Il default greco? Solo questione di tempo
Il Fmi sta valutando di elargire un nuovo prestito alla Grecia per scongiurare il rischio di un default nazionale. Ma proprio a questa ipotesi sembrano credere ormai in molti. E per qualcuno c'è solo da aspettare
Il Fondo Monetario Internazionale sta valutando l’ipotesi di garantire un nuovo sostegno finanziario alla Grecia una volta esaurito il programma tuttora in corso. Notizia confermata anche dal Wall Street Journal che ieri ha citato una fonte anonima vicina all’organismo. Per il Governo di Atene è una prospettiva salubre, considerato che soltanto il Fondo può garantire la salvezza del paese.
Per quanto dal Fondo tengano a precisare di non credere nell’ipotesi bancarotta, infatti, l’apertura nei confronti di un ulteriore intervento salva-Atene suona implicitamente come un’effettiva ammissione di.................................
Basel III: The Global Banks at The Edge of The Precipice. Trillions of "Toxic Waste" in the Global Banking System
by Matthias Chang | |||||
- 2010-09-19 | |||||
The Global Too Big To Fail Banks are so precarious that literally anything can trigger a collapse in the coming months. I have read recent commentaries on Basel III posted to various renowned websites and financial publication, but they missed (or deliberately misled) the underlying message of the proposals, the implementation of which will be delayed till 2017 and some till 2019. Basel III is pure spin and its timing was to assuage the deep-seated fears that there are no solutions in sight to save the fiat money system and fractional reserve banking. THE PROBLEM The major global banks are all under-capitalised and this was all too apparent when Lehman Bros. collapsed. Banks were borrowing so much and so recklessly to play at the global casino that when the bets went sour, they were staring at a black-hole in the $trillions. In fact the banks are all insolvent. The problem was compounded when the central bankers (all are corrupt without exception) and regulators turned a blind eye to how bankers defined what constituted “capital” so as to circumvent the need to maintain the capital ratio. THE BASEL III SOLUTION At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November. The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011. Increased capital requirements Under the agreements reached, the minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2% level, before the application of regulatory adjustments, to 4.5% after the application of stricter adjustments. This will be phased in by 1 January 2015. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period. The Group of Governors and Heads of Supervision also agreed that the capital conservation buffer above the regulatory minimum requirement be calibrated at 2.5% and be met with common equity, after the application of deductions. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions. This framework will reinforce the objective of sound supervision and bank governance and address the collective action problem that has prevented some banks from curtailing distributions such as discretionary bonuses and high dividends, even in the face of deteriorating capital positions. A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances. The purpose of the countercyclical buffer is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth. For any given country, this buffer will only be in effect when there is excess credit growth that is resulting in a system wide build up of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the conservation buffer range. These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures described above. In July, Governors and Heads of Supervision agreed to test a minimum Tier 1 leverage ratio of 3% during the parallel run period. Based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration. Systemically important banks should have loss absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams. [1] THE LOOPHOLE & ADMISSION OF INSOLVENCY Since the onset of the crisis, banks have already undertaken substantial efforts to raise their capital levels. However, preliminary results of the Committee’s comprehensive quantitative impact study show that as of the end of 2009, large banks will need, in the aggregate, a significant amount of additional capital to meet these new requirements. Smaller banks, which are particularly important for lending to the SME sector, for the most part already meet these higher standards. The Governors and Heads of Supervision also agreed on transitional arrangements for implementing the new standards. These will help ensure that the banking sector can meet the higher capital standards through reasonable earnings retention and capital raising, while still supporting lending to the economy. THE IRON CLAD CONFIRMATION THAT BANKS ARE IN DEEP SHITS Please read all the passages which I have highlighted in bold in the above paragraphs. If the banks were at all material times adequately capitalised and the central bankers in collusion with these banksters and fraudsters were prevented from manipulations, there would not be any need for Basel III regulations. In saying this, I am not in anyway conceding that even with these new requirements, the banks will be adequately capitalised. The simple truth is that as long as the derivative casino is still running and banks are allowed to continue their off balance sheet activities, nothing will be resolved. The 2 tables below tell the whole story:   Source: Basel iii Compliance Professionals Association (B iii CPA) How can the ultimate capital requirement of 8 percent be adequate when leverage under Basel III is still allowed at the astronomical rate of 33:1? In the second table, and it is a no brainer to conclude that the banking crisis (if we are lucky) may be “resolved” by 2015 but it is most likely that it can be only resolved by 2017/2018 . This is an express admission that all banks would require such a long transition period to comply with the new requirements! The stark reality is that the Too Big To Fail Banks do not have the ability and or the means to raise capital at this critical juncture. To use an analogy, the banking patient will be in Intensive Care until 2017, which is rather optimistic for the projection implies that the patient may be able to recover. It is my view that Basel III is pure spin and is intended to convey the impression that the central bankers and regulators have things under control. This is a big lie! I have said in my earlier article that the FED through QEI purchased toxic assets from the banks and part of the monies were used to shore up the reserves and part to purchase treasuries (to give an illusion of better quality assets in banks’ balance sheet). There are so much more, $trillions more of toxic waste that no amount of QE (quantitative easing) can remove them. This situation does not even take into consideration the toxic waste in SPVs – the off balance sheet mumbo jumbos. The FED and Accounting Bodies have suspended accounting and regulatory rules that have enabled the banks to hide such toxic waste in SPVs and not having to account for them in the banks’ balance sheet. LIFE SUPPORT QEI has merely enable the Too Big To Fail Banks to continue some form of banking activities thus deceiving the public that they are solvent and prevent a bank run. But the central bankers cannot have the cake and eat it as well. In trying to shore up public confidence in banks with the introduction of Basel III, they have inadvertently let the cat out of the bag and as the above two tables show, the banks are all insolvent. Additionally, whatever reserves that have been accumulated are insufficient to stimulate further lending, because the banks have reached their limits under the fractional reserve system. This is the reason for the contraction of credit and not as one commentator has postulated that Basel III would “contract credit”. Two burdens are weighing down on the banks: 1) inadequate capital to meet liabilities (borrowings); and 2) inadequate reserves under fractional reserve banking. This is a big mess! THE CONFIDENCE GAME At this moment, I cannot give a precise time-line as to how long the FED and the global central banks can prolong the confidence game, hoodwinking the public and sovereign creditors that all is well. When confidence in banks evaporates for whatever reasons, the consequences will be ugly and there will be massive social upheavals across the globe. The first indication that the game is up is when US treasuries are increasingly purchased by the FED to make up for the shortfalls by foreign creditors and to finance the ballooning US deficits. All of a sudden, some entities may start to get real nervous and unload the treasuries, and the FED steps in to shore up treasuries. Then, the tipping point is reached and Hell breaks loose! China is also part of this confidence game. But, contrary to IMF and other renowned economists who are betting on China’s and Asia’s so-called economic strengths, I take the view that when US treasuries collapse, faith in all fiat monies will likewise evaporate and there will be massive capital flight to commodities, especially gold, silver and oil. Asian stock markets will be devastated and there will be volatile gyrations in currency values. Therefore, it is utter lunacy and recklessness for the Malaysian central bank (Bank Negara) and the government to even consider allowing the ringgit to be traded. When confidence in dollar assets vaporises, China will be caught right in the middle. The third and final phase of the Global Financial Tsunami will devastate Asian economies and with it, the greatest depression in history will ensue. Time Line? Between now and anytime in 2011. At the latest, 2012. God help us. | |||||
