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Mar 3, 2009

expecting an inflationary depression

excerpts from commentaries recently posted at www.speculative-investor.com [my emphasis]:

"Clarifying our depression forecast

Although we are anticipating another great depression we want to emphasise that we are NOT anticipating a replay of the 1930s. We are anticipating a drawn-out period of economic contraction, but the details will almost certainly differ markedly from previous depressions.

One of the most important differences between the coming -- actually, "current" is a more appropriate word since it has probably already begun -- great depression and the 1930-1945 episode is that today's version is likely to be inflationary. An inflationary depression is potentially worse because the inflation (money-supply growth) leads to more mal-investment (more wasted savings) and higher living costs relative to incomes...

...Based on emails we have received, a fairly common view seems to be that the government will "inflate away" its own debt problem as well as the problems of debt-ridden private-sector consumers. Our view is that the government will TRY to do this, but as is typically the case it won't work as planned/expected. Let's think this through. Monetary inflation causes a NON-uniform increase in prices throughout the economy, so someone can only benefit from inflation if his/her income and assets are amongst the INITIAL prices to rise in response to the inflation. ...

...The average person is rarely helped by inflation because he/she is usually near the end of the line when it comes to the so-called 'positive' effects of inflation. Furthermore, in the current economic environment there is even less chance than usual that the average person will be a beneficiary of monetary inflation, and an even greater chance than usual that they will be hurt by monetary inflation, because the inflation will likely increase living and debt-servicing costs relative to incomes and will very likely do little to support home prices (at least initially). Only those average folk who have substantial exposure to gold-related investments stand a good chance of coming out ahead.

It is always the case that the biggest beneficiaries of inflation are the entities that get the new money first. Therefore, the biggest beneficiaries are usually the government, the banks, and large speculators. And as far as the next few years are concerned it is likely that the government will be the biggest beneficiary by a huge margin. This is because the government can borrow in terms of its own currency without giving any consideration to how the loans will ever be repaid, thus allowing it to grow rapidly at the expense of the private sector. Note, though, that the government can never actually "inflate away" its debt; rather, each new dollar that gets borrowed into existence necessarily results in a liability in excess of one dollar due to the obligation to pay interest. In other words, the debt always grows faster than the money supply. It is therefore a good bet that the quantity of debt will continue to expand until the entire monetary system collapses.

In summary, under the current monetary system the debt can never be "inflated away" because inflation occurs via the creation of additional debt. Furthermore, the people and organisations that benefit from the inflation, at least in the short run, are those that get the new money first. In the long run nobody wins, but if you are a Keynesian you don't care because in the long run we are all dead anyway." Steve Saville email: sas888_hk@yahoo.com Hong Kong

things are A-changing...

Just in from the Daily Reckoning UK edition. Extracts [my emphasis]:

"...Remember, this is a Depression...with a capital D...not a recession. It’s a depression because it requires a perestroika of the economy...a restructuring, not just a breather and bailouts. The debt cycle is now turning in the other direction. America could be creeping back towards a 10% savings rate – as predicted here in the Daily Reckoning...and now taken up by Nobel-prize winner Paul Krugman. Savings bottomed out in the US in 2006 – when the rate went negative. Now, they’re moving higher – fast.

This is good news for the people doing the saving, but it is the kiss of death to the consumer economy. Somehow, businesses have to get along without adding more debt to household balance sheets. House-builders have to make a profit by building houses only for people who can actually afford them. Malls have to give up on customers who spent money they hadn’t earned yet. Every business in the world has to adjust to the new economy.

Economists call it the ‘paradox of savings.’ Savings are good for the individual, but when savings rates go up spending goes down. The economy suffers. Then, people lose jobs and income, further depressing economic growth.

Many economists came to believe that a little inflation was a necessary thing, since it discouraged saving. But people will believe anything if you give them enough education. They also thought derivatives were a healthy innovation, since they dispersed risk... and that sub-prime debt was a service to the nation, since it made it possible for people to buy houses they couldn’t otherwise afford.

But now it’s the “Revenge of the Glut,” says Krugman. He’s referring to another stupid idea economists had: that the US was doing the world a favour by consuming Asia’s glut of savings.

Suddenly, Americans have wised up. They aren’t carrying water for Asia’s savers any more. As a result, the huge reservoirs of dollar savings in Asia aren’t filling up like they used to. And as a consequence (as yet unnoticed by most commentators), Asians aren’t going to be in a position to buy so many T-bonds.

Now Americans are saving for themselves. A welcome trend, as far as we’re concerned...even if it does bring a Depression. And more thoughts... " Read all here

compounding troubles in Europe

Interesting perspective: further deterioration of the situation in Eastern Europe could trigger a massive increase of immigration in Western Europe:

"...With a Central and Eastern European population of 350 million, of which 100 million are in the EU, a 10 per cent increase in unemployment would lead to at least five million unemployed people within the EU...” Source

"Don't Fear, But Don't Ask" Says Europe Finance Chief

I wonder if he meant to sound reassuring: "...Meantime in Europe – where capital flight out of newly-joined states has sparked a crisis in their emerging-market currencies – monetary affairs commissioner Joaquin Almunia told the European Policy Centre think tank today that the European Union would step in to rescue a failed member state before emergency aid from the International Monetary Fund (IMF) became necessary.

"Don't fear," he said in his speech. "We are equipped intellectually, politically, economically to face this crisis scenario.

"It's not clever to tell you the solution in public. But the solution exists. By definition, this kind of thing should not be explained." Source

waiting for social mayhem

From the latest article by A. Evans-Pritchard some interesting fresh data on the state of the collapse of the world-economy. The author find his only reason of hope in the USA though, (if it is so, then we are freaking doomed as my guru says). Extracts:

"...Factory output is collapsing at the fastest pace everywhere. The figures for the most recent month available are, year-on-year: Taiwan (-43pc), Ukraine (-34pc), Japan (-30pc), Singapore (-29pc), Hungary (-23pc), Sweden (-20pc), Korea (-19pc), Turkey (-18pc), Russia (-16pc), Spain (-15pc), Poland (-15pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc), France (-11pc), US (-10pc) and Britain (-9pc). Norway sails blissfully on (+4pc)...

...This terrifying fall has been concentrated in the last five months. The job slaughter has barely begun. Social mayhem comes with a 12-month lag. By comparison, industrial output in core-Europe fell 2.8pc in 1930, 5.1pc in 1931 and 3.9pc in 1932, according to RBS...

...Fiscal stimulus is reaching its global limits. The lowest interest rates in history are failing to gain traction. The Fed seems paralyzed. It first talked of buying US Treasuries three months ago, but cannot seem to bring itself to hit the nuclear button.

As the Fed dithers, a flood of bond issues from the US Treasury is swamping the debt market. The yield on 10-year Treasuries has climbed from 2pc to 3.04pc in eight weeks. The real cost of money is rising as deflation gathers pace..." Read all here