This page has been archived and commenting is disabled.
Stock World Weekly: Inflation & the Great Beyond
Here's the latest Stock World Weekly: Inflation & The Great Beyond
In a classic retelling of the ancient “irresistible force meets immovable object” riddle, irresistible forces of rampant oil speculation, political and social instability in North Africa and the Middle East, and the Federal Reserve’s policy of quantitative easing (QE) are combining to support higher oil prices. Unfortunately, when the price gets high enough, it hits an immovable object called demand destruction every time.
[...]
As the American consumer copes with rising food prices, rising energy costs, stagnant wages, high unemployment, and declining real estate values, the premise of a “consumer led” recovery is difficult to fathom. High gasoline prices alone are costing U.S. consumers $360 million more a day compared to prices a year ago, according to petroleum industry analyst Bob van der Valk. Bob also expects the price of West Texas Intermediate Crude to drop sharply over the next few weeks, and points to the fact that inventories at the Cushing, Oklahoma hub are at all time highs, something we have been noting for months.
Jan Hatzius is Goldman Sachs’ chief US economist, and is responsible for setting the firm’s US economic and interest rate outlook. Friday afternoon, Zero Hedge reported that Mr. Hatzius issued a major downgrade in his forecast for the “real GDP” for 2011, revising it down to 1.75% (annualized), from 2.5% previously (and from 3.5% not too long ago). He is very concerned about the downside risk to household real disposable income. In his view, the best chance for improvement in the forecasts is either “a substantial acceleration in the labor market and/or a large drop in gasoline prices.” (Jan Hatzius Friday Night Bomb: “We Are Downgrading Our Real GDP Growth Estimate”)
With all the talk about real inflation rates, the impact of inflation on food and energy prices, and its resulting problems, popular opinion begins to embrace the inflationary premise and soon people begin talking openly about the possibility of not only inflation, but even hyperinflation. However, not everyone shares this opinion. Charles Hugh Smith, of the blog “Of Two Minds,” takes an opposing view of the future:
“What the true believers of hyperinflation and the destruction of the dollar cannot accept is that debt is an asset to the owner of that debt. In focusing solely on the advantages of inflation to borrowers, they ignore the critical fact that inflation quickly destroys the value of the asset that debt represents to the owner. And debt is a primary asset to pension funds, insurance companies, banks, and indeed the entire financial sector."
Archives here >
»
- ilene's blog
- 3400 reads
- Printer-friendly version
- Send to friend
- advertisements -
Awe come on ilene. Total bullshit, very disappointing. Asset inflation does, in fact INCREASE the value of the debt. Did you mean to say asset deflation? Like what we have now with housing.
Look, the inflation/deflation debate is pure bullshit. Think of it this way, yes, debt is of value to the holder of that debt, but only as long as the person paying the debt can afford to do so. The problem is that the debt is a fraud and the interest to the average Joe is excessive.
Think about it this way, taxes are an asset to the government. However, that asset is only good if the people can afford to pay it. On the flipside, as a small business owner I do worry about my tax burden, but if my input costs keep climbing and my customers can not adsorb higher prices, then guess what? I will shut down and Uncle SAM will collect ZERO taxes from me. The same is true for debt. If the interest becomes EXCESSIVE, guess what? I think you get the picture. The low interest rates for the banks has done nothing but enrich the elite. How about a zero interest rate loan for my small business so I can expand my business and the REAL value that I bring to the economy? Unfortunately I don't have the luxury of "mark to fantasy" accounting.
I think "inflation" is an over-broadly used term, and ambiguous as well. So it's not clear to me that your response to Charles' essay (I think that's what you're referring to) is like not comparing apples to oranges -- e.g. perhaps comparing the nominal value of an asset to the real value of the debt on that asset to the owner of the debt?
How about a zero interest rate loan for my small business so I can expand my business and the REAL value that I bring to the economy?
Amen brother
In focusing solely on the advantages of inflation to borrowers, they ignore the critical fact that inflation quickly destroys the value of the asset that debt represents to the owner. And debt is a primary asset to pension funds, insurance companies, banks, and indeed the entire financial sector."
Whatever real underlying assets these paper structures front will be acquired cheaply. Don't tell me these poor sharks don't know how to invent a profit.
"High gasoline prices alone are costing U.S. consumers $360 million more a day compared to prices a year ago" -> missing 000?
"As the American consumer copes with rising food prices", this ideology is the crux of the problem. Not inflation, not deflation, not whether one or the other is an asset or not. If "americans" or any other countrymen continue to be refered soley by the amount of consumption, hence energy, they provide for the beast, which is the corporatocracy, we are doomed as a species. The sad part is that this frame of mind is so far ingrained in our society that even if you were to provide clear and vivid proof, they still wouldn't see that this is the problem.
precisely, it has always amazed me that this way of defining "us", that is, "you" and "me", as human "resources" and "consumers", is so blindly accepted.
Until we, as people, stop the acceptance of corporate definitions of who we are, and what our "value is", nothing will change.
I wonder how many months it will take untill we'll get the Chinese style inflation where monthly inflation rates exceed the yearly once we have now...
"they ignore the critical fact that inflation quickly destroys the value of the asset that debt represents to the owner."
Wouldn't inflation enhance the nominal value of the asset?
I think Charles is making a distinction between the nominal value of the asset and the value of the debt itself. - Is that correct?
the nominal value is meaningless if inflation triggers a default by the borrower.
True.
Inflation only "quickly destroys the value of the asset that debt represents to the owner" if the debt is being paid off at a fixed rate. My understanding is, if you examine the fine print of a fixed-rate mortgage, you'll see that the rate is fixed only (and here I paraphrase) if there are not exceptional economic circumstances. In other words - if inflation rises too much, the banks will be given cover to raise their interest rates.
The myth of being able to pay off your month's mortgage with the monetary equivalent of a six-pack of beer is just that - a myth.
I paid off my home on a fixed rate mortgage. Does this mean I can now use "mark to fantasy" accounting just like the banks? Go ahead, jack everyone's interest rates up so that everyone is insolvent overnight. Go ahead, I dare you.