Hyperinflation? Not in America.

[Zoomie1980]

You can wipe out most of the liabilities by raising the retirement age to 72. There is no reason not to do this. When Social Security was changed in the 60s, the average expectancy was 65. The amount actually paid out wasn't that large. Today, the average life expectancy is 77. So we will change it to 72.

The reason why we will do this is because the other option is inflation, which will erode the value of Social Security anyways. Seniors live on fixed incomes. Inflation is bad for them. So they will have the option of inflation or changing social security.

But that is a different issue. It will not cause hyperinflation even if we have all these liabilities.

The single biggest source of governmental budget shortfalls and bad large corporate balance sheets are PENSIONS. And not just pensions, but pensions that were designed on actuarial statistics from 30, 50, 70+ years ago. That is true with Social Security, GM and Chrysler, and California, and countless municipalities that have ridiculous police, fire, and civil service pensions. Until we realize we have to tie pension benefits to life expectancy we will continue to have major budget and corporate profit issues.

Inflation and deflation are really simple things. If you have more "stuff" than is needed or at least "perceived" to be needed, you will have DEFLATION in that "stuff". Be than monetary supply, commodities, finished goods or services....

 

[Toro]

The single biggest source of governmental budget shortfalls and bad large corporate balance sheets are PENSIONS. And not just pensions, but pensions that were designed on actuarial statistics from 30, 50, 70+ years ago. That is true with Social Security, GM and Chrysler, and California, and countless municipalities that have ridiculous police, fire, and civil service pensions. Until we realize we have to tie pension benefits to life expectancy we will continue to have major budget and corporate profit issues.

There is a really good book on this entitled "While America Aged."

One solution to this problem is to change pensions from defined benefit to defined contribution. Here in Florida, the politicians changed the law to encourage new state workers to put their money into a defined contribution plan. It has not taken up as well as one would have thought but that is the future trend. A defined contribution plan takes the liabilities off the balance sheet of the sponsor and places them onto the individual.

 

[Zoomie1980]

well toro i stand corrected.

I don't want everyone to think that everything is hunky-dory though. I first started investing in gold in 2002, and I was told that in the fund I ran, I was the largest owner of shares in gold companies in the Southeast. I don't know if that is true or not, but that is what I was told. At various times, I have had half my net worth in gold. I own none now, but I understand the fundamental argument which says that gold is going to $2000 or $3000 an ounce, and I may own large amounts again in the future.

Gold is still a commodity, not a currency. The majority of Gold is used in manufacturing and contained in chemical compounds like nitrates used for plating. There is always the manufacturing demand on gold to consider when turning to that as an investment. High end electronics continue to use more and more gold for precision, highly conductive, components. Every additional ounce of gold used in manufacturing is one ounce left for bullion and trading. Bottom line for me, most of the time, commodities are too volatile for me for an investment. I do or will own gold to protect wealth, but will usually never use it to build wealth.

 

[Toro]

Zoomie

Most gold consumption is for jewelry and investment demand.

Supply and demand statistics > World Gold Council, gold market research, reserve asset and investment statistics

 

[Zoomie1980]

First of all, I think we ought to kiss TORO's ass for taking the time to put so much effort into schooling us on this issue.

Kudos are definitely in order.

Now, as to inflation and deflation?

Our economy is in the crapper because American losts the PERCEIVED WEALTH we thought we had when the market pricing was inappropriately inflated and the prices of real estate was wildly out of align with how much money most of us make, too.

Hence the "monetary velocity" has crapped out (people aren't spending)

And note that savings (which was down to 0%!!!) is now up to about 5%!! (historically what American saved)

So a people who IMAGINED they had a lots more money in stocks and real estate, upon finding that they didn't really have all that much money, stopped spending and started saving.

And what happens in a CONSUMER-DRIVEN ECONOMY, when consumers stop buying stuff?

duh!

Folks, we NEED some inflation. What we need is MORE MONEY CIRCULATING IN THE SYSTEM, not less!

And that is WHY the government is borrowing money.

Basically, to prevent our economy from going into a economic anaphylatic shock.

Of course, in my opinion, the BLEEDING ARTERIAL WOUND that is FREE TRADE is going to continue to plague us.

American didn't just lose the industrial jobs it once had, America has created a system of trade policies and tax laws which insure that we will also NOT CREATE JOBS in future's industries, either.

This faith based belief in FREE TRADE is the major problem facing this nation.

We invent industries here, and then the moment they become viable, they go offshore to make the stuff we'll need.

But unemployed pAmerican do not make great consumers, folks.

We are screwing our working class to the benefit of the investor class, and as the investor class is (hopefully) now beginning to realize, they cannot SELL to people who don't have JOBS!

duh!

