Saturday, April 5, 2014

Seeds Of Economic Chaos

The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. If faith drops in these intangible "promises" and money would suddenly begin to flow into tangible goods seeking a safe haven inflation will soar.  Never before has mankind diverted such a large percentage of wealth into intangible products or goods. This includes currencies, bonds, pensions, and stocks. I contend this is the primary reason that inflation has not raised its ugly head or become a major economic issue. Like many of those who study the economy, I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply. 

The timetable on which events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue has to do with timing. If the price of gas jumps to $8 a gallon overnight many people will buy gas and not make their car payment because it would be months before their car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises are often left unfilled. Is this possible and if so where would that leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  

Using the analogy of having to go across a bridge, if you are unable to get to the other side you often have a problem. That may be where our economy is. We currently have to get to the other side of a plethora of vexing issues like how well Obamacare will play out, the future of entitlement programs, and how we will deal with paying interest on the growing national debt. A plank breaking under your feet as you cross a bridge may spell a problem but the collapse of the total structure is a disaster. Planning to cross a bridge and getting to the other side is not the same thing. If obstacles develop in the process of crossing it is possible the goal may never be accomplished. Government and financial institutions have built bridges they want us to cross.

The rate and ease at which traffic flows across a bridge can change dramatically if faith in the structure is lost or becomes an issue. Much of how society reacts is based on faith in its institutions. History shows that savage economic disruptions and bumps have occurred to society over the decades, still life goes on and it is very likely that tomorrow morning the sun will rise in the east. Please note, if such an inflation scenario were to unfold it could bring new meaning to the phrase "it's different this time" and contrary opinion could becoming meaningless. Even if many people agreed this was coming at us stopping it would be like trying to stop a train hurtling down the tracks.

The crux of this article is to reconcile, debunk, and counter the argument that deflation lays before us. This is the claim made by Central Banks to justify and explain how they have massively expanded the money supply far beyond just adding liquidity. If inflation were to suddenly sprout wings central Banks and the government would reach into their toolbox and attempt to produce a series of fast fixes. I would expect these to include things like a "price freeze" and limiting the flow of funds.  Remember many debts may go unpaid and promises left unfilled. The history of such actions put in place after a panic begins generally shows them to be far behind the curve. This means many intangible investments could suddenly become very illiquid.

There is a major flaw in the concept  Modern Monetary Theory. What do you do when it becomes apparent the economic efficiency of credit is beginning to collapse? This means as more money is poured into the system lower rates are no longer effective in driving the economy forward. As the extra GDP growth generated by each batch of loans drops and momentum ends this becomes the equivalent of pushing on a string and is a sign of exhaustion. What I'm seeing is an "almost surreal" feeling of indifference towards reality. Companies have ushered savings from interest paid on their debt into the earning column and a major reason inflation remains low is they are sitting on a hoard of cash this has lowered the velocity of money. The artificially low FED controlled interest rates are a one-time tailwind that is mainly behind us. When rates stop going lower or reverse they will become a major headwind.

Predicting or timing inflation, stagflation, or hyperinflation is very difficult. All tend to take a few years to prepare the ground from which they sprout. Inflation in any of these forms develops a positive feedback loop that is sort of a slow-motion panic. A very important thing to remember is that the expectation of inflation can have a major effect on both sides of supply and demand at the same time. When money begins to pursue a product or goods and the price begins to rise those holding that item lose the incentive to sale. In reaction, more money may be pulled out of the closet before the next price jump. This "more money" constitutes an increase in demand. If this happens at the same time items are being held back or removed from retail shelves awaiting better prices which "reduces supply" things can really get interesting fast. This helps explain why hyperinflation is so drastic.

Changes in the value of a currency directly affect "buying power" and the value of assets. Trying to predict in which currency a major loss in value will first occur gives us a clue as to where inflation will strike. I don't mean just a little inflation but hyperinflation which could develop very fast. Historically, when hyperinflation occurred people did not understand what was going on, sometimes for years. With blogs, YouTube, Facebook, and other social media it would not be long before people realize the implications of hyperinflation. Once people understand what is occurring the currency dies. This means instead of taking three years, the cycle could go from start to finish in only three months.

