Hyperinflation

Below are several excerpts only the brains of those practicing the world's most useless profession (and we are very generous with that assessment) could possibly come up with, in attempting to explain the shocking outcome of reality continuously refusing to comply with their exhaustive and comprehensive Dynamic Stochastic General Equilibrium models.

Given that policymakers seldom if ever experimented with forward guidance this far in the future, there is little data to guide them. The problem, however, is that these DSGE models appear to deliver unreasonably large responses of key macroeconomic variables to central bank  announcements about future interest rates (a phenomenon we can call the "forward guidance puzzle")

But the absolute punchline you will never hear admitted or discussed anywhere else:

Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters.This is an unsettling finding given that the current horizon of forward guidance by the FOMC is of at least eight quarters. 

In short: the Fed's DSGE models fail when applied in real life, they are unable to lead to the desired outcome and can't predict the outcome that does occur, and furthermore there is no way to test them except by enacting them in a way that consistently fails. But the kicker: the Fed's own model predicts that if the Fed does what it is currently doing, the result would be "explosive inflation."

Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, we estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation. The rial’s death spiral is wiping out the currency’s purchasing power

Yes, you read that correctly. High ranking members of the US Federal Reserve believe that because a one time purchase of an iPad is cheaper, the increase in the daily cost of food and energy is balanced out.

"It will surely take at least a decade... for the world economy to get back to decent shape" is the somewhat shockingly honest (and at the same time hopeful that ECOpocalypse does not happen before) outlook that the IMF's Olivier Blanchard offers in a recent interview with Hungary's Portfolio.ru via Reuters. His diatribe of expectations that Germany would have to accept higher inflation, the US had to fix its fiscal problem, "Japan is facing a very difficult fiscal adjustment too" is more an understatement of facts than a forecast but on the bright-side he thinks China has turned the corner on its asset boom (but faces slower growth ahead). The reality is that, as he also notes, debt reduction (via default or deleveraging) is unavoidable and while he believes that this can be done without stifling growth in this credit-fueled world in which we have lived (though no mention of the tooth fairy). Dismissing the idea of inflation-targeting, he warns "You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks." It seems the IMF is waking to the new reality - perhaps as evidenced by their actual disagreement with Greece over fantasy GDP data - though we fear what another decade of this will do to global instability.

At its most fundamental level, SocGen's Dylan Grice notes that economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. Grice emphasizes that history is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. Dylan, like us, fears a Great Disorder.

To those familiar with Algebra, we suggest that the Ponzi scheme we live in is actually an overdetermined system, because there is no solution that will simultaneously cover all the financial and non-financial imbalances of practically any currency zone on the planet. Precisely this limitation is the driver of the many growing confrontations we see: In the Middle East, in the South China Sea, in Europe and soon too, in North America. That these tensions further develop into full-fledged war is not a tail risk. The tail risk is indeed the reverse: The tail risk is that these confrontations do not further develop into wars, given the overdetermination of the system! We have noticed of late that there’s a debate on whether or not the US dollar zone will end in hyperinflation and whether or not the world can again embrace the gold standard. The fact that we are still in the early chapters of this story does not allow us to state that hyperinflation is only a tail risk. The tail risk is (again) the reverse: That all the steps central banks took since 2008 won’t lead to spiraling quasi-fiscal deficits.

With gold being horded in Iran and hitting 2012 highs this morning, CNBC's Rick Santelli addresses the 800lb gorilla in the Fed's room - the threat of inflation. Critically noting that the hyperinflation of Weimar Germany "did not happen overnight" but was gestated quietly until it was unstoppable by currency debasement; the question remains of what exactly the Fed thinks it is doing. Santelli makes the important point that if we look at 'printing money' as any type of solution then why not take it to the extreme - "if we just print a million dollars for every man, woman and child and handed it to them, wouldn't that fix everything?" As he adds "if it was that easy there would be no need for economist, no need for even CNBC, but it isn't that easy," Reflecting on Evans' earlier inability to quantify any metrics for whether QEternity was working, Santelli notes that the Fed man falls back to 'confidence' (animal spirits) but worries that inflation is a lot like soybeans; need sun, water, and time but eventually will grow rapidly.

Let me be clear: if US Treasuries collapse, then the US has lost credibility in the global markets and we’re going to face a currency Crisis. I am not saying that this will happen right now. Europe could always implode first, buying the US some time. But at some point the US debt situation will lead to a Crisis. And the Fed is pushing us ever closer to this with QE 3.

