[Discussion prompted by the commentary below continues to evolve and may yet enlighten us sufficiently to produce some useful conclusions about the banking system's looming endgame. Hyperinflation, or deflation? At this point, I'll concede that it could be either that brings us to economic ruin. But I will nonetheless argue in a forthcoming essay that the dollar could collapse without triggering a hyperinflation. Under this scenario, it would not be a question of paying $1,000 for a barrel of oil, or $100 for a carton of eggs; rather, those in a position to supply such basic necessities would simply stop taking dollars. This clearly implies that we would move rapidly to barter, abandoning a currency system that might conceivably have become useless overnight. (The spectacularly bullish implications this holds for gold are impossible to miss). To drive the discussion toward a conclusion, I would urge readers to immerse themselves in this idea. You can skip the commentary itself if you'd like, since whatever insights it might provide at this point pale in comparison to the gems that have turned up in the forum. Simply click on the "Comments" link above to enter the forum.
When you jump into the fray, argue not from theory but from the logic of how you imagine your life would proceed in the wake of a collapse of the banking system and the dollar. You might pretend that the catalyst for the collapse was a Treasury auction at which the Fed was the only buyer amidst wholesale dumping of U.S. paper by...everyone. To heighten your acuity and stimulate the imagination, make this catastrophe a personal one. Pretend, for example, that it is the first of the month, that your employer and your $100,000 job are unexpectedly in dire jeopardy, and that you are about to send your mortgage lender a check for $2000 drawn on an account with $10,000 in it. The evening news is filled with reports that the Federal Reserve will do everything in its power to keep the system liquid, but they note as well that the dollar has fallen steeply relative to other currencies. All interest rates have soared spectacularly, threatening to send your ARM in the same direction. RA]
First, let me say that I’ve long enjoyed reading the rants of over-the-top inflationists like Jim Willie, but also the relatively subdued essays of Gonzalo Lira — even if the latter sometimes comes across as the kind of guy who could wear out a mirror. I feel a comradeship with both because, predictions about the financial endgame aside, I agree with much of what they have said — most particularly about the robust defensive role that bullion seems likely to play no matter what happens. But that is not to say that I agree with all of Lira’s and Jim Willie’s arguments. Some background is in order. My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
Expanding on that point alone, I could dismiss Lira’s entire argument with a wave of the hand, invoking the killer question that blogger Charles Hugh Smith has asked of overheated inflationists, to wit: Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen? The obvious answer is that they wouldn’t. And won’t. I’ve made this point myself many times before and in many ways, sometimes asking rhetorically whether we should expect Joe Sixpack and tens of millions of other underwater homeowners to be able to retire their mortgages using the confetti money that a hyperinflation would produce. Mortgage lenders would be big losers, of course, but so would anyone hoping to ever own a home — or to borrow money, for whatever purpose.
Unbearable Cost of ‘Escaping’ Debt
One of the best places to find the inflation vs. deflation argument deconstructed to a fine science, and to confront the horrific – and, as I am about to argue, unbearable — cost of “escaping” debt via hyperinflation, is the 1993 book The Great Reckoning. Co-authors Jim Davidson and Lord William Rees-Mogg went to great lengths to refract every aspect of the debate. It was this book, and a subsequent dialogue that I had with Jim Davidson, that hardened my deflationist ideas, convincing me – as they likely would many of you, though perhaps not Lira — that a deflationary path would at least be less ruinous than a hyperinflationary one. To be sure, vast amounts of real wealth would be destroyed in either case. But deflation would have the virtue of inflicting pain on debtors more or less in accordance with their sins, bankrupting those who most deserved it. That said, one needn’t drag in moral baggage to explain why the powers that be are extremely unlikely to pursue a hyperinflationary course.
And “pursue” is the correct word here, since, as The Great Reckoning made clear, hyperinflations don’t simply happen; they can only occur following the willful and deliberate decision of a sovereign government to hyperinflate. We need only consider the catastrophic consequences of hyperinflation to understand why such a scheme is so very unlikely to be promoted and effected by the Masters of the Universe. For starters, savers and lenders as a class would be wiped out, since their financial assets would become as worthless as the dollar itself. Bond markets and all other institutional conduits of saving and investment would cease to function in the absence of trust – trust that would take many years for capitalists to earn back. From day one, a darkening economy would subsist on cash transactions, which in turn would bring on the hardest of times, little economic growth, and a drop in the standard of living so steep that it might take a generation to rekindle even a glimmer of the American Dream.
Deflation’s ‘Virtues’
Deflation, on the other hand, would leave the bond and stock markets intact, sparing those with little or no debt from its worst ravages. For those who owe, a tidal wave of bankruptcies would mete out punishment commensurate with each borrower’s sins of profligacy and/or greed. Businesses would be starved for credit, but whatever savings were available would go to the most promising of them. Most advantageously for an economy on-the-mend, it would be many years before capital would be hijacked by the paper-shufflers and feather merchants. In both the public and private sphere, Americans would be forced to live within their means.
I won’t belabor Lira’s arguments where he attempts, not entirely without success, to “slice and dice” my logic when it is at its weakest. But his main criticism — that I have not made a case for deflation, only one against hyperinflation – is disingenuous. For in fact, I have stated the case for deflation thus: Someday very soon, following the precipitous failure of the world’s banks and securities markets, we will all be too broke to push the price of anything sky-high. Hyperinflationists assume we will have vast piles of cash at-the-ready, physical or digital, to exchange for real goods in a panic or along the way to hyperinflation. But will we? Read Lira’s smug hit-job a dozen times and you will find no mention of how that cash will get into our hands, much less into our hands if the banking system should go blotto. He avers only that, well before a collapse, via quantitative easing, the government will “ram” money “into the economy.” As if that hasn’t been tried to death already.
No Middle Way
If you believe that one or the other, deflation or hyperinflation, will eventually do us in, then you may find yourself won over by my argument simply on the evidence I muster against hyperinflation. Read on and judge for yourself. For what it’s worth, Lira’s ruinist essays suggest that we do see eye to eye on one thing – that there is no “middle way” that might allow us to avoid the catastrophic liquidation of a global debt bubble whose notional value has been estimated as high as a quadrillion dollars.
Let me dwell for yet another moment on this idea that Americans could go broke overnight. Lira apparently believes this unlikely, if not impossible, and he could be right. But not very, since it is beyond conjecture that the day-to-day economy would grind to a halt quickly if digital money were thrown into chaos and disrepute for more than a few days. And it’s not as though Americans are so very confident in electronic money’s soundness at this point that the banking system could withstand even a minor crisis. Unfortunately, and as we all know, there are no minor crises any more, especially in the financial realm.
We’ll All Be Broke
So, broke is what most of us will be when the dust settles, and it is perhaps only a matter of the rate at which we go broke that divides inflationist from deflationist. How quickly could the financial system come tumbling down? Last May’s “flash crash” on Wall Street demonstrated that it could occur in a trice. Picture the Morning After the next flash crash, but assume that, this time around, the Plunge Protection Team has been unable to arrest its spread into bond markets and other securities markets around the world. Hardly a stretch, right? But it’s a big stretch to imagine a hyperinflation arising from the smoke and rubble of the creditless world that would result.
Will we have gone broke without having had the chance to pay off our mortgages in snide? I say yes; Lira, for his argument to hold, is obliged to say no. I hope he’s right. Then again, maybe hyperinflation will unfold so slowly that we’ll all have time to trade piles of shrinking dollars for real stuff currently owned by…fools?
