Inflation, Deflation, the Euro and Student Loans (via MaxKeiser.com)

Rick appeared on The Keiser Report yesterday in a wide-ranging interview that covered inflation/deflation, the Euro crisis and student loans. The video and transcript of the interview are shown below. (If watching the video, Rick’s segment begins at 13:00).

Max Keiser: Welcome back to the Keiser Report. I’m Max Keiser. Time now to go to Rick Ackerman of Rick’s Picks newsletter.
Rick, welcome to the Keiser Report.

Rick Ackerman: Hey Max. How you doing?

Max: Fantastic. Rick Ackerman, tell us, what happened to all the hyperinflationists?

Rick: I think they’ve been pretty quiet lately, Max. We have nothing but a deflationary juggernaut unfolding in Europe. Austerity may have been voted thumbs down, but you don’t see any infusions of new credit making their way into the system. It seems like everything that’s happening in Europe right now has a deflationary outcome.

Max: Right. The ravages of the credit peak of 2007 continue to wreak all kinds of damage around the world. No matter what the central banks try to do to stop it, the deflationary pressures continue to mount.
What do you tell people when they say, “Well, look at the price of medical costs and look at the price of student loans, these are rising in price.” How does that factor into or square against this deflationary trend?

Rick: Well, I call that lettuce bin inflation, Max. Compared to the larger deflationary picture – which is an asset deflation – the grocery store inflation is relatively tame. Even that’s going to hit a wall, because the money that you spend on groceries has to come from something else if the price of groceries goes up, because real incomes are stagnant.
So it’s really sort of a closed loop. And if the price of one thing goes up, it means that less is available for something else. But also, I think that the three intractable engines of inflation are slowing down.
One of them of course is government spending. At the state and local level, it’s actually crashed and burned. That hasn’t happened at the federal level, of course, because the Federal Government can print whatever it needs.
But two other engines of inflation – healthcare and education – have sort of hit a wall. On the college end of things, for a number of years, the colleges basically collected their fees from parents who were putting their homes and hawked second mortgages, were paying a lot of tuitions.
But of course that route is not available. I think that even though tuitions continue to go up, they may have reached that point where the coyote has run off the cliff and just hasn’t looked down yet.

Max: Let’s talk about the euro for a second. The euro has become a very volatile currency, with huge swings in both directions. What are your charts saying? Despite the political and the debt crisis, the euro, where’s it ultimately heading?

Rick: A very interesting question, Max. From a purely technical standpoint, I’m looking at a dollar eight, and I feel pretty confident about that. It goes against the common wisdom that the euro is headed to at least par with the dollar or lower, because it doesn’t seem to be going that low to me. The question is, why? As far as I can see or as far as I can reason, the countries that are solvent still using the euro, are stuck with it.
For instance, if Germany or Finland or the Netherlands would attempt to go back to their original sovereign currencies, the whole world would converge on them. They would basically say, “Geez, I’d love to have German bonds or German this or that,” because the Germans are very prudent stewards of their money.
So that’s the last thing in the world that Germany wants, is to be the hard currency of the world. They’re all, I guess, going to be keepers of the flame. They’ll retain the euro, regardless of which countries – Greece, Italy or Spain, perhaps – exit the currency union.

Max: Okay. So let’s talk about Germany some more. They recently floated the idea of a European Redemption Fund (ERF), whereby nations would have to put up gold as collateral for any national debts over the Maastricht Treaty limit. Your thoughts?

Rick: Well, I don’t think any of the countries in debt are going to easily give up what you would call real money. No one has any skin in the game, except for Germany. That’s why Germany is insisting on hard currency and hard terms. But as far as the debtors, if they ain’t got, they ain’t got.

Max: Well I mean, gold has been talked about by us in the study of which way inflation or deflation will impact the price of gold. It seems as though even though you’ve got deflation, it’s deflation in everything against gold. Correct?

Rick: Yes. But you need to understand that the whole world really doesn’t prefer a hard money standard. Even the Chinese use debt-based money. It’s really the payment method of choice. If countries were forced to pay for… for instance, if oil was something other than worthless dollars, there’d be a lot less oil sold.
So it’s an arrangement of convenience that the oil-producing nations accept fiat currency, which they convert into essentially the next best thing, whether it be euros or dollars or gold or silver.

Max: Right. But these countries are now aggressively buying gold. They’re doing swaps outside of the dollar reserve. They’re positioning themselves for the return of gold. Germany now wants gold. So clearly the writing is on the wall, that once again, as we’ve seen historically, gold ends up being the reserve currency.
Now, let’s talk about the U.S. Treasury paper market for a second. This is a recurring theme. We’ve touched on it before.
The question always is, have the U.S. Treasury bonds finally tapped up? And is the bull market that’s been going on for 30 years in U.S. Treasury bonds finally run its course? Seemingly, it just keeps on going and going and going.
Your thoughts? What do the charts say? What do the fundamentals? This is really the biggest question of all, I would think.

