Income loss is the one fixture of every depression in recorded history, and so too will the 2007 Depression severely lower income. Whether through inflation or deflation, it is bound to occur. Income from investments is just as threatened by the 2007 Depression as income from employment. One only needs to look at: the drop in corporate earnings; the falling stock market; the minuscule yield on bonds, including government bonds; the increasing possibility of default of bonds, including government bonds; meaninglessly low interest rates on bank deposits.
In deflationary depressions, like the 1929 Depression, cash is king because its purchasing power increases. This can happen through several ways: its market value increases (as in a hard money system); the velocity of money drops (i.e. the speed at which people spend money for stuff); supply physically decreases (as theoretically possible in a paper money system, maybe); some combination of all the above.
Although it is possible that in the 2007 Depression "cash is king," we are of the opinion that cash will be trash in the very near future. Because the Federal Reserve is putting its considerable might into preventing deflation at all costs, we feel that inflation is the name of the game. This will happen through several ways: physical supply of money will expand at an accelerated rate; the velocity of money increases; or a combination of the two.
As all but one historical paper money experiments have ended with a hyperinflationary depression, investing will take on a new face. It will not necessarily be to increase wealth; rather, it will be to lose as little as possible, or hopefully preserve it. Gone are the days of making investments which will increase steadily in value. As one individual of our acquaintance put it, when the water goes out before a tsunami hits, don't go onto the sea bottom and fight over the fish. Head for higher ground instead.
We feel very strongly that the tsunami will come in after the synthetic CDOs we wrote about in yesterday's post start unwinding. Between then and now, however, 'higher ground' may be a difficult thing to find. Investment markets of all varieties are in disarray, and supposed safe havens (bonds, precious metals, and select foreign currencies) don't look so good. One could take cynical risks, and throw one's lot in with one of the biggest swindlers in human history: JP Morgan. When their synthetic CDOs start paying out, they might be the biggest winner... or they might not be. Time will tell.
Showing posts with label paper money. Show all posts
Showing posts with label paper money. Show all posts
Monday, December 8, 2008
Saturday, November 29, 2008
How Likely is Hyperinflation in the USA?
Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.
Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?
Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.
Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.
The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.
We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.
Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?
Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.
Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.
The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.
We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.
Wednesday, November 26, 2008
Two Macro Trends of the 2008 Depression
We have been careful to avoid detailed or specific predictions of what is going to happen during the 2008 Depression. Certain symptoms, like the housing price and tax receipt collapses, are 'baked into the cake.' In this post, we will look at some macro-scaled trends of this Depression, and what shapes they may take in coming years.
The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.
This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.
This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.
The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.
As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.
These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.
The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.
This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.
This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.
The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.
As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.
These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.
Saturday, November 22, 2008
An Introduction to the Gold Standard
There is some talk on the fringes of the media about a "Bretton Woods 2" being developed. If it sees the light of day, this system would be similar to the financial treaty established at the end of World War II. Put simply, the original Bretton Woods made the U.S. Dollar backed by Treasury Bills and gold (initially fixed at $35 an ounce), while the member nations pegged their currencies to the U.S. Dollar. This system was effectively gutted by President Nixon, when he effectively took the Dollar off the gold standard.
The United States' gold standard, loosely, was a monetary program where a bank issues paper notes (the certificate notes of yore). These certificates were backed by a preset quantity of physical gold, held by the bank. Due to other banking regulations (which we will discuss in a later post) the banks were not required to hold enough gold to cover all of their issued certificates, merely a certain percentage of them.
One of the reasons the United States went off the gold standard, and indeed one of the primary criticisms of gold-as-money, is that there is not enough gold physically in the world to have a smoothly-circulating monetary system. This is indeed true, both now and in the past. Historically, gold was not a form of money which circulated. Rather, it was more of a store of value, or for exceptionally large purchases (say, an apartment building or two). Gold has always been too scarce to serve as a day-to-day form of money.
To remedy the problem, one can turn to 'lesser' metals, such as copper, nickel, and silver. These metals are more commonly discovered. Discussion of these other metals as money will be for a later post. Let it suffice to say that gold, due to its inherent scarcity, will never, ever work as the day-to-day money of any economy.
Indeed, the idea that it could work is foolish, and is a definite reason the entire world has entered the 2008 Depression (to say nothing of the 1929 Depression). The idea that a paper currency could be 'as good as gold,' and that gold could function as a day-to-day money, are both flawed. We will explore this concept, as well as others, in the near future.
One of the reasons the United States went off the gold standard, and indeed one of the primary criticisms of gold-as-money, is that there is not enough gold physically in the world to have a smoothly-circulating monetary system. This is indeed true, both now and in the past. Historically, gold was not a form of money which circulated. Rather, it was more of a store of value, or for exceptionally large purchases (say, an apartment building or two). Gold has always been too scarce to serve as a day-to-day form of money.
To remedy the problem, one can turn to 'lesser' metals, such as copper, nickel, and silver. These metals are more commonly discovered. Discussion of these other metals as money will be for a later post. Let it suffice to say that gold, due to its inherent scarcity, will never, ever work as the day-to-day money of any economy.
Indeed, the idea that it could work is foolish, and is a definite reason the entire world has entered the 2008 Depression (to say nothing of the 1929 Depression). The idea that a paper currency could be 'as good as gold,' and that gold could function as a day-to-day money, are both flawed. We will explore this concept, as well as others, in the near future.
***
We've posted more discussion about problems with gold standards on the Silver Money Report.
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