Whatever happens, I wouldn’t put much store in Lira’s assurance that even small branch-banks keep scads of cash around. Try to withdraw $25,000 from your own branch if you want to find out the truth. He’ll probably say that the banks, with a nod from Uncle Sam, could refill everyone’s account with digital money overnight. I say, think about that for a moment – about the economically fatal traffic jam this would create instantly in the world of real transactions.
Deflationary Gas-Bag
Lira’s arguments, although certainly not his ungentlemanly, preening condescension, are at their weakest when he attempts to explain how quantitative easing will inject a hyperinflationary sum of dollars into the real economy. He says our bankrupt government will simply spend limitless quantities of funny money into the “wider economy.” If it were that easy, why are home prices still falling after trillions of dollars worth of “stimulus”? And why have wages failed to rise? Granted, fuel and grocery prices have been going up. But how long can that trend continue with incomes stagnating and household discretionary cash plummeting? (That was not a problem in 1922 Weimar, by the way, for reason that I shall explain shortly.) And how many seats will the airlines fill this summer if prices stay above $500? With respect to the inflation of stock-market prices, we’ll let Lira shoot himself in the foot if he wants to argue that Wall Street’s cosmic gas-bag is other than a deflationary juggernaut waiting to implode. Meanwhile, a vastly larger gas-bag in the form of a global derivatives bubble is set to implode with irresistible force. Hundreds of trillions of dollars’ worth of collateral are destined to shrink to the vanishing point. That is the true measure of deflation’s force, and when it starts to snowball again as it did in 2008, no puny multitrillion-dollar monetization by the Fed will even begin to counteract it.
Finally, we cannot let Lira evade the question of how, specifically, the government will “ram” (his word) QE3/QE4/QE5 money into the economy, especially when the state and local governments who in earlier times would have been the most eager and efficient conduits for these sums have begun to refuse them, knowing as they do that each new stimulus dollar will only create more debt for future taxpayers. We’d like to believe that the common sense of Republican and Tea Party governors and legislators alone will suffice to smother any inflation that might otherwise seep into the economy via supercharged outlays of cities, counties and states. In fact, the deflationary opposite is happening as local and state governments expand layoffs and pare budgets to the bone. Which leaves only the private economy to receive a wage stimulus sufficient to catalyze hyperinflation. On that score, just as we’ve asked hyperinflationists to wake us when we can sell our home for a quadrillion dollars, we’ll ask them now to send us a job application when GM is paying assembly-line workers $800 an hour.
When Money Dies
Big employers effectively did so in Germany, allowing weekly wage settlements with then-pervasive trade unions to track hyperinflation almost step-for-step. But you’ll need to read Adam Fergusson’s book about the Weimar hyperinflation, When Money Dies, to understand exactly why the U.S. is legally and practically constrained from duplicating Germany’s dubious feat. If you believe otherwise — believe, as Lira evidently does, that the Fed could somehow put a google of dollars into circulation on demand — then you should be buying real estate hand-over-fist right now. When Money Dies is a great read even for those who’d rather not be disabused of the notion that today’s USA, economically and financially, is not 1921’s Weimar. I particularly recommend a chapter that recounts how the most extreme periods of German hyperinflation occurred while the country’s money-printing presses were idled by strikes. Turns out, some of Weimar’s largest employers had been authorized by the government to print scrip in the event that crates of official money didn’t arrive in time to meet payroll. Imagine what such a policy could do for Detroit! For the whole world!
Rather than argue that this couldn’t happen, we’ll say only that if it did, it would be but a momentary blip in a deflationary collapse in real estate that Lira doesn’t even mention. Just wait till the incipient collapse in commercial property values hits full-bore. This is yet another deflationary juggernaut that the arrogant and pompous Lira has conveniently failed to notice. He will soon, though, and the shock of it may yet distract his attention from an inflation that so far has barely overflowed the lettuce bin.
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First, I want to point out that the Federal Reserve is modeled exactly after Weimar Germany’s banking system. In 1907, a delegation from the United States went to Germany to study their banking system which was reputed to be the best banking system in the world at that time. They then returned to the U.S. and designed the Federal Reswerve system which was put into law in 1913.
Next, you raise an interesting point when you note that American wage earners do not have the negotiating power to obtain the ever increasing wages that were obtained by the powerful German trade unions. Therefore, you argue that German style hyperinflation is impossible without the increasing wages to push prices higher.
However, you are proceeding on a false assumption. You assume that it is increasing wages that cause prices to go higher and that, absent the increased wages, prices would remain stable. Would that this were so. If this was the case, our problems would be over.
Certainly, increasing wages can fuel the flames of inflation. However, at the end of the day, there isn’t any difference between wages increasing from $1 to $100 while the price for a loaf of bread increases from $1 to $1,000, and wages staying at $1 while the price of bread increases to $100. The net result is the same; the impoverishment of the people.
In fact, prices are rising. In the last 6 monthe of 2010, the wholesale price index was up an average of 22%. Wages haven’t gone up 22%. They haven’t gone up at all. But, according to your deflationary theroy, prices can’t go up without increased wages to cause this.
Perhaps “German style” hyperinflation is impossible, but American style hyperinflation certainly is possible. And, this “style” of inflation is prices increasing while wages do not.
You ask; “Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen?”
You have asked the 64 thousand dollar question. Or, adjusted for inflation, the 64 billion dollar question.
The men who control the Federal Reserve and the other central banks around the world are not the Ben Bernankes or the Alan Greenspans. These individuals are merely front men, employees, hired hands. Those with the real power are the owners of the central banks. And, their identities are, for the most part, a secret. The central banks, including the Federal Reserve member banks, are private corporations. The stock in these corporations cannot be sold. It can only be transferred by inheritence. These people are the real “masters of the universe”.
These people already have unlimited wealth. (How could they not. They have the power to print money.)
Now, they are seeking absolute power. The New World Order that you hear some priominent people refer to, is a one world government. This government will be controled by the same peiople that own the central banks. They will impose a cashless society, the world will be impoverished while they will live in luxury, and they will have absolute power.
In order to achieve their goal of a one world government, it is necessary to impoverish the middle class in all countries, especially the United States. The reason for this is that a country with a prosperous middle class would never agree to relinquish its soverignty.
Okay, I know that this sounds like crazy talk. However, before you dismiss it, check out a book called “The Naked Capitalist” by W. Cleon Skousen. Go to Amazom.com and read the reviews. This will, I’m sure, motivate youi to purchase and read this book. After you read it you will know that I am correct in what I say. So, don’t take my word for anything. Read the book.
When the dollar crash (which will likely be soon), the solution offered will be a North American Union with Canada and Mexico, and a common currrency called the Amero. If we agree to this, we will have relinquished our soverignty and the ability to rebuild our economy. The United States of America, as we know it, will cease to exist and we will be permanently impoverished.
I do agree with you about one thing. The hyperinflationary crash of the dollar will not happen gradually over a period of years or even months. In this age of instant communications, it is likely to happen overnight. If you would like to view a fictional scenario depicting this, go to YouTube.com and search for “The Day The Dollar Died”.
If you want to understand why the debt based monetary system that we have MUST eventually end with hyperinflation, I urge you to watch a video called
The Crash Course at ChrisMartensom.com.
Last, if you want to understand how the Federal Reserve operates and why it must be abolished, go to YouTube and search for a video called “The Money Masters”.
Let me close by saying that I wish you were right because deflation would be less painful than hyperinflation. But in order for deflation to happen, the government would have to be willing to default on its obligations. In other words, declare bankruptsey. Ain’t gonna happen. The politicians ain’t gonna put themselves out of business. Instead, they will continue to print money until our paper dollars are completely worthless.
