Jump to content
House Price Crash Forum
Sign in to follow this  
Guest An Bearin Bui

Debt Deflation Or Hyperinflation: What Do You Think?

Recommended Posts

Guest An Bearin Bui

This is a report that everyone should read - it's about a year and a half old but it's incredibly prescient regarding the current stock market and housing problems in the USA, and consequently is relevant for the world economy.

http://www.gloomboomdoom.com/gbdreport/download/GBD0602.pdf

The author (Marc Faber) is a Swiss economist / financier who leans towards the Austrian School of thought on economics i.e. inflation is bad, recessions are needed from time to time. It is extremely interesting to read what he has to say on the credit-fuelled economy. He looks back at Ben Bernanke's published research as an academic and concludes that Bernanke is an inflationist and will, under any circumstances, favour inflation over even the risk of a mild recession, let alone an actual debt deflation. Bernanke is described as "representing the final stand of central banking against the forces of economic reality" i.e. he is trying to perpetuate the Greenspan trick of asymmetrically responding to bubbles by re-inflating them as they flag but this time round it won't work. Looking at his previous academic papers, we see that Bernanke has some interesting ideas on how to manage the US (and thus world) economy. In his view, if the US reaches a "Japan c.1992" scenario where interest rate cuts no longer work, i.e. the zero-bound problem, and a massive housing and stock market bubble has burst, the main focus of the Federal Reserve should be on inflation, inflation, inflation. Bernanke recommends that central bankers do anything in their power to keep people spending, even if it's illegal. His (admittedly academic rather than official govt policy) recommendations from the turn of the millenium are:

1. The central bank intervening in financial markets by buying up foreign currency reserves, stocks and bonds and long-term Treasury bills

2. The central bank loaning money into existence (i.e. generating inflation) by accepting as collateral any illiquid asset from any debtor (family homes, IOUs etc) thus allowing any investor with illiquid assets to get cash for them

3. The central bank conducting a "money rain" where they print money and distribute it to keep up spending

4. If people aren't willing to spend due to lack of confidence, the central bank could create a carry tax on money by making it have a negative interest rate so no-one holds cash

These "unconventional" measures were actually considered as policy by the Fed in 2002 but are described by the author of this report as: "more inflationary than the conventional central bank policies; and [...]among the most absurd, bizarre, and preposterous monetary crank schemes ever proposed by anyone calling themselves an economist."

What does everyone think: will Bernanke re-inflate this deflating bubble? Are we facing into a period of extreme inflationary policies that will make Greenspan look like an amateur? Is hyperinflation a real possibility, given the continuing inflationary pressures in the economy e.g food and oil prices? More to the point, will his hyperinflation plan work? It would wipe everyone's debt slates clean and get us back to square one BUT how could it work long-term when the dollar's value would crash through the floor as a result?

I'd like to hear the readers' thoughts: I hope this doesn't seem too hypothetical but I think we're in for some rough water and I'm intrigued to know what the policy-makers have in store for us: debt deflation and recession / depression or hyperinflation and more asset-price insanity?

Share this post


Link to post
Share on other sites

Rising food/commodity/energy prices leading to rising interest rates coupled with a credit crunch/consumer debt burden leading to falling house prices, repossessions and job losses. A vicious circle that ends with stagflation.

If Bernanke tries to borrow from Greenspan’s playbook and attempts to prevent or mitigate the severity of the coming recession, the excess liquidity will not simply move into another asset class, as it did from stocks to real estate, but into real stuff, such as commodities and consumer goods. As far as the Fed is concerned, it has now reached a monetary divide where all roads lead to stagflation.

Click

Share this post


Link to post
Share on other sites

The 0.5% cut in the discount rate shows that the Fed will attempt to reflate the bubble

Inflation will increase as interest rates fall

But the US is still a long way from Zimbabwe in terms of inflation, so don't expect Germany 1930's anytime soon.

What did Keynes say about the long run?

Borrow up to the hilt (take the free money) and purchase assets like housing that will go up faster than the general rate of inflation.

Share this post


Link to post
Share on other sites
Guest muttley
The 0.5% cut in the discount rate shows that the Fed will attempt to reflate the bubble

Inflation will increase as interest rates fall

The Japanese tried that and it didn't work. If people and banks become debt averse we could very well see deflation.