The Curse of Fiat Money
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| | It may come as a surprise to many, but the relative size of the US commercial-banking industry has not declined following the so-called credit-market crisis, which developed in the second half of 2007. On the contrary, it has increased since then. While nominal GDP rose 4.2% from the second quarter of 2007 to the second quarter of 2010, banks' total assets rose 18.4%.  In a recession one would expect an unwinding of credit-financed investments that have turned sour. Economically unsuccessful firms go out of business, malinvestment is liquidated, losses reduce investor equity capital, and the cost of borrowing increases, providing incentives for reducing overall indebtedness. However, this is not what happened in the banking industry as a whole. The Federal Reserve, in an attempt to prevent the bank system from collapsing, supplied any amount of base money that was deemed necessary to keep banks afloat. This can be illustrated by the drastic increase in banks' base money holdings since around the third quarter of 2008.  The Fed's monetary policy tries to keep the balance sheet of the commercial banking sector from shrinking. For a shrinking of banks' assets would be accompanied by a decline in the credit and money supply — a development that is widely seen as being harmful to production and employment growth. However, this is a severe, and actually fatal, misinterpretation of cause and effect. It is bank-credit expansion that has brought about the trouble in the first place, and a policy of ever lower interest rates, provoked by ever greater doses of credit and money injections, is not going to solve the damage done but will actually make matters even worse. Fiat-Money Creation through Circulation Credit Whenever commercial banks extend loans to nonbanks (private consumers, firms, and public-sector entities) in today's fiat-money regime, they increase the money supply uno actu. Ludwig von Mises called this type of credit "bank-circulation credit." Bank-circulation credit, which is associated with a rise in the money supply out of thin air, causes malinvestment and boom-and-bust cycles. It causes all the evils that are regularly associated with inflation: rising prices (and a corresponding decline in the purchasing power of the money unit), a coercive redistribution of income, and malinvestment. However, what happens if and when commercial banks are no longer willing to roll over maturing loans, or borrowers wish to repay their bank debt? Such developments — which are frequently labeled deleveraging and derisking — would lead to a decline in the economy's fiat-money stock. This is because repaying bank loans basically means that the fiat money that has originally been injected into the economy is literally leaving the economic system. And if this happens, the inflation regime turns into a deflation regime. Deflation in a fiat-money system is of a different nature than in a commodity-money regime. To see this, consider the gold standard. Here, the money supply may decline because people decide to move gold from monetary to nonmonetary purposes. Another reason for a decline in the money supply is a correction of fraudulent banking. Fraudulent banking means that banks issue money substitutes in excess of holdings of money proper (gold). If clients demand redemption, banks default on their payment liabilities. The outstanding money stock drops, as money substitutes not covered by gold become worthless. Deflation in a gold standard comes to a halt once the outstanding claims on money proper are brought back in line with the stock of money proper people have deposited with banks. In other words, deflation makes the inflated money stock return toward its rightful level. In today's fiat-money system, however, the inflated money stock cannot be brought back toward any rightful level, as fiat money is created out of thin air via circulation credit, not backed by any commodity whatsoever. There is no equilibrium level the fiat-money supply could shrink toward. "The Piper Must Be Paid" Fiat-money systems collapse once the increase in ever-greater amounts of credit and money comes to a halt, let alone goes into reverse. Even a slowing down of credit and fiat-money expansion causes economic trouble — as the illusion fueling the credit boom breaks down. As Murray N. Rothbard noted, Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, the piper must be paid, and the inevitable readjustments must liquidate the unsound over-investments of the boom and redirect the economy more toward consumer goods production. And, of course, the longer the boom is kept going, the greater the malinvestments that must be liquidated, and the more harrowing the readjustments that must be made.[1] However, couldn't the central bank just keep the money supply unchanged, preventing it from falling by, for instance, purchasing assets (bonds, stocks, etc.)? Such a policy wouldn't do the trick. The ensuing slowdown of credit and money expansion would, as Rothbard outlined forcefully, make the economic production structure explode. The market interest rate would start moving from its artificially suppressed level toward its natural level as determined by the societal time-preference rate. This, in turn, would reveal that the economy — due to increases in circulation credit and fiat money — has lived beyond its means. Malinvestment will be revealed. Credit losses would rise as firms run up losses due to bad investment and consumers, plagued by unemployment and declining incomes, default on their debt. Tax revenues would decline, and governments, which chronically rely on debt financing, would have to pay ever higher interest rates for rolling over their maturing debt and financing new deficit-financed outlays. That said, once increases in fiat money slow down, come to a halt, or become negative, the credit pyramid and the production structure it has created would start disintegrating. Inflation Temptation Under a fiat-money regime there is a great temptation for governments and their supporters (protégés) to advocate a further increase in the fiat-money supply — by arguing that a further increase in the fiat-money supply (and a somewhat higher inflation) is the policy of the lesser evil as compared to a breakdown of the economic and monetary order. Many renowned economists have argued that, because of political reasons, (hyper)inflation rather than deflation will be the ultimate consequence of fiat money. Take, for instance, Irving Fisher, who in his book The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises (1911) made an unmistakable statement regarding the quality of fiat money: "Irredeemable paper money has almost invariably proved a curse to the country employing it."[2] A similar view was expressed by Frank A. Fetter, who explicitly referred to the political-economic dimension of inflation when he wrote in his book Modern Economic Problems (1926), Once the issue of political money begins to be excessive, its further limitation proves to be most difficult. A result usually unintended is the derangement of business and of the existing distribution of incomes. The rapid and unpredictable changes in prices give opportunity for speculative profits, but injure legitimate business. This incidental effect on debts and industry offers the main motive to some citizens for advocating the issue of paper money. It is peculiarly liable to be the subject of political intrigue and of popular misunderstanding. It is this danger, more than anything else, that makes political money in general a poor kind of money.[3] Mises, in a 1952 addition to his book The Theory of Credit and Money (originally published in 1912), put forward an explanation of why people opt for inflation in times of emergency. The emergency that brings about inflation is this: the people or the majority of the people are not prepared to defray the costs incurred by their rulers' policies. They support these policies only to the extent that they believe their conduct does not burden themselves. They vote, for instance, only for such taxes as are to be paid by other people, namely, the rich, because they think that these taxes do not impair their own material well-being. The reaction of the government to this attitude of the nation is, at least sometimes, directed by the sincere wish to serve what it believes to be the true interests of the people in the best possible way. But if the government resorts for this purpose to inflation, it is employing methods which are contrary to the principles of representative government, although formally it may have fully complied with the letter of the constitution. It is taking advantage of the masses' ignorance, it is cheating the voters instead of trying to convince them.