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How far can prices rise, even for essentials, if households savings are non-existent, wages are stagnant, and unemployment is headed for 30 percent? RA
The first book I read when I was starting to get really concerned about the global economy in 2006 was “The Dollar Collapse” by an ex IMF economist Richard Duncan
Most of you will probably have read it.
Bottom line it will be death by ice or fire.
Looking at the evidence to date since 2008, governments are going to extraordinary lengths to prop up the banks and the financial system, living in Ireland I’ve seen the workings of our European overlords up close and personal .
Seems to me that Robert Prechter nailed it years ago in “Conquer the Crash” – we will probably get both , first a crushing period of deflation and only then will the hyperinflationary phase emerge from that ruin.
This current period of phoney war limbo can’t last forever, can it ?
Sorry correction “The Dollar Crisis”
I understand that it would not be in the best interests of the U.S. Federal Reserve and all U.S. banks to have hyper-inflation; however, the U.S. Fed is merely reacting to the increasing governmental debt placed on us by our politicians.
As the U.S. House of Representatives originates all financial and monetary appropriation bills [voted on by the House, the Senate and vetoed or signed by the president of the United States], and it is the job of Congress to oversee the U.S. Federal Reserve, the most likely long-term outcome is hyper-inflation, not deflation.
The U.S. Federal Reserve is supposed to be independent, but, in reality, it reports to the U.S. Congress.
On the other hand, either way, a hyper-inflationary or a deflationary depression will mean the end of business as usual, and a forced new way of doing business, which I like to call “financially responsible behavior” that will permeate the affairs of all private citizens, businesses, organizations, bureaucrats and politicians in the United States of America.
In the not so distant future, out of dire necessity this new “financially responsible behavior” will be demanded by all Americans.
Though it will look like the end of the United States, in reality, it will just be a new beginning, which will make us much stronger, wiser and more cautious, again.
We are just one of a long line of nations and civilizations that will have had to re-learn these lessons of history, which play over and over, again, throughout time and probably always will.
In the end, human nature is always the same, we learn from lessons, then we prosper from those lessons, the generations that lived through those lessons die-out, and then we go through the painful process of re-learning all of those lessons again.
I agree with KC. The Obama’s and Bernanke’s are just the puppets of the men behind the screens. They play a game which enriches them the most, that’s actually human’s nature. Besides that they like to manipulate.
They play a game, and no game plays out as foreseen.
People took the bait of increasing home prices. They manipulate interest down, and instead of shelter people regarded their home as a cash machine. The mantra was real estate never goes down. That play worked out okay, but now it has burst. Sure thing the puppeteers saw it coming as they orchestrated it. In 2000 I bought my first home. I never followed real estate, but I was amazed what a home cost me. I paid down cash in full. I knew something wasn’t right, but I knew nothing about the monetary system and the manipulations in it. Everybody said real estate would skyrocket forever, but I counted on a 150,000 usd loss as a home is only shelter, you can’t expect the children of the future only work for a roof over their heads. It took an overwhelming long time, because only now it’s beginning to go down in Holland, after it indeed went further up for a time. I don’t care at all because a home is a place to sleep. I don’t care what my home is worth, because I would like to die in it. Then in 2008 I started to investigate the monetary system and started to study the financial system. It’s bubble to bubble, and mainstreet pays the bill as it has always been. A gradual devaluation of fiat paper is a slow process which produces a long time of enrichment for the elite. I retired 11 years ago at the age of 36, but as real estate soared further I got a little worried about cash capital. In 2008 I started to study the internet, GATA, Schiff, Zeitgeist, Faber, Calente, Prechter and so on. I took action and did well. It’s bubble to bubble, where in the meantime higher inflation than wage increases will lower the standard of living. A gradual process, but accidents could happen. It’s all about manipulation. When the euro was forced upon us the government promised the stability pact which included a maximum money growth of 4,5%. When I checked the ECB site in 2008 I found money growth was some 12%. I never heard of it in the media, but it jumpstarted my hunger for investigation on the internet.
The trouble I experience now is a lot of debates make sense to me, and they vary from deflation, inflation, hyperinflation, stagflation and so on. All the debates make sense to me. Debt can’t grow forever and must implode. Money printing can go on forever. One thing will be sure, the standard of living in the west will go down.
We live in interesting times. If people fall back on the essentials of life, they tend to rethink things. Let’s hope it will be gradual process as no one lives happily in chaos. I financially gained by the ongoing process, but I would have hoped it wouldn’t be necessary as chaos I wouldn’t like to see. Common sense should prevail, and to me common sense is to stay out of debt. I never owed one penny to anyone, and allways lived below my means. I always lived worriefree and slept well.
Hard to say exactly how this is going to work out. If it was me solving the problem I would deflate first driving the world into depression. Then and I would do the necessary money printing. When money is very hard to come by people really don’t care if the government is printing it. Depression holds prices down and reduces the cost of everything including entitlement programs and debt service. Under such circumstances a nation could get away with monetizing a large portion of it’s debt without causing serious inflation. The inflationary effects of all this new money would be minimized or postponed until the population recovered from their financial woes and began to consume again.
Thought you might like to read this piece found on Wikileaks.
http://mirror.wikileaks.info/wiki/Shadowy_Bilderberg_group_meet_in_Greece_-_and_here%27s_their_address/index.html
I’m afraid Rick has skewered his deflation argument with the description of $100 offer / no bid for 1 doz eggs. Sounds to me like that equals infinite inflation.
I came across this Chris Martenson interview with Paul Tustain of BullionVault fame today. Paul eloquently and succinctly ends the inflation/deflation argument once and for all during the interview.
http://news.goldseek.com/GoldSeek/1302277170.php
” But in fact, the point that I have been trying to make is that what we will get, what we will hear from governments as they print money, is that it is a relatively modest amount of money that they are printing. And in fact, it is, that is perfectly true. But it hides the thing that is really going on. And this is the thing that really worries me. When you just print even a little bit of money, if you just print whatever it is, seven hundred billion dollars, or whatever, it sounds modest next to coins and notes of some fifteen trillion dollars in circulation, but it sends a very powerful message to savers. Now if you look at that monetary stock, it has got this time element built into it. You think of the hundred trillion dollars of bonds, they are basically spaced out over broadly about a twenty-year period. Most of that money was frozen into the bond market freely by people who owned the debts. But they basically had this signal from QE that it is no longer safe to put money out to twenty years. And indeed, you will see that the likes of PIMCO have basically withdrawn all their money from U.S. Treasuries because they think that it is so fatal.
Now what that means is that you give the markets that signal that you are going to print money whenever the going gets tough, but eighteen-year bonds or twenty-year bonds are all still eighteen and twenty-year bonds. And the clock has to wind down, allowing those bonds to get to the short end. And you see steadily, and this of course already happened in Greece, you see a mountain of money, as it gets redeemed, even a twenty-year bond which gets redeemed, is going to be re-invested in the short end. Nothing goes back out to twenty years. And so you get this hump of money at the short end and short-end money behaves very much like cash. That is why it is kept at the short end; you can sell a short dated bond for very near its cash value, its nominal value. You cannot necessarily do that with a long-term bond. So with this pile of money at the short end, you have got, instead of having twenty trillion in coins and notes and near-term money, you suddenly go up to one hundred and twenty trillion in coins and short-term notes but getting there, is going to take fifteen years. And that is the point. The switch has been flicked and it is not possible to un-flick it. So that shift to the short end is clearly happening. If you look at quantitative easing now, it is essentially making the financing of bond purchases very cheap but the bonds themselves are still, lets say in the fifteen-year end, anything from seven years up, which is basically in the quantitative easing stock. But they are only being bought by banks, because the banks can put them back to the central bank because the central bank has got a mandate now to buy illiquid long-dated quality bonds. So that is where they all end up, everyone connects it and goes back into cash which is provided by the central bank when it buys these long-term bonds and converts all the holder’s money back into cash. So it creates this mountain of short-term money. And this is why you get inflation and deflation at the same time.
