This recession.....before it's over.....will teach a lot of people the importance of SAVING in a way that will impact them for the rest of their life and their children's lives.
Much the same as it taught my parents during the depression of 1929-1939.
What you don't eat for dinner, you have for breakfast and if you don't eat it for breakfast--you get it at lunch.We are only in the 3rd inning of this game. The reports that we are in for a recovery starting somewhere in 2009 are just a way to keep a lot of people in the game. This recession is going to be the real McCoy. 4-8 years is my call.
<< <i>Do you know what hyper-inflation does to people's savings? >>
No I don't, but please enlighten us .. apparently you've gone through one. But this time take into account that all major currencies will be in the same sinking boat (devalued).
"Bongo drive 1984 Lincoln that looks like old coin dug from ground."
Do you know what hyper-inflation does to people's savings?
We all know what inflation does to "fiat related savings." Many or most of us have experienced that over the past several decades where it often takes 2 breadwinners today to accomplish what one did in the 1960's to 1970's. The fact that a dollar today is worth less than 5% of the 1913 FRN clearly shows the effects.
What inflation or hyper-inflation does for savings placed into gold and silver bullion, land, homes, collectibles, etc. can and should be quite different than the above.
But this time take into account that all major currencies will be in the same sinking boat (devalued).
All the more reason not to have too much of one's savings tied up into any currencies, treasuries, or anything associated with them.
<< <i>Do you know what hyper-inflation does to people's savings? >>
No I don't, but please enlighten us .. apparently you've gone through one. But this time take into account that all major currencies will be in the same sinking boat (devalued). >>
Buy a history book. Better yet, check what's happening in Zimbabwe right now. There are other alternatives to converting your life savings to a different countries currency.
Worry is the interest you pay on a debt you may not owe.
What we will see is well hidden incideous inflation probably around 5-10%. I really cannot bring myself to believe 'OFFICIAL' statistics on inflation because the gubberment has a vested interest in underreporting bad news. I.E., by accurately reporting inflation---COL's kick in on transfer payments at those rates and that in and of itself is reason to fudge.
Inflation may be a good thing if you are 18-40 years old. It makes your house payment appear to be cheap 10 years from now for instance.
But if you have been saving regularly and say ...are over 50....ahem.....then follow what it does to each $100,000. in savings. 10% inflation per year over a 5 year span just halved your net worth. So instead of getting richer.....like most of us aspire to....we just got poorer....and the g'ment just basically confiscated our wealth in order to pay for mismanagement of the economy. From my perspective, inflationary policies are tantamount to a political felony----stealing in plain sight.
Why I tend to buy the more inflation and less deflation theory:
1. Too many people, in fact the vast majority, are buying the D. theory. The masses are always wrong and do the wrong things at the wrong times. They are scared to death of D. Hence it won't occur as they think it will. Everytime I hear another chant of deflation, it only reinforces to me that it just won't go down that way. The banks want to buy up what they can of cheap assets that were dumped due the fears of the D-word. Fear from words they helped spread through the media. From there, the banks can inflate the value of those new assets.
2. Bernanke's only reason for being Fed chief is to combat the deflation that the banks brought into existence.... he's said as much. He'll print or key stroke gobs of money into existence even if it means killing all the trees on the planet first to save us from D. Hey, I believe the guy will keep his word. He wants to go down in history as beating the D...something Hoover, FDR, and the FED couldn't do on their own in the 30's....even if it means a strong inflation that could morph into hyperinflation.
3. The government doesn't understand (or refused to understand) basic economics and underestimates the effects of their lever-pulling. They always overshoot or undershoot the problem rather than leaving it to market forces that would correct it more quickly.
4. We haven't actually shrunk the money supply in over 50 years. 2008 to 2015 will not be an exception. Inflation makes money for the bankers.....not deflation. They will fight hard for the I-word. The money will make its way to the sheeple.
Here's a great read from Cliff Droke, a thorn in the side of gold bugs most of the time - but sometimes bullish too, and a darn good contrarian who has often picked up market pessimism as his key sign of the next recovery. He is looking for a stock recovery in 2009 as well as for the first wave of FED dollars to hit main street, well in time to have a major impact on the macro-economy. Droke is one of the stock and gold contrarians whose work I respect, even when it conflicts with all the gold gurus. This is how we get the I-word and not the D-word.
One caveat though. Droke was bullish on stocks in Dec 2007 and right up until the 2008 crash, plus he blew off the liquidity crisis in early 2008 as a non-event. Unfortunately his projections tanked in later 2008 along with everyone else as stocks tanked and the liquidity crisis became catastrophic. Still, his analysis on 6 and 10 year Kress cycles bottoming in 2008 did support massive volatility and a basic deflationary collapse. In light of those cycles now gone, a stronger 2009 equities cycle seems possible, esp. since everyone believes otherwise. He also expects longer 40 and 60 year cycles to bottom in 2010 to bring back the bear in spades and crush whatever optimism that lingers over from 2009.
I think we'll muddle through but we're going to have inflation peak at about 120%. A few years ago I thought it might be contained to as low as 40% but this was put off longer than I believed possible.
This is a systemic problem that can't be addressed through the types of policies that worked in the past. Deflation would simply wipe out almost every major business and the financial system. It would lead to massive civil unrest and ultimately (in very short order) to significant population de- clines. Even if you believe the do-gooders want population declines to pro- tect mommy Earth they would not intentionally engineer a course of events which would lead to their loss of power and personal endangerment. Riot- ing and breakdown in the social order on a large scale would interfere with much more than just the status quo.
While inflation will be painful and destructive it will accomplish the task of bringing the components of the financial system back into balance.
I would suggest it's nearly time to start repatriating your capital and putting it in industry that will do well in inflation where money for most tends to be a little tight and unemployment returns to the levels of the baby boom gen- eration. Look for signs of economic distress in many places such as job shar- ing and people returning to the workforce.
As always we must be prudent. While it might be tempting to go deep in hock to buy real estate when you believe in inflation, don't forget there are never sure things. It is wise to try to balance all our bets with other bets. Set up for the most likely scenario and hope for the best.
I love chaos but would never make a financial bet on it. Never bet on something where you have to lose to win and always cover all your bases.
As always we must be prudent. While it might be tempting to go deep in hock to buy real estate when you believe in inflation, don't forget there are never sure things. It is wise to try to balance all our bets with other bets. Set up for the most likely scenario and hope for the best.
I love chaos but would never make a financial bet on it. Never bet on something where you have to lose to win and always cover all your bases. >>
Clad, interesting you mention RE. I spent this last week in and around Vail, CO (a couple of hours away). Didn't seem like there was a financial crisis in the aire. What I did notice was the lack of the English language. I heard Italian, German, Spanish (Spain), and Portuguese (Brazil). What struck me curious were the South Americans. These people must be the cream of the wealthy. These are people from countries that have gone through inflation, deflation, devaluation, currency changes etc. in the past two decades. To fly to Vail for a week of skiing ( daily $85 lift ticket), shopping, dining, entertainment, chauffeurs etc....during their summer. They must really love the mountains.
