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You mean so that hyperinflation is created whereas you are still forcasting deflation?

:unsure:

That's the second time in just a few days that you have implied that when I talk of markets worrying about inflation I must be talking about hyperinflation. I am on the record, several times, as stating that I do not see hyperinflation as a realistic possibility. And I have repeatedly said (ad nauseum) my belief in a deflationary outcome is based on a balance of probabilities, not on an absolute conviction either way.

Why when I talk of inflation worries does it have to be hyperinflation? Why not inflation of 10% or 15% p.a.?

I hope others reading this thread are aware of your tendency to (wilfully?) misinterpret the comments of others, A&K. It's a pity because you make some very good points.

I know you have a complaint that too much focus is being placed on extreme outcomes, but you don't seem to recognise that it's the intensity of the current tug of war in economic theory, markets and politics that may well create the very middle road that you think is more likely.

And the debate isn't just on this site. Do you think the foreign central banks don't discuss these scenarios? Pension funds? Hedge funds? The investment banks?

Here's Willem Buiter on the unsustainability of the US budget deficit, posted today:

The fiscal black hole in the US

This is no article from a goldbug, but a heavyweight of mainstream economics. He believes the US will inflate, and opposition from the Fed will likely be quashed. His final paragraph:

The $300bn worth of Treasury securities the Fed has agreed to purchase already are not a threat to price stability - it is peanuts.  It does barely enough to offset the reduction in the balance of the Treasury’s account with the Fed since the beginning of the crisis.  But as the Federal government starts issuing additional debt worth a couple of trillion US dollars or more each year, the willingness of the Fed to monetise this increased debt issuance will be the key factor determining who will win the game of monetary-fiscal chicken that is just now starting.  The independence of the Fed is not securely anchored.  A chairman of the Fed who refuses to monetise government debt that the Treasury wants to be monetised, or who wants to de-monetise Federal debt acquired in past quantitative easing episodes when the Treasury does not want the Fed to exit from QE, will be replaced.

Note how speculation on Bernanke being replaced by Larry Summers is growing so the administration can have a 'team player' in charge of the Fed.

Edit: missed word.

Edited by FreeTrader
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So in this sense inflationary expectations are certainly being raised, but are they in danger of being raised too high?

I was focusing on your use of the word 'danger'.

For the record i am personally getting very worried about deflation while inflation remains a possibility that many economists such as Paul Krugman or Ben Bernanke regard as the best outcome

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For those who would like a definitive explanation of QE and the rationale for it (at least in the BoE's eyes), the Bank's Quarterly Bulletin has a dedicated paper on the subject. Here's the relevant PDF for the QE part:

Quantitative Easing

Cheers FT. Interesting lunch read, was that.

Would be I right in potting it down to "if we can make 'em expect inflation we might increase V, and the new money will increase M". In other words, in theory it's as simple as it sounds?

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Cheers FT. Interesting lunch read, was that. Would be I right in potting it down to "if we can make 'em expect inflation we might increase V, and the new money will increase M". In other words, in theory it's as simple as it sounds?

IMHO the concept of credible threat remains credible only because it appears that the threat is being carried out.

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Would be I right in potting it down to "if we can make 'em expect inflation we might increase V, and the new money will increase M". In other words, in theory it's as simple as it sounds?

That's a pretty fair summary Moo, but for me the timing of the start of QE with the needs of the DMO to sell a huge amount of new debt will always be just a little too coincidental. ;)

The final para hardly inspires one with confidence either:

"It is too soon to say how powerful the stimulus will ultimately

be. There is considerable uncertainty about the strength and

timing of the effects. Standard economic models are of

limited use in these unusual circumstances, and the empirical

evidence is extremely limited. However, the monetary policy

framework will ensure that the appropriate measures are taken

over time so that the inflation target is met in the medium

term."

Translation: We ain't got a clue whether this is going to work, but if it doesn't we'll clean up the mess.

Edit: missed word (again!).

Edited by FreeTrader
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just a thought, if this yield spike is driven by inflation expectations, how come g0ld has been slowly folding over a similar time frame?

Shed,

With the caveat that I think it's unwise to read too much into short-term movements in the gold price, I see the recent action as a response from traders to the possibility that the Fed will not up its QE programme at the FOMC meeting on June 23/24.

The rise in Treasury yields is spilling over into mortgage rates and this will squeeze any nascent recovery in the economy. Also, in the absence of rising US wages the increase in the oil price may ultimately be deflationary because of the reduction in disposable household incomes. Consequently inflationary expectations ease slightly and the price of gold drops back as do yields on US govt bonds (as I write gold is down over $20 today and the yield on the ten-yr note is 3.80%).

