Weimar 1920-21 : "It felt like deflation was underway"

[romans holiday]

Can we agree on two points?

 

1. Hyperinflation is not caused by rising wages

 

2. Instead, hyperinflation is caused by a currency collapse, swiftly followed by currency repudiation

If Weimar is the model, then it seems 2 is closer to the "mark". First, you have currency depreciation against foreign currencies then a spiraling demand-pull inflation before eventually the hyper-inflationary destruction of the currency.

 

Yet, since this Weimar scenario - where first an extended period of high inflation and full employment was seen - looks unlikely today, the question for hyper-inflationists is how exactly do we jump straight to the currency collapse/ hyper-inflation stage?

 

My suggestion is we've already seen the high extended period of inflation in debt money. The indebted middle classes will now be slowly squeezed, as they were in the inflationary period of Weimar but in a different way [before hyper-inflation proper]. Like Weimar, money will become scarce, but given the different monetary systems, our currency will actually strengthen relative to assets due to a debt deflation where "short-covering" of the currency takes place [this is what will bankrupt the indebted middle classes]. The working classes aren't much better off as the strengthening currency crucifies the economy leading to a prolonged period of high unemployment. But still better off if debt free and able to become self-employed where they see a need for some good or service. Oh well, at least the money is worth something.

[romans holiday]

?

 

what do you mean by assets?

Primarily property.

[BlackPepper]

Primarily property.

 

 

 

Deflation, is real and the velocity of deflation is gathering pace, but Weimer world wide?

[malvern hills]

 

The sheeple are being stampeded into speculation.

 

I think this and the other story today about Buffett positioning for inflation ,are indicating to me that money velocity is about to take off.

[romans holiday]

Deflation, is real and the velocity of deflation is gathering pace, but Weimer world wide?

An eventual debt deflation worldwide due to the intertwined nature of the global economy and the currency system.

[romans holiday]

 

The sheeple are being stampeded into speculation.

 

I think this and the other story today about Buffett positioning for inflation ,are indicating to me that money velocity is about to take off.

The middle classes once again will get slaughtered in the market doing exactly the wrong thing... speculating.

 

For money velocity to take off.... it has to be seen in the real economy, not as speculation in the financial market.

[BlackPepper]

 

The sheeple are being stampeded into speculation.

 

I think this and the other story today about Buffett positioning for inflation ,are indicating to me that money velocity is about to take off.

 

Speculation; speculators market is usually fueled by cheap credit; USA is no longer the market dude!

 

 

[G0ldfinger]

For money velocity to take off.... it has to be seen in the real economy, not as speculation in the financial market.

Why do you think it is possible to properly separate these notions? Don't you think (in the 'real' economy) someone's heating cost will go up if some 'speculators' buy too much oil or gas?

[romans holiday]

Why do you think it is possible to properly separate these notions? Don't you think (in the 'real' economy) someone's heating cost will go up if some 'speculators' buy too much oil or gas?

Commodities can spike on speculation, but if higher prices can't be supported in the real economy they will slump again.

 

There has to be either increasing real demand, or a depreciating currency to maintain higher prices.

 

imo it is only investors who, for primarily ideological reasons [monetarism/ money printing etc], see the currency depreciating. The bulk of the population is valuing the currency more as they pay down debt and/ or save.... this is motivated by the reality of debt.

[G0ldfinger]

Commodities can spike on speculation, but if higher prices can't be supported in the real economy they will slump again.

 

There has to be either increasing real demand, or a depreciating currency to maintain higher prices.

 

imo it is only investors who, for primarily ideological reasons [monetarism/ money printing etc], see the currency depreciating. The bulk of the population is valuing the currency more as they pay down debt and/ or save.... this is motivated by the reality of debt.

The reality of too much currency (and hence too much debt) will rule indeed.

[romans holiday]

The reality of too much currency (and hence too much debt) will rule indeed.