The latest trend I've noticed regarding RE in the Vail Valley is "scape-off" homes. This is where someone buys a home that is ski-in, ski-out for around $10-15 million and flattens it to rebuild to their liking! Vail is going through a $1 billion dollar facelift in the "Village" area. There is a 5,000 square acre private ski and private golf project called Battle Mountain just off of I-70 near Minturn in the works. And people are cashing in "funds" and buying RE "down valley" to bequeath instead of stocks and bonds...according to one article I read over the week. Sometimes looking at the uber-rich can give clues to what is coming. Of course they make mistakes too.
The latest trend I've noticed regarding RE in the Vail Valley is "scape-off" homes. This is where someone buys a home that is ski-in, ski-out for around $10-15 million and flattens it to rebuild to their liking! Vail is going through a $1 billion dollar facelift in the "Village" area. There is a 5,000 square acre private ski and private golf project called Battle Mountain just off of I-70 near Minturn in the works. And people are cashing in "funds" and buying RE "down valley" to bequeath instead of stocks and bonds...according to one article I read over the week. Sometimes looking at the uber-rich can give clues to what is coming. Of course they make mistakes too.
Ren >>
that trend died here a few years ago.
Vail is in a state of mind all its own.
drop a link either here or PM, i'd be interetsed in reading it
The Feds new inflation policy, purchasing of Treasurys, outrageous gov't spending, anti-small-business environment, steady high unemployment, rising PM's, international concern of US debt, QE1, QE2....are setting the stage.
How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
There's a story of a young woman in Germany in 1921 whose husband died suddenly resulting in a nervous breakdown. Being extremely wealty she went to the Alps for an extended period to recover.
Early in the year the bank sent her a letter advising her to put her money into assets that would stand up under inflation. Being sick she didn't want to be bothered with such mundane tasks. Late in the year she recieved a letter from the bank regretting to inform her that all her accounts had been closed to purchase the stamp for the letter.
People should consider current conditions their letter from the bank.
It's unlikely we'll have run away inflation since this is difficult in a planned economy but ask yourself how much inflation has to occur to force a rationalization of debt and consumption. It will be substantial because inflation introduces inefficiencies which reduce productivity. Some good businesses won't be able to raise prices sufficiently to make a profit and some very poor companies will thrive.
Just reducing municipal pensions to a deliverable level would require 80% inflation. Colas could increase it from there. I'm looking for a quick 60%. It will seem almost like a devaluation it will happen so suddenly. From there it will moderate but per- haps not for long.
It would be nice to know the future, but of course what does happen is usually not what we are prepared for, things seldom turn out as expected, whatever your view of the future is. I do agree though, it doesn't look good. I'm not as sanguine as I was here a year ago, and I have gone from a 50/50 stock/bond allocation (about 18% of the stock is in gold or PM funds) to 1/3 each of cash, stocks and bonds, with, again, the gold and PM funds having a now larger role. I am planning on paring the bonds down further , where can they go but down? I mean up, but down, you know I now have about 4 1/2-5 years of expenses in cash, plus the coin collection, which could tide me over for another 4 or 5, depending on what happens tin that market. We have another house and property but you can't count on that for anything, unless people get desperate to own land, and if inflation gets that bad I'm certainly not going to sell it then! More of the stock now is in emerging nations, if there is going to be any global growth I think it is more likely to take place there. And for the SHTF scenario? It doesn't matter what you do, we'll all be toast.
I realize that my cash could lose much of its purchasing power if we did have HI.
what i found if not more interesting than a Weimar article for the "Liberal Arts major" was the main article posted by RR. it is just screamimg what is happening today albeit the call was again EARLY by a week or so.
If the Chinese raise interest rates, shouldn't that raise the value of the Chinese currency and in relative terms, devalue the dollar? Nobody on CNBC seems to understand why the dollar is going up, either.
The Chinese may have become tired of Geithner telling them to raise the value of their currency and decided to let him have his way, thinking that it won't be long before he comes back begging them to buy more Treasuries, putting them in a much stronger negotiating position. Geithner has nowhere to go because he can't really lower rates in order to "boost the economy". He knows that Bernake is going to start monetizing more debt. He's already buying bad debt from Fannie and Freddie for us.
Geithner is selling us down the river, and the Chinese are simply playing along. I wonder when they are going to put in a bid for Oregon?
Q: Are You Printing Money? Bernanke: Not Literally
<< <i> I wonder when they are going to put in a bid for Oregon? >>
I think they're going to finish off owning all of Hawaii before they start on Oregon. However, if they're big football fans, then Oregon may be on the table as you say.
<< <i> I wonder when they are going to put in a bid for Oregon? >>
I think they're going to finish off owning all of Hawaii before they start on Oregon. However, if they're big football fans, then Oregon may be on the table as you say. >>
This is what they were saying about Japan 20 years ago, and now look at them.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
Which isn't happening anytime soon? China putting in a bid for Oregon, or Hyperinflation?
Maybe Oregon is a stretch due to political constraints, so let's give odds on a hyperinflation scenario. Can we agree that hyperinflation isn't caused by a specific amount of monetary inflation, but that it is related to monetary inflation?
Hyperinflation is a phenomenon that is brought on by a collapse of confidence in the currency or in the system. Practically everyone has a vested interest in seeing that the system doesn't fail. This puts our politicians in the position where they can abuse the system ad infinitum with no repurcussions and they will get away with it, right?
There is a limit to that scenario, and we may be reaching that point. Retirement plans are tied to the stock market and to bond funds. Who is going to bail out the public employee pension funds when they have losses due to bad paper holdings and the state budgets are being cut at the same time?
As inflation picks up, will retirees try to get their money out or leave it in a fund that's holding paper that can't be sold? Everybody wants their money "back" because they think they've been robbed.
It's a bad situation and it's not getting any better. I don't see the silver bullet here. And then there's Social Security, Medicare, Medicaid and all the rest of those lovely government creations. Where do you think the money for those payouts is coming from as the baby boomers need services and payouts?
I don't think that the bankers are going to be handing out the free money they got during the bailout, do you?
Q: Are You Printing Money? Bernanke: Not Literally
I don't think we have the leadership, even after November 2nd, that will have the guts to do what is required to save our Union from financial collapse. The fundamental transformation is underway.
I just don't see hyperinflation happening anytime soon. What I do see is a credit bubble that burst, resulting in a huge destruction of paper wealth (as homes and stock prices have fallen). I don't see how you get to inflation from falling prices.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
I don't think we have the leadership, even after November 2nd, that will have the guts to do what is required to save our Union from financial collapse. The fundamental transformation is underway. >>
I'mnot sure cultures can change. We just wabntr to add on more layers of rules and regulations that further hamstring those who would deal with the fundamental changes which need to be addressed.
Cheap oil is gone forever but there's no leadership in addressing it. The ed- ucational system has namby pambied itself to death and we get more pro- grams from the fed and less ability for teachers or local government or any- body to deal with it. "No child left behind" apparently just means no child is allowed to excell. We can't support 300,000,000 people any longer using the techniques that worked in the past so the government brings in more people from Mexico.
"I'mnot sure cultures can change. We just wabntr to add on more layers of rules and regulations that further hamstring those who would deal with the fundamental changes which need to be addressed."
Yes, we are watching Great Britain trying a culture change. Hopefully, we will have the bravery to do something similar.