[4] In the past, the inflations were of relatively short durations, limited to periods of national emergency when the central government was called upon to finance extraordinary defense expenditures. After the end of hostilities monetary stability soon returned as the emergency financing was abandoned. Today, public demand for governmental services never abates, in wartime and in peacetime, but seems to accelerate year after year. In fact, the more government spends on economic and social objectives the louder the public clamor for more services seems to become. Thus, the temporary emergencies that in the past gave occasion for extraordinary defense expenditures and inflationary financing have given way to a permanent emergency of social service and inflationary financing. It is true that inflation can never be permanent, for it must come to an end with the total destruction of the currency.[5] The only chance to prevent the exchange value of fiat money from collapsing altogether is a return to sound money — a way that would start by reanchoring fiat monies to gold, as outlined most prominently by Mises, Rothbard, and Sennholz. However, limiting the damage done by the fiat-money curse is not a technical problem in the first place. It is first of all a matter of overcoming the political, economic, and sociophilosophical framework of our time. As Mises noted, The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.[6] Notes [1] Rothbard, M. N. (2006, 1973), For A New Liberty: A Libertarian Manifesto, 2nd ed., Ludwig von Mises Institute, p. 237. [2] Fisher, I. (1922, 1911), The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, New York: Macmillan, p. 78. [4] von Mises, L. (1981), The Theory of Money and Credit, Liberty Fund, Indianapolis, p. 468. The quote was taken from part four, "Monetary Reconstruction," which was written in 1952 and first appeared in the 1952 American edition by Yale University Press. [6] Mises, L. (2006, 1923), "Stabilization of the Monetary Unit — From the Viewpoint of Theory," in The Causes of the Economic Crisis, Ludwig von Mises Institute, Auburn, Alabama, p. 44. Thorsten Polleit Thorsten Polleit is Honorary Professor at the Frankfurt School of Finance & Management. This essay was originally published in www.Mises.org. By authorization. |
Currency War
The Economic Collapse
Are you ready for a currency war? Well, buckle up, because things are about to get interesting. This week Japan fired what is perhaps the opening salvo in a new round of currency wars by publicly intervening in the foreign exchange market for the first time since 2004. Japan's bold 12 billion dollar move to push down the value of the yen made headlines all over the world. Japan's economy is highly dependent on exports and the Japanese government was becoming increasingly alarmed by the recent surge in the value of the yen. A stronger yen makes Japanese exports more expensive for other nations and thus would harm Japanese industry.But Japan is not the only nation that is ready to go to battle over currency rates. The governments of the U.S. and China continue to exchange increasingly heated rhetoric regarding currency policy. In Europe, there is growing sentiment that the euro needs to be devalued in order to help European exports become more competitive. In addition, exporters all over the world are already loudly complaining about the possibility that the Federal Reserve is about to unleash another round of quantitative easing. Virtually all major exporting nations want the value of the U.S. dollar to remain high so that they can keep flooding us with lots of cheap goods. The sad reality is that our current system of globalized trade rewards exporting nations that have weak currencies, and many nations have now shown that they are willing to take the gloves off to make certain that their national currencies do not appreciate in value by too much.
Some nations have been involved in open currency manipulation for some time now. For example, Singapore is well known for intervening in the foreign exchange market in order to benefit exporters. Also, the Swiss National Bank experienced losses equivalent to about 15 billion dollars trying to stop the rapid rise of the Swiss franc earlier this year.
But as we race toward the end of 2010, currency manipulation is becoming a major issue on the world stage.
Rumors that the Federal Reserve is considering a substantial new round of quantitative easing is already causing many major exporting nations around the world to howl in outrage.
Why?
Well, quantitative easing by the Federal Reserve could put substantial downward pressure on the value of the dollar and that would make exports significantly more expensive in the United States. The reality is that even a relatively small change in the value of the U.S. dollar can have a major impact on exporters.
But what could really set off a massive currency war is the ongoing dispute between the U.S. and China.
For years, China has kept the value of their currency artificially low. Even though China has made a few small moves toward a more free-floating currency policy, at this point China’s currency is still pretty much pegged to the U.S. dollar. It is estimated that the Chinese government is keeping China's currency at a value about 40 percent lower than what it should be. This is essentially a de facto subsidy to China's exporters.
This has enabled China to flood the United States with cheap goods and it is killing entire industries in the United States. Americans have loved rushing out to Wal-Mart to get super low prices on all kinds of stuff, but in the process we have slowly but surely been shipping our manufacturing base and our standard of living over to China.
In recent years both the Bush administration and the Obama administration have been whining about this currency manipulation by China, but both administrations have stopped short of taking any real action.
But are there now signs that the Obama administration is going to get serious and start a currency war?
Well, last week Barack Obama did send the head of his national council of economic advisers, Larry Summers, to Beijing to discuss currency issues.
But what can we do other than whine at this point?
Are we willing to start a trade war?
Considering the fact that China holds nearly a trillion dollars worth of U.S. Treasuries, that probably would not go so well for us.
Even though China's currency manipulation is absolutely raping the U.S. economy, China has so much leverage over us at this point that it isn't even funny.
For example, China has almost a complete and total monopoly on rare earth elements. If China totally cut off the supply of rare earth elements, we would have no hybrid car batteries, flat screen televisions, cell phones or iPods. Not only that, but rare earth elements are used by the U.S. military in radar systems, missile-guidance systems, satellites and aircraft electronics.
But something has to be done. Essentially we are caught between a rock and a hard place.
Today, the United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.
Last month, the monthly trade deficit with China was approximately 26 billion dollars. For the year, the trade deficit with China will be somewhere in the neighborhood of 300 billion dollars or so. The transfer of wealth to China that represents is absolutely mind blowing.
The U.S. economy is getting poorer and the Chinese economy is getting richer each and every month.
We are in decline and China is on the rise. In fact, one prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.
This would not have ever happened if we had not put up with China's open and blatant currency manipulation all this time.
But now they have us over a barrel and standing up to China would be incredibly painful for the U.S. economy in the short-term.
So will we actually see a currency war break out soon?
Well, it seems almost a certainly that countries throughout the world will continue to manipulate their currencies in order to gain a competitive advantage, but if you are waiting for the Obama administration to truly stand up to China you are probably going to be waiting for a very, very long time.
Going Out with a Bang: Americans Using Credit Cards They Can’t Pay Back
Mac Slavo
As usual, Schiff is a bull on gold and precious metals commenting that silver "is going a lot higher." Though he didn’t have a specific number in mind, he sees a likely and continued uptrend that can reach levels much higher than where it is today. "I think silver is going to go, ultimately, fifty dollars an ounce, a hundred dollars an ounce, who knows how high it can go?" forecasts Schiff.When asked what sort of time frame he expects for silver to reach these levels, Schiff’s response closely mirrors our own view on when we can expect a significant move in precious metals and other essential commodities like food and energy:
It could happen very soon. It all depends, I think, on when you really have a collapse in the dollar. I think the dollar index, which is trading a little bit above 80, I think it’s headed down to 40. Whether it gets there in two years, three years, I don’t know. It just depends on when the world wakes up and figures out what’s going on. I mean the United States right now is completely powerless to prevent runaway inflation.It is our view that not only have the major powers in the world like China, Russia and Europe woken up, but they are very well aware of what is going on. The Europeans, whose banks are closely allied with those in the United States may get slammed just as hard as US banks. And the Dollar and the Euro could very well see the same fate over the course of the next decade, which, in our view, would essentially be a complete destruction of their value in terms of buying power.
