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How can Peter Schiff see simultaneous hyperinflation and high unemployment?

January 6, 2010 Leave a comment

To pick up a brilliant point made by Peter Schiff in the video to the previous post below (but not understood by those on the brain-dead panel):

Inflation is simply debasement of the currency, or increases in the money supply.  Inflation is occurring, just not where you expect it.  It’s occurring in govt pork and govt employee numbers and in govt contractors making big bucks off govt spending.

Banks are lending massive amounts of new money – to governments around the world.  They are the only entities the banks can find who will pay them back (even if it has to be in worthless paper currency – ha ha ha!).

Therefore, the “de”-flation that we should have seen occur to “cure” the credit bubble has been deferred – by way of an increase in brain-dead govt employees! 

This is unlikely to “cover” for the loss in private sector activity because govt spending is generally unsustainable and therefore has a lower “velocity of money” than genuine private sector investment.  However, these ridiculous “heroin stimulus packages” do cover up (temporarily and only to some degree) the deflation we should have had, coming out of the “credit boom” years.

Because of the massive distortions and misallocations caused by (1) the classic ABCT credit-fuelled Ponzi-boom and (2) now the ridiculous unsustainable govt spending, crowding out the private sector’s access to cheap capital for real sustainable projects that the public actually wants, we are now going to get (at the end of the day) much higher unemployment. 

Higher unemployment is baked into the cake because of the massive stimulus spending.  Take any specific “stimulus” measure, be it “Cash for Clunkers” in the US or the “First Home Buyer’s Grant” or incentives for home insulation or solar panels.  Now, simply ask yourself:

What happens when the “stimulus spending” stops? 

Most of the “stimulus spending” simply brings forward future consumption patterns – it re-allocates inter-temporal spending patterns, but doesn’t actually increase the total consumption over time.

I explained all of this in much more detail several months ago here.  I see the balance of the forces being slight deflation rather than hyperinflation, but the dynamics are the same.  I see possible inflation (possible hyperinflation) in 2012-2015, but that’s a long way off – and I mightn’t even be alive then (here’s hoping!).

Only Austrians such as the brilliant Peter Schiff understand that you can have very high inflation and very high unemployment because of preceding bad investments and unsustainable economic activity, leading to an economic dead-end rather than to ongoing economic activity.

When you build on Ponzi-quicksands, you fall into Ponzi-quicksands.

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Silver: The Bargain of the Century!

January 6, 2010 Leave a comment

Let me add an addendum to my Trade of the Decade: 

Silver, the longtime poor cousin to gold, is $et to $oar!

There are so many industrial applications for silver it’s not funny.  They are growing by the day, especially in nano-tech.

The shorting of silver by the bullion banks is insane and unprecedented.

The historical gold:silver ratio over the last 700 odd years appears to be around 30:1.  Some say it’s as low as 16:1.  It’s currently around 70:1.

Wow.

Admittedly, the Makian Distribution predicts massive volatility in commodity prices with increased leverage/debt, and that’s exactly what we’ve had in the silver market over the last 50 years.

But something tells me silver is due to switch across to the right hand side of the bifurcating normal distribution very, very soon.

I would love to see a short squeeze in the silver market.  It would be like watching fireworks on New Year’s Eve.

Volatility is the “new normal”

December 4, 2009 Leave a comment

Gold was down today on US dollar strength. Treasury yields were up (and conversely bond prices down) on news of “growth” in the US economy.

If the govt “”borrows” (prints?) trillions and then spends these trillions on handouts and killing people, of course “GDP” numbers will spike.  The question is: What happens when the handouts end and there are no new people to kill?

Govt spending is invariably unsustainable.  So these ripples in the market mean nothing when the tide continues to recede.  If I was still in the US, I’d buy gold today and continue to reduce exposure to the US dollar, despite these short-term movements. 

Volatility is your friend now.  Use it.

Predictions for 2010

December 4, 2009 7 comments

As the year comes to an end, let me list my predictions for 2010.  Note: Anyone who says their predictions are based on modelling is an idiot or a liar.

