Shadow Government Statistics: Hyperinflation could be experienced as early as 2010

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

Lukester,

There are international markets for everything, but the United States has large bodies of water between us and almost all the large ones.

If the government of the US outlaws the use of PMs for any form of money, it is pretty impractical to get on a plane to go exchange your PMs for some other currency.

If you store your PMs somewhere else, then you run both the cost of storage/security and the risk entailed with leaving large sums of value far away and unsupervised.

Once again, I merely point out that unlike Europe - for example - it is not so easy to find another place to cash out a PM. From any point in Europe, you can reach a half dozen major financial centers without air travel.

Haven't you ever wondered why any country in Europe was never able to confiscate its citizen's gold? Because in Europe, you can go to Switzerland, to Luxembourg, to the UK, to Andorra, etc etc and stash your valuables there.

Where are you going to go here? An Indian reservation? Mexico? Canada? None of these places are politically or financially set up to act as long term repositories for value (or flight funds as GRG has noted in another article).

Great points, truly... but Panama and South America are reachable without water barriers and one can also catch a plane or boat from those countries too.

[Finster]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

It certainly not a positive on the short term inflation front, but its far from the only item that affects inflation too... and I'm not trying to weasel away from an answer. The real and fuller answer depends greatly on the time frame being addressed.

You're right about a demand for cash though - negative or borrowed reserves is both an indication of major solvency issues and a financial crisis (and disinflationary too)... and its also a huge kick to monetary base in the sense that effectively reserves are now zero.
You'll remember the last time that base was kicked in 1995, and also that there was not an immediate effect (the old concept of monetary lags applies)... and the effect was rather significant when it hit too.

And in the lags area, we have the M2/M3 correlation to inflation and M3 is not exactly dropping nor has it dropped in the last two years. 18 months ago, M3 was growing at about 10% and CPI+lies is now growing at about 12%... and M3 now is around 18-20%, depending on whether you're looking at John Williams or my reconstruction.

And then we have the bull in the closet (and way off the beaten path element ) of velocity - the speed with which money moves through an economy. Its very much sentiment based and also goes back to one of the basic definitions of money being "an idea backed by confidence". In plain English, velocity is very likely to be in the very early stages of taking off as shown by the University of Michigan's inflationary expectations measure.

Here's two pictures of it, the first starting in 1978 and then the discontinued one that starts in 1952 and ends in 1978.

Thanks! Very much appreciate the thoughful reply. If I grok you right, the referenced phenomena don't necessarily presage either an inflationary spike or a deflationary one by themselves ... but do strongly suggest something major coming down the pike?

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

Thanks! Very much appreciate the thoughful reply. If I grok you right, the referenced phenomena don't necessarily presage either an inflationary spike or a deflationary one by themselves ... but do strongly suggest something major coming down the pike?

Generally yes... but again, it depends greatly on the time frame we're looking at. And as always, black swans can blow any plans of mice or men.. and then there's the FOMC... and Congress... and the unholy trio of the IMF, BIS & World Bank... and war probabilities... etc. etc. ad nauseum.

On the short term, I don't expect much significant change in overall inflation.

On the long term, high inflation is baked into the cake... along with the the euphemistic concept of "social disturbances". :mad:



I do want to stress the velocity situation again. The Fed is losing the battle on controlling inflationary expectations.
The velocity dragon, once let out of its cage, can have huge implications and was indeed the primary factor in Wiemar and other hyperinflations. I also want to stress that it has not yet shown up in any of the various velocity related stats I track, except for U Mich expectations.

[Rajiv]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

Bart,

One of the things missing in these discussions is taxation policy. I think we are not adequately addressing those issues, when we are trying to face the conundrums of the problems we are facing. See the two videos I posted yesterday and then look at the Pittsburgh economy -- the housing bubble and consequent bust seems to have bypassed it entirely -- this I believe is due to the taxation policy discussed in the two videos. It is almost as if Pittsburgh is in a totally different world!

