Australian Politics Forum - Bond Bubbles and Hyperinflation next in the GFC

Sappho

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Bond Bubbles and Hyperinflation next in the GFC
Aug 24^th, 2010 at 11:55am

excerpts
http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen

Quote:

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

This is to help you understand the difference between inflation and hyperinflation. Although the author says that they look the same, I actually disagree. Hyperinflation is born of different economic triggers and is far more frantic and destructive

Quote:

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

This explains the bond bubble which is not only a US issue but also a European issue. The difference between the two economies is that Europe is looking to avoid a hyperinflation outcome through austerity economics but the US is not.

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Sappho Gold Member Offline OzPolitic Posts: 1406 Gender:	Re: Bond Bubbles and Hyperinflation next in the GFC Reply #1 - Aug 24^th, 2010 at 12:02pm you will have to check out the link to understand further the implications because when I tried to post more excerpts, the editing function determined certain terms used to be spam.
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perceptions_now

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #2 - Aug 24^th, 2010 at 3:26pm

Sappho wrote on Aug 24^th, 2010 at 11:55am:

excerpts
http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen

Quote:

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

This is to help you understand the difference between inflation and hyperinflation. Although the author says that they look the same, I actually disagree. Hyperinflation is born of different economic triggers and is far more frantic and destructive

Quote:

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

This explains the bond bubble which is not only a US issue but also a European issue. The difference between the two economies is that Europe is looking to avoid a hyperinflation outcome through austerity economics but the US is not.

There is In-flation, Hyper-in-flation, Stag-flation & De-flation. We have experienced the standard in-flation Globally, for quite some time, with ocassionally the other 3 making a short term appearance, locally & rarely Globally.

We now have Global De-leveraging, which in turn is making way for De-flation, which the US Federal Reserve is desperate to avoid, as they have seen what can happen, simply by looking at the Japanese experience 1990-2010.

However, history does not do exact duplications and the current situation is different to the Japanese experience, in a number of aspects and so the outcome of current events will also differ.

I think that the 2nd leg of this GFC is now under way and another substantial fall on world share markets is likely by the end of this year, probably around October.

Over this period immediately ahead, it is likely that De-flation will be with us, Globally. However, at some point and in some places, Hyper-in-flation may also get into the act and the scenario presented in this article is quite plausible, particularly for a country such as the USA.
http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen

The US$ is the Global currency, Oil is priced almost exclusively in the US$ and the US Deficits & Debts are now racing, out of control. The US$ is also regarded as THE SAFE HAVEN currency, so it is now rising against a background of rising fear, as the prospect of a deeper Recession looms.

That said, at some point, the realisation will dawn that neither the USA or its $ are actually safe and at that point, the US$ will De-value substantially, either deliberately or by accident or the USA will De-fault on its Debt.

Under either scenario, our goose is cooked!

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Sappho

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #3 - Aug 24^th, 2010 at 5:35pm

perceptions_now wrote on Aug 24^th, 2010 at 3:26pm:

There is In-flation, Hyper-in-flation, Stag-flation & De-flation. We have experienced the standard in-flation Globally, for quite some time, with ocassionally the other 3 making a short term appearance, locally & rarely Globally.

Whilst I or the article do not suggest that Hyperinflation will impact all nations affected, I and the article are suggesting that it will impact the US.

Quote:

We now have Global De-leveraging, which in turn is making way for De-flation, which the US Federal Reserve is desperate to avoid, as they have seen what can happen, simply by looking at the Japanese experience 1990-2010.

Deflation, Inflation and Stagflation are all related to supply and demand economics. Hyperinflation relates to the lack of faith in a currency used within supply and demand economics. So it is perfectly reasonable to deflate as an economy whilst at the same time suffering hyperinflation.

Regarding Japan: I find it interesting that the US think they can apply the same kind of quantitative easing and expect to succeed. They can't of course, because in the Japanese situation savings were collateral for Govt. debt, whereas the people in the USA don't save much.

Quote:

I think that the 2nd leg of this GFC is now under way and another substantial fall on world share markets is likely by the end of this year, probably around October.

Funny you should mention that. The Hindenburg Omen has been seen again... that is, sharp rises and falls in same day trading of about 70 to 80 points has been noted 3 times in the last 2wks. This Omen when seen tends to portend in approx 77% of cases, a market crash within the next short time... about 20 days.