I just don't see hyperinflation happening anytime soon. What I do see is a credit bubble that burst, resulting in a huge destruction of paper wealth (as homes and stock prices have fallen). I don't see how you get to inflation from falling prices.
How does that credit bubble bursting and huge destruction of paper wealth translate into hyperinflation?
Here is how. The banks were forced to take back the bad paper and put it on their books. They got one heckuva break from FASB and then they got free money from the US government in order to shore up their balance sheets so that they could begin lending again. So, they gave everyone big bonuses and stopped lending. Unfortunately, their bad paper grossly exceeds their asset base by a few orders of magnitude. That problem is still active.
In the meantime, our national debt is being accelerated by massive government spending to such an extent that the interest on the debt eats up more of our productivity every day. At the same time, our government's unfunded liabilities present a massive problem that can only be managed by keeping interest rates way low and by inflating the money supply. The government's reporting of inflation numbers is a sham and has been used to screw Social Security beneficiaries out of their COLAs and government bondholders out of the higher yields on government bonds that they should be due. This is just a preview of what's coming.
There is nowhere to go in terms of the Fed lowering interest rates in an effort to keep federal disbursements at a manageable level. Any rate increase will make the federal budget deficit even worse because of increases in these types of payments, on top of the $1.3 Trillion from 2009 and the $1.2 Trillion from this year. Every government has this same problem and can't get out from under the huge problem of government retirees who expect big pensions at early retirement ages. Everything points to higher spending while everything also points to lower revenues because of the crappy economy.
Yes, an amazing amount of paper "wealth" was destroyed, but nothing in comparison to the amount of bad paper that's still out there. And what's still out there is divided into two parts - the part that can be "kicked down the road" and the part that can't. And even some components of the bad paper that can be kicked down the road are still popping to the surface, such as the suit against Bank of America by the 50 Attorneys General who want repayment for their injured parties (mostly pension funds and PIMCO) because of the mortgage securitization scandal.
The part of the bad paper that cannot be "kicked down the road" are the entitlement payments, bond coupon payments and the stuff that's being routed into Fannie & Freddie with the US Treasury as the ultimate buyer. Other governments are involved now, and it's clear that Treasuries are not being purchased at the rate the government needs to avoid a default because they know that the Treasury is being loaded up with bad paper and has no way to pay it off. They aren't stupid. There just isn't enough "money" to pay off the monthly obligations and a bunch of bad paper besides. There are two different ways around it - higher taxes or inflation - and the politicians know that neither one of those options will ever be acceptable because The People didn't create the problem, the politicians and bankers did.
Hyperinflation isn't baked into the cake, but if The People decide that the dollars are depreciating too fast, they will spend them even faster. When that happens, the pressure is back onto the government to print more in order to maintain its own obligations. The whole question of hyperinflation revolves around the velocity of the currency and the confidence of The People in that currency. Don't say I didn't warn ya.
Q: Are You Printing Money? Bernanke: Not Literally
I think we'll survive these deficits, as we have in the past. Link. Eventually - maybe sooner than we all think - the government will get its finances back to something approaching the norm of the last 25 years (and not the crazy deficits of the past 2 years).
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
I think we'll survive these deficits, as we have in the past. Link. Eventually - maybe sooner than we all think - the government will get its finances back to something approaching the norm of the last 25 years (and not the crazy deficits of the past 2 years).
You're assuming that a yearly marker of govt deficit vs. GDP is a true marker of the economy. I'd say it's a microview of the overall problems. Yeah, during WW2 that ratio was higher. But in WW2 we didn't have a 65 year legacy of SS, Medicare, Medicaid, Pensions, Fannie, Freddie, GM, banks on the dole, etc. That's where the real long term costs are coming from. And for the govt to reign in this over-spending >50% of Congress and the Senate would have to do a 180 deg shift in policy to enact programs that will enrage the electorate and ensure they don't get re-elected...because they did the right thing. Not going to happen. Those guys know where their bread is buttered and no way do they give up the gravy train and try to find work in the private sector after serving just one term.
If that previous paragraph didn't have enough issues, we as a nation have never had to deal with a crushing derivatives and debt issue as we have today. That is different from any time in history. The bankers created a Rubik's Cube of financial products that as of right now, don't have a solution...or at least not one that anyone wants to follow since it would mean an immediate implosion of the financial system. Fwiw this problem was unsolvable 2 yrs ago even w/o the additional deficits that have since been piled on. I'd go so far to say that the problem was unsolvable >5 yrs ago. The problems with real estate, otc derivatives, and bogus accounting standards was already well entrenched. By "unsolvable" I mean that the only choices are very unatractive ones that will cause a lot of pain. Reasonable and workable options choices went out years ago.
<< <i>I think we'll survive these deficits, as we have in the past. Link. Eventually - maybe sooner than we all think - the government will get its finances back to something approaching the norm of the last 25 years (and not the crazy deficits of the past 2 years).
You're assuming that a yearly marker of govt deficit vs. GDP is a true marker of the economy. I'd say it's a microview of the overall problems. Yeah, during WW2 that ratio was higher. But in WW2 we didn't have a 65 year legacy of SS, Medicare, Medicaid, Pensions, Fannie, Freddie, GM, banks on the dole, etc. That's where the real long term costs are coming from. And for the govt to reign in this over-spending >50% of Congress and the Senate would have to do a 180 deg shift in policy to enact programs that will enrage the electorate and ensure they don't get re-elected...because they did the right thing. Not going to happen. Those guys know where their bread is buttered and no way do they give up the gravy train and try to find work in the private sector after serving just one term.
If that previous paragraph didn't have enough issues, we as a nation have never had to deal with a crushing derivatives and debt issue as we have today. That is different from any time in history. The bankers created a Rubik's Cube of financial products that as of right now, don't have a solution...or at least not one that anyone wants to follow since it would mean an immediate implosion of the financial system. Fwiw this problem was unsolvable 2 yrs ago even w/o the additional deficits that have since been piled on. I'd go so far to say that the problem was unsolvable >5 yrs ago. The problems with real estate, otc derivatives, and bogus accounting standards was already well entrenched. By "unsolvable" I mean that the only choices are very unatractive ones that will cause a lot of pain. Reasonable and workable options choices went out years ago.
>>
We had a golden opportuinity in 1987 when the world ended to just simply outlaw derivitives and that kind of nonsense but it was the beginning of the era of "greed is good" and the banks made huge profits on them and could pay even larger bonus- es, so they did that instead.
The bankers have been mortgaging our future, not their's. By stealing the wealth of a nation they have absolutely no concern about their future. The hell of it is that much of their money was made by destroying profitable enterprise.
Now the bankers have it all and none of the risk since their lifeboats are already se- cured and lined with gold.
<< <i> for the govt to reign in this over-spending >50% of Congress and the Senate would have to do a 180 deg shift in policy to enact programs that will enrage the electorate and ensure they don't get re-elected... >>
We had budget surpluses in the late 1990s -- not because the Republicans in Congress loved Clinton -- but for the opposite reason. They didn't want to spend money if that would make him look good. Sound familiar to what's happening now? Election's in 2 weeks.
I'm not predicting a return to surpluses anytime soon... or $300 gold ever again (like we had in the late 90s). I'm just saying, I wouldn't be so sure this all ends up in doom-and-gloom.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
I wouldn't be so sure this all ends up in doom-and-gloom.