The two videos
Ricardo's Law - The Great Tax Clawback Scam
Beating the Bust: Land Value Taxation

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

Bart,

One of the things missing in these discussions is taxation policy. I think we are not adequately addressing those issues, when we are trying to face the conundrums of the problems we are facing. See the two videos I posted yesterday and then look at the Pittsburgh economy -- the housing bubble and consequent bust seems to have bypassed it entirely -- this I believe is due to the taxation policy discussed in the two videos. It is almost as if Pittsburgh is in a totally different world!

The two videos
Ricardo's Law - The Great Tax Clawback Scam
Beating the Bust: Land Value Taxation

Great points and I was not aware of the sanity being expressed in Pittsburgh - lets hear it for any small bits of extant government sanity... and continue to sadly observe the law of (apparently) unintended consequences.

"Everybody, sooner or later, sits down to a banquet of consequences.”
-- Robert Louis Stevenson

[metalman]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

Great points and I was not aware of the sanity being expressed in Pittsburgh - lets hear it for any small bits of extant government sanity... and continue to sadly observe the law of (apparently) unintended consequences.

"Everybody, sooner or later, sits down to a banquet of consequences.”
-- Robert Louis Stevenson

this is as the next bubble article says... gov't helps create bubbles via tax policy. or put another way, no bubble can happen without gov't help.

[grapejelly]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

I am a big fan of Steve Saville and subscribe to his newsletter.

He wrote this weekend that fears of inflation really haven't started yet but are on the way to starting.

I think this is right.

When fears of inflation kick in, those fears change the game. And it is precisely sentiment that makes the future so unpredictable.

What is predictable is huge inflation. What is not predictable is what happens as a result of it.

For instance, Bernanke said the Fed could buy long treasurys close to maturity. Of course that is highly inflationary because, a) the Fed prints the money to buy them, and b) the fact that the Fed is doing that is cause for concern by itself...and might be the sort of thing that convinces our foreign creditors to finally dump dollars. Leading up to the "crack up boom" that Ty Andros has been writing about.

One thing I do believe, though. For those of us who are interested in taking action. I think that we can do no worse than buy gold and silver and equities in good mining companies. I think we are in the calm before the storm.

Saville also mentioned how he laughs when people call the stock market an efficient discounting mechanism. There were months and months when the credit crisis and the mortgage crisis were obvious and the market was oblivious. We are in a situation now where the market hasn't begun to discount the severity of what we are in.

I was thinking how it was on iTulip that I first read about the ABX
index and how it fell steeply and that presaged disaster. And it did. But the market took months to react to that.

Similiarly, we have time to get prepared. It is quite obvious from charts like these, and Williams essay, that there will be enormous money printing. Whether that is inflationary or not can't be debated. It is the response that people will have to that, that is wholly unpredictable.

[GRG55]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

right now what the fed fears most is the implosion of the banking system. they will therefore sacrifice the dollar and any hope of containing inflation expectations RIGHT NOW.

williams' piece, though, is trying to look a few years ahead, when it predicts hyperinflation in roughly 2010-2012. similarly, i am trying to look ahead to see if there are options available to avoid the hyperinflation williams predicts.

so, looking ahead, i see high inflation rates and a very steep yield curve after bonds [finally] sell off in recognition of that inflation. [we already have tips with a yield of zero, so perhaps people are beginning to get it.]

so, looking ahead, i see bernanke no longer worrying about deflation. i see a few years of a steep yield curve allowing the banks to recapitalize, and time for the busted mortgage paper to be written off gradually as they are brought back onto the banks' balance sheets from their sequestration in one of the new fed lending facilities. the dollar index has already dropped to about 52. the boomers start turning 65 [medicare] in 2011, and 66 [social security] in 2012.

in THAT context, is there anything the authorities can do to avoid hyperinflation? the government can means test social security and medicare [or the equivalent, make the benefits fully taxable], and the fed can raise short rates and intervene to lower long rates.

It's certainly a plausible scenario looking out beyond the current banking balance sheet crisis, but I still question the effectiveness the Fed attempting to lower long rates in an environment of rising inflation expectations [and also a situation where actual inflation is probably higher than today].

That's what provoked my comment about the Fed having to buy every last T-bond [of a given duration] in a potentially futile effort to have their way. Might that be yet another desperate, short-term, stall-the-eventual-outcome, lauded-as-"creative" Fed action?