Some people have been calling for a "world currency" for years and a meltdown with high levels of fear and contagion would present a perfect opportunity to advance this agenda down the field. Many people have a lot to gain when a major shift in the currency markets takes place. Dislodging the American dollar as the world reserve currency represents such a shift. Calls for a new world currency may grow over the coming years if the world stumbles into an economic hell. People and their leaders tend to look for easy answers and this option would represent a new lease on life and a way to lessen the consequences of their past actions. It is very important to remember, we are not the "important people" in how the future unfolds, those in power are the ones that count and everything will be shaped in their favor.

  Footnote; Please feel free to explore the blog archives and as always you comments are encouraged. This article ties together several posts I have made over the last few months.



  1. Your description of how the economy is rigged by artificial demands and monopolized price-fixing of suppliers/vendors shows how far away the whole system has strayed from its origins. Creating a world currency or setting up weak regulatory bodies who can do little except providing public illusion is merely the next wave of corruption. If new currencies are created to wash away the unmaneageable debt caused by runaway "credit", surely they should be owned, distributed and monitored by real, ordinary people who still regard money as a representative of some real product or service to the human community? Years ago, I suggested new, sovereign currencies for mega-nations (North America, South America, Europe, Soviet Union, Middle East, Africa, The Orient, etc.) that would be policed by local Credit Unions under the direction of their Association's principles. This would be a global shutdown of the entire rigged financial casino that has enslaved our species. Anything less than this won't be a real change ... it will be a new scam by the same old same old.

    1. Blair, thanks for your comment. Very well said. Your point is noted.

  2. Each time the "train" is going to wreck, the ones in power come with either a new flag or a new currency....or both. After the attack of Soros on the pound, Portugal was the next target. Suddenly, it was urgent to instaure the Euro, fast speed...
    This did not avoid the PIGS problems.
    Can be USA or Europe, they have made a kind of underground partnership with central banks. Low interest rate will help to balance a little bit better the deficit. But for how long.
    Inflation calculated by government doesn't show the reality. Consummers can tell you in each country. Why ? You can easily find out !
    So, you're right with the world currency only if the entire world central banks and politicians see no other solution. And this will never happen before a major collapse. Each "nationalist" politician would not let their national currency being swallowed by another "institution". They would prefer to manipulate more and more, to fix prices, doing every tricks possible and impossible in order to keep a symbol of their "nationality".
    History teaches us that politicians prefer to go to war, destroying everything in order to keep their piece of cloth (I mean a flag). How many young people are dead because of these piece of cloth ????
    When we see the "war" between democrat and republican in the USA, there is no doubt about the fact that a war is more likely than any other human way to solve the problem of countries spending more money than they earn. Specially when they reach nearly a trillion of dollar a year for the "defense" and not able to offer a
    decent free education for their own citizen !!!!

  3. I have to take issue with "nobody knows which currency would lose its purchasing power first" meme. I understand this piece is a month old yet signs have been bright for a loss in Chinese purchasing power longer than a month now. A currency problem in China become a commodity rout everywhere else? Much of the loss of western purchasing power has been local in nature and is company based. A good blame of out of control printing allows companies to raise prices to offset collapsing demand? Lets cut to the chase EVERY TICK DOWN IN THE DOLLAR MAKES EVERYBODY EXCEPT USA horrified? And inflationist to start with the mubbles? America is set to excel and not collapse fall or fail?

  4. Paulson took the job at treasury to takedown FULD the Lehman CEO. And cared less how he did it? Everything that happened in 2008 beginning middle and end was a process and NOT ORGANIC! 2000 was BILL GATES unhappy about breaking up Microsoft and broke all of tech in a temper tantrum?1997 currency crisis was AMERICA RAISING INTEREST RATES UNILATERALLY and its effect and your memee destroyer?