The Chinese and Russians, who are not as exposed to US and European financial problems from the banking side, are likely biding their time. We often hear that we have global collaboration in geo-politics, economies and finances, but make no mistake, China and Russia have no interest in seeing America succeed. At some point in the future, the Chinese are going to pull the plug on buying our Treasuries - their purchases are already down 10% year-over-year as of July 2010 - and when this happens we can expect other countries to follow. There will be a rush to the exits by Central Banks and institutional investors across the world as everyone holding any kind of US paper is going to be selling.
It is at this time that the US "bailout bubble," a term coined by trend forecaster Gerald Celente, or as financier George Soros refers to it, " the super bubble," will burst. Interest rates will sky rocket and the US dollar will collapse.
Why would China do this if they know that this would have a significant negative impact on their own economy? Because they are patient, that’s why. The Chinese powers-that-be are willing to take a short-term, multi-year hit to their economy, no matter how badly their people are affected if the end result will be a downfall of the world’s current super power. If you haven’t guessed by now, this is a global war being fought on multiple fronts over many generations.
The Chinese know where we’re headed, as do the powers that be here in the US, as we described in our recent article assessing Timothy Geithner’s recent comments to the Wall Street Journal.
In fact, not only do those in the top echelons of government and finance understand what is happening, according Peter Schiff it is clear that even consumers know the end game:
You definitely want to stay away from Mastercard - any company that’s leveraged to the US consumer. Remember, one of the reasons so many Americans are using Mastercard is because they’re putting their food on it, they’re putting their basic necessities on it.As above, so below. It’s clear that maxing out debt on all levels is the strategy of the day (decade?) in America. The government is spending so much money, and pulling forward so much time and energy yield from our children, grandchildren and great-grandchildren that it is simply impossible to ever pay back our national debt without inflating the dollar. In other words, it is a mathematical impossibility for us to ever pay back what we owe in real US dollar terms. The only way to do it is to print more money and pay off debt with dollars that are worth less.
I think a lot of Americans are so willing to use their credit cards because they’re so far in debt, they know they’re broke, and they might as well go out with a bang. A lot of people have no intention of paying back the money that they’re using whether it’s Visa or Mastercard.
US consumers, already getting hit hard with permanent job losses that are never coming back, wage decreases, and depreciating real estate prices, understand that with their current debt load, most will never be able to pay back the money they owe. So, instead of defaulting on their debt with available credit remaining on their cards, they’ve decided to max out those cards before they stop paying.
This author has personally witnessed two separate instances of just this phenomenon. A close friend and Citibank credit card holder recently saw a rate increase from roughly 10% to 29.99% on their existing balance. Already running on a tight budget, his payment increased from a monthly $150 per month to over $400 per month. Our friend, rather than simply stopping his payments because he was no longer able to afford them, promptly took his Citibank card to a local outdoor goods store, purchased several thousand dollars worth of guns, ammunition, and camping gear. He never made another payment. That’s a $20,000 delinquency on Citibank’s books - and that debt will never be collected. We can talk about the ethics and morality of this move, but that is irrelevant at this point. Tens of thousands, perhaps millions, of Americans are doing exactly the same thing with credit cards and home loans.
Eventually, the US government itself will follow. This is the reason for why we recommend hard assets - because your paper currency will be worthless.
Watch Peter Schiff on CNBC September 13, 2010:
Wampum
Don Stott
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Indians were great hunters, and the Pilgrims wanted their furs and pelts to take back to England to sell at a profit, and the Indians had plenty of that, but wanted what the white man had. The Colony was supposed to show a profit for its investors, and trade was the only possible way to show one, which meant developing a system of 'money' for trade. In 1624, the Dutch trading agent Isaac de Rasiere introduced the Pilgrims to wampum, the white and purple shell beads that quickly became the medium of exchange in New England and revolutionized trade with the Indians. By the early 1630s, Plymouth had established a series of trading posts that extended all the way from the Connecticut River to Castine Maine.
Wampum consisted of strings of cylindrical beads made from either white periwinkle shells or the blue portion of quahog shells, with the purple beads being worth approximately twice as much as the white beads. To be accepted in trade, wampum had to meet scrupulous specifications, and both the Indians and the English became expert at identifying whether or not the beads had been properly cut, shaped, polished, drilled, and strung. A fathom of wampum contained about three hundred beads, which were joined to other strands to create belts that varied between one and fine inches in width. When credit became difficult to obtain from England during the depression of 1640, (there have been over a hundred 'depressions' since then), the colonies eased the financial burned in New England by using wampum as legal tender. The Indians had provided the English with what became an American way of doing business!
Wampum no longer exists as legal tender, but believe it or not, old wampum beads have become extremely collectible! Many years later, the Indians realized that wampum was merely beads, with gold and silver being the real valuables. They simply took millions of beads and discard them, threw them into the ocean, or even buried them. Today, on rare occasions, three hundred year old wampum beads can be found by beachcombers, and they are highly collectible. What all this proves, aside from a note on American history, is that what is scarce is valuable, in this case, wampum beads. There is a finite supply of Model A Fords, Tiffany lamps, gold and silver. Trees can grow, and paper money can be printed from paper made from trees, ad infinitum. As GM is now about to prove, millions of stocks can be printed, diluting the value of those already held. Banks create dollars by making loans of them, which dollars have been created out of thin air. Gold and silver do not grow on trees, nor can they be created out of thin air. People around the world are beginning to realize the self worth of gold and silver, and are buying it in ever increasing amounts. The entire world is scared, and especially of government created paper wampum. Eventually, due to their desirability and availability, gold, silver, Model A Fords, and Tiffany lamps, will continue their ascendancy in paper money prices, even though they are exactly the same Model A Fords, Tiffany Lamps, gold and silver. This is why my son and daughter, and myself deal in actual, historic, valuable, beautiful, eventually scarce, gold and silver.
Fed "Tap Dances On A Land Mine"
Tyler Durden
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John Williams, arguably one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams’ argument? Read on. Incidentally, even if some fellow bloggers disagree with Mr. Williams’ assesment, we believe it is in our readers’ best interest to have them make up their own mind on this most critical economic development.
Summary OutlookWhat does this mean for US financial markets? (take a wild guess)
Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable
Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes - probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.
U.S. Economy
Already the longest and deepest economic contraction of the post-World War II era, the current downturn in the U.S. economy is re-intensifying, with no near-term stability or recovery on the forecast horizon. After an initial plunge, broad-based business activity bottom-bounced at a low-level plateau for more than year. Shy of short-lived bumps in activity from stimulus measures, there has been no recovery. Reflecting an intense real (inflation-adjusted) annual contraction in broad systemic liquidity (SGS-Ongoing M3 estimate), the economy has started to contract anew. In the popular media, where the hype of a recovery-at-hand readily was accepted, the renewed downturn already is being called a "double-dip," but underlying reality is that of an extremely protracted, deep and ongoing contraction. If there is a double-dip, it is in the combination of the two major economic downturns of the last decade (see graphs).