Weimar had a great little thing going until it went south. The arts, architecture, prosperity - basically a Roaring Twenties of their own - until it ran away from them. Nobody knows what's going to happen. It would be nice if we did.
Q: Are You Printing Money? Bernanke: Not Literally
We had budget surpluses in the late 1990s -- not because the Republicans in Congress loved Clinton -- but for the opposite reason. They didn't want to spend money if that would make him look good. Sound familiar to what's happening now? Election's in 2 weeks.
. >>
They didn't have as much bank fraud/greed. They didn't have a collapsing housing market. Actually, they had a housing market on the rise. They didn't have the high unemployment that we have now. There are way more cracks in the system today then there were yesterday. Can we fix them ?
We had budget surpluses in the late 1990s -- not because the Republicans in Congress loved Clinton -- but for the opposite reason. They didn't want to spend money if that would make him look good. Sound familiar to what's happening now? Election's in 2 weeks.
Besides a tad of austerity don't forget the following 3 tricks that Clinton used to proclaim a surplus during his tenure:
1. usurping SS payments to help pay off liabilities 2. restructuring the longer term Treasury debt into shorter term contracts 3. significantly revamping the methodology of govt stats such as CPI to help reduce govt payouts
The immediate savings on interest payments worked for the short term. We're going to be paying dearly for it in the longer term. Just another version of smoke and mirrors. It was during Clinton's tenure with Treasury Secretaries Rubin and Summers that otc derivatives and other "high level" finance really took off.
Wild West Willie gives his latest update today on where things are headed. He doesn't agree that the system is salvageable.
One thing for sure, the Western Govts plus the Japanese Govt will go to extraordinary lengths to invest good money after bad in supporting the broken system until it becomes a ruined system.
We present today's thoughts by Art Cashin on the coming hyperinflation (and no, it does not mean very high inflation - it means a complete and total collapse in the monetary system - which is what Ben Bernanke is attempting to achieve), without commentary. AN ENCORE PRESENTATION
(Today we will revisit one of the most devastating economic events in recorded history. It all began with the efforts of a few, well-intentioned government officials.)
Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money.
But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).
So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.
Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any “real” sense. Thirty years ago an older member of the NYSE (there were some then) gave me a graphic and memorable (at least for me) example. “Young man,” he said, “would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just put aside $500 every week for the next 40 years.” I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a…..trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.
Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins. OCTOBER 14, 2010 8 In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed.
Let’s go back to “marks”. In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nations just 10 years earlier).
How Could This All Happen? – In 1913 Germany had a solid, prosperous, advanced culture and population. Like much of Europe it was a monarchy (under the Kaiser). Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the world moved toward war. Each side was convinced the other would not dare go to war. So, in a global game of chicken they stumbled into the Great War.
The German General Staff thought the war would be short and sweet and that they could finance the costs with the post war reparations that they, as victors, would exact. The war was long. The flower of their manhood was killed or injured. They lost and, thus, it was they who had to pay reparations rather than receive them.
Things did not go badly instantly. Yes, the deficit soared but much of it was borne by foreign and domestic bond buyers. As had been noted by scholars…..“The foreign and domestic public willingly purchased new debt issues when it believed that the government could run future surpluses to offset contemporaneous deficits.” In layman’s English that means foreign bond buyers said – “Hey this is a great nation and this is probably just a speed bump in the economy.” (Can you imagine such a thing happening again?) When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.
Currencies, Culture And Chaos – If it is difficult to grasp the enormity of the numbers in this tale of hyper-inflation, it is far more difficult to grasp how it destroyed a culture, a nation and, almost, the world.
People’s savings were suddenly worthless. Pensions were meaningless. If you had a 400 mark monthly pension, you went from comfortable to penniless in a matter of months. People demanded to be paid daily so they would not have their wages devalued by a few days passing. Ultimately, they demanded their pay twice daily just to cover changes in trolley fare. People heated their homes by burning money instead of coal. (It was more plentiful and cheaper to get.)
The middle class was destroyed. It was an age of renters, not of home ownership, so thousands became homeless.
But the cultural collapse may have had other more pernicious effects.
Some sociologists note that it was still an era of arranged marriages. Families scrimped and saved for years to build a dowry so that their daughter might marry well. Suddenly, the dowry was worthless – wiped out. And with it was gone all hope of marriage. Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all. Social morality began to collapse. The roar of the roaring twenties began to rumble. All hope and belief in systems, governmental or otherwise, collapsed. With its culture and its economy disintegrating, Germany saw a guy named Hitler begin a ten year effort to come to power by trading on the chaos and street rioting. And then came World War II.
We think it’s best to close this review with a statement from a man whom many consider (probably incorrectly) the father of modern inflation with his endorsement of deficit spending. Here’s what John Maynard Keynes said on the topic: By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.
To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.
Lenin was certainly right. There is no subtler, no surer means of over-turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract….governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century.
To celebrate have a jagermeister or two at the Pre Fuhrer Lounge and try to explain that for over half a century America's trauma has been depression-era unemployment and deflation while Germany's trauma has been runaway inflation. But drink fast, prices change radically after happy hour. And, tell Fed Chairman Bernanke that it was the “German Experience” that caused many folks to raise an eyebrow when he alluded to the power of the “printing press” a few years ago. But, rest assured that no one would let it happen again.
It is important to note what Hyper-inflation is (see first paragraph in parenthesis)
"... it does not mean very high inflation - it means a complete and total collapse in the monetary system..."
I think we AVOIDED a complete collapse in 2008. The future, well, is a bit more dimly lit.
Comments
<< <i>100! >>
good job, and not even a give-a-way!
Much the same as it taught my parents during the depression of 1929-1939.
What you don't eat for dinner, you have for breakfast and if you don't eat it for breakfast--you get it at lunch.We are only in the 3rd inning of this game. The reports that we are in for a recovery starting somewhere in 2009 are just a way to keep a lot of people in the game. This recession is going to be the real McCoy. 4-8 years is my call.
<< <i>This recession.....before it's over.....will teach a lot of people the importance of SAVING ........... >>
Do you know what hyper-inflation does to people's savings?
Worry is the interest you pay on a debt you may not owe.
<< <i>Do you know what hyper-inflation does to people's savings? >>
No I don't, but please enlighten us .. apparently you've gone through one. But this time take into account that all major currencies will be in the same sinking boat (devalued).
We all know what inflation does to "fiat related savings." Many or most of us have experienced that over the past several decades where it often takes 2 breadwinners today to accomplish what one did in the 1960's to 1970's. The fact that a dollar today is worth less than 5% of the 1913 FRN clearly shows the effects.
What inflation or hyper-inflation does for savings placed into gold and silver bullion, land, homes, collectibles, etc. can and should be quite different than the above.
But this time take into account that all major currencies will be in the same sinking boat (devalued).
All the more reason not to have too much of one's savings tied up into any currencies, treasuries, or anything associated with them.
roadrunner
Knowledge is the enemy of fear
<< <i>
<< <i>Do you know what hyper-inflation does to people's savings? >>
No I don't, but please enlighten us .. apparently you've gone through one. But this time take into account that all major currencies will be in the same sinking boat (devalued). >>
Buy a history book. Better yet, check what's happening in Zimbabwe right now. There are other alternatives to converting your life savings to a different countries currency.