Share this post


Link to post
Share on other sites
Guest muttley
4. If people aren't willing to spend due to lack of confidence, the central bank could create a carry tax on money by making it have a negative interest rate so no-one holds cash

Can you imagine the uproar!!? Besides, wouldn't people simply move their money abroad? Didn't Dennis Healey try something like this in the 70's* and it got dubbed a "wealth tax"?

*Where's Charlie the Tramp when you need him?

Share this post


Link to post
Share on other sites
Can you imagine the uproar!!? Besides, wouldn't people simply move their money abroad? Didn't Dennis Healey try something like this in the 70's* and it got dubbed a "wealth tax"?

*Where's Charlie the Tramp when you need him?

I seem to recall reading somewhere recently that the new European Constitution that our politicians are just about to sign us up to, and which isn't really a Constitution therefore we can't have a referendum, (lying b******s) allows for imposition of Exchange Controls if The Council of Europe see fit.

Share this post


Link to post
Share on other sites
The 0.5% cut in the discount rate shows that the Fed will attempt to reflate the bubble

Inflation will increase as interest rates fall

But the US is still a long way from Zimbabwe in terms of inflation, so don't expect Germany 1930's anytime soon.

What did Keynes say about the long run?

Borrow up to the hilt (take the free money) and purchase assets like housing that will go up faster than the general rate of inflation.

housing doesn't tend to go up faster than inflation, it tends to go right in line with inflation.

otherwise every house ever made would be worth a billion dollars.

Share this post


Link to post
Share on other sites

Sterling Broad Monetary Inflation (M4) is running at nearly 20% at an annual rate.

Today the Bank of England just released its M4 statistics for Sep 07 which can be found on the BoE's website. Here's the link:

http://213.225.136.206/mfsd/iadb/fromshowc...&FromSeries

=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=19&TM=Oct&TY=2007&VFD=N&

VPD=Y&html.x=29&html.y=16&CSVF=TT&C=GM

Note that M4 growth for September was 1.5% at a MONTHLY rate. So if we raise 1.015 to the power 12 to get the annual rate we get 1.1956.

In other words M4 inflation at 19.6% at an annual rate.

That's a pretty clear sign to me that we're heading for hyperinflation, but it'll be interesting to see what next months figures are.

Remember - central banks have been given the God-like power to create legal tender and also set the price of credit at essentially arbitrary levels. The rate of inflation (or deflation) will be whatever the hell they want it to be. I do not believe you can predict their actions. The best you can do is look at the money supply growth and use it as a rough indicator for what price inflation is likely to be in the coming months.

Share this post


Link to post
Share on other sites

Annual M4 money has been at about 12-14%, which is not as high as you extrapolate, but still far too high!

Oh, and welcome!

Share this post


Link to post
Share on other sites
Annual M4 money has been at about 12-14%, which is not as high as you extrapolate, but still far too high!

Oh, and welcome!

Cheers for the welcome! :D

Well you're right in that the M4 growth since this time last year (red line) is 'only' 12.1%. Now if we look at the figures on a month by month basis (blue line) then they fluctuate all over the place, which is why I wouldn't normally make a big deal out of them, BUT I'll make a big deal out of them on this occasion because the idea that we're experiencing a credit crunch seems to be incompatible with these figures. Even in July when a couple of hedge funds went bust, M4 growth remained positive.

I keep getting some stupid error message everytime I try to load the graph image so not sure if this is gonna work...

m4.JPG

post-10815-1192890555_thumb.jpg

Share this post


Link to post
Share on other sites

Wouldn't M4 be particularly high to the BoE pumping fresh cash into the system, i.e. lending several billion to Barclays on two occasions, and the huge loans it has given Northern Wreck.

Either way, deflation or hyperinflation is the most sorely debated point on here. Hyperinflation seems difficult to see if wages are depressed due to the globalisation; whereas deflation is something totally incomprehensible to politicians and central bankers.

We do live in interesting times!

Share this post


Link to post
Share on other sites

I think were going down the higher higher inflation route, however the general population will be hoodwinked for longer so the outcome will be stagflation and strikes...

Share this post


Link to post
Share on other sites
I think were going down the higher higher inflation route, however the general population will be hoodwinked for longer so the outcome will be stagflation and strikes...

