There is a much more convincing case for a Japanese-style deflation to take place rather than inflation.
I can only see massive inflation in the medium to long term. The world has far too much debt and there is no way it can afford to pay it back. We will be left with little option but to default through inflation IMO.
Are you saying the Eurozone is insolvent?
This to me is the big unknown in this crises. We don’t have a national currency anymore, so surely the health of the Eurozone as a whole is actually more important than the health of Ireland, when we consider the likelyhood of runaway inflation in Euros.
What I mean is that, prices may increase in Ireland due to various reasons, but will that mean that the Euro will buy me significanly less across the Eurozone, or just in Ireland? Will the value of my savings be maintained in, say, Germany, France or the Netherlands?
How big is “massive”? Would it be correct to say that someone with a few hundred grand will see that money wiped out as they need it to cover cost of living expenses. So are you talking about having at least tens of million in cash?
And what sort of cash. Is it safe to keep it in EUR or CHF or even USD? Or what?
Why not just a default, with consequent write-offs of debt values and widespread deflation?
I don’t want to come across heavy handed or seem like an expert as I’m not. I only prowse certain websites and interpret the info as I see it. I may be wrong.
The problem here is the same as the US in 1929. There were both creditors not debtors, hence deflation. Although it’s more complicated than that, itulip have an article (which I don’t fully understand) which addresses this issue. Deflation happens to countries with massive savings or is on the gold standard.
Whch currency is the safe haven?
Good question. I don’t know. As I see it paper assets in themselves are the problem hence the eventual run to gold and tangibles. The Yen is up at the moment or so I read, but China, Japan, or any other creditors will be in just as bad shape or maybe worse if the US defaults. Another analogy here is the 1873 depression which apparantly was much worse than the 1929 one. The US took the role of China as the exporter of cheaper goods into Europe (taking the role of modern US). Europe was devastated, but the US was hit much worse when Europe went down. Basically it was an end to the first era of globalisation. Apparantly, globalisations do not end well.
I didn’t want to alarm anyone, but wether you have 4k, 10k 100k or 1 million in savings is better than none at all. Even if you don’t have any savings, people are flexible. You can live with your parents who probably don’t have a mortgage anymore. Hopefully more people come together in times of crisis. When everyone is in the same boat and can’t emigrate since the problem is global then I imagine people will help each other out. Cities might not be the best place to live as cities tend to be anonymous. This is real shtf scenario though, but not out of the question with capital flight.
That’s the US, what about the Euro zone?
Another good question. Not long ago I would have said US capital flight would have fled to Europe. However, since the Euro banks have been involved with the US toxic waste even more so than US banks, this has put the Euro in jepardy. Deutsche bank is rumoured to be insolvent. Too much leverage allround really. I’m not sure about the debtor/creditor situation of the Euro zone. Germany is obviously a net creditor, but if all the Euro zone countries were put together, then I am not sure. But if confidence in the Euro is bad too (due to their banks messing in America), then capital flight has the same possibility with the Euro as well. It isn’t here yet, but keep your heads to the ground. If you have savings, keep them liquid to move at a moments notice. This isn’t investment advice, but if I had savings I would keep 10% in gold. Physical coins or bullion in Switzerland? Don’t know.
And lastly, a little extra titbit which I have found on itulip. The current US situation has an analogy to Germany 1930.
The precedent is not US 1930 or Japan 1990. Both countries were net creditors with large pools of national savings and industrial capacity to tap to use to develop export trade to earn their way back out of an economic hole. A closer analogy is 1930 Germany.
The sequence of Germany’s pre-WWII economic crisis is commonly misremembered as follows:
1. Hyperinflation 2. Depression 3. Hitler elected by angry masses 4. WWII Not so. Here's what really happened. 1. 1921 to 1923: German hyperinflation 1924: Dawes Plan to restructure debt, Rentenmark replaces the Papiermark 1924: Rentenmark backed by land and industrial goods, hyperinflation ends 1924 to 1929: US and British financing pours into Germany, economy recovers 1925: Germany joins the League of Nations 1929: US market crash (FIRE Economy V1.0), US and British investment in Germany ends 1930: German economy collapses Then: 2. Depression 3. Hitler 4. War
So far US creditors have held their ground, but as the US recession and financial crisis deepen and the US transmits demand destruction to its creditors, that ground may give way. After the crash of FIRE Economy V2.0 in 2008 China, Japan, and the BRIC lenders may have to cut off funds to the US just as the US and the UK cut off funding to Germany in 1930 following the crash of FIRE Economy V1.0.
