Hyper Inflation in the Confusion Market

Here I was ready to not post and then a startling news story broke and I had a thought I wanted to write about from earlier in the day.

Running Out the Clock Explained

I have harped on the banking/government/Fed/Treasury unified theory of running out the clock. By my line of thought, hiding losses and providing "liquidity" are the two steps decided upon to try and wait out some kind of material improvement. Yesterday Calculated Risk had an extended excerpt from an interview given by Bryan Marsal, CEO of Lehman Brothers Holdings (he is overseeing the unwind) that explains this all far better than I can.

Here is the game plan from an insider:

One of my partners said yesterday that we are going to call this phase the "extend and pretend" phase in our economy. Which is you extend someone's maturity - because they are going to default - and you pretend that business will come back or that leverage factor is going to come back.

Then we'll enter phase two, which he said is the request to extend or "amend".

Then "send". In other words send the keys.

That is the phases we are in right now. Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether you are a banker or a company, they are all trying to buy time. I don't see the leverage coming back, and I don't see the consumption of good and services coming back.
Bryan Marsal, CEO of Lehman Brothers Holdings.

And there it is plain as day.

Now one might wonder why the entire banking sector, the government, and companies across the board think playing for time is going to work. Perhaps they know something we don't. I was thinking about this another way:

If debts are going to be rolled over into new never-to-be-paid loans guaranteed by the government, then the losses may be able to be hidden for as long as no major "call in" occurs.

Sick and sad but that is what the deal is.

Goldman Sachs: The Story with No Ending

Yesterday there was a story so important, so world changing, and so believable that you should at least take a look before I kill off all the excitement (from Market Ticker):

**FLASH** Goldman Code Theft Bombshell
from DailyKos:

...GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.
Two things come out of this:
1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...
(2. ... is way off point....)

God help Goldman if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!
God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

I encourage the readers to check out Market Ticker and the links to Daily Kos (I know, a pretty crazy site, but this story is hot!) and get excited and scared all at once.

After you are done reading, and before you try and pull all of your accounts from everywhere in readiness for the financial market collapse.... WAIT!!!

Still here? Ok.

Nothing at all is going to come of this story.

Now do not get me wrong, there is some real meat here and I personally have NO DOUBT that Goldman Sachs (GS) has been front-running trades via complex networks and thereby "skimming" as much as 100 million a day from what is easily illegal activity.

And that is why there will be no story, no action against Goldman (at least in the open), and no market dislocation.

If this is true, it cannot be allowed to see daylight, and hence it will not. There is simply no way, no how.

Ok, now you can still get crazy, but keep it "contained".

Hyper Inflation in the Confusion Market

I am not one that sets his feet to an idea and refuses to move no matter what kind of information or argument is presented before him. I have been wrong so many times about so many things I have experience in changing my view, yes flip flopping, should I think I am wrong. There is nothing wrong with changing your mind as long as you have as solid line of reasoning behind it.

So here I was, thinking about the whole inflation/deflation debate that we have all been having. After careful consideration of the great Stoneleigh missive on deflation and the followup by Ilargi, both of The Automatic Earth, I must say my inflation scenario was losing steam in my own mind. Add to this the daily data that Mish Shedlock provides and I was feeling like a deflation type of guy.

And then out of no where I became all confused again.

The culprit was, strangely enough, a Mish piece on deflation! As I was reading this article I was ticking off the deflation proofs presented and was again feeling the deflation groove. Mish covers all the usual, but then this line hit me over the head:

Please keep in mind every country on the planet is following the same stupid Keynesian Handbook so on a relative basis the US is not as bad as appears at first glance. Don't expect a complete collapse of the dollar to happen anytime soon.

And thus came my confusion.

I hardly ever find myself at odds with Mr. Shedlock, but this line was a head scratcher for me.

Now we have entered into a period where as long as relative money magic is applied, all will be well? If this is so, then cannot every country simply print up some amount of money (relative to their monetary bases), use this new money to retire debt (debt deflation), and then all can go on as if this whole episode never happened? As long as each country stays withing relative limits, is there something wrong with it?