Structural problems tied to lack of real consumer income growth - and worsened now by a credit-intensified contraction in consumer liquidity - pushed the economy into recession by early 2007, almost a year before the officially-clocked onset of December 2007. Such helped to trigger the credit collapse, which exacerbated the unfolding downtown and threatened systemic collapse. Despite extraordinary efforts to prevent a failure of the banking system, the structural consumer liquidity issues have not been addressed. Until they are, sustainable growth in U.S. business activity will be lacking.
The current contraction likely will meet my definition of depression (a greater than 10% real decline in peak-to-trough activity). In response to a likely hyperinflation, the current circumstance would evolve into a great depression (a greater than 25% real decline in peak-to-trough activity). Ongoing contractions in the world’s largest economy have sharply negative implications for global economic growth, but the hyperinflation risk for the United States likely will not spread to the more-stable major U.S. trading partners.
U.S. Inflation
Risk remains exceptionally high in the next six-to-nine months for a combination of massive U.S. dollar selling and heavy Federal Reserve monetization of Treasury debt to boost inflation, and to open the early stages of a U.S. hyperinflation. As discussed in the Hyperinflation Special Report, runaway inflation is a virtual certainty by mid-decade.
Defining inflation (deflation) in terms of annual change in the prices of consumer goods and services, consumer prices currently are about as contained as they have been since before the financial crises began to break in 2007, even as measured by the SGS-Alternate CPI measures. Tied to wild swings in oil and related gasoline prices, the CPI began to pick-up sharply in 2008, as oil prices soared, but prices then retreated to a period of short-lived official deflation in 2009, as oil prices collapsed. The current "contained" circumstance will not last, and the problem ahead very likely is not going to be deflation, partially because the Fed has indicated that it will act to prevent deflation, and it has the ability to do so.
First, though, again, as point of clarification, I define inflation in terms of changes in consumer prices, not in terms limited purely to changes in money supply growth (annual broad nominal growth is negative), nor in terms of asset inflation or deflation (a stock market crash does not necessarily lead to contracting consumer prices).
A sharp annual contraction in money supply, as seen at present in annual M3 (the SGS-Ongoing M3 estimate) legitimately can and has raised fears of deflation. Federal Reserve Chairman Bernanke has noted (see his 2002 comments in the Hyperinflation Special Report) and effectively confirmed in his recent Jackson Hole, Wyoming speech that a central bank in conjunction with its central government always can debase its currency (create inflation) in order to prevent deflation.
A central bank indeed can do that, if it so desires. The quantitative easing undertaken by Japan never was designed to debase the yen. Similarly, Mr. Bernanke’s quasi-effort at dollar debasement in the trillion-dollar-plus expansion of excess bank reserves was aimed specifically at banking system stability, not at creating inflation, per se. The deflation fight, though, is at hand and will be discussed further in the Systemic Stability section.
Current projections on the federal budget deficit, U.S. Treasury funding needs, banking industry solvency stress tests, etc. all have been predicated on some form of economic recovery. There is and will be no recovery for the foreseeable future; and the negative implications of that for U.S. funding needs and for systemic stability should act as eventual triggers for massive dumping of the U.S. dollar. Those circumstances also should lead to funding difficulties for the U.S. Treasury, putting the Federal Reserve in the position as lender of last resort to the Treasury. Such lending would be direct monetization of U.S. Treasury debt, which would feed directly into the money supply.
Actions already taken by the Fed and the U.S. Government in the ongoing crises have pushed major U.S. lenders to the brink of abandoning the U.S. dollar as the world’s reserve currency, and to the brink of dumping dollar-denominated assets. Keep in mind that a weak U.S. dollar can be extremely inflationary, particularly when dollar-denominated oil prices rise in response to such weakness, as has been seen in the last several years.
Systemic Stability
Threatened with systemic collapse at the time of the 1987 stock crash, then-Federal Reserve Chairman Alan Greenspan began serious efforts to forestall an eventual day-of-reckoning for the economy and financial system, through encouraging massive debt expansion, with leverage built upon leverage. As the economy faltered in early 2007, the system began to fall apart. The financial system did face collapse, and the Fed and the U.S. government did all in their powers - spent whatever money they thought they had to - to prevent it. A systemic collapse would have represented a complete functional failure of the U.S. government and the Federal Reserve. Such had to be, and still has to be, avoided at all costs, as far as the government and Fed are concerned. The big problem is there are no viable solutions.
The federal government effectively is bankrupt, unable to meet its long-range obligations or even to cover physically its annual shortfall in operations (see the Hyperinflation Special Report). Accordingly, the efforts at fiscal stimulus rapidly are approaching their practical limits, the point at which the U.S. Treasury will have difficulty raising needed funds. There are three options open to the government for meeting its impossible fiscal needs: balancing its books, reneging on its obligations or printing the money it cannot possibly raise through taxation.
The option for balancing the books would mean the U.S. government reversing its ever-evolving social-system policies of the last 75-plus years, abandoning the concept of federal government social programs supporting the income, retirement and health needs of the broad public. The economy cannot expand enough, taxes cannot be raised enough and other expenses cannot be cut enough otherwise to balance the books.
Specifically needed are slashing of the Social Security, Medicare and Medicaid programs, as well as the nascent fiscal shortfalls already building up as a result of the healthcare system control recently seized by the federal government. Such change is an extremely unlikely political possibility in the current system and circumstance, which leaves open the general options of government default on its obligations or government printing of money to meet its obligations. The latter option is the usual and likely one to be taken.
With no easy or politically-practical solutions, the available options all are bad; the choices being made and likely to continue being made are aimed at delaying systemic turmoil as long as possible. Ironically, it likely will be the efforts at saving the system that push the system into its ultimate day-of-reckoning in a hyperinflationary great depression. The general background material provided in the Hyperinflation Special Report again is referenced here, as I do not want to get overly repetitive with key points of the broad picture.
Consider, though that the "quantitative easing" entered into by the Fed had minimal impact on the money supply, as it involved mostly the purchase of mortgage-backed securities, with the created excess bank reserves being deposited with Fed, earning interest. As result, bank lending into the normal flow of commerce has been in contraction, and the broad money supply has followed. Now the Fed is considering the possibility of inducing banks to lend, by cutting the interest rate it pays on reserve balances.
The Fed’s primary function - as a private corporation owned by commercial banks - is to protect the banking system. Supporting economic growth and containing inflation are secondary concerns, but the renewed economic threat now also can shatter the fragile appearance of banking-system stability. Indeed, the banking system is far from stable, which is one reason lending is down.
Separately, a number of states will need financial bailouts, insolvent pension funds will seek government backing, the unemployed will be looking for greater support, etc., and all these pressures will be on top of a renewed decline in federal tax revenues. The most likely course of action here remains ongoing efforts to spend or create whatever money is needed to keep the system from collapsing. Where the options are for devil’s choices, the one that buys the most time and is least politically painful usually is the one chosen.
