sitting here with no debt, I'd rather see house prices drop by half than for them to stay at current levels.
So who do we reward? People that mortgaged their ass in order to try to rip the rest of the country off?
Or people that KNEW it was a scam, didn't buy the hype, and didn't buy things that we couldn't afford?
Hey you are preaching to the choir. I have very little sympathy for anyone who assumed massive amounts of debt so that they could live in a house that they couldn't afford. But, deflation, whether you are debt free or not, is bad when it entices the powers that be to turn on the printing press and debase the currency in an attempt to try and reflate. Not only has that failed, but it's set the stage for possible hyper-inflation in the future. Which I think is the point of the piece.
In other words, we can't have deflation because that will cause hyper-inflation... *facepalm*
Sometimes in life we're presented with bad situations... situations that call only for undesireable actions... we're in a bad situation.
Wow, twice today I have to tip my hat to Johnny Bravo! More good points.
Still want to buy gold though.
So who do we reward? People that mortgaged their ass in order to try to rip the rest of the country off? Or people that KNEW it was a scam, didn't buy the hype, and didn't buy things that we couldn't afford?
This is the problem with most of the people on this site. You look down at the ignorant masses that you have been gaming all your lives when the system has been pushed so far past the equilibrium that it is not going to be able to recover. Those "morons" who never thought the value of their house would go down were repeatedly told "get your foot in the market now it's always going to go up on average" and "Hey - you know the one thing that they're not making anymore? Land!". And the prices DID keep going up because the banks kept lending more and more money.
Que Bono? The people who lied to the ignorant masses or who knew full well that they had no idea how the money system worked, and there's a lot of them here at this site and running financial sites. When the shit starts to hit the fan it's time to point down at the patsies and pin it on all on them, or the other fucking retards in the government who are just slightly smarter but way better bullshitters. That's the problem with most of the financial sites - you guys are smart, theres no question of that (apart from you Bravo), and most of you made a lot of money on the way here but when it starts to fall apart from the rampant greed it's time for the "morons" to shoulder the blame and pay the price.
It's like in that movie Dumb and Dumber where the blind kid is sold the dead parrot with it's head taped on. That kid is the average citizen.
http://i676.photobucket.com/albums/vv124/JnrLogical/PeteyDumbandDumber.jpg
Everyone is culpable in the process. Even the "morons" who were lead astray. Look at it this way, when you make $50k/yr and you're getting a $500k mortgage, what level of sophistication is necessary to understand that you cannot afford it? To understand that even if you were lucky enough to make a payment or two, that any hiccup along the way would bust you...
It's not fraud if you should have reasonably known otherwise... in this case, it would have been patently obvious they could not afford the homes... (i'm looking at you california).
We're all culpable... even the "morons"... while we should strive to ensure traps for the unweary are not attractively baited, at some point we have to leave people to their own devises.... freedom, ultimately, is also the ability to make bad choices.
I know what you're saying but let's be totally honest here - 99+% of the population has no clue how the money system works. Yet their whole life is spent serving it. They are born and bred sheep and to say a sheep should have figured out from the fenced in area it lives in that it was eventually gonna get sheared or slaughtered a cop-out for enjoying a good lamb-roast dinner.
My point is that you do not need to know the intricacies of the money system to know you cannot afford something. Case in point, why has the consumer withdrawn from the retail market? Why is deleveraging happening? They know enough to be culpable...
Now, you may make the point that they had no alternative to borrowing because they needed food and shelter... but, I suspect on more careful analysis, this only applies to very few situations and, even if applicable, less credit could have been taken.
Some of the issues with 18 year old kids taking student loans are pretty heartbreaking... they've been indoctrinated into thinking they need to keep going to school... but the problem is that at 18 we turn them loose... that's the age in which we claim they are perfectly capable of making their own decisions and they're perfectly aware the training wheels are off... I'm just not inclined to care about their plight very much when alternatives (such as vastly cheaper trade school) were available... their position ends up being reduced to "i'm entitled to borrow, therefore I'm entitled to a degree, therefore I'm entitled to have a job that requires no elbow grease that pays more." It's just not plausible.