Say the US goes 5 trillion, China 2 trillion, Japan 1 trillion, and so on. Could not enough money be "printed" to offset the debt deflationary cycle?

As long as some parameters are kept fixed, then no currency should have issues as they are all doing the same thing, yes?

I admit I am confused by all this. A currency is measured, of course, against other currencies for the most part. It is also measured against goods and services. But if all money is funny money, will all money be just as good as it is today?

I am sure Mish has a well thought out process about that line, and to be fair it was two tiny sentences in a long article, but I have been stuck on it all day.

And thus I am still on the fence on the whole deflation/inflation thing. With the entire world printing money it is hard to imagine it will not come down to roost somewhere. While deflation says people will just save it, and banks will not lend it, and it will just be used as a set aside for losses the money is being put out there. Eventually it will replace the bad debt. Then it will enter the money system at some point.

I liked it better when I was not so confused!

Comments

[Roger Knights:]

"With the entire world printing money it is hard to imagine it will not come down to roost somewhere."

It's another instance of "extend and pretend." (What else can they do, having gotten into this pickle?)

Jul 09 11:07 AM

[I need more...:]

"Then it will enter the money system at some point."
That is the theme of all the inflationistas. And I always say, "How?".
How will velocity which is 20,000 leagues under the sea, reverse trend?
research.stlouisfed.or...
And I always come up with only one answer, employment must reverse, otherwise consumption will remain low, savings will remain high, taking on debt will remain repudiated, and businesses will have zero reason to expand.
I'm no big money player, but like to watch the ones who are, and the entities they move. Gold continues down, oil down, commodities cratering. Seems the market has bet on deflation.

Jul 09 11:22 AM

[Economic Di...:]

I need more,
"That is the theme of all the inflationistas. And I always say, "How?"

The theme of all deflationistas is that no amount of money can stop the debt deflation. I will tell you how all the money will enter the system:
When printed money is >/= what the banks need as reserves, they will extend all the rest just as wildly as they did before, albeit through some other path than housing exclusvely. Real deflation has occurred only 2 times in 109 years while inflation (and some hybrids like stagflation) have been the norm for that time. As far as any bets the "market" may make, the market could not find its own arse with a flashlight and a map. BTW, if you TRULY believe in deflation then you should be ready to add oil and gold to your portfolio, I would ask at what price? Will deflation make oil $2 a barrel and gold $30 an ounce? If so dollars will be worth so much that you could buy a tanker of oil, yes??

Jul 09 01:18 PM

[I need more...:]

They can "extend" all they like. If people and businesses neither can qualify nor more importantly want credit, it cannot move into the economy. The wealth destrction so far in the US alone is estimated to be $20T, and rising daily. Housing and commercial real estate are still falling, and only the government ( Goldman Sacks, that is, the new government ) is holding the stock market up.
It's artificial, and it cannot last.
The polls are clearly showing people are finally waking up, they don't want another stimulus, they don't want more bailouts, and at some point politicians who only fear for re-election will stay, stop.
If that occurs, all this house of cards kicking the problem down the road will be over, and prices will revert to reflect the real much lower demand in the marketplace.
There is no way in hell they can reflate housing etc to past levels, its over.


On Jul 09 01:18 PM Economic Disconnect wrote:

> I need more,
> "That is the theme of all the inflationistas. And I always say, "How?"
>
>
> The theme of all deflationistas is that no amount of money can stop
> the debt deflation. I will tell you how all the money will enter
> the system:
> When printed money is >/= what the banks need as reserves, they will
> extend all the rest just as wildly as they did before, albeit through
> some other path than housing exclusvely. Real deflation has occurred
> only 2 times in 109 years while inflation (and some hybrids like
> stagflation) have been the norm for that time. As far as any bets
> the "market" may make, the market could not find its own arse with
> a flashlight and a map. BTW, if you TRULY believe in deflation then
> you should be ready to add oil and gold to your portfolio, I would
> ask at what price? Will deflation make oil $2 a barrel and gold $30
> an ounce? If so dollars will be worth so much that you could buy
> a tanker of oil, yes??