China Cuts 1-Year Lending Rate; Reduces Lending Curb Sept. 15, 2008 (Bloomberg) China cut interest rates for the first time in six years and reduced the amount of cash that some banks are required to set aside after economic growth slowed and amid tumult on Wall Street. The People's Bank of China cut the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio by 1 percentage point at some banks. The changes were in a statement on the central bank's Web site today.
Watch for signs of recession among major US trade partners. When they are no longer able to ship their so-called “excess savings” to the US to fund America’s twin deficits, the FIRE Economy will be no more, and the US will have to find a way to run its economy the old fashion way – by working, saving, and investing.
(FIRE economy is Financial, Insurance, and Real Estate)
We’ve been warned!
Is this why the us went to war in Iraq?? At the time noone could understand why they were so adamant and went on flimsy and fabricated evidence and arguments. Bush etc would surely have known about Americas pending insolvency. I saw a documentary about the dollar and its status as reserve currency and its use in oil trading. The thesis was that the dollars role as global reserve currency was acollausaul house of cards waiting to come down and people were aware of this pending crash for at least a decade.
This is the beginning…
How did the US war in Iraq address the issue of solvency/insolvency? Surely by eating up 100’s of $bns it exacerbated the problem. Sounds like paranoid ramblings to me.
Also, if the US is insolvent (whatever that means for a country that has an independent monetary policy and whose foreign debt is denominated in it’s domestic currency) why are CDS on US sovreign debt not trading at levels consistent with imminent default?
Great posts labasta, thanks for condensing the mass of information. In relation to the US national debt, if the US government continues to pump in money, like into today’s new “Money Market Investor Funding Facility” (link below), how much more foreign credit do you think they have available before inflation sets in?
Heres the kicker though.
If we do get a serious dose of inflation, will the central banks raise rates to counteract its effects, or leave them low enough to the extent that we have negative real interest rates ?
My thoughts are ECB will raise and the FED will leave low.
This was making sense until the bit about Argentina and Iceland. In a recessionary environment suppliers will be desperate for business, they are in no way able to increase prices. If a buyer from Europe approaches a Chinese supplier they are not going to turn him down, I think the Euro will be more stable than almost any currency I can think of in this environment (which is not very stable but a heck of a lot better than the sinking dollar).
Just because the central banks give the banks more money doesn’t mean they will be able to loan it out, they have all been burned and they need to recapitalise and regulatory environments will now be much stricter. Businesses are not going to be looking for loans because they have no collateral and no deposits and no business to go after! So far I can’t see any reason for inflationary environmentary and all for a long drawn out deflationary environment and for this to occur almost uniformly across the world- in US, EU, China, Saudi Arabia, Russia, Sth America-- we are all heading for years of deflation as deleveraging takes effect the global bubbles pop one by one, sell your apartment in Dubai, now! In a broad sense no one wants loans, no one wants to buy anything, no one wants to put money into anything. Simple analysis but that’s what I feel.
I don’t get the inflationary environment either. Maybe in the US where their debts are denominated in USD and they have control over their own currency, but I think this is fundamentally different to the eurozone. For that reason, I’d caution against applying iTulip theories to the eurozone as they are very USD-centric.
In my own opinion, I just don’t see how you’ll get capital flight from, say, Germany. They make stuff that people need, they are a nation of savers, they have a good fiscal position. As Germany goes, so goes the Euro, to my mind. That might be incredibly painful for certain fiscally unresponsible peripheral eurozone economies though.
Any particular places in mind ??
Mind you, Germany and France were the first to break the 3% borrowing limit set by the Maastricht Treaty. Subsequently, they made sure penalty provisions were watered down so it’s hard to blame Portgual or Ireland now coming from that angle.
Is it not true that inflation has already kicked in for emerging and troubled countires, i.e. Argentina, Brazil, Mexico, Hungary, Iceland, etc., etc. The depreciation of currency vs. the dollar in these countries, for whatever reason, would seem to be the main driving force to immediate inflation, the exceptions today would seem to be the Eurozone, China, and Japan, but are they really immune?
If the dollar continues to strengthen for the next year as capital flight continues from emerging and weak countries, would that not continue to drive inflation up in those countries? So deflation for the US and Eurozone, inflation for weaker countries, and who knows what for Aisa?