The story, in the end, is that there are all types of speculators, sophisticated, unsophisticated, and everywhere in between... What we have yet to receive from Joe sixpack is the acknowledgement that he, in fact, was a speculator... and a very poor one at that. Everyone wants the spoils of entitlement without the responsibility of the work necessary to derive them.
How many people who had close proximity to the great depression got left holding the bag in our present debacle? It's not about sophistication or intelligence...
I appreciate your reply, and we both know what each other is saying but, we have at least a generation of people now who have been living in a world where housing prices have continously gone up, where their government has told them everything is going to be ok, and they actualy believe that the news is truth. It's like any religion - if you're told blah blah by people who you trust all the way through you never question it because you accept it as truth.
I live in Canada so our real-estate market is still in fantasy land... A buddy of mine has his own business, makes well over $100k a year, and is very smart. Yet he is constantly bugging me to get back into the market. He watches the news everynight and is 100% sure that the market is going to keep going up and I am going to be screwed because "I'll miss out".
Case in point, why has the consumer withdrawn from the retail market? Why is deleveraging happening? They know enough to be culpable...
Sure, but they're putting the brakes on when it's probably too late for most of them. Most of the people here have a clue and that's why they're here, but the majority are listening to propaganda and don't recognize it for what it is.
Like I always tell my fiance, if you try and save every stray dog, eventually you'll run out of place/ability to keep them. Where do we draw the line for culpability? When do we take the training wheels off? When does everyone get out of diapers?
Not only are we in a zero sum game, but the pie is shrinking. We're no longer faced with a scenario in which we get easy choices... this is triage... this is the liquidation of assets Mako always talks about. There's no point in trying to talk yourself out of the decision you're going to be forced to make anyway...
Next time you're on the street or in a bar (outside of a business or wealthy district) ask someone at random how money is created. Ask them why house prices went up so much. I think you're actualy more likely to get better answers in the States right now because it has deflated somewhat, but here in Canada people are still in fantasy land, because the bubble hasn't popped yet. They don't teach "modern money mechanics" in school for a reason. Look at Johnny Bravo - he's no idiot - but he cannot get why gold has any value, it is borderline incomprehensible to him because he's been taught propaganda as truth.
I pointed out in another thread that 1/5 of Americans think the sun revolves around the earth.. here was the reply:
by Vampyroteuthis:
It is how idiot politicians stay in office. If a portion of the voters are clueless, you just need to manipulate them with emotions.
We both/all here know this is true. They're sheep.
Could you get MORE micro in your analyses? It may be good for you, since you have dollars. Look across the street. The price dropped on your new rental property because nobody had any money to buy/rent it.
Good for Sherman. Bad for economy.
"What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next."
The end of The Great Keynesian Experiment is upon us. Prepare accordingly.
Significant inflation will happen. It seems that most economists have forgotten the basics which are taught in Econ 101. Namely that there are two types of inflation:
1) Demand-Pull inflation. The classic rising wages, full employment, happy times blah blah blah where fat and happy consumers/workers are optimistic about their future and bid up the price of items as they go on buying sprees. The domain of the "Phillips Curve" economic managers of today.
2) Cost-Push inflation. This is what is coming. The reckless increase of the money supply (the rapid devaluation of the dollar) causes dollar-denominated inputs to increase in price. These price increases are passed along to consumers/users, regardless of underlying economic conditions.
I doubt seriously that Weimar-style hyperinflation is in the cards, though its certainly possible. More likely, we return to a 1970s-style stagflation, with 10%+ inflation and 10%+ unemployment.
I don't think our debt-based economy will survive the 18% interest rates that Volcker brought last time around.
Exactly. Now you know just how dire the situation really is. We are truly at The End.
We won't need 18% interest rates though. We needed them to STOP people from borrowing at the end of stagflation, in order to make the dollar worth more.
If people won't borrow at 4%, what use is there for raising rates to 18%?