Markets are like a game of chess where investors/traders are always looking at what will be rather than what is, and that's why sometimes price movements can seem anomalous with the story of the day. The classic example is where a high CPI print causes a currency to rise rather than fall – it seems counter-intuitive, but what you're seeing is traders betting that higher inflation will force the central bank to raise interest rates, making the currency more attractive.

The WSJ reported today that there are "divisions brewing within the Fed" as to whether the unconventional monetary measures should stop. The article said that the FOMC was "unlikely to significantly boost purchases of U.S. Treasurys and mortgage-backed securities when they meet in late June, but could make other adjustments in the face of rising bond yields and fresh signs of an improving economy".

Against that we have PIMCO's Mohamed El-Erian telling Reuters today that he thought the Fed would have to up its purchases of bonds. Now there's a surprise - the chief exec of the world's largest bond fund telling us that without more QE the US economy could be in big trouble (in an earlier comment I said that a good proportion of those who claimed that QE was a success in Japan had a vested interest in the Fed doing the same – PIMCO has been one of the biggest proponents).

Over here we've got a similar decision day looming, with the MPC also having to show its hand on whether QE will be extended. We may get a clue on this when the MPC minutes are released next Wednesday.

This constant to-and-fro over inflation and deflation is going to continue for months, maybe even for years. All I can say from the point of view of someone who has been closely following this stuff for over three decades is that this is without a doubt the most riveting and remarkable period in markets and macroeconomics I have ever known.

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That's a pretty fair summary Moo, but for me the timing of the start of QE with the needs of the DMO to sell a huge amount of new debt will always be just a little too coincidental. ;)

I was about to answer that one when it suddenly occured to me I was in the dark about something really bloody basic, but also rather complex. I'm probably going to make a Horlicks of describing this, so bear with me...

Is it the case that the need to sell government debt works more or less like this... The government runs, in effect, a current account with no overdraft. When running a deficeit, they are obliged to sell lumps of debt via the DMO in order to get the money into said account before it can be spent? Or, does it work more like a current account with an overdraft, in that they can go overdrawn but the cost of doing so is considerably higher than selling off the debt for longer terms to other parties?

(I'm rather embarrassed to not know that)

The final para hardly inspires one with confidence either:

<snip>

Translation: We ain't got a clue whether this is going to work, but if it doesn't we'll clean up the mess.

In all honesty, do you think they could have released the document without including it? Given the recent examples of plucking money out of one's ****, there wasn't a lot of evidence to suggest it was a surefire great solution. Japan was probably better for it than not, but it was hardly a cork-popping bonanza, and the other examples (albeit extreme) stand as an example of bloody stupidity to all and sundry.

There's also the performance metrics aspect, insofar as it's not a mechanism that's been tried enough times in non-totally-Mickey-Mouse* economies to allow for the creation of reliable metrics with regard to it's impact. Put simply, the phrase "QE is working" (and, for that matter, "QE is not working") is, as far as I can tell, absolute horseshit because unless a direct link can be established between cause and effect, it's entirely possible to attribute the existance of an unexpected result to the application of an unconventional measure.

That's not to say I'm comfortable with the whole thing. I'm merely saying that I'm happier to know that the BoE know they're just giving it a whirl to see what happens then I would be if they thought they knew exactly what was going to happen, and I suspect that goes for the readers that matter as much as it does for me.

* [insert series of daft one line posts about Britain having a smaller economy than Madagascar here]

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No kidding. They've (allegedly) got severe deflation too – 9.2% in just the first four months of this year.

We need a new hyperinflation basket case – anyone know who's now leading the pack?

Zimbabwe demonstrates a couple of things that posters here might wish to bear in mind.

1. Hyperinflation (say above 20%) is incredibly difficult to acheive, you have to have a completely dedicated loon literally printing paper money in large quantities.

2. Hyperinflation is ridiculously easy to stop. You just stop the physical printing.

We may see severe inflation (up to 20%) in the UK or US in the near future, though personally I doubt it will ever get above 10%.

We will never have hyperinflation.

And better 20% inflation than any deflation.

We know how to fix inflation, we don't know how to fix deflation.

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Zimbabwe demonstrates a couple of things that posters here might wish to bear in mind.

1. Hyperinflation (say above 20%) is incredibly difficult to acheive, you have to have a completely dedicated loon literally printing paper money in large quantities.

2. Hyperinflation is ridiculously easy to stop. You just stop the physical printing.

We may see severe inflation (up to 20%) in the UK or US in the near future, though personally I doubt it will ever get above 10%.

We will never have hyperinflation.

And better 20% inflation than any deflation.

We know how to fix inflation, we don't know how to fix deflation.

Hang on, for most of the 70s, wasn't UK inflation > 20% pa?