We have slowly been putting ourselves into this bind by opening one market after the other to foreigh imports.

And we cannot just close the borders now, because we do EXPORT and the trade war that would ensuew would screw the entire world, us included.

But we can slowly and surely start initiating a FAIR TRADE policy to insure that Americans can work too.

And, if China doesn't want to end up holding a trillion dollars in worthless bonds, they're going to WANT to work WITH US to see to it that the trade imbalance that they have enjoyed tilts back toward the USA somewhat.

There is NO FREE LLUNCH in economics.

There is no SIMPLE SOLUTION to these problems.

There are difficult things to balance to insure that we do not DISRUPT our economy and the economies of our trade partners, too.

But the time when AMERICAN THE WEALTHY NATION can just give away the farm to other nations is past.

America is NOT a wealthy nation, right now.

We are the world's largest DEBTOR nation.

If we do not invest in AMERICAN INDUSTRY, then inflation is only a small part of the problem we're going to be facing.

Because a recently empoverished well armed people who think they are not peasants and slaves are easily driven into very unpleasant modes of thinking.

The economic destruction of Germany gave us Hitler.

Now imagine what wierdness the AMERICANS can come up with if ENOUGH OF US FIND THAT WE HAVE NOTHING TO LOSE!

A few points.

Inflation will happen when too much money chases too few "things". The determination of the actual quantity of "things" is usually a perception, so shortages or gluts are usually "perceived", not real. And usually what people perceive will be the situation in the near future, not RIGHT NOW.

Thus the oil price shock last year. The nutty rise in housing prices. The run up in foodstuffs, and so on...

Want to make some money? Take the ACTUAL cost of making something and then delivering it to market. How much does it REALLY cost to grow a bushel of corn? Then harvest it, store it, and then ship it to the mill? Take that number, add in the historically standard profit margins for producers and shippers and you get something approaching the real VALUE of a "thing". I said repeatedly that the "value" of oil has always been somewhere in the $40-$50 barrel range. We live with a nearly constant speculative pressure on oil so the equilibrium price in this day and age is about $60-$65 or so. Anything deviating much from that is "speculative" and the basis for making a quick profit in that commodity. You can do that for corn, soybeans, cotton, palladium, etc....

You can't for gold, though. Gold is unique....because it still has a numismatic component to it.

 

[Zoomie1980]

Zoomie

Most gold consumption is for jewelry and investment demand.

Supply and demand statistics > World Gold Council, gold market research, reserve asset and investment statistics

Well, I was considering jewelery and industrial usages together..... Something other than just investment bullion. But jewelery can always be melted down to bullion I suppose

 

[Terral]

Hi Zoomie and El Toro:

You can wipe out most of the liabilities by raising the retirement age to 72. There is no reason not to do this. When Social Security was changed in the 60s, the average expectancy was 65. The amount actually paid out wasn't that large. Today, the average life expectancy is 77. So we will change it to 72.

The reason why we will do this is because the other option is inflation, which will erode the value of Social Security anyways. Seniors live on fixed incomes. Inflation is bad for them. So they will have the option of inflation or changing social security.

But that is a different issue. It will not cause hyperinflation even if we have all these liabilities.

The single biggest source of governmental budget shortfalls and bad large corporate balance sheets are PENSIONS.

Listen to El Toro! His thesis says Hyperinflation will NOT come to America, even though all of these people (my Topic from Post #30) draw exactly the opposite conclusions from the evidence. Seniors and Social Security are adding to the unfunded liability BLACK HOLE (story) that surpasses 100 Trillion Dollars (story and story)!!!! This Bullheaded El Toro Zombie continues pushing the 'negative thesis' that Hyperinflation will NOT come to America, which is perhaps the most idiotic thing anyone can say in light of the growing National Debt Black Hole that far exceeds 100 Trillion Dollars (story)! We have a corrupt Federal Government running multiple sets of ‘cooked books’ in order to give We The Sheeple the false notion that the National Debt is around 10 Trillion Dollars or less than 1/10th of the real trouble coming down the tracks. The error of Toro’s negative thesis is that the unfunded liability bubble is just one problem added to the printing and spending and printing and spending leading the USA to Financial Armageddon. Add to this problem that the Govt is short 44 percent of tax revenue for the month of April (story) and Obama is trying to grow Govt at the very same time!!!