Jul 09 01:31 PM

[Economic Di...:]

I need more,

I really do not think we are as far apart as it may seem. I agree housing cannot be re-inflated. I agree that as long as credit quality requrirements are at least minimal, not many will qualify for new credit and those that do qualiify will not want it. I do think, as I wrote, commercial and bank debt CAN be rolled over as long as the Government plays ball and China does not call in the ball.

Where we differ is that there will indeed be a stimulus 2.0 in September or October. The "people" did not want the last one, nor TARP and all the rest. We got them anyway. How many TARP yes voters lost their seat in the 08 election? I think 3 did.

Deflation, then Inflation is still likely. The probelme is the relativeness of it all. If credit truly dries up (deflation) and all had to pay just by cash (what you have in the bank) then yes real prices will COLLAPSE. The problem is nobody has any money, so even if a new car cost $1000, it might as well be $100,000 with no ability to finance. That is a wild INFLATION of the cars price relative to what one could afford. Depends how you se it playing out.

Check out this dialogue from Stoneleigh and Aaron Krowne from last night on this very topic:
tinyurl.com/lhc249

Jul 09 01:50 PM

[tedfoo:]

"Now we have entered into a period where as long as relative money magic is applied, all will be well? If this is so, then cannot every country simply print up some amount of money (relative to their monetary bases), use this new money to retire debt (debt deflation), and then all can go on as if this whole episode never happened?"

Yep, and that's been the game plan for many months now, and will continue to be the game plan.

I share your confusion on the inflation and deflation debate, and I have wondered if I was bordering on bio-polar disorder going back and forth between camps. I settled on a camp now, and I'll explain my logic.

I liken the every-country-printing... debate to rig the system to a simple analogy from college. In my technical classes after a long night of group studying sometimes our group came to the conclusion that if everyone in the class (of 15 or 20) did bad on the test on purpose the prof would be forced to curve everyone's grade. We wouldn't have to understand the material, nor would we be punished with a bad grade. Of course, this is only good in theory, because all it took would be one student who was advantaged (and did understand the material) to say they'd go along with the plan and on test day sabotage everyone to blow the curve out of the water.

So I see the same thing happening today. Everyone with a fiat currency and a motive to keep the values of those fiat currencies in a steady state has got together to rig the economic system. So I ask is there a country or economy that can and wants to "blow the curve"?

I say yes. Any economy that still operates on a gold standard or uses gold as currency is unable to "print" more money. They can't go along with this plan if they even wanted to. Now these gold economies are pretty anemic, but think India and the middle east where gold is still used as currency. I think we will still see gold try to rise to its "real' value relative to all the fiat currencies around it.

But this real value has to find it's way out of those economies and be exchanged with fiat currencies in order to "express" it's value in the fiat currency wold. Will that happen? I don't know, but I believe that the economic system can't be rigged forever and it will find it's true value. I was anti-gold 6 months ago and even laughed and pointed at gold bugs, but now I've taken a position. We'll see.

Jul 09 02:05 PM

[Economic Di...:]

tedfoo.
loved the analogy! I am pretty sure no country on earth still uses the gold standard for their currency though. Still I think your call on the "first currency to crack the curve" would be very interesting.

Jul 09 02:20 PM

[I need more...:]

Hmmm, we're still at a bit of loggerheads I believe.You wrote:

"Deflation, then Inflation is still likely. The probelme is the relativeness of it all. If credit truly dries up (deflation) and all had to pay just by cash (what you have in the bank) then yes real prices will COLLAPSE. The problem is nobody has any money, so even if a new car cost $1000, it might as well be $100,000 with no ability to finance. That is a wild INFLATION of the cars price relative to what one could afford"

That statement implies access to credit is the most natural thing in the world; in fact, until recently ( last few decades ), it was totally unnatural. Credit was sought to start businesses almost solely, it was not used to buy forward garbage from China for example. I still remember lawaway, to hold an item with a small amount down until you had saved enough to buy it. Certainly, credit was used for home purchases, and large ticket items where saving would just take too long to be feasible. Point though: credit was mostly used to create wealth ( assuming the enterprised borrowed for did well ), not buy forward "stuff".
So if we revert towards old-timey values, if you will, cash is king, and the instant gratification BS that has corrupted our culture will diminish. The "ability to finance" thinking will diminish also- if you can't afford a new car, you can't afford a new car, deal with it.
It's hard to think in these terms, we have had it way to easy for way to long.





