Hyperinflation

Guest Post: Get Ready For An Epic Fiat Currency Avalanche

What is it that makes Keynesians so insanely self destructive?  Is it their mindless blind faith in the power of government?  Their unfortunate ignorance of the mechanics of monetary stimulus?  Their pompous self-righteousness derived from years of intellectual idiocy?  Actually, I suspect all of these factors play a role.  Needless to say, many of them truly believe that the strategy of fiat injection is viable, even though years of application have proven absolutely fruitless.  Anyone with any sense would begin to question what kind of madness it takes to pursue or champion the mindset of the private Federal Reserve bank… Quantitative easing has shown itself to be impotent in the improvement of America’s economic situation.  Despite four years of free reign in central banking, employment remains dismal in the U.S., the housing market continues its freefall, and, our national debt swirls like a vortex at the heart of the Bermuda Triangle.  Despite this abject failure of Keynesian theory, the Federal Reserve is attempting once again to convince you, the happy-go-lucky American citizen, that somehow, this time around, everything will be “different”.

The One Big Problem With QE To Infinity

There is one big problem with the Fed's announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don't think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity. Now rewind back to that one certain paper by the New York Fed, which laid it out clear for all to see, that if it wasn't for the expectation of easing in the 24 hour period ahead of the FOMC meeting, the market would be 50% or lower than where it is now, and would have been effectively in negative territory in the aftermath of the Lehman collapse. What Bernanke did is take away this key drive to stock upside over the past 18 years, because going forward there is no surprise factor to any and all future FOMC decisions, as easing the default assumption. It also means that Bernanke may have well fired his last bullet, and it, sadly, is all downhill from here, as soaring input costs crush margins, regardless of what revenues do, and send corporate cash flow to zero. Unfortunately, not even in the New Normal can companies operate without cash flow.

Guest Post: How Draghi Opened The Door To Hyperinflation And Denied The Fed An Exit Strategy

We will mince no words: Mr. Draghi has opened the door to hyperinflation. There will probably not be hyperinflation because Germany would leave the Euro zone first, but the door is open and we will explain why. To avoid this outcome, assuming that in this context the Eurozone will continue to show fiscal deficits, we will also show that it is critical that the Fed does not raise interest rates. This can only be extremely bullish of precious metals and commodities in the long run. In the short-run, we will have to face the usual manipulations in the precious metals markets and everyone will seek to front run the European Central Bank, playing the sovereign yield curve and being long banks’ stocks. If in the short-run, the ECB is the lender of last resort, in the long run, it may become the borrower of first resort!

The Bundesbank Replies To The ECB

Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below.

Guest Post: What to Do When - Not If - Inflation Gets Out Of Hand

The cheek of it! They raised the price of our favorite ice cream. Actually, they didn't increase the price; they reduced the container size. Raising prices is one thing. We understand raw-ingredient price rises will be passed on. But underhandedly reducing the amount they give you… that's another thing entirely. It just doesn't feel… honest. You've noticed, we're sure, how much gasoline is going up. Food costs too are edging up. Kids' college expenses, up. Car prices, insurance premiums, household items – a list of necessities we can't go without. Regardless of one's income level or how tough life might get at times, one has to keep spending money on the basics. According to the government, we're supposedly in a low-inflation environment. What happens if price inflation really takes off, reaching high levels – or worse, spirals out of control? That's not a rhetorical question. Have you considered how you'll deal with rising costs? Are you sure your future income will even keep up with rising inflation? If your monthly expenses are about $3,000/month, you need 45 ounces of Gold to cover two years of high inflation.

Germany Steals Draghi's Bazooka Before The Main Event As Monetization Mutiny Grows

With one day to go until the European soap opera hits its peak, and with the ECB doing all it can to spread disinformation and sow discord and disunity between Germany and everyone else on both the ECB governing council and everywhere else, Germany has decided to again make it clear just where it stands on the topic of hyperinflation and other printing matters. The punchline:

  • ECB'S DRAGHI DOESN'T HAVE 'TOO MUCH' SUPPORT FROM MERKEL, MERKEL BACKS WEIDMANN
  • ECB CAN ONLY BUY BONDS ATTACHED TO CONDITIONALITY

But wait, there is much more. Readers may recall that yesterday that one of the articles we pointed out came from Dutch Dagblad which suggested that it was Weidmann who was isolated on the ECB governing council, and that the Dutch member of the ECB council Klass Knot as well as all other members was "for buying government bonds of Southern European countries." Well, prepare to be shocked, because what kind of soap opera would it be if it wasn't for unexpected narrative plot lines. Today, Frankfurt-based Market News reported precisely the opposite, and not only is Knot on the same side as the Germans, but so are virtually all the other "virtuous" European countries, aka the non-beggars.