Iran is not blameless, and continues to provoke Israel through its support for Hamas and Hezbollah and through eliminationist rhetoric. But given the level of provocation from the Israeli and American side, it is astonishing that Iran remains free of nuclear weapons. Yet it is a fact that Iran is not armed with nuclear weapons, and it remains a fact that Iran has not attacked nor occupied any foreign lands since World War 2. Iran is not an expansionistic country. As neocon provocateur Patrick Clawson essentially admitted in advocating for a false flag attack to get America to war, Iran is not likely to attack either the United States or Israel. So when it comes to drawing red lines, we in the West would do well to draw a red line around our behaviour — because right now, we in the West are the ones who are stirring up trouble by threatening to strike first.

Since any debt issued under 3 years during ZIRP (i.e., in perpetuity) is nothing more than a cash for cash exchange, only with the conversion of counterparty risk from unsecured bank obligations (if cash outflow is from deposits) into Uncle Sam exposure, it is no surprise that today's 2 year bond auction was a snoozer. Sure enough, the just auctioned off $35 billion in 2 year bonds came at a nominal yield of 0.273%, precisely where it was last month, with investors getting a nominal yield in the off chance that Bernanke loses all control of the curve and hyperinflation arrives in under 730 days. For now this probability appears minimal. The internals were just as boring. a 3.6 bid to cover, lower than last month's 3.94, and below the TTM average of 3.77. Directs took down 17.5%, Indirects 27.27% and Dealers were stuck holding 55.33% of the same bonds that Bernanke will be selling to them soon too, resulting in a PD inventory in the 1-3 year window near all time highs. And following the balance of this week's auctions, which include a 5 and 7 year bond for a total of $99 billion in gross issuance, net US debt will rise by $46.8 billion, which together with an earlier net addition of $13 billion in debt, will take total US debt to just shy of $16.1 trillion.

Some wonder why we have been so convinced that no matter what happens, that the Fed will have no choice but to continue pushing the monetary easing pedal to the metal. It is actually no secret: we explained the logic for the first time back in March of this year with "Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing." The logic, in a nutshell, is simple: everyone who looks at modern monetary practice (as opposed to theory) through the prism of a 1980s textbook is woefully unprepared for the modern capital markets reality for one simple reason: shadow banking; and when accounting for the ongoing melt of shadow banking credit intermediates, which continues to accelerate, the Fed has a Herculean task ahead of it in restoring consolidated credit growth. Shadow banking, as we have explained many times most recently here, is merely an unregulated, inflationary-buffer (as it has no matched deposits) which provides the conventional banking credit transformations such as maturity, credit and liquidity, in the process generating term liabilities. In yet other words, shadow banking creates credit money which can then flow into monetary conduits such as economic "growth" or capital markets, however without creating the threat of inflation - if anything shadow banks are the biggest systemic deflationary threat, as due to the relatively short-term nature of their duration exposure, they tend to lock up at the first sing of trouble (see Money Markets breaking the buck within hours of the Lehman failure) and lead to utter economic mayhem unless preempted. Well, preempting the collapse in the shadow banking system is precisely what the Fed's primary role has so far been, even more so than pushing the S&P to new all time highs. The problem, however, as we will show today, is that even with the Fed's balance sheet at $2.8 trillion and set to rise to $5 trillion in 2 years, it will not be enough.

Earlier today we casually wondered whether the US stands to lose more by supporting China or Japan in their escalating diplomatic spat, considering the threat of a US Treasury sell off is certainly not negligible, a dilemma complicated by the fact that as today's TIC data indicated both nations own almost the same amount of US paper, just over $1.1 trillion. In a stunning turn of events, it appears that China has taken our thought experiment a step further and as the Telegraph's Ambrose Evans-Pritchard reports, based on a recommendation by Jin Baisong from the Chinese Academy of International Trade (a branch of the commerce ministry) China is actively considering "using its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to "impose sanctions on Japan in the most effective manner" and bring Tokyo’s festering fiscal crisis to a head." I.e., dump Japan's bonds en masse.

Congratulations Mario Draghi and Ben Bernanke, you’ve unleashed "unlimited" and "open-ended" programs and the bond markets are still imploding.

Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.  

One cannot but wonder at the idiocy blindness of those who sustain that both the European and the US central banks removed “tail risks” in the last days, with their new measures. To start, the whole idea that a tail risk exists is simply a fallacy of Keynesian economics. It assumes there is a universe of possible outcomes and, as if humans acted driven by animal spirits, randomly, each one of them has a likelihood of occurring. In all honesty... what else can occur if a central bank prints money to generate a bubble? Why would the bursting of the bubble be called a tail-risk, rather than the logical outcome? Why, if that was tried in 2001 in the US, resulting in the crisis of 2008... why would it be any different now, when there is an explicit announcement to print billions per month? Why?