On Jul 09 01:50 PM Economic Disconnect wrote:

> I need more,
>
> I really do not think we are as far apart as it may seem. I agree
> housing cannot be re-inflated. I agree that as long as credit quality
> requrirements are at least minimal, not many will qualify for new
> credit and those that do qualiify will not want it. I do think, as
> I wrote, commercial and bank debt CAN be rolled over as long as the
> Government plays ball and China does not call in the ball.
>
> Where we differ is that there will indeed be a stimulus 2.0 in September
> or October. The "people" did not want the last one, nor TARP and
> all the rest. We got them anyway. How many TARP yes voters lost their
> seat in the 08 election? I think 3 did.
>
> Deflation, then Inflation is still likely. The probelme is the relativeness
> of it all. If credit truly dries up (deflation) and all had to pay
> just by cash (what you have in the bank) then yes real prices will
> COLLAPSE. The problem is nobody has any money, so even if a new car
> cost $1000, it might as well be $100,000 with no ability to finance.
> That is a wild INFLATION of the cars price relative to what one could
> afford. Depends how you se it playing out.
>
> Check out this dialogue from Stoneleigh and Aaron Krowne from last
> night on this very topic:
> tinyurl.com/lhc249
>
>

Jul 09 02:42 PM

[Economic Di...:]

I need more cowbell,

I am in total agreement if credit goes away things are going to change (revert to norm?) big time. My contention is that will be opposed at all costs, or at least an attempt be made.

Jul 09 02:59 PM

[Mad Hedge F...:]

Inflation has gone MIA. The incredible melt up in Treasuries yesterday tells you that traders are dumping the global reflation trade like a hot potato. The ten year yield spiked up to a high of 3.28%, down from 4% only a month ago. Yesterday’s auction of ten year Treasury notes saw an amazing bid to cover ratio of 3.28, the highest in 15 years. When traders don’t want to play, they flee to government paper. The music has stopped playing, so it’s time to sit down. It looks like the deflationistas are going to have the upper hand over the inflationistas for the next couple of months. See my interview with Janet Yellen at (www.madhedgefundtrader...). This certainly puts my TBT trade on hold (see “Sell in May and Go Away” at www.madhedgefundtrader... and “The Viagra is Wearing Off” at www.madhedgefundtrader...). It’s best to read the writing on the wall, especially when it is in ten foot high, in fluorescent block letters, like this.

Jul 09 03:52 PM

[Economic Di...:]

mad hedge,
seems you are correct, but how can an entire market move in the "right" direction over the course of 4 days?? Props for the Janet Yellen access!

Jul 09 08:43 PM

[derryl:]

Economic Disconnect asked,
"Now we have entered into a period where as long as relative money magic is applied, all will be well? If this is so, then cannot every country simply print up some amount of money (relative to their monetary bases), use this new money to retire debt (debt deflation), and then all can go on as if this whole episode never happened?"

Yes, this is exactly what a real, actual solution would look like. You've probably read, "The New Velocity of Money" by Prieur du Plessis on May 12 SA, where the Russian tourist puts down 100 Euros on a hotel room and the indebted townspeople rapidly use that money to pay each other back, then the Russian decides against taking the room and retrieves his 100 Euros. But now the townspeople are all debt free, happy and optimistic even though none of them got to keep the 100 Euros. There was no inflation caused by adding this money to their local economy, just debt elimination.

The trick of this happy scenario is that the 100 Euros functioned as a no interest loan. The innkeeper started the sequence by paying off his 100 Euro debt to his butcher, who pays his debt to his supplier, etc., until finally the hooker uses the 100 Euros to pay back rent to the innkeeper. When the Russian comes back to the desk the entire 100 Euros is available to return to him. Everybody is out of debt and nobody loses.