But consider that in our monetary system, money is created by "shorting" the currency; it's a balance sheet where debt on the one side balances money created on the other.

 

If a debt deflation has set in, then this amounts to an extended period of short-covering on the currency; existing dollars, pounds etc will become more valuable as the population seeks these dollars and pounds to pay down debt.

 

I don't see how hyper-inflation can eventuate here. What looks more likely is asset prices will continue to decline as actual money [liquidity not debt] becomes more valued. This may even play out in lower commodity prices and then consumables.

 

If governments continue to fight this by taking further debt onto the public balance sheet, gold will continue higher. I think it would continue higher anyway given that the international currency system is destabilized with the collapse of asset values in developed countries.

 

 

[whereas in Weimar it was the savings of the middle classes that got squeezed, today the equity/ monetary value of assets of the middle classes are being squeezed]

[G0ldfinger]

... If a debt deflation has set in, then this amounts to an extended period of short-covering on the currency; ...

This is exactly where we differ, because the central banks and governments do all so that this does not happen.

 

In the absence of central banks or governments, you'd be right. But this scenario is quite obviously irrelevant.

[malvern hills]

Commodities can spike on speculation, but if higher prices can't be supported in the real economy they will slump again.

 

There has to be either increasing real demand, or a depreciating currency to maintain higher prices.

 

imo it is only investors who, for primarily ideological reasons [monetarism/ money printing etc], see the currency depreciating. The bulk of the population is valuing the currency more as they pay down debt and/ or save.... this is motivated by the reality of debt.

 

RH did you read the Express story?

The general population is being explicitly told in a tabloid that if you put your savings in a bank you are eroding your wealth in real terms.

 

I agree that the bulk will be paying down debt however the bulk of the wealth held is held by the extreme minority(2-3%) of the populace and they will be the ones speculating to keep their wealth intact.

 

Secondly QE2,3,4 and so on will be required to keep asset prices steady or the banks will once again be insolvent, leading inevitably towards currency crises in indebted countries.

 

John Williams at shadowstats seems to be of a similar view and I for one am coming round to the HI conclusion.

http://www.theenergyreport.com/pub/na/7005

TER: We no longer really have the option of expanding the debt and it's doubtful that even short-term stimulus will have much impact. Looking at this next leg down against that backdrop, what projections would you make about unemployment, housing prices, GDP as we look through the end of 2010 and into '11?

 

JW: Unemployment will be a lot worse than most people expect. Housing will continue to suffer in terms of weak demand. But in this crazy, almost perverse circumstance, the renewed weakness to a large extent will help push us into higher inflation. Real estate tends to do better with higher inflation, but it's not going to be a happy circumstance for anyone.

 

The government is effectively bankrupt. Using GAAP accounting principles, the annual deficit is running in the range of $4 trillion to $5 trillion. That's beyond containment. The government can't cover it with taxes. They'd still be in deficit if they took 100% of personal income and corporate profits. They'd also still be in deficit if they cut every penny of government spending except for Social Security and Medicare. Washington lacks the will to slash its social programs severely, to change its approach to ever bigger government. The only option left going forward is for the government eventually to print the money for the obligations it cannot otherwise cover, which sets up a hyperinflation.

 

All of what I just described was already in place when the systemic solvency crisis broke. Before this crisis the government was effectively bankrupt. In response to the crisis, the government may have gone beyond what it had to do, but you err on the side of conservatism when you're trying to prevent a systemic collapse. That was a real risk. It still is. Irrespective of the politics of big government spending, quantitative easing, renewed bailing out of banks, whatever is involved, I'd argue that the government still will do whatever it takes to prevent a systemic collapse. That last series of actions had the effect of rapidly exploding the deficit. In just a year, we went from something under $500 billion in official reporting, on a cash basis as opposed to GAAP basis, to something close to $1.5 trillion.

[romans holiday]

This is exactly where we differ, because the central banks and governments do all so that this does not happen.