Greenspan abandoned the U.S. dollar for a while following the 1987 stock crash. The dollar and foreign investment likely will become secondary concerns for political Washington against a U.S. populace looking to kick out the political miscreants - both sides of the aisle - who have lead the U.S. system into this crisis over decades. The ultimate cost in domestic inflation will be horrendous.
In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.
Holdren uses free market to get back to stone age
Sept 17, 2010
Nearly 40 years ago John Holdren (now “science” advisor to Obama) wrote a book with the infamous Ehrlichs. In the “recommendations” at the end of 1973 book Human Ecology: Problems and Solutions, they said: “A massive campaign must be launched to restore a high-quality environment in North America and to de-develop the United States”.
It’s a weird use of the word. But there is no mistaking “de-develop”: to undo development, to go backwards, to get rid of advances…
And it was hardly a juvenile slip of the tongue; 37 years later, all this time passes, and when asked about that passage he acknowledges it’s still on his agenda:
“What we meant by that was stopping the kinds of activities that are destroying the environment and replacing them with activities that would produce both prosperity and environmental quality. Thanks a lot.”Just imagine what twisted, sicko “free market” would freely choose to do some de-developing?
CNSNews.com then asked: “And how do you plan on implementing that?”
“Through the free market economy,” Holdren said.
Holdren’s version of freedom is just another grand control scheme: “Let me tell you how to live”. “Free market” has become the false advertising banner of the totalitarians. A market is not free if you have to coerce people or jail them into joining the market.
“De-development means bringing our economic system (especially patterns of consumption) into line with the realities of ecology and the global resource situation,” Holdren and the Ehrlichs wrote.There are plenty of world-peace-type-problems to discuss. But the mindset that thinks 1973 USA was “overdeveloped”, and that development itself is the problem is two dozen beers short of a slab. If people are unfed, sick, or homeless then problem is not the development, but that the development is only half done.
“Resources must be diverted from frivolous and wasteful uses in overdeveloped countries to filling the genuine needs of underdeveloped countries,” Holdren and his co-authors wrote. ”This effort must be largely political, especially with regard to our overexploitation of world resources, but the campaign should be strongly supplemented by legal and boycott action against polluters and others whose activities damage the environment. The need for de-development presents our economists with a major challenge. They must design a stable, low-consumption economy in which there is a much more equitable distribution of wealth than in the present one. Redistribution of wealth both within and among nations is absolutely essential, if a decent life is to be provided for every human being.”
Populations can’t keep growing exponentially, sure. But the only countries which have got control of their population surge are the ones which developed.
Read the whole report on CNS.
H/t Climate Depot (see also John Holdrens Ice Age Warning in 1971)
The man just wants to stop everyone else flying around in planes, having fun:
In their 1971 chapter, Holdren and Ehrlich speculate about various environmental catastrophes, and on pages 76 and 77 Holdren the climate scientist speaks about the probable likelihood of a “new ice age” caused by human activity (air pollution, dust from farming, jet exhaust, desertification, etc.).He also wrote that trees ought to be able to sue in court…
Giving “natural objects” — like trees — standing to sue in a court of law would have a “most salubrious” effect on the environment, Holdren wrote the 1970s.If you met him at the pub, he’d be the guy you might egg on just for sake of a good dinner party anecdote to use after the fact, but he’s not just the nutter at the bar, he’s one degree of separation from the The Leader of The Free World.
“One change in (legal) notions that would have a most salubrious effect on the quality of the environment has been proposed by law professor Christopher D. Stone in his celebrated monograph, ‘Should Trees Have Standing?’” Holdren said in a 1977 book that he co-wrote with Paul R. Ehrlich and Anne H. Ehrlich.
Voce - Contestazione a Bonanni, denunciata la figlia di un pm
LO ZIO PROPONE UNA SOTTOSCRIZIONE CON LO SCOPO DI PAGARE UN CORSO DI TIRO A SEGNO ALLA RAGAZZA DENUNCIATA!!!!!!
Cronaca
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Contestazione a Bonanni, denunciata la figlia di un pm
Forse l'autrice del lancio del fumogeno che ha colpino il segretario della CislTorino - E' stata denunciata per lancio di oggetti pericolosi, danneggiamento aggravato e accensioni pericolose la giovane identificata ieri nel corso della contestazione al leader della Cisl, Raffaele Bonanni, durante la Festa del Pd di Torino.
A confermare le accuse sembra ci siano anche le immagini scattate durante il blitz. A quanto sembra la giovane avrebbe lanciato il fumogeno che ha raggiunto il giubbotto di Bonanni poco prima che lasciasse il palco.
Le altre persone che hanno partecipato alla contestazione sono in via di identificazione. La 24enne fiorentina, Rubina Affronte, scrive La Stampa, è figlia del pm Sergio Affronte, in servizio alla procura di Prato. La giovane, che farebbe riferimento al centro sociale Askatasuna, è già stata denunciata in passato per invasione di terreni ed edifici.
9/9/2010
Just Another Hyperinflation Post
Hyperinflation talk has come to the forefront once again (thanks to a few recent articles), and being my #2 (of 2) topic here at FOFOA, I have a small but relevant offering for you. This is a compilation of a few posts from a recent discussion I had on another forum. The subject was hyperinflation and the deflationists that emphatically say it is impossible here. And the question was asked, What do these deflationists mean by deflation? Monetary deflation? Price deflation? Asset deflation? And so on. "What is deflation?" was the primary question.
Always looking for a fresh angle, which I like to do, I thought a much more interesting question was, "What is a deflationist?" The term deflationist is one I have been using regularly on my blog for two years now. And it is a term that I appropriated, definition and all, from FOA's writings a decade ago. Here are a couple of his "deflationist quotes" to kick off this post…
"Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; Deflation was always the final outcome."
And of course his most famous one…
"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"
What is a Deflationist?
What is a deflationist? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up. The same political will that always changes the rules to suit its needs as surely as the sun rises. And it is this political will that makes dollar hyperinflation a certainty this time around.
It is beyond frustrating to watch all the bailouts of banks at a time like this. They should be allowed to fail! Right? But this ugly sight is only a symptom of the real problem. And it was never even a choice. As FOA warned 12 years ago, these bailouts were always baked into the cake. They are a mandatory function of the political will that backs the entire system. This is the main element that all of the deflationists miss.
Unlike FOA, the deflationists never saw the bailouts or the QE coming, and they refuse to believe that it will keep on coming as long as ANYTHING keeps failing. States, pension funds, large companies, foreign entities, whatever. It's all gonna be papered over. And the choice to stop bidding on dollars rests solely in the hands of those with large stockpiles of physical gold.
Once they stop bidding for dollars with their gold, the goose is cooked. (See: " Dollars Bidding for Gold? Or Gold Bidding for Dollars?" here.)
In a recent interview over a couple beers, one self-proclaimed deflationist said this:
The hyperinflation case, if one wants to make one, and I'll make one right now, is congress sends everyone $60,000, that would probably do it, but is congress likely to do that? …All this talk about the Fed being able to drop money out of helicopters, that's not the way it works.
In my last post, Credibility Inflation, I wrote the following:
First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).
Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.