  5. Money is legal tender, defined by law. Credit currency is not money, not legal tender. The U.S. money supply stands at $1.27 Trillion, $1.23 Trillion in FRNs, $300 Billion in USDs and U.S. coin. All the rest of what is called the 'money supply' is credit, a promise to pay denominated in dollars and with no legal standing as a currency. The Fed has expanded the actual 'money supply' by about $500 Billion since the 4th quarter 2007, primarily to meet people's request for FRNs. Unlike FRNs with their fluctuating value, credit as currency has no value, you either have it or you don't. Credit remains viable as a medium of exchange only for as long as the assets that back it retain their value and the institutions that maintains it, remain solvent. A failure of either one of those two things and credit as currency POOF!s out of existence, leaving nothing behind but the debt. A collapse of credit as currency would mean the end of all modern commerce on a global scale so you see, when the Fed and the EU say they are fighting deflation, this is what they are referring to.

    1. They are fearful that the aggregate value of the wealth in the ocean of IOU's (bonds) will fall. Ironically, they have insured that a collapse in the value of bonds is the only path ahead, unless one thinks this really is the End of History and the current system is changeless and permanent.

      For those in that camp, I have several bridges they may wish to purchase.

    2. I am not saying you're wrong, but I've not heard of a law that says anything about legal tender being the only legally recognized money. Is it a Federal statute?

  6. The error I see here is in thinking that this is a potential money flow issue. Perhaps I misinterpret your post, but when confidence falters in the ocean of existing IOU's (bonds) or the utility of owning common stock, money (wealth, value, whatever) does not flow out of bonds, stocks or whatever and go into somewhere else. You know this.

    As trust evaporates from this Greatest Ever Asset Mania, the wealth it represents almost entirely evaporates back into the mass-psychology fog from which it arose. In this way, vast expectations were created about future boats, vacations, tony houses and high fashions to be bought with cash that will be paid by some Greater Fool for whatever it is being sold (bond, stock, etc.). Net money flow, even for the marginal transactors? Zero.

    The actual wealth never existed. It's like the (erroneous) Schrodinger's Cat: the wealth exists only as long as almost no one opens the box to look at it (i.e., takes it to market to sell.) Therefore, there is no money to flow into tangible goods to spike "inflation" (rising prices are an effect of inflation, not inflation per se) in food, clothing and stuff people really notice (a la in the 1970's). If a million people each own 100 shares of IBM, and just one of them sells his shares for a dollar less than the prior trade. He gets $100 less for his sale than the prior seller, but 999,999 people have their 99,999,900 shares drop by an aggregate $99,999,900.........just because of a single trade for a buck less/share. All that wealth-value simply evaporates.

    All roads lead to deflation, specifically credit collapse deflation and a collapse in most prices subsequent to that shrinkage in the broad money supply. People who believe themselves wealthy may enter all sorts of auction markets to drive prices higher; those whose perception of their wealth has collapsed will eschew those auctions, turning them into ghost towns and providing a perfect environment for forced sellers to collapse prices across most asset classes (it not all.)

    Dwain D., credit as money is debt, as in IOU's. With interest rates near zero, those IOU's are deemed worth nearly face value. It's not an either-or situation as you describe. A loss of BELIEF in the solvency of the issuer can surely occur in increments, called a rising interest rate (sagging bond value.) This is the dirty little secret when an ocean of debt already exists: small concerns about return OF one's money (as opposed to return ON one's money) can inch-up rates, causing a massive evaporation of the wealth value of the ocean of existing IOU's. 10-year US treasuries have quietly risen in yield by quite a bit, as a percentage of the yield, causing billions of dollars of value to simply disappear.

    It is fairly obvious that not all IOU's are deemed as trustworthy, and as trust drains from this over-indebted system, shakiest issuers' debt will lose value fastest. Junk debt is thus a Hindenburg in search of a spark all its own. Wait until corporations discover how difficult it may be to roll over all this share-buyback debt of the last few years.

    1. It is often hard to determine what is true, but a report on Bloomberg in May of 2013 claimed that 32 Trillion dollars in funds were held in offshore accounts around the world. While much wealth would evaporate the amount of cash salted away might shock us. How safe is this money, and what exactly is it doing? More on this subject in the article below.