Quote:

Over this period immediately ahead, it is likely that De-flation will be with us, Globally. However, at some point and in some places, Hyper-in-flation may also get into the act and the scenario presented in this article is quite plausible, particularly for a country such as the USA.
http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen

Yeah... I know. It's the same article I took excepts from and also quoted. Thing is, it makes not mention of Europe suffering the same fate. Nor will it since they have been proactive in engaging austerity measures to bring down their sovereign debt obligations.

Quote:

The US$ is the Global currency, Oil is priced almost exclusively in the US$ and the US Deficits & Debts are now racing, out of control. The US$ is also regarded as THE SAFE HAVEN currency, so it is now rising against a background of rising fear, as the prospect of a deeper Recession looms.

Indeed, when the run on treasuries is in full flight the cash from those sales will be equally worthless and so exchanged for commodities such as oil. Now what happens when there is hyper demand for commodities such as oil? The price inflates and inflates at a hyper rate. As that article points out, it would be no surprise to see the gallon rise from $10US to $150US in a week or just over a week.

Now that has an impact on every bowser globally. Just imagine paying 5 to 10 times more for your petrol in a matter of days. And it is not only petrol for which oil is used... there are the petrochemicals used in agriculture... so expect food prices to rise also.

That said, although the rest of us wont dive into an hyperinflation crisis, we will feel the impact of the hyperinflation suffered by the US.

Quote:

That said, at some point, the realisation will dawn that neither the USA or its $ are actually safe and at that point, the US$ will De-value substantially, either deliberately or by accident or the USA will De-fault on its Debt.

It will begin as a run on treasures. Everyone will want to dump their treasuries and convert the cash into something of value.

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hawil

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #4 - Aug 24^th, 2010 at 5:38pm

That said, at some point, the realisation will dawn that neither the USA or its $ are actually safe and at that point, the US$ will De-value substantially, either deliberately or by accident or the USA will De-fault on its Debt.

Under either scenario, our goose is cooked!

This would also be the end of the capitalist system.

Argentina and Russia defaulted some years ago, how much did the bondholders get in the dollar?
Another thing is, that to every debit there is a opposite credit, so who are the creditors.
I,am no financial expert, but I think Australia will get into trouble with too much money in the super funds looking for a place to invest.
When Argentina and Russia defaulted, the main losers were the German and italian private super funds.

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Sappho

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #5 - Aug 24^th, 2010 at 5:53pm

hawil wrote on Aug 24^th, 2010 at 5:38pm:

That said, at some point, the realisation will dawn that neither the USA or its $ are actually safe and at that point, the US$ will De-value substantially, either deliberately or by accident or the USA will De-fault on its Debt.

Under either scenario, our goose is cooked!

This would also be the end of the capitalist system.

Argentina and Russia defaulted some years ago, how much did the bondholders get in the dollar?
Another thing is, that to every debit there is a opposite credit, so who are the creditors.
I,am no financial expert, but I think Australia will get into trouble with too much money in the super funds looking for a place to invest.
When Argentina and Russia defaulted, the main losers were the German and italian private super funds.

Who are the creditors? Japan, China, Hedge Funds/ Super Funds and Commercial Banks in the main.

One would hope that Super Funds can see the coming calamity and get in early to sell their treasury holdings and convert the cash to commodities.

Otherwise, I would not be too worried about AU national debt, because like Japan our savings (super funds) are collateral for our debt. Do be worried however, if the govt. do decided to get their dirty mits on our super savings as has been speculated in the past by Krudd.

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perceptions_now

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #6 - Aug 25^th, 2010 at 11:33am

Sappho wrote on Aug 24^th, 2010 at 5:35pm:

perceptions_now wrote on Aug 24^th, 2010 at 3:26pm:

There is In-flation, Hyper-in-flation, Stag-flation & De-flation. We have experienced the standard in-flation Globally, for quite some time, with ocassionally the other 3 making a short term appearance, locally & rarely Globally.

Whilst I or the article do not suggest that Hyperinflation will impact all nations affected, I and the article are suggesting that it will impact the US.

Whilst I agree that direct Hyper-in-flation is possible in the USA, it will likely follow after De-flation and whilst Hyper-in-flation may not afflict other nations directly, but they will be affected in-directly by the flow on effects from the USA!

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perceptions_now

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #7 - Aug 25^th, 2010 at 11:49am

hawil wrote on Aug 24^th, 2010 at 5:38pm:

That said, at some point, the realisation will dawn that neither the USA or its $ are actually safe and at that point, the US$ will De-value substantially, either deliberately or by accident or the USA will De-fault on its Debt.