As was clear from our experience in 2009, politics, connections, favours, and plain old everyday third world corruption play a major part in any economic outcome today.

The “logical” prediction for 2009 would have been the bankruptcy of AIG, the bankruptcy of a number of major US and UK banking institutions, deflation, a continued stockmarket collapse, a spike in long-term interest rates (caused by a decline in demand for T-bonds due to US govt deficits), a collapse in the value of the US dollar and a spike in gold.  Almost none of these happened because of the multiple, trillion dollar interventions of the Fed and the US Treasury.  AIG was saved, US and UK banks received hundreds of billions in bailouts, swapping toxic trash at the discount window 100 cents in the dollar, the stockmarket was artificially supported, the long end of the bond market was (allegedly) supported by the Fed, and gold was shorted relentlessly by the primary dealers.

So predictions for 2010 are really political predictions and these cannot be taken very seriously.  Nevertheless, it’s fun to speculate, so here goes:

1.  A CRE and housing bust in Oz in the second half of the year due to (a) wholesale funding costs jumping for Cth Bank and Westpac in particular and a fight for deposits (b) APRA liquidity requirements kicking in (c) high $A killing exports and local manufacturing, combined with a generally slowing economy due to a fall in Asian growth and a crisis in Japan (d) pullback of the FHBG and other handouts from Rudd Bank (e) pull back on the govt backing of Oz banks, exposing them to “market” rates for wholesale funds especially for LT debt (f) housing prices already being ridiculously too high, as Steve Keen has pointed out many times in the last 3 years.  It should be a bloodbath in CRE in 2010. 

We’ll see whether the govt and the desperate Oz banks can hold back the receding tide.  Unlisted funds with illiquid assets were massacred in 2009 by the govt’s bizarre, indiscriminate bank guarantee (thereby predictably and savagely killing off the supply of liquidity for unlisted CRE trusts).  This should mean that the marginal players in the finance industry have simply had their executions stayed, not commuted. Will this now infect the whole CRE market, as supply continues to overwhelm declining demand due to liquidity tightening for the dumb Oz retailers of debt?  Bank guarantees should have engendered moral hazard in the marginal lenders.  This should have made the problem worse.  This problem may be deferred until 2011, but something tells me this Ponzi-scheme can’t be sustained throughout 2010.  We’ll see.

2. S&P 500 down for the year, with a “crisis” in early and/or mid 2010 due to (a) the fallout from the bubble being delayed this year – meaning that the bust will be even bigger and flow into 2010 (b) a significant portion of consumers (70% of the US economy) being bankrupted in unsustainable debt (c) debt levels threatening the long-end of the US bond market (d) unemployment continuing towards 15% in official terms and 25% in unofficial terms (e) a possible US dollar/bond crisis, with an unprecedented volume of bonds being needed to be flushed into the market (f) the banks being supported, but the bulk of US industry being left to die.  The S&P 500 includes much more than just Goldman Sachs (which will continue to perform well, given they print their own profits).

3. Gold up – for all the reasons in (2) above, plus the fact that the Fed will continue to pour e-dollars out into the market in the trillions, without any effect (see Japan over the last 15 years).  So gold will be the only place for the e-dollars to go.

4.  Silver to go up more than gold – for all the reasons in (3) above, plus the fact that silver is a tighter market with the massive short positions in silver finally having to be unwound on reality.

5.  Oil higher.  Inflation’s got to go somewhere.   And Peak Oil has arrived.

6.  Food and food inputs higher.  Possibly significantly higher.

7.  Fed Funds Rate probably around where it is now.  The big story will be everything BUT interest rates.  Interest rates will stay low (to save the banks) but chaos and volatility with be a tempest around stable, low rates.  The debt load is massive and people will be killing themselves to extract themselves from this killer debt-load by repeatedly trying – and failing – to spark a new bubble in the stockmarket.  Then in desperation they’ll spark a bubble in oil, food, gold and silver.  Currency volatility will be unprecedented.  There is the real prospect of a US dollar meltdown.  If so, gold will soar on its angelic wings.