The reason we are in the unhappy opposite scenario is that all of our money is created and loaned at interest. In the New Velocity story, it would end with the Russian demanding 2 Euros interest in addition to the return of his original 100 Euros. Of course the additional 2 Euros does not exist and the indebted townspeople have no Euros to pay the interest. So now they are 2 Euros deeper in debt, and the only way to get more Euros into this equation is by borrowing them from the Russian, at interest. It's clear that the outcome will be ever-increasing and utterly unpayable indebtedness for the townsfolk.

Every sovereign government has the constitutional authority to create its national currency. The money is created at no cost and there is no reason why in its distribution an additional interest charge must be attached to it. In fact the interest can never be paid because only the money, and not the interest, was created and distributed into the economy. The money to pay the interest does not exist. Only the principal exists.

It took a couple centuries of finagling but in 1913 the banksters got their American national bank and the right to create US$. The Fed and the fractional reserve banks it fosters create money as loans at interest. Uncle Sam pays interest to the Fed for the privilege of using money that Uncle Sam has the authority to create for himself interest and debt free. The interest can never be repaid.

The predictable outcome of this arithmetically challenged monetary system is accelerating national indebtedness and the ultimate ownership of the USA by the banksters who might let you talk them into taking your house in lieu of repayment of your loan. They create money with no effort and lend it to you; you build your house at huge effort and sign it over the the banksters. Not a good deal for you.

I was ready to applaud California's IOUs as a government stepping up and creating its own money, until I found out they promise to pay interest, which destroys the benevolence of the action and only makes future debt worse, not better.

Neither America nor any other country will ever get itself out of our present debt-based doldrums by borrowing more money at interest. But we could be out of debt tomorrow, if our governments created non debt money and distributed it to their citizens as free money. I have written previous comments describing how this doesn't have to be inflationary, so I won't repeat it here.

Jul 10 03:41 AM

[manya05:]

I am no economist, but let me try to articulate an answer. Inflation does NOT come from the mere printing of money, Inflation comes from a shortage. Something must be in short supply relative to demand for people to bid the price higher, and of course, the cash must be there for you to bid higher. If nobody has any money, there can be no inflation, so, as long as unemployment is very high, you can print all the money you want, there will be no inflation. Right now the Fed has printed gobs of money, but it has not given it to the people, it gave it to the banks. People are trying to save, not spend, and, there is a huge overcapacity for everything. No inflation here. The banks have used the money to appear as if they were solvent when they are indeed insolvent (so it is funny monopoly money sitting on a book). No inflation there. Some of the money (stimulus) has indeed entered the economy but gone to states, counties, municipalities, universities, etc. to plug holes for the next 2 years so they can keep operating laying off 10% of the people instead of 50%, or closing one branch library instead of the entire system (plus, keep those cops and firemen around for 2 more years while their tax base evaporates). So to me is clear. More of the "extend and pretend", let's keep the cart going without the wheels falling off for the next 2 years (mid-term elections) and we see what happens after that. Of course this painted scenario is fraught with danger, and indeed predicated on the fact all currencies will move more or less at the same time while the political class waits for some kind of miracle before the proverbial sh..hits the proverbial fan. Look at the dollar index chart, look at it over a 1 year period, it is stuck at 80, it has never been so flat before, I think you could not have it flatter even if you tried. As long as the forex markets can be manipulated for some type of stability, we are OK, should the dollar collapse then inflation is a real possibility. But that is a different type of inflation, it is not driven by scarcity, it is driven by the fact our currency collapsed and since we cannot make anything anymore (we need to import everything), then as we sink into the hole the world looks very expensive to us. So I say, not to worry, politicians are trying to keep everything stable and manipulated, stay out of the stock market, it is rigged, stay in cash, and keep it in a basket of different currencies, worst case, you will stay even, best case, you could make a lot of money if the dollar takes a plunge. Don't worry about inflation (yet).

Jul 10 04:58 AM

[dragonpaw:]

Good -god ; this is ''tulipmania" all over again. Back then, the currency was ,literally tulips. Today, the currency is ,both on and off, currencies and commodities. "Wake up and smell the roses", guys!
If anyone can predict the coming financial Armegeddon, play it out for me. Otherwise all this prattle that I read is just knee-jerk reaction to the daily Wall-Street b.s.; or perhaps simply part and parcel of their ever-present missives.

Jul 12 09:29 PM