What you have got now, is an increasing glut of short-term money chasing all the things that people buy with short-term money, and that seems like your shopping basket or the gasoline for your car. But you have got a shortage of long-term money and that is what you would use obviously to buy a house. So your house, there being a shortage of money, is falling in price but the things that you buy in your shopping basket, they are all increasing in price. So the inflation has switched round from where it was in 2005 but it was the other way around as all of the money was swept out to the long end to finance house purchases. It has switched round now and it now both ways, it hurts people who have savings. Their cost of living goes up, their assets go down in value, and their standard of living steadily slides as they compete on world markets for their commodities, their food, their clothes and their oil that are the compulsory purchases of life. And for which you are competing for, on international markets, with Asians who now are sitting on a stock of two trillion dollars.”
&&&&&&
This is a lucid desciption of what is in fact happening, but it stops short of predicting an outcome. As how could it? In terms of size, there is no precedent for the debt collapse still to come, nor can their be any certitude about the response politicians and the Fed will attempt. So far, they have guessed wrong about how many trillions of dollars’ worth of stimulus it would take to arrest the deflation in real estate.
Whatever is still to occur, no one can say for certain whether it will lead to hyperinflation or deflation. As FOFOA points out, the two are nearly identical. But if the dollar is repudiated overnight, don’t expect that, necessarily, to produce hyperinflation. The implication of $100 eggs and no bid in no way “skewers” my argument. Indeed, it is a deflationary paradigm. RA
Marcel: great quote, thanks!
On the possibility of the commencement soon, of a deflationary (OR inflationary) world depression, I would like to read opinions on this forum, on the specific bearing the following wikipedia excerpt has, on this particular matter.
(Excerpt taken from wikipedia´s definition of
´Mark-to-market accounting´–
especifically taken from it´s last section, entitled:
´Effect on subprime crisis and Emergency Economic Stabilization Act of 2008´):
———————————-
Note—I placed in CAPS, words or sentences I found to be the most pertinent (to this thread´s argument, whether there is soon a forthcoming deflationary, OR inflationary, depression).
Additionally, to the subjective inferences below I felt were the most hypothetically questionable, I added MY OWN questionmarks at their end: (?)
I have not changed one word in this wikipedia article– you can go to wikipedia and read it yourself.
As far as I know, the section I have quoted herein was added to the ´amrk-to-market´ definition, sometime in late 2009.
(FYI, I have only reduced the capitalized acronyms (such as ´MBS´or ´FDIC, down to ´m.b.s.´ or ´f.d.i.c´), so they are not confused with MY use of CAPS, for what I found to be most interestingly relevant.
I also separated some sentences into paragraphs, to make more readable what I considered of consequence.
————————————–
¨FORMER f.d.i.c. Chair William Isaac placed much of the blame for the subprime mortgage crisis on the Securities and Exchange Commission and its fair-value accounting rules, especially the REQUIREMENT FOR BANKS TO MARK THEIR ASSETS TO MARKET, PARTICULARLY mortgage-backed securities.
Whether or not this is true has been the subject of ongoing debate.
The debate arises because this accounting rule REQUIRES companies to ADJUST THE VALUE of marketable securities (such as the mortgage-backed securities (´m.b.s.´, at the center of the crisis) TO THEIR MARKET VALUE.
The INTENT of the standard is to help investors UNDERSTAND THE VALUE OF THESE ASSETS at a point in time, rather than just their historical purchase price. BECAUSE THE MARKET FOR THESE ASSETS IS DISTRESSED, IT IS DIFFICULT TO SELL many m.b.s. at other than prices which may (OR MAY NOT)(?) be reflective of market stresses, which MAY(?) be below the value that the mortgage CASH FLOW related to the m.b.s. WOULD MERIT(?).
As initially INTERPRETED(?) by companies and their auditors, the typically lower sale value was used as the market value rather than the CASH FLOW VALUE(?).
Many large financial institutions RECOGNIZED significant losses during 2007 and 2008 as a result of marking-down m.b.s. ASSET prices to MARKET VALUE.
For SOME institutions, this also triggered a margin call, where lenders that had provided the funds using the m.b.s. AS COLLATERAL had contractual rights to GET THEIR MONEY BACK. This resulted in further forced sales of m.b.s. and emergency efforts to obtain cash (liquidity) to pay off the margin call.
Markdowns may also reduce the value of BANK REGULATORY CAPITAL, requiring additional capital raising and CREATING UNCERTAINTY(?) regarding the HEALTH(?) of the bank.
It is the combination of the EXTENSIVE use of financial LEVERAGE (i.e., borrowing to invest, leaving LIMITED room in the event of a downturn), margin calls and large REPORTED losses that MAY(?) have exacerbated the crisis.
IF(?) CASH FLOW-derived VALUE(?) — which EXCLUDES(?) market JUDGMENT(?) as to DEFAULT RISK but MAY(?) also MORE(?) accurately reflect ‘ACTUAL’(?) value IF the market is SUFFICIENTLY(?) distressed — IS used (rather than sale value), the size of market-value adjustments under the accounting standard would TYPICALLY(?) be reduced.
One MIGHT(?) question WHY banks or GSEs (Fannie Mae and Freddie Mac) are allowed to use HIGH-RISK, DIFFICULT-TO-VALUE assets like m.b.s. or deferred tax assets as PART of their regulatory CAPITAL BASE.
Whether a margin call is involved IS NOT part of the accounting standard itself; it is part of the contracts negotiated between lender and borrower.
Critics charge that claims that this had happened are akin to claiming “the problem, in short, is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could NEVER be repaid. It is that SOMEONE IS FORCING THEM TO FESS UP. If only the banks could PRETEND(?) the assets WERE valuable, then THE SYSTEM(?) would be SAFE(?).”
On September 30, 2008, the s.e.c. and the f.a.s.b. issued a JOINT clarification regarding the implementation of FAIR(?) value accounting IN CASES(?) where a market is DISORDERLY OR INACTIVE(?).
This guidance CLARIFIES(?) that FORCED liquidations are NOT INDICATIVE(?) of FAIR(?) value, AS this IS NOT an “ORDERLY”(?) transaction.
Further, it CLARIFIES(?) that ESTIMATES(?) of FAIR(?) value CAN be made using the EXPECTED(?) cash flows from SUCH(?) instruments, provided that the estimates REFLECT(?) adjustments that a WILLING(?) buyer WOULD(?) make, such as ADJUSTMENTS(?) for DEFAULT and liquidity RISKS(?).
Section 132 of the Emergency Economic Stabilization Act of 2008, titled “Authority to SUSPEND Mark-to-Market Accounting” restates the Securities and Exchange Commission’s authority to suspend the application of f.a.s. 157 IF the s.e.c. DETERMINES(?) THAT IT IS IN THE PUBLIC(?) INTEREST AND PROTECTS(?) INVESTORS.