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Zimbabwe demonstrates a couple of things that posters here might wish to bear in mind.

1. Hyperinflation (say above 20%) is incredibly difficult to acheive, you have to have a completely dedicated loon literally printing paper money in large quantities.

2. Hyperinflation is ridiculously easy to stop. You just stop the physical printing.

We may see severe inflation (up to 20%) in the UK or US in the near future, though personally I doubt it will ever get above 10%.

We will never have hyperinflation.

And better 20% inflation than any deflation.

We know how to fix inflation, we don't know how to fix deflation.

the pain in stopping printing leads to leadership change and even greater social unrest.

Think WWII.

Think Politicians who resign one week, thinking they can pull down the leader, find it doesnt work and a week later is contrite and sorry and begging for a return.

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1. Hyperinflation (say above 20%) is incredibly difficult to acheive

as Yellercat already pointed out, we had >20% pa inflation in the '70s.

we'll have >20% pcm inflation before this year is out.

HMG is bankrupt many times over.

you have to have a completely dedicated loon literally printing paper money in large quantities.

that's exactly what we have

2. Hyperinflation is ridiculously easy to stop. You just stop the physical printing.

no, you have to take the money out of circulartion via taxation, which is kinda difficult to say the least when you have rioting and the mechanisms for actually collecting the tax aren't there due to state failure.

We will never have hyperinflation.

because...

And better 20% inflation than any deflation.

better to have neither (by getting rid of central banks).

We know how to fix inflation, we don't know how to fix deflation.

they are both caused by central banks

you can fix both inflation and deflation by de-chartering central banks, revoking legal tender laws etc...

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Is it the case that the need to sell government debt works more or less like this... The government runs, in effect, a current account with no overdraft. When running a deficeit, they are obliged to sell lumps of debt via the DMO in order to get the money into said account before it can be spent? Or, does it work more like a current account with an overdraft, in that they can go overdrawn but the cost of doing so is considerably higher than selling off the debt for longer terms to other parties?

The management of the Government's day-to-day cash requirements is best described in the following three paragraphs from the DMO's Cash Management Handbook (PDF):

The structure of Government cash management

2.2. The DMO’s operations are part of a wider Government structure for managing

Exchequer cash flows. Government cash flows, whether expenditure, revenue,

interest payments or borrowing are based around two central funds: the

Consolidated Fund and the National Loans Fund (NLF). Government revenue

from taxation and other sources is collected daily into the Consolidated Fund.

Payments out of the Consolidated Fund to finance government spending are

authorised by Parliament and almost all this spending is channelled through

accounts held by Government Departments at the Office of HM Paymaster

General, which in turn banks at the Bank of England. The NLF formally borrows

money for the Government and for example funds, via the Public Works Loans

Board (PWLB), lending to local authorities. UK government bonds – gilts – are

liabilities of the NLF.

2.3. An arrangement of accounts, known as the Exchequer Pyramid, ensures that any

cash balances which remain in government accounts at the Bank of England at

the end of every business day are channelled into the main central government

accounts, thereby minimising the government’s cash borrowing needs. If the

Consolidated Fund has a surplus, this is automatically transferred to the NLF to

reduce its need to borrow. Equally, a deficit in the Consolidated Fund is

automatically financed by a transfer from the NLF.

The DMO’s cash management task

2.4. It is the DMO’s task to undertake market borrowing or lending during each

business day to balance the remaining position on the NLF after the operation of

the Exchequer Pyramid described in paragraph 2.3 above. To do this the DMO

needs to have reliable forecasts of each day’s significant cash flows into and out

of central government, and up-to-date monitoring of actual cash flows as they

occur. Responsibility for forecasting and monitoring central government cash flows

lies with HM Treasury.

So, the NLF acts as a sort of sweep facility for daily Government cash shortfalls/surpluses, and the DMO's cash managers will deal on money markets throughout the day as the Government's net cash position constantly changes. The cash flows can be forecast to an extent, but obviously the timing of certain tax receipts and expenditures is unpredictable and constant active management is therefore required. The managers will try and maximise the return from any short-term cash surplus, and minimise the interest cost from shortfalls.

There's also this article (PDF) on the DMO's website. See the insert section on page 2 ("A day in the life of a government cash dealer").

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Interesting timing of a WSJ article today discussing the development of a 'bailout bubble' as all the liquidity injected through QE and fiscal stimulus finds its way into asset markets rather than the real economy. This was obvious some time ago and was noted on this thread. So why is the WSJ highlighting it now?

But governments around the world are pumping money into the economy at a frenetic pace. Because businesses can't put trillions of new dollars to work in such a short time, the money is finding its way into financial markets. Some investors have begun speaking of a "bailout bubble" being created in certain markets, and about a "melt-up" in demand fueled by the growing supply of money.