The U.S. Economy is shedding JOBS by about a half million people EVERY MONTH, which means more Americans will default on mortgages, go into bankruptcy and foreclosure and into Tent Cities all over the USA. Someone tell me how you raise taxes on the unemployed with Illegal Aliens EVERYWHERE sending our money to all corners of God’s Green Earth. If tax revenue is down 44 percent in April, then Social Security revenue is down and heading south the very same way. Trying to raise taxes on fewer Americans with the JOBS is only going to raise prices and lower the demand for American goods and services abroad and the American Consumer Base contracts again and sheds even more JOBS. All of this printing and spending and printing and spending Bailout/Stimulus Stupidity represents Bushie/Obama attempts to prop up an IMPLODING U.S. Economy that has been on the ropes since December 2007. Obama is the New World Order Puppet, who replaced Senor Bushie, as the man with all of his fingers stabbed into the holes in the Great Hyperinflation Dam that is definitely going to BURST. We are watching the demise of the Great American Empire where the captain and crew are moving chairs around in preparation for going down with the ship.

And not just pensions, but pensions that were designed on actuarial statistics from 30, 50, 70+ years ago. That is true with Social Security, GM and Chrysler, and California, and countless municipalities that have ridiculous police, fire, and civil service pensions. Until we realize we have to tie pension benefits to life expectancy we will continue to have major budget and corporate profit issues.

Until ‘we’ realize???? You guys cannot be this stupid!!! Public Pensions in the U.S. are now underfunded by more than 1 Trillion Dollars (story)! The California Public Employees’ Retirement System has been reporting 7 to 8 percent rates of return for the past eight years, but when the markets tanked it lost 27 percent. Changing the age requirement rules in the middle of the game is NOT going to push rates of return into the black, when we are looking at the signs of an IMPLODING Economy. Public Pensions in the USA had a total liability of almost 3 Trillion Dollars and that hockey stick is pointing in the wrong direction!

Inflation and deflation are really simple things. If you have more "stuff" than is needed or at least "perceived" to be needed, you will have DEFLATION in that "stuff". Be than monetary supply, commodities, finished goods or services....

Holy Molies . . . :0) All of this printing and spending and printing and spending is inflating the number of U.S. Dollars in circulation and ‘deflating’ the value of each dollar. This is a completely different scenario from house price deflation that sees home prices going DOWN into the ground right along with mortgage-backed security portfolio values of ALL the banks. Inflation of the currency will eventually lead the USA into a Hyperinflation Tsunami, NOT simply because the out-of-control FED is printing up Trillions and Trillions and Trillions of worthless dollars, but because the foreigners holding and buying our DEBT will lose confidence in the USA over inabilities to pay the rising interest payments (“Global Systemic Crisis Alert – Summer 2009: The US Government Defaults On Its Debt” = story). In other words, we have lines of ‘destruction’ converging for the U.S. Economy ‘and’ the U.S. Dollar ‘and’ Global Confidence in USA ability to make even the interest payments on the 100+ Trillion-Dollar National DEBT. The USA will float along on a fake sea of tranquility, so long as foreigners continue drinking from the Obama Kool-aid Fountain of Deception; just like day traders keeping the stock markets artificially high, when in reality the Great American Ship Titanic is about to go belly up . . .

El Toro is trying to prove a negative thesis (No Hyperinflation In USA), when all of the evidence says exactly the opposite and he is drinking more Obama Kool-aid than anyone here ‘and’ marching around in a drunken stupor to beat the Loyal Bushie/Obama Band . . .

GL,

Terral

 

[Toro]

Until ‘we’ realize???? You guys cannot be this stupid!!! Public Pensions in the U.S. are now underfunded by more than 1 Trillion Dollars (story)! The California Public Employees’ Retirement System has been reporting 7 to 8 percent rates of return for the past eight years, but when the markets tanked it lost 27 percent. Changing the age requirement rules in the middle of the game is NOT going to push rates of return into the black, when we are looking at the signs of an IMPLODING Economy. Public Pensions in the USA had a total liability of almost 3 Trillion Dollars and that hockey stick is pointing in the wrong direction!

You fail - unsurprisingly - to understand two things. First, you do not understand how liabilities are calculated. If you did, you would not have said that changing the age of qualification does not matter. It certainly does matter. Projected liabilities is calculated as future cash flows discounted back to the present. If someone who is 65 years olds and is expected to live to 80, that person will receive benefits for 15 years. However, if that person cannot receive benefits until 72, then that person can only receive benefits for 8 years. If someone is 65 right now and is expected to receive $20,000 a year, and the discount rate on those earnings is 5%, his liability is $207,593. However, if he cannot receive benefits for another 7 years, his liability is $91,866. If you moved the age of retirement up to 80, and his expected life span is 80, then his expected liability is $0. So, as the math says, you reduce the liabilities by increasing the age before people can receive the benefits.