Under either scenario, our goose is cooked!

This would also be the end of the capitalist system.

Argentina and Russia defaulted some years ago, how much did the bondholders get in the dollar?
Another thing is, that to every debit there is a opposite credit, so who are the creditors.
I,am no financial expert, but I think Australia will get into trouble with too much money in the super funds looking for a place to invest.
When Argentina and Russia defaulted, the main losers were the German and italian private super funds.

Current events, will certainly bring to a close, the existing Capitalist franchise and most likely bring massive change to the Political arena!

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Sappho

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #8 - Aug 25^th, 2010 at 12:10pm

perceptions_now wrote on Aug 25^th, 2010 at 11:33am:

Sappho wrote on Aug 24^th, 2010 at 5:35pm:

perceptions_now wrote on Aug 24^th, 2010 at 3:26pm:

There is In-flation, Hyper-in-flation, Stag-flation & De-flation. We have experienced the standard in-flation Globally, for quite some time, with ocassionally the other 3 making a short term appearance, locally & rarely Globally.

Whilst I or the article do not suggest that Hyperinflation will impact all nations affected, I and the article are suggesting that it will impact the US.

Whilst I agree that direct Hyper-in-flation is possible in the USA, it will likely follow after De-flation and whilst Hyper-in-flation may not afflict other nations directly, but they will be affected in-directly by the flow on effects from the USA!

What are you talking about?

Whilst currency is becoming valueless through hyperinflation, what is happening to the economy? Is it growing at a hyper fast speed? Is it merely growing? Is it stagnating? Is it deflating?

I don't understand what you mean. Hyperinflation relates to the debasing off currency. Inflation, Deflation and Stagflation relate to the health of the economy.

currency and economy are two different things. so again... whilst currency is debasing due to hyperinflation, what is the economy doing.

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perceptions_now

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #9 - Aug 25^th, 2010 at 12:11pm

Sappho wrote on Aug 24^th, 2010 at 5:53pm:

hawil wrote on Aug 24^th, 2010 at 5:38pm:

That said, at some point, the realisation will dawn that neither the USA or its $ are actually safe and at that point, the US$ will De-value substantially, either deliberately or by accident or the USA will De-fault on its Debt.

Under either scenario, our goose is cooked!

This would also be the end of the capitalist system.

Argentina and Russia defaulted some years ago, how much did the bondholders get in the dollar?
Another thing is, that to every debit there is a opposite credit, so who are the creditors.
I,am no financial expert, but I think Australia will get into trouble with too much money in the super funds looking for a place to invest.
When Argentina and Russia defaulted, the main losers were the German and italian private super funds.

Who are the creditors? Japan, China, Hedge Funds/ Super Funds and Commercial Banks in the main.

One would hope that Super Funds can see the coming calamity and get in early to sell their treasury holdings and convert the cash to commodities.

Otherwise, I would not be too worried about AU national debt, because like Japan our savings (super funds) are collateral for our debt. Do be worried however, if the govt. do decided to get their dirty mits on our super savings as has been speculated in the past by Krudd.

Let me put it this way, Hedge /Super Funds & Banks are still locked into the current commercial paradigm of stort term returns, so they will follow what "they perceive from past experience", as the best short term returns, until the herd mentality takes over.

China, on the other hand, are already lessening their support of US Treasury, by around US$100 Billion in the last year.

Further, I would not bank on (pun intended) Hedge /Super Funds or Banks, seeing the writing on the wall and moving a substantial amount of their investments out of the way.
In fact, if they did so, it may actually speed up the decline in shares, by removing funds from that arena?

Now, allow me to roam a little?

I suggest that most of the probably, even likely scenario's have occurred to "them", those who are the real holders of power!

I also suggest that co-incidences don't happen too often!

I also suggest that they will have a number of contingency plans!

Finally, I suggest that it is likely that an emergency will arise and a De-fault or De-valuation will take place!

Now, let me go back to the first point, where most of the likely scenario's have occurred to them and in that case they would have known for quite some time that a number of major factors would come together, in the period around 2000-2050, those being -
1) Peak Essential Resources, including Oil, to some extent Coal & other essential resources.
2) Population Aging, the Baby Boomer Bust.
3) Population Decline, as is already being experienced in Japan & parts of Europe.
4) And, most importantly climate Change, which would have dramatic affects on the Absolute Essentials of Food & fresh Water, but also in the most Essential resource of all, the possible Extinction of humanity.