Worry is the interest you pay on a debt you may not owe.
What we will see is well hidden incideous inflation probably around 5-10%. I really cannot bring myself to believe 'OFFICIAL' statistics on inflation because the gubberment has a vested interest in underreporting bad news. I.E., by accurately reporting inflation---COL's kick in on transfer payments at those rates and that in and of itself is reason to fudge.
Inflation may be a good thing if you are 18-40 years old. It makes your house payment appear to be cheap 10 years from now for instance.
But if you have been saving regularly and say ...are over 50....ahem.....then follow what it does to each $100,000. in savings. 10% inflation per year over a 5 year span just halved your net worth. So instead of getting richer.....like most of us aspire to....we just got poorer....and the g'ment just basically confiscated our wealth in order to pay for mismanagement of the economy. From my perspective, inflationary policies are tantamount to a political felony----stealing in plain sight.
What say you.
<< <i>Something keeps pulling me into the hyper-DEFLATION swamp. I just hope the water isnt too deep. And no alligators. >>
cohodk
maybe a tsunami?
forbes article
1. Too many people, in fact the vast majority, are buying the D. theory. The masses are always wrong and do the wrong things at the wrong times. They are scared to death of D. Hence it won't occur as they think it will. Everytime I hear another chant of deflation, it only reinforces to me that it just won't go down that way. The banks want to buy up what they can of cheap assets that were dumped due the fears of the D-word. Fear from words they helped spread through the media. From there, the banks can inflate the value of those new assets.
2. Bernanke's only reason for being Fed chief is to combat the deflation that the banks brought into existence.... he's said as much. He'll print or key stroke gobs of money into existence even if it means killing all the trees on the planet first to save us from D. Hey, I believe the guy will keep his word. He wants to go down in history as beating the D...something Hoover, FDR, and the FED couldn't do on their own in the 30's....even if it means a strong inflation that could morph into hyperinflation.
3. The government doesn't understand (or refused to understand) basic economics and underestimates the effects of their lever-pulling. They always overshoot or undershoot the problem rather than leaving it to market forces that would correct it more quickly.
4. We haven't actually shrunk the money supply in over 50 years. 2008 to 2015 will not be an exception. Inflation makes money for the bankers.....not deflation. They will fight hard for the I-word. The money will make its way to the sheeple.
Here's a great read from Cliff Droke, a thorn in the side of gold bugs most of the time - but sometimes bullish too, and a darn good contrarian who has often picked up market pessimism as his key sign of the next recovery. He is looking for a stock recovery in 2009 as well as for the first wave of FED dollars to hit main street, well in time to have a major impact on the macro-economy. Droke is one of the stock and gold contrarians whose work I respect, even when it conflicts with all the gold gurus. This is how we get the I-word and not the D-word.
Cliff Droke - a recession worth rejoicing
One caveat though. Droke was bullish on stocks in Dec 2007 and right up until the 2008 crash, plus he blew off the liquidity crisis in early 2008 as a non-event. Unfortunately his projections tanked in later 2008 along with everyone else as stocks tanked and the liquidity crisis became catastrophic. Still, his analysis on 6 and 10 year Kress cycles bottoming in 2008 did support massive volatility and a basic deflationary collapse. In light of those cycles now gone, a stronger 2009 equities cycle seems possible, esp. since everyone believes otherwise. He also expects longer 40 and 60 year cycles to bottom in 2010 to bring back the bear in spades and crush whatever optimism that lingers over from 2009.
roadrunner
about 120%. A few years ago I thought it might be contained to as low
as 40% but this was put off longer than I believed possible.
This is a systemic problem that can't be addressed through the types of
policies that worked in the past. Deflation would simply wipe out almost
every major business and the financial system. It would lead to massive
civil unrest and ultimately (in very short order) to significant population de-
clines. Even if you believe the do-gooders want population declines to pro-
tect mommy Earth they would not intentionally engineer a course of events
which would lead to their loss of power and personal endangerment. Riot-
ing and breakdown in the social order on a large scale would interfere with
much more than just the status quo.
While inflation will be painful and destructive it will accomplish the task of
bringing the components of the financial system back into balance.
I would suggest it's nearly time to start repatriating your capital and putting
it in industry that will do well in inflation where money for most tends to be
a little tight and unemployment returns to the levels of the baby boom gen-
eration. Look for signs of economic distress in many places such as job shar-
ing and people returning to the workforce.
As always we must be prudent. While it might be tempting to go deep in hock
to buy real estate when you believe in inflation, don't forget there are never
sure things. It is wise to try to balance all our bets with other bets. Set up
for the most likely scenario and hope for the best.
I love chaos but would never make a financial bet on it. Never bet on something
where you have to lose to win and always cover all your bases.
As always we must be prudent. While it might be tempting to go deep in hock
to buy real estate when you believe in inflation, don't forget there are never
sure things. It is wise to try to balance all our bets with other bets. Set up
for the most likely scenario and hope for the best.
I love chaos but would never make a financial bet on it. Never bet on something
where you have to lose to win and always cover all your bases. >>
Clad, interesting you mention RE. I spent this last week in and around Vail, CO (a couple of hours away). Didn't seem like there was a financial crisis in the aire. What I did notice was the lack of the English language. I heard Italian, German, Spanish (Spain), and Portuguese (Brazil). What struck me curious were the South Americans. These people must be the cream of the wealthy. These are people from countries that have gone through inflation, deflation, devaluation, currency changes etc. in the past two decades. To fly to Vail for a week of skiing ( daily $85 lift ticket), shopping, dining, entertainment, chauffeurs etc....during their summer. They must really love the mountains.
The latest trend I've noticed regarding RE in the Vail Valley is "scape-off" homes. This is where someone buys a home that is ski-in, ski-out for around $10-15 million and flattens it to rebuild to their liking! Vail is going through a $1 billion dollar facelift in the "Village" area. There is a 5,000 square acre private ski and private golf project called Battle Mountain just off of I-70 near Minturn in the works. And people are cashing in "funds" and buying RE "down valley" to bequeath instead of stocks and bonds...according to one article I read over the week. Sometimes looking at the uber-rich can give clues to what is coming. Of course they make mistakes too.
Ren
I knew it would happen.
<< <i>
The latest trend I've noticed regarding RE in the Vail Valley is "scape-off" homes. This is where someone buys a home that is ski-in, ski-out for around $10-15 million and flattens it to rebuild to their liking! Vail is going through a $1 billion dollar facelift in the "Village" area. There is a 5,000 square acre private ski and private golf project called Battle Mountain just off of I-70 near Minturn in the works. And people are cashing in "funds" and buying RE "down valley" to bequeath instead of stocks and bonds...according to one article I read over the week. Sometimes looking at the uber-rich can give clues to what is coming. Of course they make mistakes too.
Ren >>
that trend died here a few years ago.
Vail is in a state of mind all its own.
drop a link either here or PM, i'd be interetsed in reading it
<< <i>I now know that I will never own a ski-in, ski-out home in Vail. Thanks, comradrenski!
comrade jmski, I see you up early. No Vodka party last nite? I wake up a 10. Sky clear but I see fog.