Rick: Yeah, it really is, because as the dollar goes, and as dollar instruments go, so goes the world’s financial system.
From a technical standpoint, Max, I’ve been looking at a run-up perhaps to about 170 basis the T-bond futures. And that would mean that there’s some room for yields on the 30-year to come down a bit. They’re somewhere around two and five-eighths, two and three-quarters now.
But from a technical point of view, with the T-bond futures up around 170, it puts yields down around, I’m guessing 2.1% or so. So there’s probably some room to move for the bonds. But I think that relative to the 30-year run-up, the 30-year bull market in bonds, they are getting close to the limit on the low end for yields.

Max: Right. Now, here’s a question about the analysis, whether it’s technical or fundamental. I mean, the U.S. government itself is buying, by last estimates, 61% of the U.S. Treasury paper that it floats. So it’s just recycling itself. This latest auction, they bought billions of dollars’ worth of bonds, and then they sold billions of dollars’ worth of bonds six hours later.
So it’s become a huge laundromat, a huge Ponzi scheme, I’d say. Does that impact the technical analysis or the fundamental analysis? It’s become, really, a joke. Does the technical analysis, is that the beauty of it? It sees through all of the underlying shenanigans?

Rick: Well I think that’s true, that sometimes it’s a little too difficult to parcel all the logical pieces of why bonds go higher or why the dollar’s weak or strong. That’s why I ultimately depend on the charts.
But sometimes, as is the case for this dollar eight projection on the Euro, I start with the projection and try to back out the logic. But you’re right. It is a Ponzi scheme. I’ve heard higher numbers in 60%, as far as how much of the Treasury paper, new Treasury debt the Fed is buying.
But it’s really a show game. If you say that the Fed is not doing QE3, that it’s not monetizing, it’s effectively doing that by making credit almost free to the banks, so that they have to park it in treasuries.
Of course, in Europe, the swap arrangement with the U.S. Federal Reserve makes it possible for Italy or… Europe to have its own monetization, but to have it in a currency other than the euro. So it really is a big… it’s worse than a Ponzi game. It’s a fraud that I should think anyone would be able to see through at this point.

Max: Right. Well, to be honest, the total aggregate amount of U.S. purchase of its own paper exceeds 100%. If you understand the collusion between itself and Wall Street, this is why the total indebtedness keeps skyrocketing to levels that have historically never ever been achieved.
This is, as you point out, worse than a Ponzi scheme. It’s financial suicide, vis-à-vis death by paper creation. But this is something that America seems comfortable with at the moment.
Now speaking of federally-backed paper, you’ve written recently about the student loan market. Is this the next subprime disaster, the next part of the global J.P. Morgan disaster that will require more austerity, more printing, more of the same?

Rick: Well, it’s a trillion-dollar boondoggle at this point. In the bigger scheme of things, a trillion dollars is, I’m going to say, not much. It certainly is a lot of money. But at the margin, it is one aspect of the big picture that could probably topple things.
But I don’t think so. I think that the student loan program is simply going to wind up as a scandal when it turns out that very few of the loans are repaid. We already know that the borrowers are coming out of school ill-prepared to make the kind of money that will allow them to put aside a little bit. Not that any of us can put aside anything these days.
But I think the average indebtedness coming out of college is I’ve heard $36,000. That’s a lot of money for a newly-minted Humanities grad, someone with a B.A. in Literature, to pay back.
So I think that the trillion dollars might as well be written off at this point.

Max: Right. This might be a good time to drill down and look at this relationship between inflation and deflation and prices on the student loan market.
The reason the cost of student education is going up is not because of an increase in demand; it’s because of an increase in credit, which has ultimately got to be paid for. Since they don’t have the ability to pay for that credit, it results in deflation.
So this is a masking deflation or deflation gets masked in the ruse of a fake price signal; that is to say, a fake price for student educations, which is driven entirely through financial manipulation. It has nothing to do with the rule of supply and demand. Would you agree?

Rick: That’s absolutely correct. The student loan bubble was really the same as the housing bubble. The demand is artificially stimulated, simply by the availability of easy money.
In this case, the student loans are much easier money even than housing money was during the first go-round prior to the 2007 collapse. Obama has more or less said, “Hey,” this is with a wink, “Don’t worry, you’ll really never have to pay it back.”
Even if you go to the letter of the law, the payback terms are so simple. They’re so easy that the student can easily see borrowing without the expectation of paying back.

Max: All right. Rick Ackerman, we’re out of time. Thanks so much for being on the Keiser Report.

Rick: Thank you, Max and Stacy.

Max: All right. That’s going to do it for this edition of the Keiser Report with me, Max Keiser and Stacy Herbert. I want to thank my guest Rick Ackerman of Rick’s Picks. If you want to send me an e-mail, please do so at keiserreport@rttv.ru.
Until next time. Max Keiser saying, bye you all.