Can you see that the above deflationist is basing his view of hyperinflation on this misconception? We don't need the helicopter drop to spark hyperinflation. Zimbabwe didn't have billion dollar notes when hyperinflation started. They only had Z$100 notes just like the US. The million and billion dollar notes followed the onset of confidence collapse as the government printed to survive.
Another consideration is that sometimes there is a "deflationary
head-fake" right before the onset of hyperinflation as the private bank credit money disappears...
With these charts I am not saying it always looks exactly the same. I am only observing that the common deflationary metrics can fall while credit collapses, but then be immediately followed by a confidence collapse in the currency itself. Deflationists don't see this because they are viewing the economy as if it were a machine. And machines don't flip 180 degrees on a dime like this.
I tend to agree with 99% of what the deflationists write. For the most part they are masters at analyzing the minutiae and then painting it into a grand macro picture. I like the Kondratieff cycles and I agree we are in the winter cycle. In fact, almost everything most deflationists describe will probably happen, in my view.
But they all miss the hyperinflation that is coming. And they miss it because they don't understand how perfectly it fits with a deflationary collapse. In fact, they argue vehemently against it the same as they argue against inflation, which is how I know they don't understand hyperinflation. And they miss it because they are so meticulous in their observations and calculations that they can't see that the collective will always changes the rules when things get really painful. The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.
See All Paper is STILL a short position on gold if you have not already. It was an early but very popular post I wrote in response to a deflationist's article titled "Hyperinflation is Impossible."
Here's the main thing: the deflationists make all their calculations in dollar-denominated terms. They can't help it. It's as natural and automatic as breathing air to their Western minds. But this small flaw in the numéraire of their calculations leads them to funny conclusions about the future value of dollars. For one thing, the coming deflation must be in dollar-denominated terms, they believe. But this is impossible today. Because we have a purely symbolic currency, a dollar-denominated deflation is impossible... because of the political will I mentioned above!
Yes, we will have a grand deflation... denominated in GOLD! It will be brought on by all the same factors the deflationists correctly recognize. The failure of debt, the winter cycle, etc... And it will look the same as they imagine. Depression, unemployment, falling prices (when priced in GOLD), black and white pictures, etc...
You see, hyperinflation is exactly like deflation. The only thing hyperinflation has in common with inflation is part of its name. Other than that it looks just like a deflationary depression. In fact, it IS a deflationary depression, with a different numéraire! Just look at Zimbabwe a couple years ago. Other than the fancy wheelbarrows, it looked just like a depression.
Now you might ask, "What's the difference between a deflation denominated in gold versus dollars?" Well, there's a huge difference to both the debtors and the savers. In a dollar deflation the debtors suffocate but in a gold deflation they find a bit of relief from their dollar-denominated debts. And for the savers, the big difference is in the choice of what to save your wealth in. This is what makes the deflationists so dangerous to savers.
The deflationist equation, if properly applied, always leads to the conclusion that the best things to save are cash and Treasuries. And some (not all) deflationists even apply their formula to gold (because they believe it will behave like a commodity) and conclude it must crash to around $200/oz during their deflation. So they warn their readers to stay away from gold.
Can you see how one little flaw in the numéraire can make an analyst very dangerous to your bottom line?
Here is the way the deflationist views the world. Think of all the debt as a large balloon. As it is expanding the balloon is being inflated. Today that balloon is deflating and no matter what the Fed does, it can't seem to reflate that balloon. And the deflationist concludes that as long as that balloon is deflating, not inflating, we MUST have deflation, and the value of a dollar MUST rise.
But here is the correct way to picture it. There are actually TWO balloons side by side. These two balloons are the two sides of the global balance sheet. One belongs to the debtor and the other to the saver.
If we think about "global debt" as "global liabilities," then there must be the equal and opposite "global assets." Simple balance sheet math. The liabilities are failing because collateral values are falling and debtors are defaulting. As FOA said, "As debt defaults, fiat is destroyed." Or another way to say is, "As debt defaults, fiat savings are destroyed."
But what is actually happening is the assets are being papered over with fresh base money. FOA: "hyperinflation is the process of saving debt at all costs, even buying it outright for cash." Or said another way, "hyperinflation is the process of saving debt-backed assets (MBS's etc..) at all costs, even buying them outright for cash."
These two balloons are a metaphor for the global balance sheet with an "airy" elastic bubble-like quality since we are talking about "inflation" and "deflation." They are a way to visualize the two sides of the balance sheet inflating and deflating in tandem like they're supposed to, and then separately as the debt-backed assets are saved at the cost of destroying the transactional currency.
In the beginning, as the debt balloon expands so does the savings balloon. And this second balloon expanding represents credibility inflation (see my last post). Credibility inflation is the confidence the savers have in saving the debtor's debt. And this is what enabled the debt bubble to grow so large in the first place. And in a circular fashion, the debt also allowed the savings bubble to grow so big, bigger even than the underlying world of real things.
So in the early stage we have a feedback loop of credibility inflation. Debt creation inflates the amount of "stored wealth" and this "stored wealth" (stored as someone else's debt) enables more and easier debt creation. Subprime loans and MBS's are a perfect example of this kind of a feedback loop. The invention of Subprime fed the MBS phenomenon, and the MBS phenomenon enabled (and demanded) the invention of Subprime. And today's credit contraction is a sure sign that the feedback loop is no longer functioning. Banks don't like to extend credit unless they can immediately sell the resulting hot potato of "stored wealth" to a pension fund or some other sucker.
Anyway, the future hyperinflation fuel is stored in the savings balloon during this period of credibility inflation. (Again, see my last post.) That's why we see very little price inflation during this stage. And when the debt starts to fail, so does the credibility of paper debt to the savers. The Fed is trying desperately to restart the credibility feedback loop that will reflate the deflating debtor balloon. That, of course, is impossible at this point; an observation the deflationists intuitively make correctly, even though they are only looking at one of the balloons.
So as the credibility of debt paper as a savings instrument fails in the mind of the savers, that hyperinflation fuel stored in the savers' balloon turns into real price inflation as it scrambles to be spent. Remember that this savings balloon has grown larger than the underlying world of real things!
Now here is where the deflationist would stop me and say, "Wait a minute. Both of your balloons are deflating at the same rate so your 'savings' could never escape." But this is also where the political (collective) will comes into play. It will NOT let that savers' balloon deflate. The Fed is helpless against the debtors' balloon and the credit/debt feedback loop, but it is most certainly NOT helpless against the savers' balloon.
The Fed has the power to keep the savers' balloon 100% full if it wants to, and the political will to fully back that action. It simply buys those deflating MBS's (etc..) at full price ("dumping them on your front lawn! (smile)") and suddenly the air in the savings balloon has been replaced with non-elastic fresh cash. This process is already well underway… and IT IS the trigger for hyperinflation.
Remember, first comes hyperinflation, then, and only then, comes the massive printing as the Fed tries desperately to keep the government functioning. So don't look for massive printing to see hyperinflation coming. Look for the monetization of bad debt and the first signs of real price inflation, even in the face of apparently deflationary forces.