Section 133 of the Act, titled “Study on Mark-to-Market Accounting,” requires the s.e.c., IN CONSULTATION WITH the Federal Reserve Board and the Department of the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including IT´S EFFECT on BALANCE(?) sheets, IMPACT on the QUALITY(?) of financial INFORMATION(?), and OTHER(?) matters, and to report to Congress within 90 days on its FINDINGS(?).
The Emergency Economic STABILIZATION(?) Act of 2008 was passed and SIGNED INTO LAW on October 3, 2008. On October 7, 2008, the s.e.c. began to conduct a study on “mark-to-market” accounting, as authorized by Sec. 133 of the Emergency Economic STABILIZATION(?) Act of 2008.
On October 10, 2008, the f.a.s.c. issued further GUIDANCE(?) to provide an EXAMPLE(?) of HOW to estimate FAIR(?) value IN CASES(?) where the market for THAT(?) asset is NOT ACTIVE(?) at a REPORTING DATE.
On December 30, 2008, the s.e.c. issued its report under Sec. 133 and decided NOT to suspend mark-to-market accounting.
On March 9, 2009, In remarks made in the COUNCIL ON FOREIGN RELATIONS in Washington, Federal Reserve Chairman BEN BERNANKE, “We should review regulatory policies and ACCOUNTING RULES to ENSURE(?) that THEY(?) do not INDUCE(?) EXCESSIVE(?) (SWINGS in the financial system and economy)”.
Although he doesn’t support the FULL suspension of BASIC proposition of Mark to Market principles, he is OPEN to IMPROVING IT(?) and provide “GUIDANCE”(?) on REASONABLE(?) ways to VALUE(?) assets to REDUCE(?) their pro-CYCLICAL(?) effects.
On March 16, 2009, f.a.s.b. PROPOSED ALLOWING companies to use MORE LEEWAY(?) in valuing THEIR assets under “mark-to-market” accounting, a move that could EASE(?) balance-sheet PRESSURES(?) many companies say THEY ARE FEELING(?) during the economic crisis.
On April 2, 2009, after a 15-day public COMMENT(?) period, f.a.s.b. EASED the mark-to-market rules.
Financial institutions are still required by the rules to mark transactions to market prices BUT MORE SO IN A STEADY(?) MARKET and LESS SO(?) WHEN THE MARKET IS INACTIVE(?).
To proponents of the rules, this REMOVES(?) the UNNECESSARY(??) “positive feedback loop” that CAN(?) result in a DEEPLY weakened economy.
On April 9, 2009, f.a.s.b. issued the OFFICIAL update to FAS 157 that EASES the mark-to-market rules WHEN(?) the market is UNSTEADY(?) or INACTIVE(?).
EARLY ADOPTERS were ALLOWED to APPLY the ruling AS OF March 15, 2009, and THE REST as of June 15, 2009.
It was ANTICIPATED that THESE changes COULD(?) SIGNIFICANTLY boost banks’ statements of earnings and ALLOW THEM TO DEFER REPORTING losses.
The changes, however, AFFECTED accounting standards APPLICABLE TO A BROAD RANGE OF DERIVATIVES, NOT JUST banks holding mortgage-backed securities.
Opponents argue that the IMPLICATIONS for investors are that the VALUATION of assets UNDERLYING SUCH securities will be INCREASINGLY DIFFICULT TO ANALYSE, NOT less so.
An example would be DETERMINING a company’s ACTUAL ASSETS, EQUITY and earnings, which WILL BE OVERSTATED IF the assets are NOT ALLOWED to be marked down APPROPRIATELY.¨ [citation needed](?)
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Bottomline–As of March 15, 2009, publicly-held banks can now publicly report the valuation of their ´assets´(INCLUDING derivatives), pretty much in any way they ´feel´ like–as to never create ´uncertainty´, or appear ´unhealthy´, nor ´unsteady.´
And with the full authorization (and encouragement) of ALL their oversight govermental agencies.
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Curiously, March 15, 2009 is also EXACTLY when, the current ongoing 2-year+ stockmarket rally started.
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So, in your opinion, is LEGALLY ´flexible´ public bank reporting, deflationary or inflationary?
For I have never read anyone, anywhere on the net, writing about the effect of the repeal of mark-to-market rules in early 2009, for ALL public corporations (not just public banks, but also home builders, mortgage lenders, etc.).
So I would like to know what you think about it.
Deflationary, or inflationary.
“Satan, your kingdom must come down” (Buddy Miller – from the Written in Chalk album) – couldn’t resist it – nothing personal intended.
I do hope this is not a troll. You will easily find a great deal of material which discusses “mark to market”, its abandonment, and why everything is “still OK” – accounting presses were rolling out little else. I am myself an erstwhile accountant by profession (I am ashamed to admit) and I think if you need to ask whether what we have now is better than mark to market you need the help of your local pharmacist.
The only body of opinion to defend the abandonment of MTM in favour of “make it up as you go along”, are the banks, who have more than a little self interest at stake. MTM was accused of a destabilising effect when volatility is extreme, because they allow some measure of ad-hoc revaluation of organisations before reporting points come around. Obviously that means that if you are a large (listed) bank and your balance sheet little else but CDS, CDO’s, MBS’s etc then you are likely to be in the glue, and it is for this reason that the banks hollered out against MTM.
Unfortunately, Yerunca Sam needed to rubber stamp the notion or mainstreet might have understood rather quicker that Ben and Timmy had decided to shore up the rotting detritus of the world banking system – and in doing so had also decided to sacrifice the labour of the sons and daughters of mainstreet for the forseeable future.
Yerunca Sam complied with record indecent haste.
We now have no accounting principles left worth talking about – the FASB has long since abdicated any notion of integrity it may ever have had, and reported results are about as much use as the official NFP numbers. But earnings – “the number” – will be ruler straight, the ridiculous tree full of simians which is dubbed the NYSE will continue to generate bonuses for said simians, and by the time anyone gets really serious about fixing things, retribution will be impossible as those who brought these ills will have enjoyed their fabulous retirements, and will long since have abandoned high office – public or private.
Inflationary or deflationary was your question, and on balance I think it is clear that an absence of any consisten basis of valuation is likely to prove more inflationary than MTM, if for no other reason than it allows creative accountants to realise revaluation surpluses, and more importantly avoid making provision for unrealised losses thus keeping the money mills turning. Yes and of course, playing around with the reserve asset ratio, and potentially freeing up even more capital for recirculation via the bankers magic trick – fractional reserve money production, their favourite trick of all… If MTM had been retained, and proper and rigorous application of reserve requirements review had been put in place, a tier of banks would have been lost, their investors would have received nothing, and borrowing from Rick Ackerman – the “jig would have been up” with the massive global credit expansion of recent decades. It was to preserve the apparent loan value of worthless credit that the bailouts were conducted. My own opinion is that these gentlemen who brought us these financial miracles of loan vehicles would have been better returned to work on the petrol pumps, or pea picking. Instead, we elected to have them continue to run our miserable existences, and well… hell we might as well commit the kids for a few decades at the same time, so we did that too.
William Wilberforce might have chuckled if he could have foreseen that the slave trade of his own time would be replaced by an insidious financial slavery with the willing acceptance of the dumbed and ever dumber populations.
The only problem with arguing the inflationary effects of MTM is that right now, consumer borrowers, without whom the fractional reserve thing stalls, are right now in very short supply.
Just one further side issue – I should like to point out that some comment recently heard to the effect that banks do worse because of the low interest which currently apply is complete codswallop. Bankers LOVE low interest rates – their lend borrow spread – typically 3% or better – stays exactly the same and makes their gross lending margin look obscenely good.