The overall theme for 2010 will be continued unprecedented volatility.  Price swings, especially in the stockmarket, will be violent as liquidity sporadically dries up due to the unsustainable debt loads and banks desperately juggling debtors to stave off insolvency – both in their clients and themselves.

The Makian Distribution predicts increased volatility with increased debt.  We have increased debt.  So, according to the theory we must have increased volatility.

Deflation then inflation…

November 30, 2009 5 comments

I like this piece from Nadeem Walayat, Market Oracle editor.

But how do you pump debt-money into an economy going broke?  To whom are you going to lend this newly created debt-money?  Who is idiotic enough to borrow in this environment (other than the govt, of course)?

I’m still in the deflation camp because I can’t see the mechanism by which Zimbabwe in the West becomes a reality.  Unless the central banks start LITERALLY showering us with fiat paper money from UN black helicopters, I can’t see it happening.  And somehow I don’t think that Ben will order the helicopters to be fired up for anyone but Goldman Sachs.

Yes, I can see isolated “Icelands” occurring on the periphery.  I’ve already stated that some time ago and have recently identified Greece as the next Icelandic candidate.  But I don’t see the US being able to “achieve” inflation even if they wanted to.  Japan tried to inflate for over a decade and it couldn’t.  Will the US be any more “successful?”

When paper money starts being tossed around in the streets like confetti, wake me up and I’ll switch sides and dive into the inflation camp.  Until then, please don’t disturb me.  I’m dreaming of deflation.

Mainstream economists despise non-linearity

November 29, 2009 1 comment

Yet another old, ignored, research paper on business cycles which emphasised the potentially “catastrophic” non-linear dynamic that could arise from a combination of an economic downturn and changed savings patterns arising from the wealth effect.

The reason this stuff is ignored by the mainstream is because the mainstream can’t handle non-linearity.

So they prefer to have models that are “precisely” ridiculous rather than imprecisely realistic.

The future will be increased volatility

November 29, 2009 Leave a comment

With a possible default looming for Dubai, we have, with surprising rapidity, come to the next stop on our journey to Monetary Hell: Sovereign Debt Default.

The story so far has been: (1) private consumption collapses under the weight of unsustainable accumulation of debt, as banks systematically tried to indebt every sentient being, only to find everyone went belly up at the same time (2) banks run to govt for bailouts (3) TBTF banks get bailouts, but indebt govts (4) govt budgets deficit soar due to (a) bank bailouts (b) collapsing revenues (c) increased spending on social welfare due to the spike in unemployment.

Next stop: (5) a massive spike in interest rates FOR SOME MARGINAL PLAYERS due to the flood of govt bonds onto the market, causing bond prices to collapse and yields to soar.  Let’s call this “Who will be the next Iceland?”

Step (5) has been delayed by govts printing up $s and buying their own bonds (particularly in the US).  See this graph:

The US can do this for longer than anyone else, because they borrow in their own currency.  The marginal players don’t and so they will be the next shoe to drop.

From the heart of the British Establishment publication, the Financial Times:

Markets will not soon return to the panic of September 2008: the financial sector now has state backstops. But, because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland, in particular.

Precisely.  Sovereign debt default is the next logical step in this spiral down to gold. 

Picture a beggar on a busy street shamelessly going from stranger to stranger begging for a dollar.  Once one person has been rejected, without a second thought, the shameless beggar goes in for another attack on another mark.

Banks – ironically – are very similar.  They are shameless.  They obsess about money and finding the next $, no matter where it comes from.  They are desperate.

So banks have gone from prime, to sub-prime, to each other, and finally (and most shamelessly of all) to government.

What happens when government fails them?

The high-class “beggars” will go to gold.

Yes, I am aware of the recent negative correlation between crises and the gold price (gold went down on the Dubai news for example).  But the US Mint has suspended sales of some coins and gold and silver are in physical short supply.  You can paint a picture in the paper markets, but real physical demand is telling us something different.

At some point gold will simply be unavailable at any price.  Its price will be “precisely” (ha ha ha!) infinity.