A note: Gold could sop up most of the hyperinflation presently stored in the savers balloon without destroying the real economy (see my old post Freegold is like a Giant Sponge). But it is the US Govt. that will make sure this becomes a real Weimar-style hyperinflation when it forces the Fed to monetize any and all US debt. And as dollar confidence continues to fall, that's when the debt must go exponential just to purchase the same amount of real goods for the government. One month the debt will be a trillion, the next month it will be a quadrillion just to buy the same stuff as the previous month. How long will this last? Less than 6 months is my guess.
Another Angle
There is another important angle to this story that the deflationists all miss. You may have caught it if you thought to yourself, "Well, even if the Fed keeps the savers balloon 100% full while the debtors balloon deflates, that's only half the money supply as before." This is exactly how the deflationists think. They see no difference between the two.
But there is a fundamental difference between the kind of money that fills the debtors balloon (credit money or balance sheet money) and the kind the Fed is using to prop up the savers balloon (monetary base). This is a critical difference that deflationists can't seem to wrap their heads around (and I'm not sure why).
You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!
As the economy along with the debtors balloon contracts and the confidence of the savers wanes, the previous driving force of greed switches to the much more powerful force of fear. And "switch" is a great word in this case, because this transition can hit the entire planet all at once as fast as flipping a "light switch." It's called a panic.
When it does, that's when the velocity of the monetary base takes off. And as I have pointed out before, velocity has the same exact effect on the value of a dollar as an increase in the money supply. (See my "sea shell island" analogy here.) If the velocity jumps from fear, base money can chase scarce goods with the same disastrous effect as an exponential increase in the money supply, even before that actually occurs.
Richard Maybury describes it well here:
...velocity & money demand.
Jim Powell has pointed out that the tens of millions of people who are still working — and that's 91.5% of the workforce — have received a huge pay raise, because prices of houses, cars, refrigerators and a lot of other things, have been cut drastically. The buying power of their wages has soared!
And, it's the best kind of pay raise, because they didn't need to work any harder to get it, and it's not taxed.
This is a huge windfall. It's probably the biggest, most widely shared windfall in all of world history.
So why aren't these tens of millions of people out celebrating? They should be delirious with joy. Why aren't we seeing dancing in the streets?
Because people are scared and afraid to spend the money. And that brings us to what economists call velocity.
As this war was developing during the 1990s, I repeatedly warned that it was likely to bring a dollar crisis, and advised my readers to always have part of their savings diversified into non-dollar assets such as Swiss francs, New Zealand dollars, gold, silver, platinum, oil, and other raw materials.
Incidentally, in March on our web site, I ran a special bulletin telling my readers that I think there is an 85% probability the bottom in non-dollar assets has occurred, or is occurring, and I think those investment suggestions are now as solid as they were ten years ago.
A major reason is velocity. As far as I know, my Early Warning Report is the only publication that says much about it.
I think velocity has become the key driver in the entire world-wide economic crisis, so here is a quick explanation of it.
Money responds to the law of supply and demand just as everything else does.
If people do not want a particular currency — let's say the British pound — then the value of a pound will fall.
Sellers will demand more pounds in trade for their goods or services, and prices in Britain will rise, even if there has been no change in the supply of pounds.
On the other hand, if the demand for pounds rises, the value will rise and prices will fall even if there has been no change in the supply of the currency.
Velocity is the speed at which money changes hands. When demand for the money is high, money changes hands more slowly, and velocity is low.
When demand for the money is low, velocity is high.
A key point is that velocity and money supply can act as substitutes for each other. A 10% rise in velocity has the same effect as a 10% rise in money supply.
The biggest problem with velocity and money demand is they can turn 180 degrees overnight. If people trust the currency, and suddenly perceive some kind of big threat to their futures, money demand can shoot up.
That's exactly what happened last year. The supply of dollars certainly did not go down, but when the real estate crash happened, people became so frightened they were afraid to let go of their dollars.
Within a few days, money demand shot up, people stopped spending and held onto their dollars, and this had the same effect as an instantaneous deflation of the money supply.
If you don't spend your money, that's the same thing as taking it out of circulation.
This can instantly cause the equivalent of a sharp deflation of the money supply by 10 or 20 percent, or more.
That's what happened in the Great Depression. The Fed was inflating. In 1932, the money supply[1] was $20 billion, and by 1940 it was $38 billion. But fear was so great that velocity was falling faster than money supply was rising.
This is why Franklin Roosevelt said in his first inaugural speech, "The only thing we have to fear is fear itself." People were afraid to spend their money, as they are now, and velocity was falling, which has the same effect as deflation, because if you don't spend your money, it's not in circulation.
So, speaking economically, I think that is where we are now. Changes in money demand and velocity are running everything.
And, my key point is, it's all controlled by emotions. By fear.
What are you more afraid of? The dollar becoming worthless? Or losing your job and running out of dollars?
The whole world is constantly shifting back and forth between those two fears, so money demand bounces up and down like a yo-yo, and velocity — the speed at which the money changes hands — does, too.
These wild shifts in money demand and velocity have the same effect as massive, instantaneous shifts up and down in money supply. It's like we're having a huge inflation, then a deflation, every few hours — because our fears change every few hours — because the politicians have all this arbitrary power and we don't know what they're going to do to us!
Now, do you see why it is so important to see the economy not as a machine but as an ecology. Machines don't feel, they don't have fear, or joy, or optimism.
But people, biological organisms, do have feelings. They do fear, and their fears can change instantaneously.
The human ecology, especially these days, is driven very largely by emotions.
How are the politicians and bureaucrats who are playing God ever going to control, or fine tune, or repair, or speed up or slow down, our emotions?
This is an excellent description of what the deflationists see, and also why they don't see the rest of the big picture. They view the monetary world as a machine rather than a human ecology. They underestimate the will of the "politicians and bureaucrats who are playing God." And they also underestimate the power of fear and monetary velocity.
And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm.
This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.
It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.
So there is already enough fuel in the system to feed the fire when it starts.
And when it starts, that is when prices start to rise... price hyperinflation. And as prices rise, the government will need more money to pay for the same amount of "governing" in each successive cycle (monthly). This is when the monetary hyperinflation takes over and gives the price hyperinflation its HYPER boost.
Deflationists often refer to "foreign-denominated debt" as the cause of hyperinflation and also as their ace-in-the-hole reason why the dollar can never experience a Weimar-style hyperinflation. But this is a complete red-herring. The foreign debt was not the cause of the confidence collapse. It was only the fuel that forced the government printing... the second stage boost in hyperinflation. In our case we have a different kind of fuel, the most over-sized federal government the world has ever known!
And as the dollar confidence fails, those famous "$100T unfunded obligations" will have the exact same effect as Weimar's "foreign denominated debt." Think it through! As general price levels go exponential so do government obligations!
Let’s read FOA’s famous quote again:
"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"
And here's one more for the road:
"Yes, even my untrained eye can see that we are approaching the end of a currency life cycle. When all of the debt can no longer be rolled over, the world does not end. It moves on, into another fresh system! This current contraction will not create a deflation as it did in the past. It will involve a rollover that will balance the losses for some with the gains for others. Will your wealth balance in this event? FOA"
Sincerely,
FOFOA
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