Second, there is a difference between state government employee pensions and social security. State government employee pensions are negotiated with the employees. Social security is not. States do not issue currency, unlike the federal government. States can offload those liabilities by converting their pension plans from defined benefit to defined contribution, i.e. like a 401K. This is what several states have already done.

There is no question that unless something is done, the liabilities of social security and medicare will become serious problems. But those problems can be eliminated by changing the laws. They can all be eliminated by the stroke of the pen. The question is whether or not the American people have the political will to do so.

 

[Toro]

El Toro is trying to prove a negative thesis (No Hyperinflation In USA), when all of the evidence says exactly the opposite and he is drinking more Obama Kool-aid than anyone here ‘and’ marching around in a drunken stupor to beat the Loyal Bushie/Obama Band . . .

Again, you have yet to demonstrate how hyperinflation is going to happen. There has to be a mechanism for inflation to occur, let alone hyperinflation. All you do is post platitudes and youtube videos.

There are only a few ways for inflation to occur - the volume of reserves and credit in the banking system must be expanding, the velocity of money must be expanding, or the government must be printing more money. As we have seen, the volume of credit is collapsing and reserves in the system are not enough to offset expected losses; money velocity has collapsed; and the amount of currency in circulation has not risen. Right now, the economy is in deflation, not inflation.

 

[Terral]

Hi Toro:

You fail - unsurprisingly - to understand two things. First, you do not understand how liabilities are calculated . . .

[ame=http://www.youtube.com/watch?v=s2THs3oNooM]This El Toro Guy Cracks Me UP!!!![/ame]

GL,

Terral

 

[Toro]

You don't. Or at least you haven't demonstrated it here.

 

[Toro]

Here is further evidence against hyperinflation.

The IMF's authoritative Currency Composition of Official Foreign Exchange Reserves (COFER) report last week indicated that the dollar's share of global reserves (where the allocation is reported) rose to 65%, to stand at its highest since 2007.

http://www.thestreet.com/p/_search/rmoney/currencies/10534879_2.html

You cannot have a dollar run if central banks continue to snap up dollars, even though we have gone through the worst of the crisis. You would have thought that if central banks were going to dump dollars en mass, the meltdown of the global financial system would have been the reason to do it. They have not. In fact, they have done the opposite.

 

[gonegolfin]

OK, it is time to put an end to this silliness.

This has evolved into a bit of silliness, relative to what was a good initial post by Toro (I have been away and missed all of this). In context, this would probably be a good time for folks (that are interested in this topic), to re-read my December and January articles. I have a few comments here and will comment on some other posts later. But let me set the record that I also do not believe we are headed for hyper-inflation, but are headed for some painful inflation. The folks that typically scream about hyper-inflation are those that are numbed by the "printing money" headlines they see, but have a misunderstanding of what it actually means. Terral is a perfect example. BTW Terral, I am not a supporter of the Federal Reserve ... I am against it.

http://www.usmessageboard.com/economy/66033-interpreting-fed-policy.html (December)
http://www.usmessageboard.com/econo...y-supply-money-velocity-and-monetization.html (January)

This is a graph of the monetary base. The monetary base is also known as "high-powered money." It is the total amount of currency in circulation, bank reserves and central bank reserves.

The monetary base consists of currency in circulation (M0) plus bank reserves (reserve balances plus bank vault cash). You were probably thinking of central bank reserves as reserves on deposit with the Fed. But these are simply bank reserves, not central bank reserves.

These are the non-borrowed reserves of the banks, that is not borrowed from the Fed and other banks.

And this number was highly negative until the Fed began injecting unsterilized reserves into the banking system (last September).

But first, let us look at what has actually happened to the money supply. With the massive increase in reserves, has there been a corresponding increase in money?

Certainly not ... and this is what I continue to argue in my writings.

M3 is the broadest definition of money. M3 is M2 plus large time deposits, institutional money market funds, large long-term repurchase agreements and large Eurodollar deposits. Unfortunately, the Fed stopped publishing this data a few years back. The conspiracy theorists say they did this to hide the inflation in the system. The conspiracy theorists may be right.

It makes for good fodder. But I do not think that M3 is a good measure of broad money. I think others came to the same conclusion.

"But the actions of the Fed are planting the seeds of future hyperinflation" is what they will say. Yes, that is true, all else being equal. But things are not equal, and this is why.

First, what is known as "monetary velocity" or the money multiplier has collapsed.

Though related, I believe that these are two separate things. The money multiplier is simply money supply (choose your aggregate) divided by monetary base. This gives you an indication of whether or not base money is moving into the money supply aggregates, not the velocity of money itself (although as I said, they are related). Meanwhile, money velocity is measured by GDP divided by money supply (P = M * V), ... where P is Gross Domestic Product. As you stated, it measures the frequency with which a given unit of money is spent, measured in a specified period of time.