Renski
So, backcalculating to their old currency, that's $Z200,000,000,000,000 for a loaf of bread. 200 Quadrillion.
531 Billion Percent inflation. What, me worry?
Those people in Vail didn't get rich by being stupid, so there's still no hope for jmski buying a ski-in, ski-out with inflated dollars, is there?
Nah, probably not.
Ha, Renski. 10:00 is still morning. You weren't up too late either.
I knew it would happen.
The Feds new inflation policy, purchasing of Treasurys, outrageous gov't spending, anti-small-business environment, steady high unemployment, rising PM's, international concern of US debt, QE1, QE2....are setting the stage.
What is the equivalent Archduke Ferdinand moment?
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
Three years, 5 months, and 12 days.....could be off by a decade or two.
<< <i>
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
Three years, 5 months, and 12 days.....could be off by a decade or two.
Good .. I like your forecast, but you left out "century"
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
Art Cashin on Weimar
roadrunner
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
Art Cashin on Weimar
roadrunner >>
is he the guy on the floor of the stock exchange?
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
Art Cashin on Weimar
roadrunner >>
Hyperinflation extremists views, disinflation extremists views ... our fiat currency not even worth toilet paper. What is a person to do?
Buy Gold, Silver, Palladium, Platinum & Rhodium, with a touch of coffee & cigarettes.
<< <i>
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
Art Cashin on Weimar
roadrunner >>
Hyperinflation extremists views, disinflation extremists views ... our fiat currency not even worth toilet paper. What is a person to do?
Buy Gold, Silver, Palladium, Platinum & Rhodium, with a touch of coffee & cigarettes.
You forgot guns and ammo.
<< <i>
<< <i>
<< <i>How much longer do I have to wait for the hyperinflation scenario to take root?
It's already taken root. Hyperinflation is all about the destruction of fiat currencies, which is well underway. The next question is when does it blossom? At the end of the following article Art Cashin of UBS discusses the Weimar experience.
Art Cashin on Weimar
roadrunner >>
Hyperinflation extremists views, disinflation extremists views ... our fiat currency not even worth toilet paper. What is a person to do?
Buy Gold, Silver, Palladium, Platinum & Rhodium, with a touch of coffee & cigarettes.
You forgot guns and ammo.
I didn't....I would probably shoot myself in the foot trying to load the darn thing.
in a nervous breakdown. Being extremely wealty she went to the Alps for an extended period
to recover.
Early in the year the bank sent her a letter advising her to put her money into assets that would
stand up under inflation. Being sick she didn't want to be bothered with such mundane tasks.
Late in the year she recieved a letter from the bank regretting to inform her that all her accounts
had been closed to purchase the stamp for the letter.
People should consider current conditions their letter from the bank.
but ask yourself how much inflation has to occur to force a rationalization of debt and
consumption. It will be substantial because inflation introduces inefficiencies which
reduce productivity. Some good businesses won't be able to raise prices sufficiently
to make a profit and some very poor companies will thrive.
Just reducing municipal pensions to a deliverable level would require 80% inflation.
Colas could increase it from there. I'm looking for a quick 60%. It will seem almost
like a devaluation it will happen so suddenly. From there it will moderate but per-
haps not for long.
I believe it is imminent.
And for the SHTF scenario? It doesn't matter what you do, we'll all be toast.
I realize that my cash could lose much of its purchasing power if we did have HI.
nice post RR
The Chinese may have become tired of Geithner telling them to raise the value of their currency and decided to let him have his way, thinking that it won't be long before he comes back begging them to buy more Treasuries, putting them in a much stronger negotiating position. Geithner has nowhere to go because he can't really lower rates in order to "boost the economy". He knows that Bernake is going to start monetizing more debt. He's already buying bad debt from Fannie and Freddie for us.
Geithner is selling us down the river, and the Chinese are simply playing along. I wonder when they are going to put in a bid for Oregon?
I knew it would happen.
<< <i> I wonder when they are going to put in a bid for Oregon? >>
I think they're going to finish off owning all of Hawaii before they start on Oregon. However, if they're big football fans, then
Oregon may be on the table as you say.
<< <i>
<< <i> I wonder when they are going to put in a bid for Oregon? >>
I think they're going to finish off owning all of Hawaii before they start on Oregon. However, if they're big football fans, then
Oregon may be on the table as you say. >>
This is what they were saying about Japan 20 years ago, and now look at them.
Which isn't happening anytime soon? China putting in a bid for Oregon, or Hyperinflation?
Maybe Oregon is a stretch due to political constraints, so let's give odds on a hyperinflation scenario. Can we agree that hyperinflation isn't caused by a specific amount of monetary inflation, but that it is related to monetary inflation?
Hyperinflation is a phenomenon that is brought on by a collapse of confidence in the currency or in the system. Practically everyone has a vested interest in seeing that the system doesn't fail. This puts our politicians in the position where they can abuse the system ad infinitum with no repurcussions and they will get away with it, right?
There is a limit to that scenario, and we may be reaching that point. Retirement plans are tied to the stock market and to bond funds. Who is going to bail out the public employee pension funds when they have losses due to bad paper holdings and the state budgets are being cut at the same time?
As inflation picks up, will retirees try to get their money out or leave it in a fund that's holding paper that can't be sold? Everybody wants their money "back" because they think they've been robbed.
It's a bad situation and it's not getting any better. I don't see the silver bullet here. And then there's Social Security, Medicare, Medicaid and all the rest of those lovely government creations. Where do you think the money for those payouts is coming from as the baby boomers need services and payouts?
I don't think that the bankers are going to be handing out the free money they got during the bailout, do you?
I knew it would happen.
The lemmings have already jumped off the cliff.
I don't think we have the leadership, even after November 2nd, that will have the guts to do what is required to save our Union from financial collapse. The fundamental transformation is underway.
<< <i>not happening anytime soon.
Which isn't happening anytime soon? >>
I just don't see hyperinflation happening anytime soon. What I do see is a credit bubble that burst, resulting in a huge destruction of paper wealth (as homes and stock prices have fallen). I don't see how you get to inflation from falling prices.
<< <i>U r right comrade.
The lemmings have already jumped off the cliff.
I don't think we have the leadership, even after November 2nd, that will have the guts to do what is required to save our Union from financial collapse. The fundamental transformation is underway. >>
I'mnot sure cultures can change. We just wabntr to add on more layers of
rules and regulations that further hamstring those who would deal with the
fundamental changes which need to be addressed.
Cheap oil is gone forever but there's no leadership in addressing it. The ed-
ucational system has namby pambied itself to death and we get more pro-
grams from the fed and less ability for teachers or local government or any-
body to deal with it. "No child left behind" apparently just means no child is
allowed to excell. We can't support 300,000,000 people any longer using
the techniques that worked in the past so the government brings in more
people from Mexico.
rules and regulations that further hamstring those who would deal with the
fundamental changes which need to be addressed."
Yes, we are watching Great Britain trying a culture change. Hopefully, we will have the bravery to do something similar.
How does that credit bubble bursting and huge destruction of paper wealth translate into hyperinflation?
Here is how. The banks were forced to take back the bad paper and put it on their books. They got one heckuva break from FASB and then they got free money from the US government in order to shore up their balance sheets so that they could begin lending again. So, they gave everyone big bonuses and stopped lending. Unfortunately, their bad paper grossly exceeds their asset base by a few orders of magnitude. That problem is still active.