 

In the absence of central banks or governments, you'd be right. But this scenario is quite obviously irrelevant.

The governments, central banks, and their economists all thought a deflation could never happen. The generally accepted idea was that by managing inflation expectations and controlling the money supply, the economy and inflation could tick along at a nice even 2% or so. This idea is now not so generally accepted. It must be quite an unnerving experience for those who thought they were in control to now realise they aren't.

 

Anyway, even though I don't think we will see a Weimar-like hyper-inflation of the currency, I don't doubt that the developed economies are facing a crisis. Just that this crisis will take a different form to Weimar.

[romans holiday]

RH did you read the Express story?

The general population is being explicitly told in a tabloid that if you put your savings in a bank you are eroding your wealth in real terms.

 

I agree that the bulk will be paying down debt however the bulk of the wealth held is held by the extreme minority(2-3%) of the populace and they will be the ones speculating to keep their wealth intact.

Monetary wealth is more likely to be eroded by speculating in a volatile market than by leaving your savings in the bank. Everyone is accusing everyone today of propaganda, but consider that it suits the monetary authorities to get as much money moving out of banks as possible.

 

In deflation, monetary units appreciate in real terms. The chase for returns is a habit that will die hard among investors.

 

Secondly QE2,3,4 and so on will be required to keep asset prices steady or the banks will once again be insolvent, leading inevitably towards currency crises in indebted countries.

 

John Williams at shadowstats seems to be of a similar view and I for one am coming round to the HI conclusion.

http://www.theenergyreport.com/pub/na/7005

TER: We no longer really have the option of expanding the debt and it's doubtful that even short-term stimulus will have much impact. Looking at this next leg down against that backdrop, what projections would you make about unemployment, housing prices, GDP as we look through the end of 2010 and into '11?

 

JW: Unemployment will be a lot worse than most people expect. Housing will continue to suffer in terms of weak demand. But in this crazy, almost perverse circumstance, the renewed weakness to a large extent will help push us into higher inflation. Real estate tends to do better with higher inflation, but it's not going to be a happy circumstance for anyone.

 

The government is effectively bankrupt. Using GAAP accounting principles, the annual deficit is running in the range of $4 trillion to $5 trillion. That's beyond containment. The government can't cover it with taxes. They'd still be in deficit if they took 100% of personal income and corporate profits. They'd also still be in deficit if they cut every penny of government spending except for Social Security and Medicare. Washington lacks the will to slash its social programs severely, to change its approach to ever bigger government. The only option left going forward is for the government eventually to print the money for the obligations it cannot otherwise cover, which sets up a hyperinflation.

 

All of what I just described was already in place when the systemic solvency crisis broke. Before this crisis the government was effectively bankrupt. In response to the crisis, the government may have gone beyond what it had to do, but you err on the side of conservatism when you're trying to prevent a systemic collapse. That was a real risk. It still is. Irrespective of the politics of big government spending, quantitative easing, renewed bailing out of banks, whatever is involved, I'd argue that the government still will do whatever it takes to prevent a systemic collapse. That last series of actions had the effect of rapidly exploding the deficit. In just a year, we went from something under $500 billion in official reporting, on a cash basis as opposed to GAAP basis, to something close to $1.5 trillion.

The other option to hyper-inflation is the one right before our eyes in Japan. We'll probably see another QE or two, but it will remain ineffective. If the government really wants to get money into the economy it would have to fiscally spend big time on infrastructure and jobs, but I doubt there is the political will for this now that the tide is turning against debt at the political level. I think they stuffed up by a focus on recapitalizing banks. But then no matter what they did, the economy was well overdue for a contraction phase. What's so bad about that? Opps..... all that debt! The big stuff up was the monetary system of fractional reserve and the financial alchemy which allowed it to go into over-drive due to weak government. The government was also weak in Weimar, where another deluded bank pursued an insane monetary policy.