You explained why we wouldn’t head into a Weimar Republic engineered hyperinflation but were the dynamics in Zimbabwe and Argentina different? If so could you explain why that scenario couldn’t be repeated in the USA?
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Zimbabwe’s economy was 100% cash; and Argentina’s currency, unlike the U.S. dollar, is not a global reserve. An “Argentina” could conceivably happen here, but it would have global repercussions that would make their experience seem like a ripple on a placid pond in comparison. RA
Someone please explain to me how Mr. Drockton is coming to his conclusion that silver may hit $ 1,000 before year’s end? I’ve read his article 5 times and cannot create in my mind, a scenario in which this would occur. What conditions have to exist for this to happen?
http://www.moneyteachers.org/Paul+Drockton+Silver+Predictions.htm
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On the epiphany of the dollar’s worthlessness, think about how many who hold paper gold would seek to convert it to physical. If, in the ensuing collapse of the dollar, the CFTC, for one, were to require that all contracts settle as specified, it might well cost one $1000 to acquire an ounce of physical Silver for instant delivery. This is akin to the cash market that develops for stocks that have been subjected to a short squeeze. Shares might be trading for $30, but you could pay $100 or more for it in the cash market if you were short the stock and needed to come up with a certificate that day. RA
Excellent wrap up.
http://www.financialsense.com/financial-sense-newshour/big-picture/2011/04/08/03/john-butler/inflation-tipping-point
It seems that you and Jim Willies have differing definitions for hyperinflation and deflation. All I know is that gas is going up by leaps and bounds, and groceries, (food prices) continue going up. It seems to me up is inflation and down is deflation is down. Maybe he is speaking of what causes the man on the street to notice something going up and you are noticing the dollar going down. I am enjoying the dollar going down since it is causing my investment to go up, (inflation), since most gold mines are not worth the current price.
Capitalism needs increasing credit to expand, otherwise it contracts. After decades of finding new ways to extend and expand credit most recently derivatives, the cost of credit would appear to be greater than goods produced due to the enormity of the debt despite low interest rates thus leading to stagnation. J6P knows times are tough, but sees light at the end of the tunnel because good news media reports the stock market and their pensions in US$ rather than gold. Even when measured in gold, the gold price has been greatly suppressed. So much of the recent and even past progress is really inflation which J6P does not see because of his faith in the $. As long as the $ can buy oil at a low price (Petro dollar) under military pressure, both central banks and J6P will hold and need $. Stagflation will not give way to hyperinflation til the $price of oil goes wild.
But as Rick points out, will J6P have a wheelbarrow of $ to buy gas? Hyper-Stagflation?
What I meant to say above (in short words) was that QE is just creating a massive negative feedback loop wherein it only succeeds in destroying the initiatives it seeks to promote.
It means that the effort is a one-trick pony and it cannot be successfully reproduced twice. This is why we will see an end to that initiative. It will not be saleable next time around if it only results in another deeper recession and greater jobs losses.
Can everyone else see what I am getting at here?
The “inflation effect” brought on by the QE’s will be defeated by the process of the QE’s too as energy that goes out of reach eventually drives a deflationary effect on stocks and housing. Furthermore, as the stimulus money is withdrawn then commodities will also fall and all we will really have left is an entry point into a depression.
I hope there will be one person out there who will comment on this thought and tell me why it should not be absolutely obvious to all.
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I will add one last remark here and I think it is just stating the obvious…..If Quantitative Easing and Monetization are indeed what is driving up commodity prices then the whole exercise will become self defeating as rising energy costs will send us back to where we began.
I mean back to recession from whence we came.
They (the Fed) are “easing” to boost economic activity and growth while creating a wealth effect in stocks right?
Well the Goose that is laying the golden egg (QE’s) is actually an albatross around our necks as high oil prices will bring the recovery to a screeching halt and send us all back into an even nastier recession.
And you thought property could not become more worthless while the last bit of sweat and blood got squeezed out of your wallet to cover heating and energy costs along with food and health insurance, right?
You ain’t een nuthing baby! This is a no-win game anymore. Next time there will be no rabbit coming out of the magicians hat. Just despair.
I’m glad that you can agree that the dollar can collapse. But you are debating some ridiculous caricature of the “inflationist” argument. I admit that the deflation argument sounds pretty good when pitted against some simplistic argument such as: “prices will hyperinflate because the Fed will digitally print billions and trillions, etc. in order to liquify/save the economy.”
Your blog article mentions various issues in a way that appears you think “inflationists” are completely oblivious to these points. When I say, “inflationist,” I am referring to economists and financial experts who have long-predicted that the U.S. will experience massive inflation or hyperinflation due to the monetary policies, corporate fraud and other government policies. I cannot speaking for all “inflationists,” but anyone who follows them would probably agree that:
1. “Inflationists” have long predicted the housing bubble and collapse (and many predicted the NASDAQ bubble).
2. “Inflationists” have long predicted that commercial real estate will collapse.
3. “Inflationists” are very aware of the trillions of dollars in derivatives waiting to blow up.
4. “Inflationists” are aware of the “velocity of money” or “money needs to get from the banks to the people” argument … and do not find it convincing for various reasons.
5. There was an “inflationist” appearing on CNBC a few days ago pointing out that we have had “inflation” and “deflation” in the same commodity over the last ~40 years at the same time. If you don’t understand how this is possible, you have not really been following the “inflationist” argument.
That “killer question” by Charles Hugh Smith can be addressed very simply. Those rich and powerful men that control the Federal Reserve won’t be wiped out because they will have most of their assets in commodities, gold, land, company ownership, foreign currencies, etc. Do any of our multinational companies have money abroad? Did some major company recently divest itself of most of it’s U.S. Treasuries? These guy (and gals … Blythe) are not the total bumbling fools they pretend to be. Then, when there’s enough pain and fear, we can have a new world order currency or monetary system pushed on us that can insulate the financial terrorists from national government control.
When you mention that if the dollar collapses, we could avoid hyperinflation because we would quickly abandon currencies and move to a barter system. I suppose that is possible, but more likely, in my opinion, is that by the time the U.S. dollar is ready to collapse (or just after it has collapsed and we have defaulted as a government), there will have been tremendous inflation pain and the fear will be so great that we will welcome our financial overlords “blessing” us with a new world monetary system.
To answer your question, if there was a wholesale dumping of U.S. paper, that would mean that I would be unable to afford products and commodities from abroad unless I had a massive and sudden salary increase. The same would be true for wholesalers and retailers selling items from abroad. Yes, I won’t have much of a supply of money under your scenario, but the foreign manufacturers won’t lower prices just because I can’t afford it. Under normal circumstances, store shelves would empty out until we could supply things locally. Things that we actually make in the U.S. such as agriculture, weapons, more weapons, and energy … well the bigger companies and distributors would prefer to sell things abroad to get non-collapsing currencies. I would default on my mortgage (if I had an ARM), use my gold/silver (if I had any) to buy land, build my own house and forage/garden for my food and use my food supplies until the chaos subsides. My bad mortgage debt will be bought up by the Fed with the taxpayers as the ultimate responsibility … at least until we get a new monetary system.
Twoggle
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For starters, I think you’ve greatly overestimated the financial acumen of the rich. Their financial advisors are not exactly out-of-the-box thinkers, and their wealth has grown mainly in conventional ways. No hard statistics to back this up, but my gut feeling is that they have $100 in real estate for every $1 in bullion.