So, given that most scenarios have occurred to "them" and that co-incidences don't happen too often and that agreement between various interest groups & indeed countries was/is unlikely, perhaps we should wonder what contingency plans have been enacted already and what still awaits us?

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Ex Dame Pansi

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #10 - Aug 25^th, 2010 at 3:31pm

p_n<<perhaps we should wonder what contingency plans have been enacted already and what still awaits us?>>
................................................................................
......
I would be most surprised if anyone in our bureaucracy has any contingency plan in place, or has even considered the need for one.

I think it will be every man for himself (and woman). We are in the fortunate position of being forewarned thanks to the few economists that had their finger on the pulse.

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hawil

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #11 - Aug 25^th, 2010 at 3:51pm

Now, allow me to roam a little?

Allow me to follow suit

China is almost in a no win situation, they lent the USA so much that if they start pulling their investments out too fast,they will devalue them and finish up losers, the same if the hedge/super funds start selling the equities to fast; the first out the door maybe the winners.
It actually happened not long age, remember the shares of some compaqnies losing 50% of value and then within 18 almost doubling, although not reaching their previous levels, but there big winners and big losers.
The people who did not lose were the managers of others peoples money.
Being a cynic, I sometimes wonder if the managers are not selling shares that they manage at low point and buying at the same time on their own behalf, and do the opposite when the bulls are running; would be very hard to find out.
Now if capitaism should collapse, what can it replace, Socialism or call Communism would definitely be better if it were not run by people who are even more greedy than the capitalists, and the workers do not think that all the lunches are free.
The number of Russian billionaires is a good example, and the richest man in the world comes from Mexico, but in Mexico everybody is millionair judging by all the Americans who want to go iullegally to work in Mexico.
Now I,am being a bit facetious.

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perceptions_now

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #12 - Aug 25^th, 2010 at 5:05pm

hawil wrote on Aug 25^th, 2010 at 3:51pm:

Now, allow me to roam a little?

Allow me to follow suit

China is almost in a no win situation, they lent the USA so much that if they start pulling their investments out too fast,they will devalue them and finish up losers, the same if the hedge/super funds start selling the equities to fast; the first out the door maybe the winners.
It actually happened not long age, remember the shares of some compaqnies losing 50% of value and then within 18 almost doubling, although not reaching their previous levels, but there big winners and big losers.
The people who did not lose were the managers of others peoples money.
Being a cynic, I sometimes wonder if the managers are not selling shares that they manage at low point and buying at the same time on their own behalf, and do the opposite when the bulls are running; would be very hard to find out.
Now if capitaism should collapse, what can it replace, Socialism or call Communism would definitely be better if it were not run by people who are even more greedy than the capitalists, and the workers do not think that all the lunches are free.
The number of Russian billionaires is a good example, and the richest man in the world comes from Mexico, but in Mexico everybody is millionair judging by all the Americans who want to go iullegally to work in Mexico.
Now I,am being a bit facetious.

Yes, China is, as they say, between a rock & a hard place, they will be hurt if they stay & hurt if they go.

That said, they do seem intent on slowly reducing their USA exposure, as has been shown by their $100 Billion reduction, over the last year, which I suspect they will continue at pace quick enough to recover what is possible, but hopefully not so quick as to bring down the house of cards, too early!

Finally, there may need to be a new Capitalism MK2, something with a few alterations, so that it can work in the new Political & Economic paradigm?

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hawil Gold Member Offline Australian Politics Posts: 1345	Re: Bond Bubbles and Hyperinflation next in the GFC Reply #13 - Aug 26^th, 2010 at 8:49pm Finally, there may need to be a new Capitalism MK2, something with a few alterations, so that it can work in the new Political & Economic paradigm ? What do you have in mind; please elaborate.
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qikvtec

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Re: Bond Bubbles and Hyperinflation next in the GFC
Reply #14 - Aug 26^th, 2010 at 10:58pm

Interestingly people are lining up to commit financial suicide purchasing international bonds, especially US treasuries, like they're going out of style.

Hyperinflation in the states has the potential to do serious financial damage to China, especially if the fed cranks the usual lever to counter it; rates. Pretty ordinary time to own a ~USD$1Trillion in fed paper.

With rates at historic lows with nary a risk premium in sight, bond values can only go one way when rates inevitably move up.

Fortunately consumer confidence in the US is shot to pieces and unemployment is rampant.

It'd be interesting to see how China would react to the collapse of the US Bond Market; wouldn't be the first bond crisis; but they'd expect their pound of flesh I'd wager.

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