 

imo we have already had the inflation stage [in debt/credit], and rather than now going into a crisis stage typified by hyper-inflation, our crisis will be typified by deflation/ depression.

[G0ldfinger]

The governments, central banks, and their economists all thought a deflation could never happen.

 

One of the main reasons for the existence of central banks is to prevent a (catastrophic) money supply deflation.

[romans holiday]

 

One of the main reasons for the existence of central banks is to prevent a (catastrophic) money supply deflation.

Which is my point, and is the rationale for the existence of central banks. As I said, the central banks believed they could prevent deflation by managing [manipulating even today] inflation expectations, and controlling money supply. Demonstrably untrue today.

 

They thought it could never happen due to their position. It was all based on theory. The theory is being falsified.

[G0ldfinger]

Which is my point, and is the rationale for the existence of central banks. As I said, the central banks believed they could prevent deflation by managing [manipulating even today] inflation expectations, and controlling money supply. Demonstrably untrue today.

 

They thought it could never happen due to their position. It was all based on theory. The theory is being falsified.

Sorry, but they were extremely successful, as can be seen from still rising consumer prices and ridiculously high asset prices in e.g. houses and stocks. The theory has been proven 100% correct - which was to be expected.

 

EDIT: As I have stated before, without QE by the BoE, UK houses prices would possibly be at GBP 10,000 to 50,000 right NOW.

[romans holiday]

Sorry, but they were extremely successful, as can be seen from still rising consumer prices and ridiculously high asset prices in e.g. houses and stocks. The theory has been proven 100% correct - which was to be expected.

 

EDIT: As I have stated before, without QE by the BoE, UK houses prices would possibly be at GBP 10,000 to 50,000 right NOW.

I don't think the central bankers are so supremely confident with the theoretical model today.

 

What goes up can go down despite the theory. Watch UK house prices over the next few years.

 

A theory by its nature can never be proven 100% correct, and should always remain capable of being falsified. Otherwise it is dogma not theory. I suspect the longevity of the dubious theory rode on the back of the boomer generation....and the truth is that economies are by their nature "organic" and cyclical rather than "mechanical" and linear.

 

http://www.greenenergyinvestors.com/index....st&p=176193

 

 

All QE is doing is postponing and cushioning the decline... a rear-guard action.

 

The theory Weimar's Havenstein clung to was also false.

[InternationalRockSuperstar]

...

The bulk of the population is valuing the currency more as they pay down debt and/ or save.... this is motivated by the reality of debt.

 

pretty crap logic, tbh.

 

the majority view of what something is worth is not the same as the market value - since the few with much wealth can affect prices much more.

 

the bulk of the population probably wouldn't pay $1000 for gold bullion, but that doesn't stop it trading at ~$1200 (or whatever it is when you read this post).

[G0ldfinger]

pretty crap logic, tbh.

Essentially, what he says it that the sheeple can get fleeced for a very long time because they think that something has value which it hasn't. That is why some can profit in a (hyper-)inflation, and why most won't.

[enrieb]

I suppose that there is a psychological effect, whereby after a period of rapid inflation, an individual could be left with a stack of one million dollar/mark/pound units of currency. At this point the hope that inflation may turn to deflation must become a tempting gamble, for when the one million dollar/mark/pound stack or note of currency has the potential to become half its current value, via inflation, there also becomes a point at which the currency has the potential to double in value were deflation to occur. I believe that this is an essential part of psychological dilemma that faces investors/savers in a period of unstable currency, the temptation of opportunity to increase wealth and at the same time the fear of losing wealth. The economics of natural selection apply at this point.

 

 

[enrieb]

There is a point in lighting a bomb fire that the flames fail to spread, the temptation is to pour gasoline on the fire. At first the gasoline appears to make little difference, but eventually the flames meet the gasoline and the fire becomes greater than intended.