Concerning all of the things inflationists supposedly foresaw, you’ve deliberately avoided following these predictions to their conclusion. It’s not as though the collapse in residential and commerical real estate has already run its course. Nor do you attempt — for obvious reasons — to follow the thread of your own logic when you assert that bad mortgage debt will eventually fall on taxpayers’ shoulders. That is not exactly making an airtight case for inflation.
Ultimately, no claim made by either inflationists or deflationists can be made airtight. But deflation will surely occur in the absence of Fed efforts to counteract it. That doesn’t mean the bankers have the will or the desire to do so, though, since they really will be the big losers. The wild swings in supposedly “safe” assets in recent years should tell you that there is no safe haven. Even bullion’s course cannot be predicted with certitude. RA
Cam Fitzgerald April 10, 2011 at 5:38 am:
“I hope there will be one person out there who will comment on this thought and tell me why it should not be absolutely obvious to all.”
Cam, you’ve absolutely nailed it. Perefect. Indeed, that is all they can accomplish with QE.
And that’s because they’re hoarding the QE money for themselves. Not that our having a bigger slice of that pie would help, but since they use it to prop up prices, and we’re only as a whole getting broker-er, they simply will not keep prices at those heights.
True, it will hurt them in the end, too, but hey… from their perspective, isn’t it better to be a taller pygmy than pint-sized pygmy? That is how they will protect the FRN from the ravages of us. But oh, the agony of depression…
And while many think that government will just up entitelments, no, they won’t. With the recent defeat of a once-powerful state union, more are certain to come. And if for no other reason than spite, the public unions, as they fall, will join in the cutting games.
This, in my view, ensures that the FRN will die from loss of faith, not hyperinflation. If, that is, people don’t feel like bearing this out for at least another generation or two. I don’t, and I make no secret of that!
I almost forgot… You were looking for an explanation as to why this isn’t obvious to all?
Aside from misguided notions, I believe people pray for the “wrath of god” to end this, rather than their assertion of their liberties. So much easier that way, but it’ll never happen without effort on our part.
Delving a bit deeper, holding that hyperinflation is “inevitable” also creates a sense of security in the eternal sense. ie, It allows people to feel no pressure or guilt for living and dying in a world where the evil is certain to die on it’s own; aside from mechanical “wrath” saving them through hyperinflation, they also needn’t worry about future generations, how they leave the world.
And I ought to know because I used to think that way.
But at this point, it is impossible for me to overlook profound honesty. We have got to do what we must do. There is no getting around that.
Many thanks Benjamin,
I was happy to see you shared my concern that the QE’s may just lead to a repeat of the cycle we just got out of and may in fact accelerate that trend which has been only temporarily forestalled.
The implications for rising interest rates just makes the certainty of a return to recession an inevitability to my way of thinking as the advent of that prescription comes concurrent with an evolving commodity bubble that looks to ruin the party of its own accord.
I am worrying a little too much out loud I suppose but it still strikes me as ironic that commodity inflation which only eats up our surplus savings and deprives us the use of excess disposable income is the true bogey man here. In China on the other hand there is a more certain and predictable course underway that is seeing buying power increase as wages rise in tandem with the inflation effect while a Renminbi that floats would turn that nation into a superpower overnight.
Our inflation ironically enough will eventually lead to a deflator effect as it harms all consumption and simultaneously reduces economic activity without offering income growth or the opportunity of more savings.
Can we say “squeezed” between a rock and ahard place now?
To PH Niebyl,
“Capitalism needs increasing credit to expand, otherwise it contracts.”
Gross over-simplification. What does expanding credit mean? Relative to what? When you exclude the period from the mid 20′ through the late 40’s (bubble, crash, war), and you exclude the period from the mid 90’s till now (bubbles, crashes, ongoing wars), total US credit market debt as a % of GDP (this includes Fed, State-Muni, Corporate, Mortgage, and Consumer) ranged from 140% to 200% of GDP.
So long term, credit does NOT have to expand relative to GDP. It needs to track GDP. This is at the heart of responsible central bank policy and financial system macro-regulation.
The bubble, crash, war cycle is a cultural phenomenon of mass stupidity. People lose the wisdom of experience, and embark on credit expansion that outpaces GDP. It becomes a self reinforcing cultural phenomenon, and ends badly.
So to say you have to expand credit for capitalism to work, is to lose sight of the fact of how that growth must be paced. When a cycle of continuous credit growth that outpaces GDP year after year takes hold, you are not promoting growth, you are stealing from the future, and the price will eventually be paid.
FYI….total credit market debt is currently at 365%. It was set to collapse, as the inevitable debt default in the private sector (where most of the debt was) took hold in 08…but we have stepped in, and transferred that debt to the public sector…in hope of getting the credit growth to continue….
My question is continue to where….400%, 500%? Do these fools actually think there is no limit? Hey…lets pull and Iceland…1200%!!
“Expanding on that point alone, I could dismiss Lira’s entire argument with a wave of the hand, invoking the killer question that blogger Charles Hugh Smith has asked of overheated inflationists, to wit: Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen? The obvious answer is that they wouldn’t.”
This assumes that a) the rich and powerful actually know what they’re doing, and b) have the means to act on that knowledge. I’m not sure that’s true, and I think history bears that out. No need for a list of fallen empires – I think anyone who reads a little history will draw the same conclusion.
What this means in practical terms is that the rich and powerful, by their very effort to avoid a certain outcome may in fact precipitate it.
The serial bubbles of the last few decades are a good example. Each new attempt to avoid a loss (brought about by the greed and hubris that goes with being rich and powerful) sets the ground for the next failure and subsequent similar reaction. It’s all very predictable – the only question is, at what point are the physical limits reached? Everything has it’s breaking point. Do the rich and powerful see it coming? If so, why embark on a course that leads there? If you see it coming, why not take steps to avoid it?
Wealth, yes, but I doubt these people have as much power as we credit them with. In truth, they’re just as swept along by events as the rest of us. Their position may be more advantageous, but it also leads to a false sense of confidence that ultimately proves their undoing.
Trying to prevent something brought about by one’s own greed and conceit? How much success can it have?
ebear
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It would be lovely to think that Soros and his evil ilk will be consumed in the flames. Although hyperinflation would likely achieve this, I still have my doubts that that is what is going to occur. As I tried to make clear, hyperinflation doesn’t simply happen — it must be willfully and deliberately pursued. This would become likely if populist forces controlled the money upply and interest rates. Clearly they don’t; it is the bankers who are in charge. RA
Soros and his pals no doubt have their escape helicopters on standby. They didn’t get where they are by not anticipating contingencies. That said, it’s impossible to anticipate every contingency, so there’s always hope;)
I would agree that hyperinflation is an intentional strategy, unlikely to be pursued except as a last desperate attempt to retain control. In that scenario you’d have a general collapse where the agents responsible (bankers or otherwise) would withdraw to a safe distance. Their wealth, no doubt reduced, would still be sufficient to retain control in the new, smaller game that would result. Meanwhile, the suffering of millions is of little consequence to them since the pathology of the controller is to maintain control at any cost.
Getting back to the original question then: If we equate hyperinflation to the destruction of a currency, then the clear path to survival is to have one’s wealth offshore, or in some other asset that retains value in relative terms. That’s my answer to the question of “what if we woke up one day…etc…” But if I can prepare for it, certainly a banker can, and given the international nature of their trade it’s not hard to imagine them intentionally ruining a currency in order to pick up the pieces later at a sharp discount. Isn’t that what the IMF is accused of doing in concert with international banks?