In the meantime, our national debt is being accelerated by massive government spending to such an extent that the interest on the debt eats up more of our productivity every day. At the same time, our government's unfunded liabilities present a massive problem that can only be managed by keeping interest rates way low and by inflating the money supply. The government's reporting of inflation numbers is a sham and has been used to screw Social Security beneficiaries out of their COLAs and government bondholders out of the higher yields on government bonds that they should be due. This is just a preview of what's coming.
There is nowhere to go in terms of the Fed lowering interest rates in an effort to keep federal disbursements at a manageable level. Any rate increase will make the federal budget deficit even worse because of increases in these types of payments, on top of the $1.3 Trillion from 2009 and the $1.2 Trillion from this year. Every government has this same problem and can't get out from under the huge problem of government retirees who expect big pensions at early retirement ages. Everything points to higher spending while everything also points to lower revenues because of the crappy economy.
Yes, an amazing amount of paper "wealth" was destroyed, but nothing in comparison to the amount of bad paper that's still out there. And what's still out there is divided into two parts - the part that can be "kicked down the road" and the part that can't. And even some components of the bad paper that can be kicked down the road are still popping to the surface, such as the suit against Bank of America by the 50 Attorneys General who want repayment for their injured parties (mostly pension funds and PIMCO) because of the mortgage securitization scandal.
The part of the bad paper that cannot be "kicked down the road" are the entitlement payments, bond coupon payments and the stuff that's being routed into Fannie & Freddie with the US Treasury as the ultimate buyer. Other governments are involved now, and it's clear that Treasuries are not being purchased at the rate the government needs to avoid a default because they know that the Treasury is being loaded up with bad paper and has no way to pay it off. They aren't stupid. There just isn't enough "money" to pay off the monthly obligations and a bunch of bad paper besides. There are two different ways around it - higher taxes or inflation - and the politicians know that neither one of those options will ever be acceptable because The People didn't create the problem, the politicians and bankers did.
Hyperinflation isn't baked into the cake, but if The People decide that the dollars are depreciating too fast, they will spend them even faster. When that happens, the pressure is back onto the government to print more in order to maintain its own obligations. The whole question of hyperinflation revolves around the velocity of the currency and the confidence of The People in that currency. Don't say I didn't warn ya.
I knew it would happen.
You're assuming that a yearly marker of govt deficit vs. GDP is a true marker of the economy. I'd say it's a microview of the overall problems. Yeah, during WW2 that ratio was higher. But in WW2 we didn't have a 65 year legacy of SS, Medicare, Medicaid, Pensions, Fannie, Freddie, GM, banks on the dole, etc. That's where the real long term costs are coming from. And for the govt to reign in this over-spending >50% of Congress and the Senate would have to do a 180 deg shift in policy to enact programs that will enrage the electorate and ensure they don't get re-elected...because they did the right thing. Not going to happen. Those guys know where their bread is buttered and no way do they give up the gravy train and try to find work in the private sector after serving just one term.
If that previous paragraph didn't have enough issues, we as a nation have never had to deal with a crushing derivatives and debt issue as we have today. That is different from any time in history. The bankers created a Rubik's Cube of financial products that as of right now, don't have a solution...or at least not one that anyone wants to follow since it would mean an immediate implosion of the financial system. Fwiw this problem was unsolvable 2 yrs ago even w/o the additional deficits that have since been piled on. I'd go so far to say that the problem was unsolvable >5 yrs ago. The problems with real estate, otc derivatives, and bogus accounting standards was already well entrenched. By "unsolvable" I mean that the only choices are very unatractive ones that will cause a lot of pain. Reasonable and workable options choices went out years ago.
roadrunner
<< <i>I think we'll survive these deficits, as we have in the past. Link. Eventually - maybe sooner than we all think - the government will get its finances back to something approaching the norm of the last 25 years (and not the crazy deficits of the past 2 years).
You're assuming that a yearly marker of govt deficit vs. GDP is a true marker of the economy. I'd say it's a microview of the overall problems. Yeah, during WW2 that ratio was higher. But in WW2 we didn't have a 65 year legacy of SS, Medicare, Medicaid, Pensions, Fannie, Freddie, GM, banks on the dole, etc. That's where the real long term costs are coming from. And for the govt to reign in this over-spending >50% of Congress and the Senate would have to do a 180 deg shift in policy to enact programs that will enrage the electorate and ensure they don't get re-elected...because they did the right thing. Not going to happen. Those guys know where their bread is buttered and no way do they give up the gravy train and try to find work in the private sector after serving just one term.
If that previous paragraph didn't have enough issues, we as a nation have never had to deal with a crushing derivatives and debt issue as we have today. That is different from any time in history. The bankers created a Rubik's Cube of financial products that as of right now, don't have a solution...or at least not one that anyone wants to follow since it would mean an immediate implosion of the financial system. Fwiw this problem was unsolvable 2 yrs ago even w/o the additional deficits that have since been piled on. I'd go so far to say that the problem was unsolvable >5 yrs ago. The problems with real estate, otc derivatives, and bogus accounting standards was already well entrenched. By "unsolvable" I mean that the only choices are very unatractive ones that will cause a lot of pain. Reasonable and workable options choices went out years ago.
>>
We had a golden opportuinity in 1987 when the world ended to just simply outlaw
derivitives and that kind of nonsense but it was the beginning of the era of "greed
is good" and the banks made huge profits on them and could pay even larger bonus-
es, so they did that instead.
The bankers have been mortgaging our future, not their's. By stealing the wealth of
a nation they have absolutely no concern about their future. The hell of it is that much
of their money was made by destroying profitable enterprise.
Now the bankers have it all and none of the risk since their lifeboats are already se-
cured and lined with gold.
<< <i> for the govt to reign in this over-spending >50% of Congress and the Senate would have to do a 180 deg shift in policy to enact programs that will enrage the electorate and ensure they don't get re-elected... >>
We had budget surpluses in the late 1990s -- not because the Republicans in Congress loved Clinton -- but for the opposite reason. They didn't want to spend money if that would make him look good. Sound familiar to what's happening now? Election's in 2 weeks.
I'm not predicting a return to surpluses anytime soon... or $300 gold ever again (like we had in the late 90s). I'm just saying, I wouldn't be so sure this all ends up in doom-and-gloom.
Weimar had a great little thing going until it went south. The arts, architecture, prosperity - basically a Roaring Twenties of their own - until it ran away from them. Nobody knows what's going to happen. It would be nice if we did.
I knew it would happen.
<< <i>
We had budget surpluses in the late 1990s -- not because the Republicans in Congress loved Clinton -- but for the opposite reason. They didn't want to spend money if that would make him look good. Sound familiar to what's happening now? Election's in 2 weeks.
. >>
They didn't have as much bank fraud/greed. They didn't have a collapsing housing market. Actually, they had a housing market on the rise.
They didn't have the high unemployment that we have now. There are way more cracks in the system today then there were yesterday.
Can we fix them ?