[c1ue]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

The scenarios where the Fed continues to creatively find ways to manipulate markets and perceptions are all very possible.

However, and perhaps I am being idealistic, my belief has always been that the value of money (or the dollar, in this case) is short term a function of perception, but long term a function of the productivity of the nation and people behind it.

While there is still a lot being created and made in the United States, the differential between physical manufacturing+intellectual innovation and consumption is very large.

Thus for every iTuliper, there are hundreds, perhaps thousands who still believe:

a) The government will fix it
b) Bad things could never happen to the United States
c) Not my problem/I didn't do it
d) There's always easy money somewhere, I just have to find it
and the list goes on and on.

To some extent, I wonder at the parallels between the 'White Man's Burden' of Kipling/Pax Britannica and the 'Innovators will find a way' of America today.

Just as in Victorian England there was a subset of the nation which pushed the borders, conquered the savages, and built the road/schools/bridges in satellite nations, so now the innovators are supposed to create way to make up for the rest of us.

Can it be done?

[GRG55]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

The scenarios where the Fed continues to creatively find ways to manipulate markets and perceptions are all very possible.

However, and perhaps I am being idealistic, my belief has always been that the value of money (or the dollar, in this case) is short term a function of perception, but long term a function of the productivity of the nation and people behind it.

While there is still a lot being created and made in the United States, the differential between physical manufacturing+intellectual innovation and consumption is very large.

Thus for every iTuliper, there are hundreds, perhaps thousands who still believe:

a) The government will fix it
b) Bad things could never happen to the United States
c) Not my problem/I didn't do it
d) There's always easy money somewhere, I just have to find it
and the list goes on and on.

To some extent, I wonder at the parallels between the 'White Man's Burden' of Kipling/Pax Britannica and the 'Innovators will find a way' of America today.

Just as in Victorian England there was a subset of the nation which pushed the borders, conquered the savages, and built the road/schools/bridges in satellite nations, so now the innovators are supposed to create way to make up for the rest of us.

Can it be done?

Good question!

The age of European empire came to a close when the competition between nations migrated from battles and war in the colonies, and returned to be fought on home soil in the Great War [much like the wars between these same great powers from the late 17th century to the Napoleonic age].

That war, and it's aftermath, seems to have gradually absorbed all the resources of the relevant nations, leaving less and less for adventures abroad. Are we experiencing history rhyming?

[santafe2]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

I read John William's piece on hyperinflation. It struck me as extreme. So I returned to the Fed's site to see how the charts are doing that I asked Atlee and Hudson to check out. Here's what I found.

This chart shows how much money was left in the Federal Reserve Banking System
reserve accounts in aggregate across the Federal Reserve system when member banks
drained funds from reserve accounts during previous crises versus this one.


This chart shows how much money was borrowed from Federal Reserve Banking System
reserve accounts in aggregate when member banks drained reserves from the
Fed system during previous crises versus this one.

Maybe Williams isn't so crazy after all and our modest 100% inflation over six years forecast from 2005 was wildly optimistic.

When I showed these charts previously I received nasty emails from readers who were convinced we'd made these charts ourselves. They are available at the St. Louis Fed's web site here and here.

EJ, if not already, you will someday wish you'd never lent your reputation to this 'hair on fire' commentary by Williams. The SL Fed's chart is likely meaningless within the context of their new 'tools'. I don't want be a cheerleader for the Fed, but no rational thought has been applied in this thread to how the TAF effects this chart. After all, it's just a chart, it's spreadsheet logic, it's not thought.

From the Fed's website:

The negative level of nonborrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves.

I'm looking at this chart and asking myself why banks would start borrowing at this rate? New Japan carry trade, some way of leveraging their reserves, let's at least put our banker hats on and find some logical explanation.

[Guest]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

I'm not sure if anyone has mentioned this, but I think I found a flaw in Williams' logic concerning hyperinflation. At least I hope so!

He mentions the governments' overwhelming unfunded obligations as what seems to be the primary source of the need to "print money" and hence, the hyperinflation.

But that assumes behavior remaining static while Rome burns around them. Won't things perhaps change as this overwhelming obligation becomes more public and obvious?