Well exactly. The general population don't have a clue how inflation actually is. I bet not even 1% of the population even knows what M4 is. The Gov't and BoE will get away with it so long as the people remain this ignorant. I try to do my bit by explaining the situation to friends, family, work collegues etc and passing around that Money As Debt video.

Share this post


Link to post
Share on other sites
Well exactly. The general population don't have a clue how inflation actually is. I bet not even 1% of the population even knows what M4 is. The Gov't and BoE will get away with it so long as the people remain this ignorant. I try to do my bit by explaining the situation to friends, family, work collegues etc and passing around that Money As Debt video.

What are you guys doing to protect you investments?

Share this post


Link to post
Share on other sites
housing doesn't tend to go up faster than inflation, it tends to go right in line with inflation.

otherwise every house ever made would be worth a billion dollars.

Long-term, housing goes up with wages which go up with inflation + real gdp. Prices have overshot and will correct but long-term it's still nominal gdp that's the driver.

wrt to the OP my money's on inflation rising and the £ falling as BoE won't risk strangling the economy with IR rises.

UM

Share this post


Link to post
Share on other sites
What are you guys doing to protect you investments?

1. First of all, I wouldn't invest in UK Plc. The high debt, the high taxes, the under skilled and under motivated work force, rediculous legislation etc should pretty much strangle any growth for the foreseeable future (mainly the high debt though). I'd stay clear of UK stocks, property and corporate bonds. I would also say don't invest in sterling, but I wouldn't invest in any (fiat) currency anyway, unless you're expecting a 1930s style deflationary depression.

2. Everyone on this thread has an opnion on whether we the coming recession (or depression) is going to be inflationary or deflationary, but the truth is that NONE OF US KNOW for sure (unless one of you guys is a BoE stockholder!). Why make an investment based on something you don't know? So let's look at what we do know....

Most people on this forum are quite bearish and I think most of the members would agree that the UK is about to experience a recession (or possibly depression). The maximum amount of spending by any given consumer is their income plus any credit/loans they can get their hands on (I'm assuming they have no savings which is a pretty good assumption for a typical Brit). Wages in REAL terms per capita after tax have been falling for a few years now. On top of that, mortgage rates are on the up and credit standards show signs of being tightened.

The end result is that Brits will have less money to spend in real terms - especially if the possibilty of mass redundancy is thrown into the mix.

With less money to spend in real terms, it would seem to me to be inevitable that luxury goods will fall in value relative to essential goods. You can profit from this by placing a short position on 'luxury' investments while simultaneously placing a equal and opposite long position on 'essential' investments.

For example you might consider Burberry shares to be more sensitive to discretionary spending than say, the price of sugar (or some other agricultural commodity). So you might place a £10,000 short position on Burberry shares while also purchasing £10,000 of some sugar ETF. This way, you make money as long as burberry falls relative to sugar - the value of the pound doesn't matter.

As always, do your own research to find investments which are sensitive to discretionary spending - I just mentioned Burberry off the top of my head - I haven't actually looked into it properly. UK house builders are probably worth shorting.

3. If you have a wishlist of non-essential purchases floating around in your head, then it would be best to hold off from actually making these purchases for the next few months as they are likely to fall in value significantly by then. In 6 months time when repossions etc are at an even higher than they are now, people will be unloading what they can on ebay. That is the time to pick up a cheap Gibson Les Paul, a Concept 2 rowing machine, or any other pointless sh*t you want to clutter up your house!

4. Similarly, sell any expensive, non-essential items you have sharpish. You should be able to buy similar items back at a later date at a reduced value. If you can live without them for a few months it'll be well worth it.

5. Don't use a dodgey broker who is likely to go bust and take all your investments down the drain with them.

6. Precious Metals are probably worth a punt. Credit Suisse issued a report yesterday talking about the 'dwindling' supplies of gold ore. Might reach peak gold some day....

Plus there's no tax when you buy gold, no tax for holding it, and no tax when you sell it (unless your stupid enough to declare it). It's also an international currency because if the UK economy goes down the sh*itter, you can always flog it to the Germans, the Indians, whoever wants it really.

That's all I can think of for now - probably loads of stuff I missed out. Anyone else got any other ideas? I'd love to know what solution other people have come up with.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 350 The Prime Minister stated that there were three Brexit options available to the UK:

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.