"All that money that was printed had to go somewhere," says Joachim Fels, co-head of global economics at Morgan Stanley. "It has been pushing up commodity prices and stock prices, starting in emerging markets and then pushing over into developed markets."

WSJ (may not work if you're not a subscriber, so instead Google "Stocks in the Black on Gusher of Cash" and you should be able to read it through a Google link).

The G8 finance ministers appear to be aware of the growing concerns and are now making noises about unwinding the inflationary measures:

In what aides said was an expression of confidence in the emerging recovery – but analysts said was more of a reaction to rising government bond prices – G8 ministers started to talk of “exit strategies†and commissioned a study by the International Monetary Fund.

“We discussed the appropriate framework for unwinding the extraordinary policy measures taken to respond to the crisis once the recovery is assured. These ‘exit strategies’ will vary from country to country depending on domestic economic conditions and public finances; however close international co-operation will foster continued economic and financial stability, ensure a level playing field and promote a sustainable recovery over the long term,†the draft said.

Financial Times

Have governments now realised that their liquidity measures are driving up interest rates and commodity prices, undermining the very recovery they are trying to engineer? Or is it all jawbone to calm investor concerns? After all, IMF studies usually take some time.

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as Yellercat already pointed out, we had >20% pa inflation in the '70s.

OK, inflation peaked at 26.9% in 1975. It was above 20% for 13 months in '75/'76 and a further 3 months in 1980.

26.9% is high inflation, severe inflation, bad inflation - and most definitely a bad thing.

26.9% inflation is not hyperinflation.

we'll have >20% pcm inflation before this year is out.

No we won't. £100 says that we won't have inflation above 20% by Dec 2009, Grumpy Old Man can hold our money if that's ok with you and him.

HMG is bankrupt many times over.

Bankruptcy of governments that print their own money is a near meaningless concept. The English haven't defaulted formally on debt since the middle ages, our external debts are balanced by similar credits, and we have an economy that can support increased taxation to finance government debts. Given the history of the seventies, default by inflation is not going to happen.

that's exactly what we have

No it is not.

I would recommend Terry Pratchett's 'A Hatful of Sky', as well as being a very good read, it also is a very good education as to what the word 'literally' means. Alterntatively you could try some online dictionarys.

no, you have to take the money out of circulartion via taxation, which is kinda difficult to say the least when you have rioting and the mechanisms for actually collecting the tax aren't there due to state failure.

Rioting? State failure? This is the UK we are talking about? The last time we had real state failure was 1066. You could count the civil war I suppose, but that was rather a case of two competing succesful states in the same body politic. People know why we are in a mess, and taxes are going to go up, that's why the right wing scored near to 60% in the Euro elections (Conservative + UKIP + BNP) and the 'progressives' tanked (Lab/LDem/Green). The people who are going to pay the taxes don't do rioting, they do voting.

better to have neither (by getting rid of central banks).

they are both caused by central banks

you can fix both inflation and deflation by de-chartering central banks, revoking legal tender laws etc...

Some examples please, successful modern economies without central banks.

Historically, prior to central banks, financial crises happened much more regularly, along with recurrent recessions, multiple bank failures and huge losses of savings.

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snip

Historically, prior to central banks, financial crises happened much more regularly, along with recurrent recessions, multiple bank failures and huge losses of savings.

but no housing bubbles. it was investors who lost their shirts, not yer working nuts and bolts. as it should be.

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26.9% inflation is not hyperinflation.

I never said it was. YOU did!:

1. Hyperinflation (say above 20%) is incredibly difficult to acheive...

:lol:

£100 says that we won't have inflation above 20% by Dec 2009, Grumpy Old Man can hold our money if that's ok with you and him.

I'm already betting pretty much everything I have against GBP and fiat in general . so is GOM, btw ;) ,

Bankruptcy of governments that print their own money is a near meaningless concept.

no, they can default by stealth (inflation)

The English haven't defaulted formally on debt since the middle ages

1914, 1931 and 1967 spring to mind.

of course, since 1971 all gov'ts have just continually debased their currencies unannounced.

and aside from looking at history, you should look at the current scenario and realise that certain outcomes are mathematically impossible.

taxes are going to go up

http://en.wikipedia.org/wiki/Laffer_curve

they can raise tax rates all they like. it won't increase absolute revenue in real terms or prevent state failure.

Given the history of the seventies, default by inflation is not going to happen.

:lol: well given how little the pound in worth now compared to in the '70s...

The people who are going to pay the taxes don't do rioting, they do voting.

the people who pay taxes are the people who are not in prison.

that's how taxation works :rolleyes: (see sig).

Edited by InternationalRockSuperstar
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