Besides a tad of austerity don't forget the following 3 tricks that Clinton used to proclaim a surplus during his tenure:
1. usurping SS payments to help pay off liabilities
2. restructuring the longer term Treasury debt into shorter term contracts
3. significantly revamping the methodology of govt stats such as CPI to help reduce govt payouts
The immediate savings on interest payments worked for the short term. We're going to be paying dearly for it in the longer term. Just another version of smoke and mirrors. It was during Clinton's tenure with Treasury Secretaries Rubin and Summers that otc derivatives and other "high level" finance really took off.
Wild West Willie gives his latest update today on where things are headed. He doesn't agree that the system is salvageable.
Jim Willie rides again
roadrunner
<< <i>
Jim Willie rides again
roadrunner >>
One thing for sure, the Western Govts plus the Japanese Govt will go to extraordinary lengths to invest good money after bad in supporting the broken system until it becomes a ruined system.
Art Cashin On The Coming Hyperinflation
We present today's thoughts by Art Cashin on the coming hyperinflation (and no, it does
not mean very high inflation - it means a complete and total collapse in the monetary
system - which is what Ben Bernanke is attempting to achieve), without commentary.
AN ENCORE PRESENTATION
(Today we will revisit one of the most devastating economic events in recorded history. It
all began with the efforts of a few, well-intentioned government officials.)
Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury
took an inevitable step in a process which had begun with their previous effort to "jump
start" a stagnant economy. Many months earlier they had decided that what was needed
was easier money. Their initial efforts brought little response. So, using the governmental
"more is better" theory they simply created more and more money.
But economic stagnation continued and so did the money growth. They kept making
money more available. No reaction. Then, suddenly prices began to explode unbelievably
(but, perversely, not business activity).
So, on this day government officials decided to bring figures in line with market realities.
They devalued the mark. The new value would be 2 billion marks to a dollar. At the start
of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple
terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get
one dollar. And thirteen months from this date (late November 1923) you would need 4.2
trillion marks to get one dollar. In ten years the amount of money had increased a trillion
fold.
Numbers like billions and trillions tend to numb the mind. They are too large to grasp in
any “real” sense. Thirty years ago an older member of the NYSE (there were some then)
gave me a graphic and memorable (at least for me) example. “Young man,” he said,
“would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just
put aside $500 every week for the next 40 years.” I have never forgotten that a million
dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of
interest). To get a billion dollars you would have to set aside $500,000 dollars per week
for 40 years. And a…..trillion that would require $500 million every week for 40 years.
Even with these examples, the enormity is difficult to grasp.
Let’s take a different tack. To understand the incomprehensible scope of the German
inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep
things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get
the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13
cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919
it was 26 cents. Now the fun begins.
OCTOBER 14, 2010 8
In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of
1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf
went for $1200. By September it was $2 million. A month later it was $670 million (wide
spread rioting broke out). The next month it hit $3 billion. By mid month it was $100
billion. Then it all collapsed.
Let’s go back to “marks”. In 1913, the total currency of Germany was a grand total of 6
billion marks. In November of 1923 that loaf of bread we just talked about cost 428
billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of
butter cost 1000 times more than the entire money supply of the nations just 10 years
earlier).
How Could This All Happen? – In 1913 Germany had a solid, prosperous, advanced
culture and population. Like much of Europe it was a monarchy (under the Kaiser). Then,
following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the
world moved toward war. Each side was convinced the other would not dare go to war.
So, in a global game of chicken they stumbled into the Great War.
The German General Staff thought the war would be short and sweet and that they could
finance the costs with the post war reparations that they, as victors, would exact. The war
was long. The flower of their manhood was killed or injured. They lost and, thus, it was
they who had to pay reparations rather than receive them.
Things did not go badly instantly. Yes, the deficit soared but much of it was borne by
foreign and domestic bond buyers. As had been noted by scholars…..“The foreign and
domestic public willingly purchased new debt issues when it believed that the
government could run future surpluses to offset contemporaneous deficits.” In layman’s
English that means foreign bond buyers said – “Hey this is a great nation and this is
probably just a speed bump in the economy.” (Can you imagine such a thing happening
again?)
When things began to disintegrate, no one dared to take away the punchbowl. They
feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all
communism. So, realizing that what they were doing was destructive, they kept doing it
out of fear that stopping would be even more destructive.
Currencies, Culture And Chaos – If it is difficult to grasp the enormity of the numbers
in this tale of hyper-inflation, it is far more difficult to grasp how it destroyed a culture, a
nation and, almost, the world.
People’s savings were suddenly worthless. Pensions were meaningless. If you had a 400
mark monthly pension, you went from comfortable to penniless in a matter of months.
People demanded to be paid daily so they would not have their wages devalued by a few
days passing. Ultimately, they demanded their pay twice daily just to cover changes in
trolley fare. People heated their homes by burning money instead of coal. (It was more
plentiful and cheaper to get.)
The middle class was destroyed. It was an age of renters, not of home ownership, so
thousands became homeless.
But the cultural collapse may have had other more pernicious effects.
Some sociologists note that it was still an era of arranged marriages. Families scrimped
and saved for years to build a dowry so that their daughter might marry well. Suddenly,
the dowry was worthless – wiped out. And with it was gone all hope of marriage. Girls
who had stayed prim and proper awaiting some future Prince Charming now had no hope
at all. Social morality began to collapse. The roar of the roaring twenties began to rumble.
All hope and belief in systems, governmental or otherwise, collapsed. With its culture
and its economy disintegrating, Germany saw a guy named Hitler begin a ten year effort
to come to power by trading on the chaos and street rioting. And then came World War
II.
We think it’s best to close this review with a statement from a man whom many consider
(probably incorrectly) the father of modern inflation with his endorsement of deficit
spending. Here’s what John Maynard Keynes said on the topic:
By a continuing process of inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their citizens. By this method they not
only confiscate, but they confiscate arbitrarily; and, while the process impoverishes
many, it actually enriches some…..Those to whom the system brings windfalls….become
profiteers.
To convert the business man into a profiteer is to strike a blow at capitalism, because it
destroys the psychological equilibrium which permits the perpetuance of unequal
rewards.
Lenin was certainly right. There is no subtler, no surer means of over-turning the existing
basis of society than to debauch the currency. The process engages all the hidden forces
of economic law on the side of destruction, and does it in a manner which not one man in
a million is able to diagnose….By combining a popular hatred of the class of
entrepreneurs with the blow already given to social security by the violent and arbitrary
disturbance of contract….governments are fast rendering impossible a continuance of the
social and economic order of the nineteenth century.
To celebrate have a jagermeister or two at the Pre Fuhrer Lounge and try to explain that
for over half a century America's trauma has been depression-era unemployment and
deflation while Germany's trauma has been runaway inflation. But drink fast, prices
change radically after happy hour. And, tell Fed Chairman Bernanke that it was the
“German Experience” that caused many folks to raise an eyebrow when he alluded to the
power of the “printing press” a few years ago. But, rest assured that no one would let it
happen again.
It is important to note what Hyper-inflation is (see first paragraph in parenthesis)
"... it does not mean very high inflation - it means a complete and total collapse in the monetary
system..."
I think we AVOIDED a complete collapse in 2008. The future, well, is a bit more dimly lit.
<< <i>
<< <i>
Jim Willie rides again
roadrunner >>
The Greeks have always favored backdoors socially, whether for tax evasion or preservation of certain orientations.