From that standpoint the argument vis-a-vis the USA becomes “it can’t happen here” not that it can’t happen at all, since clearly it already has.
ebear
Bozzy,
Here is a defense of the suspension of MTM rules from someone other than a bank. And let me add that I hope the suspension does not become permanent, although it looks that way.
Please understand that this simplistic explanation is how I came to support the suspension of MTM. Assuming a default rate of 20% and a devaluation of 20% resulted in a “real” loss of a minimum of 20% and a maximum of 40%. But only an income loss of 20%. As no one wanted that paper it was only worth 20-30 cents on the dollar. But it was still earning 4% instead of 5%. So now my $1000k piece of paper, which had a “real” worth of minimum $600k can only be sold for $300k, but is earning $40k. And if held to maturity that paper will give me back $600k-800k or more, + income. But the rules are going to force me to close my doors as my asset ratio is now too low and someone else (a vulture-LOL) is going to swoop in and make a killing. I just do not see how the Powers That Be could make any decision except to suspend MTM.
Don’t know if it was the right decision, but it was the correct decision to help keep the banking industry from failing. That is a discussion for another day, but IMHO, the average man on the street benefited from the MTM rule change back to what that rule was a couple of years before that change for a total banking collapse helps no one. Again not arguing that we may or may not still be headed that way, it is just the chaos that follows will not be pretty and older citizens, like me, are particularly vulnerable.
There are times various markets act very irrationally, in either direction, and that was one of those times. If Bernanke et al have any chance of pulling this out of their butt, any action that reduces irrationality is the correct action.
Donniemac – many thanks for the comment – just spotted.
I too am a “mature” taxpayer, albeit in France rather than the USA. Frankly, I respect your opinion, but simply cannot agree, as it comes down to a very simple question of accounting principles or no accounting principles, pain now or pain later.
It feels to me that the banking industry has driven a coach and several teams of horses through ALL the attempts at meaningful regulation which have been “attempted” to the extent that you have to ask whether there ever has been any real prospect of controlling their activities.
Before the 2008 crisis, there was the third world debt problem, and the dot.com collapse, which despite all the ballyhoo was truly anticipated by very few, rather like the situation we have with gold where the majority of pundits are now claiming to have forecast the bull market based on their belated recognition of 5 minutes ago. But, in both collapses, the banks were once again at the root of the problem. Any doubt you may have about whether these actions were well intended could be dispelled by a little reading on the subject of how third world debt was and is still manufactured. In Rick’s terms, the banks like to fund the sale of fishes, not fishing rods.
For me, these are just the tip of the iceberg when considering the evils inflicted on our world by these vile institutions, and I would prefer to bring them down at all costs and as soon as possible rather than aid their survival, even though there would be a terrible price to pay. Some would argue that the price has now already become impossible to pay by reason of Bernanke’s actions.
The abandonment of MTM was described in print by a senior E&Y partner as heading into the abyss, or something similar, and it is to the shame of that, my own one-time profession that it has proved weak abject and ineffectual when most it could have benefited the system and societies that gave it existence.
“Deleveraging” once widely accepted as completely necessary to any valid recovery, is now scarcely mentioned. Those who will pay will be our sons and daughters, and yes of course we shall a little too, but the real burden has been cruelly, mercilessly flung off onto the accepting shoulders of those who are not yet able to understand it or defend against it.
No other decision practical for Bernanke et al? I do not think so. In my own opinion, better that the failing banks should have been allowed to fail, and we should all have been allowed to see them as they truly were.
Donniemac: -
I found the quote from E&Y – it was in the Jim Quinn piece kindly linked earlier by Rick.
“Suspending mark-to-market accounting, in essence, suspends reality.”
– Beth Brooke, global vice chair, at Ernst & Young
Don’t look now but the dollar should see a HUGE reversal this coming week. Just when everyone concluded it was dead.
The Republican austerity program just allowed for the dollar to rally “Big Time”. Commodities, equities are going to be tested to hold any sort of up pattern.
Time for those fast moving bets. The coming weeks will be anything but boring.
I think you could be right Gary. That would place you and I into one of the most contrarian trades of the year. There cannot be more than a couple percent of investors out there who would agree with either of us today.
I fully expect a trend reversal soon though.
Hi guys,
While I’m not in the camp of a dead USD (yet), what, exactly, will it rise against?
I’ve ruled out the EUR because their austerity started (in earnest) last year. Not the Chinese currency; as Cam pointed out, the have inflation, but rising wages and purchasing power vs the USD (not sure about others).
On the other hand, our “big austerity” is only getting started. While I believe this will continue to snowball into bigger cuts, I just don’t see it being of any significance this week, and probably not in the year. Maybe it (USDX) will bounce between a wide range, but vs other currencies I think the trends will remain intact.
that comment goes out to Cam and gary leibowitz, btw…
Benjamin, to me the Euro is over priced and due for a setback and a correction as the debt crisis spawned in Europe has not even come close to being resolved. I can barely fathom that the Euro has advanced as it has given all the hazards and in fact think that it is only speculative forces driving its value far above real worth. A dollar rise then could be inferred as a Euro fall and this outcome could be imminent.
frenchie ex-accountant boozy–
(boozy sounds better than bozzy–couldn´t resist)
does the USA govt. LEGALLY
´suspending´ (Mark-to-Market) ´reality´
(as of early 2009)–to quote your admired beth–
is THAT—deflationary, OR inflationary—you opine?
further question.
IS something´s TRUEST value, no longer what
someone else is WILLING to pay for it, in PRESENT TIME?
Or, is NOW something truly worth,
what the USA govt. LEGALLY SAYS it´s worth?
And, if THAT were true, is that—
deflationary, OR inflationary–you think, boozy?
Satan, thank you for your comment.
Just to restate – I did the inflationary/deflationary opinion about MTM from the smoke and mirrors perspective rather than belabouring all the old chestnuts again, I suggest you read it.
The second question in your response is a closed and leading question, and as such you should ask it of someone who is a bigger fool than the one you take me for.
I guess i should not be surprised that Satan has actually shown up in person on Rick’s-Picks given all the extreme hostility between inflationist’s and defaltionist’s these past few days. I am sure it is creating a healthy breeding ground for the confiscation of a few empty soul-less mouthpieces (not naming anyone or intoning the name Lira for example) to be taken to where they really belong into the purgatory of worthless commentary.
Ouch, did I actually just write that out loud!!!
bozzy–leading YES, closed NO.
CLOSED is your own perception on the matter;
for you are so obssesed with trees, you see no forest.
fitz cam–
¨extreme hostility¨ is the normal condition of all predators on earth, man included.
And it is only comfortable, well-fed, 21st century ¨educated¨ modern man,
that continues to self-servingly live out (and endlessly feed) the delusion, it is not.
There was a lengthy but good comment here after Wim’s. Now that comment is gone.
Deleted by mistake, technical error, censorship? Please put it back if deleted erroneously. If censorship, shame on you. Answer him instead of sneakily and cowardly deleting it.
FOFOA has a new post out today on this subject, and it’s great as usual.
With a central bank’s ability to create money out of thin air (legal counterfeiting), we will have deflation of real estate and wages, and at the same time, inflation of prices for consumer goods. The entire argument above for deflation does not make this distinction because of the lack of attention paid to the act of creating money out of nothing – this is inflation of the currency and a hidden tax. What a buyer is willing to pay for a house is not necessarily tied to the inflation in the system. This is called the transfer of wealth (real estate) from middle class to the elite. A concurrent asset deflation and price inflation. Please don’t waste any more time arguing for one or the other when they both will occur. It depends on what asset class you are talking about.
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