Hyperinflation

The ESM funding idea is really just Spain playing for time (the ESM doesn’t actually have the funds to bail Spain out). But the fact that Germany is now making the ESM a political issue indicates the degree to which political relationships are breaking down in the EU. And once the political relationships break down... so will the Euro.

All is (once again) failing. What to do? Much more of the same of course. Only this time whip out the nuclear option: the Helicopter Money Drop. This is the logical next step that Citigroup's Willen Buiter sees as "Central Banks should also engage in 'helicopter money drops' to stimulate effective demand" - temporary tax cuts, increases in transfer payments, or boosts to exhaustive public spending - all financed directly by the willing central bank accomplice in the monetization gambit. In his words: "This will always be effective if it is implemented on a sufficient scale." It is not difficult to implement, would likely be politically popular (nom, nom, nom, more iPads), and in his mind need not become inflationary. He does come down to earth a little though from this likely-endgame scenario noting that "helicopter money is not [however] a solution to fiscal unsustainability." It is just a means of providing a temporary fiscal stimulus without adding to the stock of interest-bearing, redeemable public debt. Any attempt to permanently finance even rather small (permanent) general government deficits (as a share of GDP) by creating additional base money would soon – once inflation expectations adjust to this extreme fiscal dominance regime - give rise to unacceptably high rates of inflation and even hyperinflation. His estimate of the size of this one-off helicopter drop - beyond which these inflation fears may appear - is around 2% of GDP - hardly the stuff of Keynes-/Koo-ian wet dreams. The fact that this is being discussed as a possibility (and was likely always the end-game) by a somewhat mainstream economist should be shocking as perhaps this surreality is nearer than many would like to imagine.

We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble. Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon. The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. Capital markets are at the heart of capitalism and they are not working.

What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so. Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation). And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies. John Aziz proposes (much to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And that those economists who are calling for even greater inflation are playing with dynamite. See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — we believe that negative side-effects from these policies may cause severe harm. Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). As John wrote recently - "So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis." We’d call that playing dice with the devil.

At first we were going to comment on this "response" by the high priest of Keynesian shamanic tautology to Mark Spitznagel's latest WSJ opinion piece, but then we just started laughing, and kept on laughing, and kept on laughing...

Four time Fed Chairman Marriner Eccles: "As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation. (U.S. Congress 1951, p. 158)... [We are making] it possible for the public to convert Government securities into money to expand the money supply....We are almost solely responsible for this inflation. It is not deficit financing that is responsible because there has been surplus in the Treasury right along; the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . [W]e should tell the Treasury, the President, and the Congress these facts, and do something about it....We have not only the power but the responsibility....If Congress does not like what we are doing, then they can change the rules. (FOMC Minutes, 2/6/51, pp. 50–51)"

So far, 2012 has been a banner year for the stock market, which recently closed the books on its best first quarter in 14 years. But Casey Research Chairman Doug Casey insists that time is running out on the ticking time bombs. Next week when Casey Research's spring summit gets underway, Casey will open the first general session addressing the question of whether the inevitable is now imminent. In another exclusive interview with The Gold Report, Casey tells us that he foresees extreme volatility "as the titanic forces of inflation and deflation fight with each other" and a forced shift to speculation to either protect or build wealth.

While one can talk until one is blue in the face about the pros and cons of the current central bank's (mis)deeds over the past 7 years, the reality is that most people are backward-looking (i.e., economists), not forward (which of course explains the prevalence of speculation as to whether the Fed's exponentially rising balance sheet will result in hyperdeflation or hyperinflation). As such, one can, for now at least, judge the Fed merely in the context of what it has achieved to date, not by the seeds of destruction it has planted. So how has Ben Bernanke performed so far when compared to his previous 4 predecessors, at least based on those two now completely irrelevant, but still oddly believed mandates: inflation and unemployment (because by now we all know that even the Chairman himself admitted the only thing that matters to the Fed is the Russell 2000 closing value). Below we present the Fed's accomplishments in the arena of inflation and jobs in the context of the past 60 years split by Chairmen starting with Martin (remember the 1951 Accord?), then going to Burns/Miller, Volcker, Greenspan and finally Bernanke. So who has been the fabbest among the Fed-est? You decide.

