Please try and convince me that I haven’t lost my mind, but I have come to the conclusion that NAMA could be an accidental masterpiece of economic sorcery.
Hyper-inflation is inevitable.
…resulting in NAMA’s debt being effectively eliminated
…preventing Ireland from becoming a serfdom owned by outside owners.
It also has the benefit of returning ownership of land and property from corrupt developers to the state (albeit at a slower rate than allowing the banks to have failed would have occurred).
Let me explain:
The main premise of my argument is that hyper-inflation is inevitable before the end of the decade, possibly sooner. Even if the Germans enforce strict anti-inflationary policies and the Euro survives I can see hyper-inflation happening. This is because hyper-inflation in the US is inevitable, and there will consequently be huge political pressure on the ECB to “revalue” the Euro to protect the Euro-area’s exporters (read: start the printing presses). Central banks across the world will be out-competing themselves in a race to protect their own exporters.
Hyper-inflation has the effect of effectively eliminating debt. The tens of billions of euro that Ireland has borrowed to buy up the NAMA loans will become very easy to pay back.
Without NAMA the banks would have gone bust, and the resulting liquidations would have meant that huge amounts of Ireland’s land and housing stock would have been bought up by outsiders. These owners would have collected their monthly rents from Irish people for generations.
Hyper-inflation ain’t pretty. But if you assume that it is inevitable, then a NAMA vehicle is the best course of action for a nation.
Extend, pretend and repay during the hyper-inflation. Ireland’s assets remain owned by the state.
To clarify - I don’t believe happy days are coming - just that NAMA+hyperinflation will make things better than the alternative of liquidating the banks and the resultant firesale of land and property to outsiders.
And fwiw, I believe that your strategy of borrowing heaving for property could very well pay off, but only if you can survive higher interest rates. Ireland (and other states) can survive higher interest rates by borrowing even more money from the now corrupted ECB. Similar to Greece’s recent bailout, where they borrowed more money simply to repay previously borrowed money.
I believe hyperinflation is inevitable because politicians will always take the easy way out and print money if they can. Deflation will probably hit first, but Ireland can simply borrow more to avoid bankruptcy.
Does anyone doubt that NAMA is a great strategy if you know hyperinflation is coming?
Try selling that to the Japanese, who have been fighting continuous deflation since 1990.
The Americans and the Europeans are applying quantitative easing and stimulus packages just as the Japanese have tried for twenty miserable years. All it does is stem the tide of deflation.
The reason is simple - the consumer engine is broken - just as it was in Japan. Without high spending consumers the whole engine stops. All the Japanese consumers have done since 1990 is save. Look at the latest US and EU consumer saving data. Consumer saving is soaring. No consumer demand - no inflation.
All the newly minted money being pumped into the economy is just sitting in accounts or flowing into hedge funds for casino operations.
The plan is not for hyper-inflation but double digit inflation say 10-11% (like the 1970’s)
but the U.S. may not achive this because the debt burden this time round is just astronomical (Japanese experience),
so they’ll need a master stroke (change the rules of the game) say hello to Bretton Woods 3.
Let’s all hope this works out well for them because if they get it wrong
I am not saying hyperinflation is a good thing. Others have rightly pointed out that it comes with very dire consequences.
My point is that if you know that hyperinflation is coming then NAMA is a great thing to do. Nobody has disagreed with this yet, so I assume everyone agrees with that argument? The only thing left to debate is whether hyperinflation is inevitable?
The problem with hyperinflation of the currency, is that it presumes debtors’ ability to get hold of money during this hyperinflationary period. The reality is that it will be incredibly difficult to make money during hyperinflation. It will be challenging enough to obtain food and other essential things with prices rising in real time, which is what happens during hyperinflation. Even with “normal” high inflation (which is qualitatively distinct from hyperinflation), wages never quite keep up with the inflation of the cost of living, which means that debtors are constantly struggling and if anything are worse off.
However, the bankrupt developers will be able to sell the houses or other assets they put in their wives name thus paying off debts is likely to become very easy. Obviously this depends on the magnitude of their debts and on how many tangible assets they still hold. For the rest of us wage slaves, inflation only helps debtors if wages keep up with inflation — in other words, inflation only makes it easier to pay off debts if wages are inflated by at least the same factor as the general cost of living. If the annual inflation rate is 20%, paying off debts will indeed be easier if wages also grow by at least 20% per year.
Wage growth very seldom keeps up with inflation!
Money is still being destroyed faster than it is being created. Much of this money didn’t exist in the first place as it was the result on inflating asset values rather than as a result of an asset changing hands at a particular price. Some of it clearly did change hands and was siphoned off in bankers’ bonuses, for example. I reckon, though, that the main effect of the bubble bursting has been a notional loss of wealth as asset prices have tumbled. For the banks with highly leveraged balance sheets, this is a real problem as the money they have created on the back of their assets - loans they have given out - is also going bad as defaults rise; so the banks are being hit with twin barrels of deflation in their asset portfolios and bad debts. Meanwhile, governments are backstopping their liabilities to prevent this deflation from transmitting to bank creditors. Money from the sale of sovereign debt is being substituted for deflating private sector assets.
Sovereign assets are high powered (i.e. they are money good), but they have a number of drawbacks, IMO. They have an immediate demand side - money is just moved from one place to another. So they are not really addressing the problem of asset deflation as they are digging a new hole to fill in an old one. At the end of the day, there is still a hole. In the meantime, nervousness about the quality of sovereign debt is leading to ‘real’ money restricting purchases. There is a flight from some sovereigns (e.g. Greece) by the traditional buyers - insurance companies and pension funds. This has led to the situation where the banks that are being bailed out by sovereign money are providing that money by buying sovereign debt (whether their own or some other country’s - a gigantic game of pass the parcel).
The Central Banks are having to step in and provide this money through unlimited repo operations where they take these circular assets and provide cash for them, usually at less than the coupon. An additional step they are taking is to intervene in sovereign debt markets to keep yields down. The problem with this, like with ZIRP, is that there doesn’t appear to be an exit mechanism.
The ECB has been thoroughly corrupted, and is now actively sending counterfeit notes to loser countries in the form of “Solidarity Bonds”. It would be irresponsible of Ireland not to take advantage of the situation. NAMA is the best way to take advantage of the free cash.
Not much I disagree with there, but I don’t see what it has to do with NAMA? It doesn’t matter if countries are in financial difficulties if the ECB keeps on sending them “Solidarity Bonds”. NAMA is the best way to take advantage of the ECB’s impending generosity.