I thought the iTulip hypothesis was for capital flight from the US to cause inflation.
Just had a look at the Roubini clips from this post. Roubini is firmly of the opinion that we shall have deflation (or “stagdeflation” as he mentions in one interview). He doesn’t see any sign of inflation. Admitidly this is for the US, but his arguements seem to apply to all “developed” economies, so I’d imagine the Eurozone would be similar.
I tend to agree with him that we will get deflation rather than inflation.
I’m not sure about the Eurozone too by the way.
Yes, but at what price?
Here’s a very hypothetical situation. Let’s say all the European banks are hopelessly insolvent. So insolvent, that if we looked at their real books tomorrow the entire European banking system would disappear within a very short space of time.
Very extreme, no?
Wait a minute… Hang on a sec…
Oh, so they wish to now lie about their assets? Right… ok… Yeah… trust is restored. Why are they resorting to lying about their books? What are they hiding? Because it is the poiticians only option to buy time to try and come up with a plan to replace their insolvent banking system.
Do you believe the banks are solvent? They don’t. They aren’t lending to each other.
Nobody believes them. They ly and ly and ly. First the banks themselves don’t believe each other, now the public doesn’t.
Does European financial (Euro) insolvency create confidence for capital markets? No. Capital leaves. Can Germany save it by producing goods for export? I don’t know. I have noi idea how this will pan out. All I think is that those banks which participated in the American financial empire are completely insolvent.
I believe insolvency = strong inflation. If you can show me a country that has become insolvent and experienced deflation then I will think again. There might be one (this isn’t a stubborn challenge). I am not knowledgable in this area. If all countries are insolvent (maybe) then you could say we deflate together, but I don’t think it will work out like that.
Here is a gem of a post by Golem XIV on one of the Guardian articles. Even though I don’t fully understand it, I agree with him:
I found the link for Sarkozy persuading the ECB to reduce rates this month (dated Oct 8th)
What Golem is mentioning is another aspect of the financial debt-as-money scam by the banks: CDSs
Buffet called these weapons of mass destructions.
So let’s try and put all this info together in one post. Not a very detailed post, but an overview.
- We have overindebted (leveraged) consumers in UK, US, Spain, Ireland, Holland, Norway, Denmark.
Even, if they could make money cheap again, the people in these countries would have to become complete debt slaves spilling over into future generations. That game is up now anyway as the fear of the downswing has been here for up to two years. Sarkozy has a bright idea of making the other European countries debt serfs. I am betting that won’t work. Also, the IMF has been failing in recent years as countries like Brazil have paid off all their national debt to the IMF. Damn… can’t tap them for debt either. Maybe Japan and China could go for the money-as-debt trap? I don’t know.
So money-as-debt is in trouble. Maybe money-as-less-debt is the answer? Or money-as-limited-value if we are really desperate.
To understand that money is debt, please take at look at Zeitgeist Addendum (an amazing video, even if you don’t agree with its solution): video.google.com/videoplay?docid=7065205277695921912 (Fast forward to 7 minutes to skip the intro: Modern Money Mechanics 2005)
Also, to understand the “end game” for interest on capital and its expotantial growth function (which must at some time end) please read this thoughtful article and discussion: itulip.com/forums/showthread.php?t=812&highlight=central+banks+buy+treasuries
What does this mean for banks? It means they can’t lend more money to people even when the desperate and greedy little feckers are crying out for debt so that they don’t miss the boat. But why not? Forget 10 times income to buy a house, why not 20? why not 100? Or 1000? Why not a thousand year mortgage? When did the difference between real income and debt become too much? I don’t know. At some stage, there were no people left to tap (read rob). The tide turned in 2006, causing the banks to go potentially or actually insolvent in 2007 and then definitely insolvent in Sep 2008 as their bets on their bets on their debts were called in. KA-POOM! You can thank deregulation for that (both in 1995 and 1999). We could be witnessing the end of money-as-debt.
- So, no 1. brings us to 2007. Now the real fun begins in 2008 as the bets (also known as derivatives) were made on more bets on the debts that are now worth a lot less as real incomes can’t pay them back. I have read that the value of these derivatives is anything from a mere $7 trillion to $63 trillion to over $500 trillion to $1.64 quadrillion! I shit you not. With $63 trillion being the standard figure quoted. World GDP (so-called real wealth figures) is around that figure too (2006): cia.gov/library/publications/the-world-factbook/print/xx.html
These are merely the bets on the debts, not the leveraged debts themselves. US and European Governments are swapping treasuries with these toxic assets (which are now deemed practically worthless, as these bets were compounded as they were made on previous bets if you see what I mean). What are treasuries? If you watched the Zeitgeist video (7 min) you will see that it is money. Real money. Core money creation. What happens when you swap real pure unadulturated money for paper worth no value? The unadulturated money has less value.