EU's Poorest Member Country Smacks Down Euro As Bulgaria Refuses To Join Eurozone

If one needs a shining example of why the days of Europe's artificial currency are numbered, look no further than the EU's poorest country which moments ago said "Ne Mersi" to the Eurozone and the European currency. From the WSJ: "Bulgaria, the European Union's poorest member state and a rare fiscal bright spot for the bloc, has indefinitely frozen long-held plans to adopt the single currency, marking the latest fiscally prudent country to cool its enthusiasm for the embattled currency. Speaking in interviews in Sofia, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said that the decision to shelve plans to join the currency area, a longtime strategic aim of successive governments in the former communist state, came in response to deteriorating economic conditions and rising uncertainty over the prospects of the bloc, alongside a decisive shift of public opinion in Bulgaria, which is entering its third year of an austerity program. "The momentum has shifted in our thinking and among the public…Right now, I don't see any benefits of entering the euro zone, only costs," Mr. Djankov said. "The public rightly wants to know who would we have to bailout when we join? It's too risky for us and it's also not certain what the rules are and what are they likely to be in one year or two."

Guest Post: Human Action Under Ultra-Low Interest Rates

Over the past months (and particularly in the last weeks), we have increasingly read negative comments on the ongoing zero-interest rate policy (ZIRP) and in some instances, negative-interest rate policy (NIRP). Today, we want to examine the origins of the idea that ultra-low rates of interest can exist, how this idea came about, why it was flawed and how it leads to an informal economic system. It was a fallacy based on misunderstanding of the rate of interest and human action. Another way of examining this is the following: The zero interest rate indicates that time is free. And as anything that is free is wasted, time will also be wasted. It should be clear that there is an inconsistency in simultaneously believing that investment demand and savings are mainly driven by income but that it is necessary to lower the interest rate to boost investment, as the Fed does... and the Fed is Keynesian! Finally, we note one last thing: As productivity, employment and production decrease, even a steady and low rate of inflation has the potential to morph into hyperinflation.

The Monetary Endgame Score To Date: Hyperinflations: 56; Hyperdeflations: 0

We won't waste our readers' time with the details of all the 56 documented instances of hyperinflation in the modern, and not so modern, world. They can do so on their own by reading the attached CATO working paper by Hanke and Krus titled simply enough "World Hyperinflations." Those who do read it will discover the details of how it happened to be that in post World War 2 Hungary the equivalent daily inflation rate of 207%, the highest ever recorded, led to a price doubling every 15 hours, certainly one upping such well-known instance of CTRL-P abandon as Zimbabwe (24.7 hours) and Weimar Germany (a tortoise-like 3.70 days). This and much more. What we will point is that at no time in recorded history did a monetary regime end in "hyperdeflation." In fact there is not one hyperdeflationary episode of note. Although, we are quite certain, that virtually all of the 56 and counting hyperinflations in the world, were at one point borderline hyperdeflationary. All it took was central planner stupidity to get the table below, and a paper with the abovementioned title instead of "World Hyperdeflations." 

Hilsenrath Sets Off To Preserve Bernanke's "Legacy"

Yesterday, when the market was plunging (by less than a whopping 1%, yet magically defending the 13K "retirement off" threshold in the DJIA), we wondered: where is the Fed's favorite messageboard: WSJ "journalist" Jon Hilsenrath. We found out at 3 am, when instead of releasing another soon to be refuted rumor of more easing, we discovered that the scribe was busy doing something very different: discussing the pros and cons of the Chairsatan's legacy.

Fingerboning Escalates: Buba Strikes Back To Draghi OpEd With Weidmann Interview

The first shot in the fingerboning wars (a key step up from mere jawboning) has barely been fired following Draghi's earlier OpEd in Zeit (posted here in its entirety), when the Bundesbank already had its response ready for print in the form of yet another interview with its head, Jens Weidmann, who says nothing new or unexpected, but merely emphasizes that no matter how loud the chatter, how empty the promises, or how hollow the bluffing, Germany's response continues to be, especially after today's higher than expected inflation across the country, 9, 9 and once again, 9. Perhaps the most notable part of the interview is Weidmann's comparison between the ECB and the Fed, and why one is allowed to monetize bonds, while the other shouldn't be: "The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe....When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks." Of course, when the wealth of the status quo is at risk, such trivialities as democracies are promptly brushed by the sideline...

Chart Of The Day: From Pervasive Cheap Credit To Hyperinflation

Just what does all this easily accessible and now pervasive student debt fund? The chart below, courtesy of Bloomberg, provides the answer: in the past 3 decades there has been no other cost that comes even remotely close to matching the near hyperinflationary surge in college tuition and costs.

Guest Post: A Critique of the Methodology Of Mises & Rothbard

Miseseans choose to reach their conclusions not from data, but instead from praxeology; pure deduction and logic. This is quite unlike the early Austrians like Menger who mainly used a mixture of deductionism and data. Like all sciences, economics should be driven by data. For if we are not driven by data than we are just daydreaming. As Menger — the Father of Austrianism, who favoured a mixture of deductive and empirical methods — noted:

The merits of a theory always depends on the extent to which it succeeds in determining the true factors (those that correspond to real life) constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements.

Praxeology is leading Austrian economics down a dead end. Austrianism would do well to return to its root — Menger, not Mises.