The following come to mind as things that might reduce the trauma or greatly postpone a collapse of the nature he's talking about:

1. The federal government will "take back" many of the promises made, such as prescription drugs for the elderly.

2. The social security and medicare obligations could be reduced by raising the ages at which people become eligible. My uncle is 77 and an executive for a major brokerage. My father's been retired since age 56. Why must we, in an age of little manual labor, all have to retire at 65? Working an extra 10 years solves the problem of saving for retirement yourself, while also reducing the amount of SS payments you'll receive.

3. They could (gasp) actually cut spending gradually over time, back to constitutional levels. If the alternative is a complete economic collapse and return to a barter system, politicians might actually be able to sell it to the masses.

4. They could continue to use the bogus CPI numbers to de-facto cut benefits to those already receiving benefits and those due to receive them later.

5. We have a new administration and congress coming in, and may save quite a nice chunk by (smart idea or not) ending the current wars and handouts to "allies" for their support. This looks to be a pretty fast payoff if campaign promises are to be believed.

6. Advances in alternative energy technologies help reduce the trade deficit by spending less on imported oil which has benefits that ripple through the economy.

7. As the dollar falls in value manufacturing things here becomes more attractive and the economy benefits, even if WE don't own the businesses doing it.

8. I'm sure more knowledgeable members could come up with many more ways in which the government/economic machine "self heals" itself to an extent.

I don't hold much hope for these things SOLVING the problem, but what would their effect be on delaying a hyperinflationary collapse? Even a train about to go off the tracks over a fallen bridge can slow down. The engineer may not be able to forestall a plunge into the ravine, but the train will slow if he hits the brake.

[c1ue]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

Bruce,

The solutions you've noted - as well as many others - can delay the problem.

The question John Williams poses is: What to do about the existing debt?

As I noted previously, even at a mere 3% interest rate - the collective $60T debt requires $1.8T/year to stay even. Given that the sum total of all dollars created in the US economy is $13.75T, this is a non-trivial sum.

Furthermore collectively this debt is increasing, not decreasing: trade deficits are still over $600B/year, and debt levels are rising - not falling.

Note also the 3% represents a very low number. Sure, treasury holders are getting less than that now except at the 30 year level, but I have grave doubts as to whether the average present interest rate level on this $60T debt is below 3%. Were it higher - say 5% - then we're looking at some serious trouble: nearly 1 in 4 dollars made in the US economy goes to pay interest on debt. Only what is left can be used for food, fuel, and various other activities of daily living. This 1 in 4 number is dangerously close to a self-sustaining spiral - something which Dr. Michael Hudson also pointed out.

Even excluding future obligations such as increased medical spending due to the baby boomers, etc etc, the numbers look bad.

Unless there is something wrong with John Williams' $60T figure, it is not clear to me how the exit from this situation can be positive.

[jk]

c1ue, the $60T figure you use includes the unfunded mandates, not just the current debt. these mandates are a bunch of promises which are impossible to fulfill. therefore these promises will be broken. they could be broken by hyperinflation and payment in shrunken dollars, or they could be broken - legislatively- in other ways. when things get bad enough, the other ways will be considered, i hope.

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

EJ, if not already, you will someday wish you'd never lent your reputation to this 'hair on fire' commentary by Williams. The SL Fed's chart is likely meaningless within the context of their new 'tools'. I don't want be a cheerleader for the Fed, but no rational thought has been applied in this thread to how the TAF effects this chart. After all, it's just a chart, it's spreadsheet logic, it's not thought.

Although I agree that the Williams commentary was over the top in many ways, it not only is not impossible but hyperinflation (over 20%/year) has happened in many countries in the last 100 years. It was 18.3% in the US in March 1980.

Williams himself also does note at the end of the article:

What has been discussed here still has not been a comprehensive overview of all possible issues, but rather at least has raised some questions and touched upon some likely consequences. No one can figure out better than you the peculiarities of this circumstance and how you and/or your business might be affected. Using common sense is about the best advice I can give.

As I pointed out elsewhere, "likely" does not mean assured.

As far as the issues surrounding reserves and non borrowed reserves, the raw fact remains that actual bank reserves behind the deposits are literally negative. All that the TAF shows is that the Fed is fulfilling its mission as lender of last resort, and "last resort" is not a positive item.