The longer this goes on, the less the core money has value. How can this in itself create inflation? This core money is itself a creation of the government/central banks. It adds to the money supply. The treasuries were not bought by the Chinese, they were bought by worthless paper (derivatives). It is the core money which is the basis of the fractional reserve (aka made-up) debt money (leverage is roughly 9 to 1). This treasury money seeps out into the real economy via this fractional reserve lending. This is the money you are now getting if you take out a loan today. It is effectively derivative-created treasury notes-based, rather than Chinese-bought treasury notes-based. But you ask, nobody is taking out a loan today. The European banks are throwing the money back at the European central Bank (deemed safe haven).
Yes, that is true. I believe the excess money is being thrown back, after it is used to keep the banks and their debtor companies (from a bed and breakfast to a multi-national) alive (you know, wages paid, bills paid, lease paid, mortgages issued etc). That last statement is just my belief however. I cannot back that bit up.
They don’t explicitly say they are buying the banks toxic derivative losses, but that doesn’t really matter as giving the fresh treasuries for nothing equates to the same thing.
America is doing the same, but this time, the Times mentions the toxic derivatives by name (dated 21 Sep, before they went ahead and did it): business.timesonline.co.uk/tol/business/economics/article4794879.ece
You’ll note, they say American Tax payers. This seems at odds with swapping derivatives for treasuries. Not exactly. Inflation is itself a stealth tax. I believe they can’t afford to tax Americans any more. It is politically unpalatable and also it would come up against the law of diminishing returns as it would further job losses and the black economy. I much easier way is through inflation.
Now we are getting closer to wrapping this up. I can feel it. But there is a potential stage three, the stage we are now entering. Stage 3 could take place somewhere in 2009/2010. This is the real potential mess; the one which could collapse economies, not merely depress them. This is the end of globalisation stage/capital flight/sudden stop danger.
- As the central banks/governments try to save these toxic banks by keeping them alive by letting them lend their own derivative-created treasuries, they create inflation reducing the value of these treasuries. Who buys treasuries? Let’s find out. Let’s start with the US.
US treasuries are held by Asian countries and oil countries largely. This is from 2005: washingtonpost.com/wp-dyn/content/article/2005/11/18/AR2005111802635.html.
Note that some of the creditor’s money went directly into mortgage lending allowing American (and you will read also later some European) assets to inflate beyond the debtors’ income. What percentage of these creditors are from private funds as opposed to foreign central banks?
So you can see it’s largely Asian central banks doing the propping up of the dollar. What about Europe?
Now I have read that Europe doesn’t have a collective bond market; the individual countries in Europe do.
But does this matter as the European banks have been sucking off the teet of the cheap Chinese money via American mortgage debt and their bets (derivatives). This European sucking then created asset price increases in those countries where the European banks could offload their newly-acquired cheap Chinese leveraged money. Any guesses which countries in Europe they are? Ireland, UK, Spain, Norway, Iceland, Denmark, Holland. Oh yeah baby, these countries’ governments are America’s real friends. Your asset money was CHINESE based! Your banks are AMERICAN! Asset price inflation didn’t work in Germany or France due to anti-bubble laws and people’s attitude to debt. Too bad Sarkozy.
If you propertypinners cashed out before the pop, say thank you very much to the People’s Republic of China and thank you very much to the deregulators of the financial markets (derivatives). Your money is mostly fake with a touch of Asian, but if you buy some gold insurance, you may be able to protect your fake Asian wealth.
We are getting a lot closer to clarity now. Let’s take a look at some European bond markets anyway.
(to be continued).
I also want to discuss the role of the third “pillar” of power in our world: industrialists (corporations) and their henchmen (the military) as I believe they are closely intertwined with this as well.
BTW, I believe the other two pillars of power are the money-lenders and property owners.
I hope you enjoyed this post as much as I did writing it. It cleared a lot of stuff up for me too.
I believe only accurate information and wise decisions based on that information will save us.
Till next time and God Bless.