In the 90s governments poured gasoline into the economy via Greenspans positive feed back loop, it took a while for the spark to ignite the flames in the form of the housing bubble. We have already seen a period of credit inflation due to the petrol poured on to the economy by Greenspan/Brown, all that is happening now is the inflationary catchup. Now through QE we see a new period of front-loading the fire with monetary petrol. As remote a possibility as it may-seem, we may never see a nominal fall in the inflated assets of houses and stocks, a period of time like the 70s may re-occur, best case scenario in my humble opinion.

 

Lighting the bonfire the wrong way

 

[drbubb]

RH did you read the Express story?

The general population is being explicitly told in a tabloid that if you put your savings in a bank you are eroding your wealth in real terms.

 

I agree that the bulk will be paying down debt however the bulk of the wealth held is held by the extreme minority(2-3%) of the populace and they will be the ones speculating to keep their wealth intact.

 

Secondly QE2,3,4 and so on will be required to keep asset prices steady or the banks will once again be insolvent, leading inevitably towards currency crises in indebted countries.

Here's a Key point:

+ Prices of Essentials can rise (thanks to cost pressures, and weak currencies), while

+ Prices of Assets fall

 

In fact, the pressures (mostly ZIRP) driving people to speculate, tend to generate BIG SWINGS in asset prices, over the long term, rather than steady appreciation.

 

Holding cash, during the inevitable downswings, can be a very good thing. And playing the swings well (if you can manage to do it), can get you ahead of the price rises in essential items, like food and energy.

 

But it is a tough game to win, and it is not good that some many of us have been driven to this !

 

[romans holiday]

I agree that the bulk will be paying down debt however the bulk of the wealth held is held by the extreme minority(2-3%) of the populace and they will be the ones speculating to keep their wealth intact.

 

 

pretty crap logic, tbh.

 

the majority view of what something is worth is not the same as the market value - since the few with much wealth can affect prices much more.

 

the bulk of the population probably wouldn't pay $1000 for gold bullion, but that doesn't stop it trading at ~$1200 (or whatever it is when you read this post).

I'm not arguing that there won't be currency depreciation in real terms. What I am arguing is there won't be hyper-inflation of the currency.

 

 

Regarding currency depreciation, even if the bulk of the wealth is held by a relatively small group of investors, particular currencies can depreciate against others as capital moves between them on the fx market. Taking the reverse liquidity pyramid idea, you'd see capital flowing from the weaker currencies into the stronger:

 

Commodity currencies such as Kiwi and Aussie

Major currencies such as Euro and Sterling

Reserve currencies such as Yen and Dollar

Natural commodity currencies such as silver and gold.

 

So from the investor's perspective, who is motivated by a "view" on what their currency is worth in the market, the local currency can depreciate... but only against other currencies.

 

 

 

Regarding currency appreciation, the above does not enatil hyper-inflation. Hyper-inflation involves the destruction of currencies as national prices of goods and services spiral ever upwards. This involves the behavior of the bulk of the population in the real economy. The majority of the population however simply does not have an investor's mindset*... they do not really have a "view" on the currency. Most are habituated to using a currency and identify that currency with money per se. They simply don't have all the ideological baggage that motivates investors. What motivates them increasingly now is the desire to pay down debt and/ or save. In the real economy then velocity is reduced and the currency becomes more valuable relative to local assets [perhaps eventually also relative to consumables/ commodities depending on the currency].

 

 

So there is a basic distinction involved here:

 

+1 At the investment level - at the level of the international financial market - the local currency can depreciate against other currencies.

 

+2 At the economic level - at the level of the real local economy - the local currency can appreciate against assets, and eventually against commodities/ consumables depending on the currency.

 

 

*That we miss this point I think derives back to Friedman's collective notion that the population will not be subject to "money illusion".... or rather that all will have inflation expectation. This is a notion that is largely stuck in the minds of investors today, not in the larger population.