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation. Neither has occurred, and the question is, why not? The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation. If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation. Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but 'hot,' inflation.

In this week's missive, Jefferies' strategist David Zervos decries the doomsayers, panders to the printers, and colors this colossal nominal rally (and its expected infinite horizon) through green toner-colored glasses. All we can say here is "Viva Jefferies' David Zervos, and Viva Sarcasm"... it is Sarcasm right? Because if serious, this letter seems like it could have been penned by anyone fighting tooth and nail to become 3rd undersecretary of central planning in Stalinist Russia. We leave it to readers' judgment on which side of the fence Mr. Zervos sits.

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can't be sustained but from which there is no graceful exit. With few exceptions, all of the noble souls who chose a career in "public service" and who've advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren't complaining, since they willingly buy the Treasury bonds and Treasury bills that fund the deficit. And taxpayers generally tolerate deficits as a lesser evil than a tax hike. So stay up as late as you like on election night to see who wins, but the deficits aren't going to stop anytime soon. The debt mountain will keep growing. The part of it the government acknowledges is now approaching $16 trillion, which is more than the country's gross domestic product for a year. Obviously, the debt can't keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.

This one is actually quite funny, although we feel that the MMTers, the Neo-Keynesians, the Econ 101 textbook fanatics, and the government apparatchiks out there will fail to appreciate the humor. However, we are a little concerned how many of those in charge read into this a little too much, and decide to make this official policy...

Americans have been listening to the mainstream financial media’s song and dance for around four years now.  Every year, the song tells a comforting tale of good ol’ fashioned down home economic recovery with biscuits and gravy.  And, every year, more people are left to wonder where this fantastic smorgasbord turnaround is taking place?  Two blocks down?  The next city over?  Or perhaps only the neighborhoods surrounding the offices of CNN, MSNBC, and FOX?  Certainly, it’s not spreading like wildfire in our own neck of the woods…Many in the general public are at the very least asking “where is the root of the recovery?”  However, what they should really be asking is “where is the trigger for collapse?”  Since 2007/2008, I and many other independent economic analysts have outlined numerous possible fiscal weaknesses and warning signs that could bring disaster if allowed to fully develop.  What we find to our dismay here in 2012, however, is not one or two of these triggers coming to fruition, but nearly EVERY SINGLE conceivable Achilles’ heel within the foundation of our system raw and ready to snap at a moment’s notice.  We are trapped on a river rapid leading to multiple economic disasters, and the only thing left for any sincere analyst to do is to carefully anticipate where the first hits will come from. Four years seems like a long time for global banks and government entities to subdue or postpone a financial breakdown, and an overly optimistic person might suggest that there may never be a sharp downturn in the markets.  Couldn’t we simply roll with the tide forever, buoyed by intermittent fiat injections, treasury swaps, and policy shifts? The answer……is no.

Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell... they appear to warn us that our resolution to avoid one fate may damn us to the other.

Something odd and not quite as planned happened as America grew from its "City on a Hill" origins, on its way to becoming the world's superpower: government grew. A lot. In fact, the government, which by definition does not create any wealth but merely reallocates it based on the whims of a select few, has transformed from a virtually invisible bystander in the economy, to the largest single employer, and a spending behemoth whose annual cash needs alone are nearly $4 trillion a year, and where tax revenues no longer cover even half the outflows. One can debate why this happened until one is blue in the face: the allures of encroaching central planning, the law of large numbers, and the corollary of corruption, inefficiency and greed, cheap credit, the transition to a welfare nanny state as America's population grew older, sicker and lazier, you name it. The reality is that the reasons for government's growth do not matter as much as realizing where we are, and deciding what has to be done: will America's central planners be afforded ever more power to decide the fates of not only America's population, but that of the world, or will the people reclaim the ideals that the founders of this once great country had when they set off on an experiment, which is now failing with every passing year?