Monetary velocity measures the rate at which money circulates in the economy. Think about an extreme example. Let's say the money multiplier fell to zero. That would mean that all transactions stopped.

When the money multiplier declines, it could mean that the Fed is flooding the system with reserves. In this case, money supply could be increasing and the money multiplier would still be falling. I think that the money multiplier is more of a measure of how the additional reserves (in our present scenario) are or are/not translating into the money supply aggregates.

So why is it falling? Remember those graphs of the banking reserves above? It is because banks are hoarding money. And why are banks hoarding money? Because they believe there are more losses to come and they will need the reserves to cover the losses.

Precisely. I think specifically, they (banks) are aware of the commercial real estate shoe that is about to drop. They know full well the quality of these loans and securities (and others) they have on their balance sheets. This is one reason why I have been shorting commercial real estate.

But there are a couple of other supporting reasons. #1 The Fed continues to pay interest (albeit a small amount) on excess reserves. This helps encourage these reserves to stay on deposit with the Fed. #2 The spread between the treasuries (that the banks are willing to invest in) and the interest paid on excess reserves is quite small. Thus, the banks have less incentive to invest their excess reserves into treasuries (which like lending, would increase deposit money and thus M1).

So all those reserves are being held to pay future costs. This isn't inflationary because that money will disappear. In fact, the $1 trillion in estimated losses approximates the expansion of the Fed's balance sheet.

The reserves will not disappear unless the Fed drains them from the banking system (or currency was withdrawn by depositors). The banks using these reserves to offset losses does not change the amount of reserves in the banking system. But it does mean that the banks will be constrained in investing (Ex. treasury purchases) and making new loans ... which are both operations that increase the money supply aggregates.

As an aside, I should say that some of the Fed reserve creation has had the direct effect of creating new deposit money (adding to money supply). Whether or not reserve creation results in simply an increase in reserves (and base money) or an increase in reserves and deposit money (and thus money supply) depends on the nature of the transaction and the counter-party involved. Much of the reserve creation thus far has been directly with domestic banks (and for their own accounts). Thus, no increase in money supply. Some of the operations have also been with primary dealers that are commercial banks (selling from their own account). Again, no increase in deposit money. However, if the primary dealer is simply a broker-dealer (not a bank) or the bank is foreign, deposit money is increased. Additionally, if the counter-party is a non-bank (Ex. a pension fund) ... even when the transaction is settled through a bank, deposit money is created (along with a credit by the Fed to reserves held at the Fed by the member bank).

Is inflation coming? Probably. There will be no inflation if the government starts withdrawing liquidity, i.e. reserves, from the financial system. Historically, however, there has usually been a lag between when monetary policy should and does work. Thus, it is likely that the Fed will wait too long to start tightening the money supply, which would lead to inflation down the road.

I should mention another item here that I do not see folks in the financial community discussing (I touched on it in the December article), which is another avenue for inflation. The composition of the Fed balance sheet is declining in terms of quality. I think that this may ultimately be the more serious problem, as opposed to the sheer size. If the Fed were to drain reserves by selling some of these non short term treasury assets, the price that these assets would fetch would not be enough to drain the amount of reserves initially created when it purchased them. IOW, simply the Fed saying that it will drain reserves (and then execute ... even with perfect timing) is not enough (with the prices of their assets falling). This will become a serious problem as MBSs, longer term treasuries, and other assets held by the Fed decline in value (especially as interest rates rise, which they will).

I think there is a decent chance (as I wrote back in December) that the Fed will eventually issue its own interest bearing debt ... essentially refinancing the liability side of its balance sheet. But this would require congressional approval and a change to the Federal Reserve Act. It would also create a number of interesting new problems. An alternative would be the Fed dumping all of its losses on the Treasury.

BTW, I certainly agree on the Fed lag. Their timing is never on.

Brian

 

[Terral]

Hi Toro:

Once again El Toro is trying to prove a negative thesis using very little in the way of credible evidence:

Here is further evidence against hyperinflation.

Here is further evidence that Hyperinflation is on the horizon:

[ame="http://www.youtube.com/watch?v=xbUIlH0stSc&NR=1"]Preparing Americans For Hyperinflation[/ame]

The Stupid Americans allowing the establishment of the Federal Reserve is reason #1 that the USA will be destroyed (my Topic). Learn how to Survive The Coming Collapse 2009 here.

GL,

Terral

 

[wimpy77]

thank you for another great post gonegolfin.